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NETSCOUT SYSTEMS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking statements under Section 21E of the Exchange Act and other federal securities laws. These forward looking statements involve risks and uncertainties. These statements relate to future events or our future financial performance and are identified by terminology such as "may," "will," "could," "should," "expects," "plans," "intends," "seeks," "anticipates," "believes," "estimates," "potential" or "continue," or the negative of such terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially due to competitive factors and other factors referred to in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for our fiscal year ended March 31, 2014 and elsewhere in this Quarterly Report. These factors may cause our actual results to differ materially from any forward-looking statement. Overview NetScout was founded in 1984 and is headquartered in Westford, Massachusetts. We are an industry leader for advanced network, application and service assurance solutions, providing high-quality performance analytics and operational intelligence solutions that facilitate the evolution toward new computing paradigms, such as virtualization, mobility and cloud. We design, develop, manufacture, market, license, sell and support these products focused on assuring service delivery quality, performance and availability for some of the world's largest, most demanding and complex internet protocol (IP) based service delivery environments. We manufacture and market these products in integrated hardware and software solutions that are used by commercial enterprises, large governmental agencies and telecommunication service providers worldwide. We have a single operating segment and substantially all of our identifiable assets are located in the United States. Our operating results are influenced by a number of factors, including, but not limited to, the mix and quantity of products and services sold, pricing, costs of materials used in our products, growth in employee related costs, including commissions, and the expansion of our operations. Factors that affect our ability to maximize our operating results include, but are not limited to, our ability to introduce and enhance existing products, the marketplace acceptance of those new or enhanced products, continued expansion into international markets, development of strategic partnerships, competition, successful acquisition integration efforts, our ability to achieve expense reductions and make structural improvements and current economic conditions. Our key objectives have been to continue to gain market share in the wireless service provider market and to accelerate our enterprise growth by extending into the application performance management segment. A common component of both initiatives has been the acceptance of our unified services delivery management strategy. This strategy has been bolstered by our acquisitions and integration of both voice/video and packet flow or monitoring switch technology. Results Overview We saw continued growth during the quarter ended June 30, 2014, with product revenue growth of 50% and overall revenue growth of 32% compared to the same period in the prior year. Our business maintained strong gross profit margins. Our gross profit for the quarter ended June 30, 2014 increased by $20.4 million, or 31%, when compared to the quarter ended June 30, 2013. The gross profit percentage remained flat at 79% during the quarters ended June 30, 2014 and 2013. We continue to maintain strong liquidity. At June 30, 2014, we had cash, cash equivalents and marketable securities of $234.4 million. This represents an increase of $15.7 million from March 31, 2014. Use of Non-GAAP Financial Measures We supplement the generally accepted accounting principles (GAAP) financial measures we report in quarterly and annual earnings announcements, investor presentations and other investor communications by reporting the following non-GAAP measures: non-GAAP revenue, non-GAAP net income and non-GAAP net income per diluted share. Non-GAAP revenue eliminates the GAAP effects of acquisitions by adding back revenue related to deferred revenue revaluation. Non-GAAP net income includes the foregoing adjustment and also removes expenses related to the amortization of acquired intangible assets, share-based compensation, restructuring, certain expenses relating to acquisitions including compensation for post-combination services and business development charges, net of related income tax effects. Non-GAAP diluted net income per share also excludes these expenses as well as the related impact of all these adjustments on the provision for income taxes. 15-------------------------------------------------------------------------------- Table of Contents These non-GAAP measures are not in accordance with GAAP, should not be considered an alternative for measures prepared in accordance with GAAP (revenue, net income and diluted net income per share), and may have limitations in that they do not reflect all our results of operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. The presentation of non-GAAP information is not meant to be considered superior to, in isolation from, or as a substitute for results prepared in accordance with GAAP. Management believes these non-GAAP financial measures enhance the reader's overall understanding of our current financial performance and its prospects for the future by providing a higher degree of transparency for certain financial measures and providing a level of disclosure that helps investors understand how we plan and measure our business. We believe that providing these non-GAAP measures affords investors a view of our operating results that may be more easily compared to our peer companies and also enables investors to consider our operating results on both a GAAP and non-GAAP basis during and following the integration period of our acquisitions. Presenting the GAAP measures on their own may not be indicative of our core operating results. Furthermore, management believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures provide useful information to management and investors regarding present and future business trends relating to our financial condition and results of operations. The following table reconciles revenue, net income and net income per share on a GAAP and non-GAAP basis for the three months ended June 30, 2014 and 2013 (in thousands, except for per share amounts): Three Months Ended June 30, 2014 2013 GAAP revenue $ 107,852 $ 81,805 Deferred revenue fair value adjustment 18 140 Non-GAAP revenue $ 107,870 $ 81,945 GAAP net income $ 11,476 $ 5,253 Deferred revenue fair value adjustment 18 140 Share based compensation expense 3,302 2,812 Amortization of acquired intangible assets 1,796 1,673 Business development and integration expense - 170 Compensation for post combination services 536 444 Income tax adjustments (1,910 ) (1,785 ) Non-GAAP net income $ 15,218 $ 8,707 GAAP diluted net income per share $ 0.27 $ 0.12 Per share impact of non-GAAP adjustments identified above 0.09 0.09 Non-GAAP diluted net income per share $ 0.36 $ 0.21 Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America consistently applied. The preparation of these consolidated financial statements requires us to make significant estimates and judgments that affect the amounts reported in our consolidated financial statements and the accompanying notes. These items are regularly monitored and analyzed by management for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates. 16-------------------------------------------------------------------------------- Table of Contents While all of our accounting policies impact the consolidated financial statements, certain policies are viewed to be critical. Critical accounting policies are those that are both most important to the portrayal of our financial condition and results of operations and that require management's most subjective or complex judgments and estimates. We consider the following accounting policies to be critical in fully understanding and evaluating our financial results: • marketable securities; • revenue recognition; • valuation of goodwill, intangible assets and other acquisition accounting items; and • share-based compensation. Please refer to the critical accounting policies set forth in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014, filed with the Securities and Exchange Commission (SEC) on May 20, 2014, for a description of all of our critical accounting policies. Three Months Ended June 30, 2014 and 2013 Revenue Product revenue consists of sales of our hardware products and licensing of our software products. Service revenue consists of customer support agreements, consulting and training. During the three months ended June 30, 2014, two direct customers accounted for more than 10% of total revenue. During the three months ended June 30, 2013, one direct customer accounted for more than 10% of total revenue. Three Months Ended June 30, (Dollars in Thousands) 2014 2013 Change % of % of Revenue Revenue $ % Revenue: Product $ 64,366 60 % $ 42,977 53 % $ 21,389 50 % Service 43,486 40 38,828 47 4,658 12 % Total revenue $ 107,852 100 % $ 81,805 100 % $ 26,047 32 % Product. The 50%, or $21.4 million, increase in product revenue was due to a $21.0 million increase in revenue from our service provider sector and a $367 thousand increase in our government enterprise sector. Compared to the same period in the prior year, we realized a 53% increase in units shipped, as well as a 5% increase in the average selling price per unit of our products. We expect continued growth in our service provider sector through the year ended March 31, 2015. Service. The 12%, or $4.7 million, increase in service revenue was due to a $3.7 million increase in revenue from new maintenance contracts and renewals from a growing support base and a $1.0 million increase in premium support contracts. We expect continued service revenue growth to be generated by product revenue growth which increases our installed base and therefore our related maintenance contracts. Total product and service revenue from direct and indirect channels are as follows: Three Months Ended June 30, (Dollars in Thousands) 2014 2013 Change % of % of Revenue Revenue $ % Indirect $ 42,103 39 % $ 39,531 48 % $ 2,572 7 % Direct 65,749 61 42,274 52 23,475 56 % Total revenue $ 107,852 100 % $ 81,805 100 % $ 26,047 32 % 17-------------------------------------------------------------------------------- Table of Contents The 7%, or $2.6 million, increase in indirect channel revenue is the result of the increase in sales to our general enterprise sector internationally. Sales to customers outside the United States are export sales typically through channel partners, who are generally responsible for distributing our products and providing technical support and service to customers within their territories. Our reported international revenue does not include any revenue from sales to customers outside the United States that are shipped to our United States-based indirect channel partners. These domestic resellers fulfill customer orders based upon joint selling efforts in conjunction with our direct sales force and may subsequently ship our products to international locations; however, we report these shipments as United States revenue since we ship the products to a domestic location. The 56%, or $23.5 million, increase in direct revenue is primarily the result of increased domestic revenue from our service provider sector. Total revenue by geography is as follows: Three Months Ended June 30, (Dollars in Thousands) 2014 2013 Change % of % of Revenue Revenue $ % United States $ 86,018 80 % $ 62,772 77 % $ 23,246 37 % International: Europe 9,046 8 8,939 11 107 1 % Asia 6,717 6 3,903 5 2,814 72 % Rest of the world 6,071 6 6,191 7 (120 ) (2 )% Subtotal international 21,834 20 19,033 23 2,801 15 % Total revenue $ 107,852 100 % $ 81,805 100 % $ 26,047 32 % United States revenues increased 37%, or $23.2 million, primarily due to gains within the service provider sector. The 15%, or $2.8 million, increase in international revenue is due to increases across all sectors. We expect revenue from sales to customers outside the United States to continue to account for a significant portion of our total revenue in the future. In accordance with United States export control regulations we do not sell to, or do business with, countries subject to economic sanctions and export controls. Cost of Revenue and Gross Profit Cost of product revenue consists primarily of material components, manufacturing personnel expenses, manuals, packaging materials, overhead and amortization of capitalized software, acquired software and core technology. Cost of service revenue consists primarily of personnel, material, overhead and support costs. 18-------------------------------------------------------------------------------- Table of Contents Three Months Ended June 30, (Dollars in Thousands) 2014 2013 Change % of % of Revenue Revenue $ % Cost of revenue Product $ 13,766 13 % $ 9,773 12 % $ 3,993 41 % Service 8,830 8 7,149 9 1,681 24 % Total cost of revenue $ 22,596 21 % $ 16,922 21 % $ 5,674 34 % Gross profit: Product $ $ 50,600 47 % $ 33,204 41 % $ 17,396 52 % Product gross profit % 79 % 77 % Service $ $ 34,656 32 % $ 31,679 39 % $ 2,977 9 % Service gross profit % 80 % 82 % Total gross profit $ $ 85,256 $ 64,883 $ 20,373 31 % Total gross profit % 79 % 79 % Product. The 41%, or $4.0 million, increase in cost of product revenue was primarily due to the 50%, or $21.4 million, increase in product revenue during the three months ended June 30, 2014. In addition, there was a $115 thousand increase in amortization of software and core technology included as cost of product revenue for the three months ended June 30, 2014. The product gross profit percentage increased by two percentage points to 79% during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The 52%, or $17.4 million, increase in product gross profit corresponds with the 50%, or $21.4 million, increase in product revenue, offset by the 41%, or $4.0 million, increase in cost of product revenue. Average headcount in manufacturing was 32 for the three months ended June 30, 2014 and 2013. Service. The 24%, or $1.7 million, increase in cost of service revenue was primarily due to a $1.1 million increase in employee related expenses resulting in part from headcount to support our growing installed base as well as increased incentive compensation. In addition, there was a $530 thousand increase in cost of materials used to support customers under service contracts. The service gross profit percentage decreased by two percentage points to 80% for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013, primarily related to the increases in costs mentioned above. The 9%, or $3.0 million, increase in service gross profit corresponds with the 12%, or $4.7 million, increase in service revenue, offset by the 24%, or $1.7 million, increase in cost of services. Average service headcount was 161 and 142 for the three months ended June 30, 2014 and 2013, respectively. Gross profit. Our gross profit increased 31%, or $20.4 million. This increase is attributable to our increase in revenue of 32%, or $26.0 million, partially offset by a 34%, or $5.7 million, increase in cost of revenue. The gross profit percentage remained flat at 79% for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. Overall, we expect our gross profit percentage to remain relatively flat in future periods with increased sales volumes offset by corresponding increases in product and service costs. Operating Expenses Three Months Ended June 30, (Dollars in Thousands) 2014 2013 Change % of % of Revenue Revenue $ % Research and development $ 18,767 17 % $ 15,965 19 % $ 2,802 18 % Sales and marketing 37,272 35 32,200 39 5,072 16 % General and administrative 8,753 8 6,981 9 1,772 25 % Amortization of acquired intangible assets 862 1 854 1 8 1 % Total operating expenses $ 65,654 61 % $ 56,000 68 % $ 9,654 17 % 19-------------------------------------------------------------------------------- Table of Contents Research and development. Research and development expenses consist primarily of personnel expenses, fees for outside consultants, overhead and related expenses associated with the development of new products and the enhancement of existing products. The 18%, or $2.8 million, increase in research and development expenses is due to a $2.0 million increase in employee related expenses due to increased compensation and other employee related costs, a $280 thousand increase in allocated overhead, a $266 thousand increase in consulting expenses, a $218 thousand increase in depreciation expense, and a $90 thousand increase in deal related compensation expenses. Average headcount in research and development was 354 and 357 for the three months ended June 30, 2014 and 2013, respectively. Sales and marketing. Sales and marketing expenses consist primarily of personnel expenses and commissions, overhead and other expenses associated with selling activities and marketing programs such as trade shows, seminars, advertising, and new product launch activities. The 16%, or $5.1 million, increase in total sales and marketing expenses was due a $2.4 million increase in employee related expenses due to increased headcount as well as increased incentive compensation. In addition, there was a $1.6 million increase in commissions due to higher shipments as well as an increase in anticipated higher quota attainment, a $558 thousand increase in allocated overhead, a $326 thousand increase in travel expenses, a $287 thousand increase in advertising related expenses, a $267 thousand increase related to the NetScout user conference, and a $193 thousand increase in recruiting costs. These increases were partially offset by a $580 thousand decrease in depreciation expenses. Average headcount in sales and marketing was 370 and 345 for the three months ended June 30, 2014 and 2013, respectively. General and administrative. General and administrative expenses consist primarily of personnel expenses for executive, financial, legal and human resource employees, overhead and other corporate expenditures. The 25%, or $1.8 million, increase in general and administrative expenses was due to a $1.5 million increase in employee related expenses due to increased incentive compensation, a $181 thousand increase in legal expenses, and a $108 increase in recruiting costs. These increases were partially offset by a $170 thousand decrease in business development expenses. Average headcount in general and administrative was 117 and 120 for the three months ended June 30, 2014 and 2013, respectively. Amortization of acquired intangible assets. Amortization of acquired intangible assets consists primarily of amortization of customer relationships related to the acquisitions of ONPATH Technologies, Inc. (ONPATH), Accanto, Simena, LLC (Simena), Fox Replay BV (Replay), Psytechnics, Ltd (Psytechnics) and Network General. The 1%, or $8 thousand, increase in amortization of acquired intangible assets is due to the increase of expense recorded related to the acquisitions of Replay and Accanto. Interest and Other Income (Expense), Net. Interest and other income (expense), net includes interest earned on our cash, cash equivalents and marketable securities, interest expense and other non-operating gains or losses. Three Months Ended June 30, (Dollars in Thousands) 2014 2013 Change % of % of Revenue Revenue $ % Interest and other income (expense), net $ (131 ) - % $ (73 ) - % $ (58 ) (79 )% The 79%, or $58 thousand, increase in interest and other income (expense) was due to a $105 thousand increase in foreign currency exchange expense. This increase to interest and other income (expense), net was partially offset by a $24 thousand decrease in loss on the disposal of assets, and a $17 thousand increase in interest income received on investments. 20-------------------------------------------------------------------------------- Table of Contents Income Tax Expense. Our effective income tax rates were 41.1% and 40.4% for the three months ended June 30, 2014 and 2013, respectively. Generally, the effective tax rates differ from statutory rates due to the impact of the domestic production activities deduction, research and development credits if enacted, the impact of state taxes, income generated in jurisdictions that have a different tax rate than the U.S. statutory rate, and losses not benefited in certain foreign jurisdictions. The effective tax rate for the three months ended June 30, 2014 is higher than the comparable prior year period primarily due to the expiration of the federal research and development credit and the exclusion of certain foreign losses for which a benefit cannot be realized, offset by decreases to the state tax rate. Three Months Ended June 30, (Dollars in Thousands) 2014 2013 Change % of % of Revenue Revenue $ % Income tax expense $ 7,995 7 % $ 3,557 4 % $ 4,438 125 % Off-Balance Sheet Arrangements As of June 30, 2014 and 2013, we did not have any off-balance sheet arrangements as defined in Regulation S-K, Item 303(a)(4)(ii). Commitment and Contingencies We account for claims and contingencies in accordance with authoritative guidance that requires us to record an estimated loss from a claim or loss contingency when information available prior to issuance of our consolidated financial statements indicates that it is probable that a liability has been incurred at the date of the consolidated financial statements and the amount of the loss can be reasonably estimated. If we determine that it is reasonably possible but not probable that an asset has been impaired or a liability has been incurred or if the amount of a probable loss cannot be reasonably estimated, then in accordance with the authoritative guidance, we disclose the amount or range of estimated loss if the amount or range of estimated loss is material. Accounting for claims and contingencies requires us to use our judgment. We consult with legal counsel on those issues related to litigation and seek input from other experts and advisors with respect to matters in the ordinary course of business. For additional information with respect to legal proceedings, refer to Part II, Item 1 "Legal Proceedings." We recorded two contingent liabilities related to the acquisition of Simena. One relates to future consideration to be paid to the former owner which had an initial fair value of $8.0 million at the time of acquisition and another relates to contractual non-compliance liabilities incurred by Simena with an initial fair value of $1.6 million at the time of acquisition. At June 30, 2014, the present value of the future consideration was $4.4 million and the contractual non-compliance liability was $0. The contingent contractual obligation has been reduced to zero as NetScout has either settled those liabilities or believes that because of the passage of time that the probability of a future negative settlement is essentially zero. Liquidity and Capital Resources Cash, cash equivalents and marketable securities consist of the following (in thousands): June 30, March 31, 2014 2014 Cash and cash equivalents $ 88,974 $ 102,076 Short-term marketable securities 88,890 75,234 Long-term marketable securities 56,580 41,484 Cash, cash equivalents and marketable securities $ 234,444 $ 218,794 Cash, cash equivalents and marketable securities At June 30, 2014, cash, cash equivalents and marketable securities totaled $234.4 million, up $15.6 million from $218.8 million at March 31, 2014 due primarily to cash flow from operations of $28.2 million, partially offset by $12.2 million of cash used to repurchase shares of our common stock and $1.9 million of cash used for capital expenditures. 21-------------------------------------------------------------------------------- Table of Contents Substantially all of our cash, cash equivalents and marketable securities are located in the United States. At June 30, 2014, cash and short-term and long-term investments in the United States was $232.1 million, while cash held outside the United States was approximately $2.3 million. Cash and cash equivalents were impacted by the following: Three months ended June 30, (Dollars in Thousands) 2014 2013 Net cash provided by operating activities $ 28,200 $ 18,613 Net cash used in investing activities $ (30,627 ) $ (8,395 ) Net cash used in financing activities $ (10,748 ) $ (7,371 ) Net cash provided by operating activities Cash provided by operating activities was $28.2 million during the three months ended June 30, 2014, compared to $18.6 million of cash provided by operating activities during the three months ended June 30, 2013. This $9.6 million increase was due in part to a $5.8 million increase in cash flows from inventories related to a larger buildup of the inventory balance during the three months ended June 30, 2013 as compared to the three months ended June 30, 2014. In addition, there was a $4.6 million favorable impact from accounts receivable in the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. Days sales outstanding of 26 days as of the end of the first quarter of fiscal year 2015 compared to 47 days at March 31, 2014 and 55 days at the end of the first quarter of fiscal year 2014. Additionally, there was a $6.2 million increase from net income, a $1.3 million increase from prepaid expenses and other assets, a $791 thousand increase from deferred income taxes, a $490 thousand increase from share-based compensation, and a $405 thousand increase from accrued compensation. These increases were partially offset by a $6.0 million decrease from deferred revenue, a $3.5 million decrease from accounts payable due to timing of payments, and a $677 thousand decrease from income taxes payable. Net cash used in investing activities Three months ended June 30, (Dollars in Thousands) 2014 2013Cash used in investing activities included the following: Purchase of marketable securities $ (42,506 ) $ (18,081 ) Proceeds from maturity of marketable securities 13,798 12,112 Purchase of fixed assets (1,865 ) (2,270 ) Purchase of intangible assets (71 ) (110 ) Decrease (increase) in deposits 17 (46 ) $ (30,627 ) $ (8,395 ) Cash used in investing activities was up $22.2 million to $30.6 million during the three months ended June 30, 2014, compared to $8.4 million of cash used in investing activities in the three months ended June 30, 2013. Our investments in property and equipment consist primarily of computer equipment, demonstration units, office equipment and facility improvements. We plan to continue to invest in capital expenditures to support our infrastructure through the remainder of fiscal year 2015. The increase in outflow related to a net increase in the purchase of investments of $22.7 million during the three months ended June 30, 2014 when compared to the three months ended June 30, 2013. 22-------------------------------------------------------------------------------- Table of Contents Net cash used in financing activities Three months ended June 30, (Dollars in Thousands) 2014 2013Cash used in financing activities included the following: Issuance of common stock under stock plans $ 8 $ 213 Payment of contingent consideration - (841 ) Treasury stock repurchases (12,187 ) (7,470 ) Excess tax benefit from share-based compensation awards 1,431 727 $ (10,748 ) $ (7,371 ) Cash used in financing activities was up $3.3 million to $10.7 million during the three months ended June 30, 2014, compared to $7.4 million of cash used in financing activities in the three months ended June 30, 2013. During the three months ended June 30, 2013, we paid $0.8 million related to the contingent purchase consideration for the acquisition of Simena. For additional information with respect to the contingent purchase consideration, see Note 11 in the Notes to the Consolidated Financial Statements of this Form 10-Q. On September 17, 2001, we announced an open market stock repurchase program to purchase up to one million shares of our outstanding common stock, subject to market conditions and other factors. Any purchases under this stock repurchase program may be made from time to time without prior notice. On July 26, 2006, we announced that we had expanded the existing open market stock repurchase program to enable us to purchase up to an additional three million shares of our outstanding common stock, bringing the total number of shares authorized for repurchase to four million shares. Through June 30, 2014, we had repurchased a total of 4,000,000 shares of common stock through the open market stock repurchase program. We repurchased 243,300 and 250,000 shares at a cost of $9.4 million and $5.9 million under this program during the three months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, all authorized shares under this stock repurchase program have been repurchased. On April 22, 2014, our board of directors approved an additional stock repurchase program. This program authorizes management to make additional repurchases of our outstanding common stock of up to $100 million. The share repurchase authorization does not have an expiration date and the pace and timing of repurchases will depend on factors such as cash generation from operations, cash requirements for acquisitions, economic and market conditions, stock price and legal and regulatory requirements. Through June 30, 2014, we repurchased 6,700 shares totaling $272 thousand in the open market under this stock repurchase plan. At June 30, 2014, $99.7 million of common stock remained to be purchased under the plan. Future repurchases of shares will reduce our cash balance. In addition, during the three months ended June 30, 2014 and 2013, we had 62,228 and 65,516 shares transferred to us from employees for tax withholding at a cost of $2.5 million and $1.6 million, respectively. We generated $1.4 million and $727 thousand during the three months ended June 30, 2014 and 2013, respectively, of excess tax benefits from share-based compensation awards. Credit Facility On November 22, 2011, we entered into a credit facility with a syndicate of lenders led by KeyBank National Association (KeyBank) which provides us with a $250 million revolving credit facility, which may be increased to $300 million at any time up to 90 days before maturity. The revolving credit facility includes a swing line loan sub-facility of up to $10 million and a letter of credit sub-facility of up to $10 million. The credit facility matures on November 21, 2016 and is secured by substantially all of our assets. At June 30, 2014, there were no amounts outstanding under the credit facility. Expectations for Fiscal Year 2015 We believe that our cash balances, short-term marketable securities classified as available-for-sale and future cash flows generated by operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. In addition, we expect that cash provided by operating activities will continue to increase due to an expected increase in cash collections related to anticipated higher revenues, partially offset by an anticipated increase in operating expenses that require cash outlays such as salaries and commissions. Capital expenditures in our fiscal year 2015 are currently anticipated to be in line with previous years' amounts. 23-------------------------------------------------------------------------------- Table of Contents Additionally, a portion of our cash may be used to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. From time to time, in the ordinary course of business, we evaluate potential acquisitions of such businesses, products or technologies. If our existing sources of liquidity are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities. The sale of additional equity or debt securities could result in additional dilution to our stockholders. Recently Issued Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. This new guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016 (April 1, 2017 for NetScout); early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. We have not determined the potential effects on our consolidated financial statements. 24-------------------------------------------------------------------------------- Table of Contents |