Annual Report 2018 Corporate Information Board of Directors Corporate Headquarters Anil K
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ANNUAL REPORT 2018 CORPORATE INFORMATION BOARD OF DIRECTORS CORPORATE HEADQUARTERS ANIL K. SINGHAL 310 Littleton Road Chairman of the Board, Westford, MA 01886 President and Chief Executive Officer Telephone: (978) 614-4000 NETSCOUT SYSTEMS, INC. NETSCOUT SYSTEMS, INC. (NASDAQ: NTCT) Fax: (978) 614-4004 ROBERT E. DONAHUE Web: www.netscout.com The world’s largest, most innovative and influential highly structured, contextual metadata — what we at President and Chief Executive Officer (Retired) Authorize.net Holdings, Inc. FORM 10-K service providers, enterprises and government agencies NETSCOUT call “smart data” — to feed an expanding Stockholders may obtain copies of the exhibits to the Company’s JOHN R. EGAN recognize that digital transformation — which typically range of powerful analytics, our customers are Annual Report on Form 10-K as filed with the Securities and Managing Partner encompasses modifying or overhauling workflow optimizing network performance, delivering high- Egan-Managed Capital, L.P. Exchange Commission at the SEC’s website, www.sec.gov, or by processes, upgrading and reconfiguring technology quality applications and services, protecting the contacting NETSCOUT Investor Relations or by visiting the investor ALFRED GRASSO relations section of the Company’s website, www.netscout.com. infrastructures and deploying new digital systems, network against attack, gaining insight into the end- President and Chief Executive Officer (Retired) INVESTOR RELATIONS applications and tools — is fundamental to growing user experience and making smarter, faster and more The Mitre Corporation ANDREW KRAMER revenue, boosting productivity, building scale, informed business and technology decisions. The JOSEPH G. HADZIMA, JR. Managing Director Vice President, Investor Relations creating new efficiencies, reducing risk Company’s powerful software capabilities Main Street Partners, LLC NETSCOUT SYSTEMS, INC. and controlling costs. Over the and flexible range of deployment 310 Littleton Road JAMES A. LICO past several years, NETSCOUT options deliver the real-time, President and Chief Executive Officer Westford, MA 01886 USA Telephone: (978) 614-4000 has invested considerably — pervasive visibility and insight Fortive Corporation Email: [email protected] through both acquisitions that customers need to VINCENT J. MULLARKEY ANNUAL MEETING and organic R&D — to accelerate and secure their Senior Vice President, Finance and Chief Financial Officer (Retired) The Annual Meeting of Stockholders of the Company will be expand its product digital transformation. Digital Equipment Corporation held on Wednesday, September 12, 2018 at 10:00 a.m. ET at portfolio and deliver a CHRISTOPHER PERRETTA NETSCOUT’s corporate headquarters. broader range of high- In an era during which Chief Information and Operations Officer LEGAL COUNSEL MUFG Americas Holdings Corporation value solutions that are connectivity has become Cooley LLP designed to support its fundamental to the way we SUSAN L. SPRADLEY Boston, MA Chief Executive Officer customers worldwide as they work, communicate and socialize, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Motion Intelligence, Inc. advance their digital transformation NETSCOUT’s solutions have never been PricewaterhouseCoopers LLP Boston, MA initiatives with confidence and assure more important to network, IT and security EXECUTIVE OFFICERS their digital business services against disruptions in teams. We’ve long understood that the costs associated ANIL K. SINGHAL TRANSFER AGENT Founder, Chairman of the Board, Computershare availability, performance and security. with network and application downtime are significant President and Chief Executive Officer P.O. Box 43006 — potentially impacting our customers’ top-line, MICHAEL SZABADOS Providence, RI 02940-3006 NETSCOUT’s solutions are playing a critical role profitability and organizational reputations. NETSCOUT’s Chief Operating Officer and President, Stockholder Inquiries: in helping service providers, enterprises and customers rely on the Company’s technology to drive ROI Service Assurance Telephone: (877) 239-1247 government agencies monitor, manage and protect on their infrastructure investments, maximize network JEAN BUA TDD for hearing impaired: (800) 231-5469 Executive Vice President, International Shareowners: (201) 680-6578 their networks and the applications and services and application performance, and quickly identify and Chief Financial Officer and Treasurer TDD International Shareowners: (201) 680-6610 that traverse those networks. By collecting and mitigate security threats — all of which are key tenets of www.computershare.com/investor JOHN W. DOWNING instantaneously transforming network traffic into digital transformation. Executive Vice President, COMMON STOCK Worldwide Sales Operations Common Stock of NETSCOUT SYSTEMS, INC. is traded on the Nasdaq Global Select Market under the symbol “NTCT” FINANCIAL PERFORMANCE REVENUE INCOME FROM OPERATIONS FREE CASH FLOW1 (Non-GAAP, $ in millions) (Non-GAAP, $ in millions) ($ in millions) $300 23.0% 25% $205.9 $1,199.8 20% $194.6 $999.3 18.4% $200 15% $275.4 10% $183.4 $100 5% $- 0% FY17 FY18 FY17 FY18 FY17* FY18 Op. Income Op. Margin 1 Free cash flow is defined as cash flow provided by operating activities less purchases of fixed and intangible assets * Includes cash provided by operating activities related to the acquisition of the Danaher Communications Business totaling ~$30 million FY17 FY18 GAAP Non-GAAP GAAP Non-GAAP Revenue 111 11 1 1 1 5.3% 23.0% -0.4% 1 1 1 1 11 1 - A reconciliation of each non-GAAP metric with the applicable GAAP metric is available on page R-1. 1 TO OUR STOCKHOLDERS During FY’18, we made substantial operational and strategic progress that we believe helped fortify our technology and market leadership while setting the stage for revenue growth, profit margin expansion, EPS gains and robust free cash flow over the coming years. We completed the integration of the technology and product assets we’ve acquired in recent years, accelerated the transition from traditional appliance-based instrumentation to a range of software-centric deployment options and funded key development, support, and sales programs. We move forward as a company that is increasingly well-positioned to help our customers advance their digital transformation initiatives with a broader set of solutions that we expect to further expand in FY’19. FY’18 Results NETSCOUT’s FY’18 financial performance was impacted by difficult market conditions that included persistent service provider capital spending pressures, longer-than-anticipated enterprise sales cycles and federal funding delays. Revenue fell short of our original FY’18 target due to the combination of a substantial moderation in spending by one of our tier-one service provider customers, limited spending by other carriers and weaker revenue in the enterprise customer segment. The magnitude of the revenue decline notably impacted our operating profitability and EPS performance even as we took actions to adjust expenses and drive gross margin improvement through increased adoption of our software-based platform. Considering our operating results, we generated strong free cash flow and returned meaningful capital to stockholders via our share repurchase activities. We also took important steps during the past year to improve our balance sheet efficiency and overall liquidity. Expanding and Elevating Our Value Proposition We have radically reshaped and expanded our product portfolio since acquiring the Danaher Communications Business nearly three years ago. At that time, our offerings were largely appliances with varying levels of proprietary hardware with the primary use cases for our solutions being network performance, and distributed denial of service (DDoS). Today, our solutions are software-centric, feature-rich and applicable to a much larger total addressable market that spans beyond network performance and DDoS to encompass application performance, advanced threat and business intelligence. As a result of broadening our capabilities and deployment options, we made tangible progress fortifying our incumbency with our service provider customers and are advancing opportunities to expand the scope of our engagements with our enterprise customers around the world. A fundamental differentiator in our solutions lies in our patented Adaptive Service Intelligence (ASI) technology, which converts high-volume network traffic into highly structured, contextual and multi-dimensional metadata — or what we call “smart data” — in real time at the collection point. It is exciting to see our solutions play an increasingly important role in helping our customers extract maximum value from the traffic moving over their technology infrastructures to optimize network performance, validate and elevate application performance, quickly identify major security threats and help investigate and mitigate them, gain insight into the end user experience, and make timely decisions that can impact their business. 2 Board Changes We move forward into the new year having added two accomplished executives, Al Grasso and Susan Spradley, to our Board as new directors in April 2018. We look forward to their advice and counsel over the coming years. Sadly, we also must acknowledge the passing of Victor DeMarines, who served on NETSCOUT’s Board for 13 years until his death last year. We are grateful for his many contributions during his tenure on the