Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission file number 000-26251

NETSCOUT SYSTEMS, INC.

(Exact Name of Registrant as Specified in Its Charter)



Delaware		04-2837575
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

310 Littleton Road, Westford, MA 01886

(978) 614-4000

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered:
Common Stock, $0.001 par value per share	NTCT	Nasdaq Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☒ Accelerated filer ☐

Non-accelerated filer ☐ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the registrant's common stock, par value $0.001 per share, as of January 30, 2020 was 73,855,221.

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NETSCOUT SYSTEMS, INC.

FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 31, 2019

TABLE OF CONTENTS




CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS		1

PART I: FINANCIAL INFORMATION

Item 1.	Unaudited Financial Statements:

	Consolidated Balance Sheets: At December 31, 2019 and March 31, 2019	2

	Consolidated Statements of Operations: For the three and nine months ended December 31, 2019 and 2018	3

	Consolidated Statements of Comprehensive Income (Loss): For the three and nine months ended December 31, 2019 and 2018	4

	Consolidated Statements of Stockholder's Equity: For the three and nine months ended December 31, 2019 and 2018	5

	Consolidated Statements of Cash Flows: For the nine months ended December 31, 2019 and 2018	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4.	Controls and Procedures	44

PART II: OTHER INFORMATION

Item 1.	Legal Proceedings	45

Item 1A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults Upon Senior Securities	46

Item 4.	Mine Safety Disclosures	46

Item 5.	Other Information	46

Item 6.	Exhibits	47

SIGNATURES		48

Unless the context suggests otherwise, references in this Quarterly Report on Form 10-Q, or Quarterly Report, to "NetScout," the "Company," "we," "us," and "our" refer to NetScout Systems, Inc. and, where appropriate, our consolidated subsidiaries.

NetScout, the NetScout logo, Adaptive Service Intelligence and other trademarks or service marks of NetScout appearing in this Quarterly Report are the property of NetScout Systems, Inc. and/or its subsidiaries and/or affiliates in the United States and/or other countries. Any third-party trade names, trademarks and service marks appearing in this Quarterly Report are the property of their respective holders.

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Cautionary Statement Concerning Forward-Looking Statements

In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking statements under Section 21E of the Securities Exchange Act of 1934, as amended, 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. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties, and other factors, including those described in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for our fiscal year ended March 31, 2019, filed with the Securities and Exchange Commission, and elsewhere in this Quarterly Report. These factors may cause our actual results to differ materially from any forward-looking statement. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events, and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events, or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

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PART I: FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

NetScout Systems, Inc.

Consolidated Balance Sheets

(In thousands, except share data)



	December 31, 2019			March 31, 2019
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	287,660		$	409,632
Marketable securities	56,274			76,344
Accounts receivable and unbilled costs, net of allowance for doubtful accounts of $1,728 and $1,583 at December 31, 2019 and March 31, 2019, respectively	244,877			235,318
Inventories and deferred costs	24,977			26,270
Prepaid income taxes	14,454			18,000
Prepaid expenses and other current assets	25,807			35,658
Total current assets	654,049			801,222
Fixed assets, net	58,700			58,951
Operating lease right-of-use assets	65,738			—
Goodwill	1,718,496			1,715,485
Intangible assets, net	602,856			669,118
Deferred income taxes	7,034			7,218
Long-term marketable securities	2,561			1,012
Other assets	17,905			16,988
Total assets	$	3,127,339		$	3,269,994
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	19,756		$	24,582
Accrued compensation	70,430			58,501
Accrued other	20,159			23,027
Income taxes payable	1,517			1,318
Deferred revenue and customer deposits	261,151			272,508
Current portion of operating lease liabilities	11,091			—
Total current liabilities	384,104			379,936
Other long-term liabilities	6,997			19,493
Deferred tax liability	115,470			124,229
Accrued long-term retirement benefits	35,808			36,284
Long-term deferred revenue and customer deposits	104,339			94,619
Operating lease liabilities, net of current portion	67,814			—
Long-term debt	450,000			550,000
Total liabilities	1,164,532			1,204,561
Commitments and contingencies (Note 14)
Stockholders' equity:
Preferred stock, $0.001 par value:
5,000,000 shares authorized; no shares issued or outstanding at December 31, 2019 and March 31, 2019	—			—
Common stock, $0.001 par value:
300,000,000 shares authorized; 121,679,117 and 119,760,132 shares issued and 73,855,221 and 77,610,361 shares outstanding at December 31, 2019 and March 31, 2019, respectively	122			120
Additional paid-in capital	2,873,702			2,828,922
Accumulated other comprehensive loss	(3,345		)	(2,639		)
Treasury stock at cost, 47,823,896 and 42,149,771 shares at December 31, 2019 and March 31, 2019, respectively	(1,255,675		)	(1,119,063		)
Retained earnings	348,003			358,093
Total stockholders' equity	1,962,807			2,065,433
Total liabilities and stockholders' equity	$	3,127,339		$	3,269,994

The accompanying notes are an integral part of these consolidated financial statements.

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NetScout Systems, Inc.

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)



	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2019			2018			2019			2018
Revenue:
Product	$	143,309		$	134,135		$	321,803		$	341,815
Service	116,715			111,873			340,666			333,101
Total revenue	260,024			246,008			662,469			674,916
Cost of revenue:
Product	34,197			40,517			90,500			107,974
Service	31,388			29,067			88,960			87,617
Total cost of revenue	65,585			69,584			179,460			195,591
Gross profit	194,439			176,424			483,009			479,325
Operating expenses:
Research and development	48,606			49,925			142,391			161,347
Sales and marketing	67,653			74,024			214,245			224,207
General and administrative	25,048			22,788			72,436			74,141
Amortization of acquired intangible assets	16,120			16,433			48,395			57,879
Restructuring charges	193			13,895			466			17,514
Impairment of intangible assets	—			—			—			35,871
Loss on divestiture of business	—			—			—			9,177
Total operating expenses	157,620			177,065			477,933			580,136
Income (loss) from operations	36,819			(641		)	5,076			(100,811		)
Interest and other expense, net:
Interest income	826			1,455			3,699			3,688
Interest expense	(4,629		)	(7,005		)	(16,167		)	(19,320		)
Other income (expense), net	(112		)	986			538			429
Total interest and other expense, net	(3,915		)	(4,564		)	(11,930		)	(15,203		)
Income (loss) before income tax expense (benefit)	32,904			(5,205		)	(6,854		)	(116,014		)
Income tax expense (benefit)	(3,821		)	(1,602		)	3,236			(23,479		)
Net income (loss)	$	36,725		$	(3,603	)	$	(10,090	)	$	(92,535	)
Basic net income (loss) per share	$	0.49		$	(0.05	)	$	(0.13	)	$	(1.17	)
Diluted net income (loss) per share	$	0.49		$	(0.05	)	$	(0.13	)	$	(1.17	)
Weighted average common shares outstanding used in computing:
Net income (loss) per share - basic	74,367			77,774			75,780			78,916
Net income (loss) per share - diluted	74,700			77,774			75,780			78,916

The accompanying notes are an integral part of these consolidated financial statements.

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NetScout Systems, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)



	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2019			2018			2019			2018
Net income (loss)	$	36,725		$	(3,603	)	$	(10,090	)	$	(92,535	)
Other comprehensive income (loss):
Cumulative translation adjustments	297			(1,170		)	(789		)	(3,319		)
Changes in market value of investments:
Changes in unrealized gains, net of taxes of $1, $12, $12 and $21, respectively	3			12			40			35
Total net change in market value of investments	3			12			40			35
Changes in market value of derivatives:
Changes in market value of derivatives, net of taxes (benefit) of $40, ($53), $6 and ($193), respectively	84			(162		)	18			(601		)
Reclassification adjustment for net (losses) gains included in net income (loss), net of (benefit) taxes of ($7), $51, $8 and $122, respectively	(30		)	157			25			382
Total net change in market value of derivatives	54			(5		)	43			(219		)
Other comprehensive income (loss)	354			(1,163		)	(706		)	(3,503		)
Total comprehensive income (loss)	$	37,079		$	(4,766	)	$	(10,796	)	$	(96,038	)

The accompanying notes are an integral part of these consolidated financial statements.

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NetScout Systems, Inc.

Consolidated Statements of Stockholders' Equity

(In thousands, except share data)

(Unaudited)



	Three Months Ended December 31, 2019
	Common Stock Voting			Additional Paid In Capital		Accumulated Other Comprehensive Income (Loss)			Treasury Stock				Retained Earnings			Total Stockholders' Equity

	Shares	Par Value							Shares	Stated Value
Balance, September 30, 2019	121,648,747	$	122	$	2,863,003	$	(3,699	)	46,810,700	$	(1,230,440	)	$	311,278		$	1,940,264
Net income													36,725			36,725
Unrealized net investment gains						3										3
Unrealized net gains on derivative financial instruments						54										54
Cumulative translation adjustments						297										297
Issuance of common stock pursuant to vesting of restricted stock units	30,370	—														—
Stock-based compensation expense for restricted stock units granted to employees				10,699												10,699
Repurchase of treasury stock									1,013,196	(25,235		)				(25,235		)
Balance, December 31, 2019	121,679,117	$	122	$	2,873,702	$	(3,345	)	47,823,896	$	(1,255,675	)	$	348,003		$	1,962,807

	Nine Months Ended December 31, 2019
	Common Stock Voting			Additional Paid In Capital		Accumulated Other Comprehensive Income (Loss)			Treasury Stock				Retained Earnings			Total Stockholders' Equity

	Shares	Par Value							Shares	Stated Value
Balance, March 31, 2019	119,760,132	$	120	$	2,828,922	$	(2,639	)	42,149,771	$	(1,119,063	)	$	358,093		$	2,065,433
Net loss													(10,090		)	(10,090		)
Unrealized net investment gains						40										40
Unrealized net gains on derivative financial instruments						43										43
Cumulative translation adjustments						(789		)								(789		)
Issuance of common stock pursuant to vesting of restricted stock units	1,621,350	2														2
Stock-based compensation expense for restricted stock units granted to employees				38,187												38,187
Issuance of common stock under employee stock purchase plan	297,635			6,593												6,593
Repurchase of treasury stock									5,674,125	(136,612		)				(136,612		)
Balance, December 31, 2019	121,679,117	$	122	$	2,873,702	$	(3,345	)	47,823,896	$	(1,255,675	)	$	348,003		$	1,962,807

The accompanying notes are an integral part of these consolidated financial statements.

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NetScout Systems, Inc.

Consolidated Statements of Stockholders' Equity

(In thousands, except share data)

(Unaudited)



	Three Months Ended December 31, 2018
	Common Stock Voting			Additional Paid In Capital		Accumulated Other Comprehensive Income (Loss)			Treasury Stock				Retained Earnings			Total Stockholders’ Equity
	Common Stock Voting								Treasury Stock
	Shares	Par Value							Shares	Stated Value
Balance, September 30, 2018	119,231,287	$	119	$	2,796,695	$	555		41,526,563	$	(1,102,481	)	$	341,710		$	2,036,598
Net loss													(3,603		)	(3,603		)
Unrealized net investment gains						12										12
Unrealized net losses on derivative financial instruments						(5		)								(5		)
Cumulative translation adjustments						(1,170		)								(1,170		)
Issuance of common stock pursuant to vesting of restricted stock units	185,742	—														—
Stock-based compensation expense for restricted stock units granted to employees				13,206												13,206
Repurchase of treasury stock				—					58,680	(1,561		)				(1,561		)
Balance, December 31, 2018	119,417,029	$	119	$	2,809,901	$	(608	)	41,585,243	$	(1,104,042	)	$	338,107		$	2,043,477

	Nine Months Ended December 31, 2018
	Common Stock Voting			Additional Paid In Capital		Accumulated Other Comprehensive Income (Loss)			Treasury Stock				Retained Earnings			Total Stockholders’ Equity
	Common Stock Voting								Treasury Stock
	Shares	Par Value							Shares	Stated Value
Balance, March 31, 2018	117,744,913	$	117	$	2,665,120	$	2,895		37,474,890	$	(995,843	)	$	396,493		$	2,068,782
Net loss													(92,535		)	(92,535		)
Unrealized net investment gains						35										35
Unrealized net losses on derivative financial instruments						(219		)								(219		)
Cumulative translation adjustments						(3,319		)								(3,319		)
Issuance of common stock pursuant to vesting of restricted stock units	1,369,122	2														2
Stock-based compensation expense for restricted stock units granted to employees				40,423												40,423
Issuance of common stock under employee stock purchase plan	302,994			7,575												7,575
Repurchase of treasury stock				96,783					4,110,353	(108,199		)				(11,416		)
Cumulative effect of adoption of ASU 2014-09													34,149			34,149
Balance, December 31, 2018	119,417,029	$	119	$	2,809,901	$	(608	)	41,585,243	$	(1,104,042	)	$	338,107		$	2,043,477

The accompanying notes are an integral part of these consolidated financial statements.

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NetScout Systems, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



	Nine Months Ended
	December 31,
	2019			2018
Cash flows from operating activities:
Net loss	$	(10,090	)	$	(92,535	)
Adjustments to reconcile net loss to cash provided by operating activities, net of the effects of acquisitions:
Depreciation and amortization	87,397			106,509
Operating lease right-of-use assets	7,872			—
Loss on divestiture of business	—			7,390
Loss on disposal of fixed assets	16			181
Deal-related compensation expense and accretion charges	—			102
Share-based compensation expense	39,961			44,142
Net change in fair value of contingent and contractual liabilities	541			—
Accretion of contingent consideration	(24		)	(64		)
Impairment of intangible assets	—			35,871
Deferred income taxes	(8,480		)	(27,667		)
Other losses (gains)	35			(206		)
Changes in assets and liabilities
Accounts receivable and unbilled costs	(9,554		)	(33,928		)
Due from related party	—			171
Inventories	(1,233		)	2,683
Prepaid expenses and other assets	10,957			5,582
Accounts payable	(4,647		)	582
Accrued compensation and other expenses	16,009			28,385
Operating lease liabilities	(9,690		)	—
Due to related party	—			232
Income taxes payable	24			(1,754		)
Deferred revenue	(1,304		)	(6,162		)
Net cash provided by operating activities	117,790			69,514
Cash flows from investing activities:
Purchase of marketable securities	(89,840		)	(184,104		)
Proceeds from sales and maturity of marketable securities	108,413			155,346
Purchase of fixed assets	(15,207		)	(19,462		)
Payments related to the divestiture of business	—			(2,911		)
Increase in deposits	(29		)	(97		)
Acquisition of businesses	(4,154		)	—
Capitalized software development costs	—			(132		)
Net cash used in investing activities	(817		)	(51,360		)
Cash flows from financing activities:
Issuance of common stock under stock plans	2			2
Payment of contingent consideration	—			(2,851		)
Repayment of long-term debt	(100,000		)	—
Treasury stock repurchases	(125,000		)	—
Tax withholding on restricted stock units	(11,612		)	(11,415		)
Net cash used in financing activities	(236,610		)	(14,264		)
Effect of exchange rate changes on cash and cash equivalents	(1,523		)	(5,380		)
Net decrease in cash and cash equivalents and restricted cash	(121,160		)	(1,490		)
Cash and cash equivalents and restricted cash, beginning of period	409,820			370,731
Cash and cash equivalents and restricted cash, end of period	$	288,660		$	369,241
Supplemental disclosures:
Cash paid for interest	$	14,019		$	17,410
Cash paid for income taxes	$	10,494		$	9,150
Non-cash transactions:
Transfers of inventory to fixed assets	$	2,290		$	2,152
Additions to property, plant and equipment included in accounts payable	$	119		$	1,190
Tenant improvement allowance	$	—		$	10,171
Issuance of common stock under employee stock plans	$	6,593		$	7,575
Contingent consideration related to acquisition, included in accrued other	$	1,000		$	—
Fair value of contingent consideration received as partial consideration for divestiture of business	$	—		$	2,257

The accompanying notes are an integral part of these consolidated financial statements.

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NetScout Systems, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements have been prepared by NetScout Systems, Inc. (NetScout or the Company). Certain information and footnote disclosures normally included in financial statements prepared under United States generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, the unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company's financial position and stockholders' equity, results of operations and cash flows. The year-end consolidated balance sheet data and statement of stockholders' equity were derived from the Company's audited financial statements, but do not include all disclosures required by GAAP. The results reported in these unaudited interim consolidated financial statements are not necessarily indicative of results that may be expected for the entire year. All significant intercompany accounts and transactions are eliminated in consolidation.

These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019 filed with the Securities and Exchange Commission on May 28, 2019.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, Income Taxes, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021. ASU 2019-12 is effective for NetScout beginning April 1, 2022. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company is currently assessing the effect that ASU 2019-12 will have on its financial position, results of operations, and disclosures.

In August 2018, the FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU adds, modifies and clarifies several disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This guidance is effective for fiscal years ending after December 15, 2020. ASU 2018-14 is effective for NetScout beginning April 1, 2021. Early adoption is permitted. The Company is currently assessing the effect that ASU 2018-14 will have on its financial position, results of operations, and disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 adds, modifies and removes several disclosure requirements relative to the three levels of inputs used to measure fair value in accordance with Topic 820, Fair Value Measurement. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. ASU 2018-13 is effective for NetScout beginning April 1, 2020. Early adoption is permitted. The Company is currently assessing the effect that ASU 2018-13 will have on its financial position, results of operations, and disclosures.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). ASU 2017-12 provides guidance to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments expand and refine hedge accounting for both non-financial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2018. The Company adopted ASU 2017-12 effective April 1, 2019. The adoption has had an immaterial impact on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-11 (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 is effective for annual periods beginning after December 15, 2019, and interim periods therein. Topic 326 is effective for NetScout beginning April 1, 2020, and earlier adoption is permitted. The Company is currently assessing the effect that Topic 326 will have on its financial position, results of operations, and disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) Section A - Leases: Amendments to the FASB Accounting Standards Codification (ASU 2016-02) and issued subsequent amendments to initial guidance in July 2018 within

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ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements (collectively, ASC 842). ASC 842 aims to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company adopted the guidance as of April 1, 2019 using the modified retrospective method. Please refer to Note 13, "Leases" for further details.

NOTE 2 – REVENUE RECOGNITION

Revenue Recognition Policy

The Company exercises judgment and uses estimates in connection with determining the amounts of product and service revenues to be recognized in each accounting period.

The Company derives revenues primarily from the sale of network management tools and security solutions for service provider and enterprise customers, which include hardware, software and service offerings. The majority of the Company's product sales consist of hardware products with embedded software that are essential to providing customers the intended functionality of the solutions. The Company also sells software offerings decoupled from the underlying hardware and software solutions to provide customers with enhanced functionality.

The Company accounts for revenue once a legally enforceable contract with a customer has been approved by the parties and the related promises to transfer products or services have been identified. A contract is defined by the Company as an arrangement with commercial substance identifying payment terms, each party’s rights and obligations regarding the products or services to be transferred and the amount the Company deems probable of collection. Customer contracts may include promises to transfer multiple products and services to a customer. Determining whether the products and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation may require significant judgment. Revenue is recognized when control of the products or services are transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for products and services.

Product revenue is typically recognized upon shipment, provided a legally enforceable contract exists, control has passed to the customer, and in the case of software products, when the customer has the rights and ability to access the software; and collection of the related receivable is probable. If any significant obligations to the customer remain post-delivery, typically involving obligations relating to installation and acceptance by the customer, revenue recognition is deferred until such obligations have been fulfilled. The Company's service offerings include installation, integration, extended warranty and maintenance services, post-contract customer support, stand-ready software-as-a-service (SAAS) and other professional services including consulting and training. The Company generally provides software and/or hardware support as part of product sales. Revenue related to the initial bundled software and hardware support is recognized ratably over the support period. In addition, customers can elect to purchase extended support agreements for periods after the initial software/hardware warranty expiration. Support services generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates, bug fixes and hardware repair and replacement. Consulting services are recognized upon delivery or completion of performance depending on the terms of the underlying contract. Reimbursements of out-of-pocket expenditures incurred in connection with providing consulting services are included in services revenue, with the offsetting expense recorded in cost of service revenue. Training services include on-site and classroom training. Training revenues are recognized upon delivery of the training.

Generally, the Company's contracts are accounted for individually. However, when contracts are closely interrelated and dependent on each other, it may be necessary to account for two or more contracts as one to reflect the substance of the group of contracts.

Bundled arrangements are concurrent customer purchases of a combination of the Company's product and service offerings that may be delivered at various points in time. The Company allocates the transaction price among the performance obligations in an amount that depicts the relative standalone selling prices (SSP) of each obligation. Judgment is required to determine the SSP for each distinct performance obligation. The Company uses a range of amounts to estimate SSP when it sells each of the products and services separately based on the element’s historical pricing. The Company also considers its overall pricing objectives and practices across different sales channels and geographies, and market conditions. Generally, the Company has established SSP for a majority of its service elements based on historical standalone sales. In certain instances, the Company has established SSP for services based upon an estimate of profitability and the underlying cost to fulfill those services. Further, for certain service engagements, the Company considers quoted prices as part of multi-element arrangements of those engagements as a basis for establishing SSP. SSP has been established for product elements as the average or median selling price the element was recently sold for, whether sold alone or sold as part of a multiple element transaction. The Company reviews sales of the product elements on a quarterly basis and updates, when appropriate, its SSP for such elements to ensure that it reflects recent pricing experience. The Company's products are distributed through its direct sales force and

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indirect distribution channels through alliances with resellers and distributors. Revenue arrangements with resellers and distributors are recognized on a sell-in basis; that is, when control of the product transfers to the reseller or distributor. The Company records consideration given to a reseller or distributor as a reduction of revenue to the extent they have recorded revenue from the reseller or distributor. With limited exceptions, the Company's return policy does not allow product returns for a refund. Returns have been insignificant to date. In addition, the Company has a history of successfully collecting receivables from its resellers and distributors.

During the nine months ended December 31, 2019, the Company recognized revenue of $240.5 million related to the Company's deferred revenue balance reported at March 31, 2019.

Performance Obligations

Customer contracts may include promises to transfer multiple products and services to a customer. Determining whether the products and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation may require significant judgment. The transaction price is allocated among performance obligations in bundled contracts in an amount that depicts the relative standalone selling prices of each obligation.

For contracts involving distinct hardware and software licenses, the performance obligations are satisfied at a point in time when control is transferred to the customer. For standalone maintenance and post-contract support (PCS) the performance obligation is satisfied ratably over the contract term as a stand-ready obligation. For consulting and training services, the performance obligation may be satisfied over the contract term as a stand-ready obligation, satisfied over a period of time as those services are delivered, or satisfied at the completion of the service when control has transferred, or the services have expired unused.

Payments for hardware, software licenses, one-year maintenance, PCS and consulting services, are typically due up front with payment terms of 30 to 90 days. However, the Company does have contracts pursuant to which billings occur ratably over a period of years following the transfer of control for the contracted performance obligations. Payments on multi-year maintenance, PCS and consulting services are typically due in annual installments over the contract term. The Company did not have any material variable consideration such as obligations for returns or refunds at December 31, 2019.

At December 31, 2019, the Company had total deferred revenue of $365.5 million, which represents the aggregate total contract price allocated to undelivered performance obligations. The Company expects to recognize $261.2 million, or 71%, of this revenue during the next 12 months, and expects to recognize the remaining $104.3 million, or 29%, of this revenue thereafter.

Because of NetScout's revenue recognition policies, there are circumstances for which the Company does not recognize revenue relating to sales transactions that have been billed, and the related account receivable has not been collected. While the receivable represents an enforceable obligation, for balance sheet presentation purposes, the Company has not recognized the deferred revenue, or the related account receivable and no amounts appear in the consolidated balance sheets for such transactions because control of the underlying deliverable has not transferred. The aggregate amount of unrecognized accounts receivable and deferred revenue was $4.9 million and $23.3 million at December 31, 2019 and March 31, 2019, respectively.

NetScout expects that the amount of billed and unbilled deferred revenue will change from quarter to quarter for several reasons, including the specific timing, duration and size of large customer support and service agreements, varying billing cycles of such agreements, the specific timing of customer renewals, and foreign currency fluctuations. The Company did not have any significant financing components, or variable consideration or performance obligations satisfied in a prior period recognized during the nine months ended December 31, 2019.

Contract Balances

The Company may receive payments from customers based on a billing schedule as established by the Company’s contracts. Contract assets relate to performance obligations where control has transferred to the customer in advance of scheduled billings. The Company records unbilled accounts receivable representing the right to consideration in exchange for goods or services that have been transferred to a customer conditional on the passage of time. Deferred revenue relates to payments received in advance of performance under the contract.

Costs to Obtain Contracts

The Company has determined that the only significant incremental costs incurred to obtain contracts with customers within the scope of Topic 606 are sales commissions paid to its employees. Sales commissions are recorded as an asset and amortized to expense ratably over the remaining performance periods of the related contracts with remaining performance obligations. The Company expenses costs as incurred for sales commissions when the amortization period would have been one year or less.

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At December 31, 2019, the consolidated balance sheet included $6.8 million in assets related to sales commissions to be expensed in future periods. A balance of $3.8 million was included in prepaid expenses and other current assets, and a balance of $3.0 million was included in other assets in the Company's consolidated balance sheet at December 31, 2019. At March 31, 2019, the consolidated balance sheet included $6.4 million in assets related to sales commissions to be expensed in future periods. A balance of $3.8 million was included in prepaid expenses and other current assets, and a balance of $2.6 million was included in other assets in the Company's consolidated balance sheet at March 31, 2019.

During the three and nine months ended December 31, 2019 and 2018, respectively, the Company recognized $1.6 million, $1.5 million, $4.8 million, and $4.8 million of amortization related to this sales commission asset, which is included in the sales and marketing expense line in the Company's consolidated statements of operations.

NOTE 3 – CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of investments, trade accounts receivable and accounts payable. The Company's cash, cash equivalents, and marketable securities are placed with financial institutions with high credit standings.

At December 31, 2019 and March 31, 2019, the Company had no direct customers or indirect channel partners which accounted for more than 10% of the accounts receivable balance.

During the three and nine months ended December 31, 2019, no direct customers or indirect channel partners accounted for more than 10% of the Company's total revenue. During the three months ended December 31, 2018, one direct customer, Verizon, accounted for more than 10% of the Company's total revenue, while no indirect channel partners accounted for more than 10% of total revenue. During the nine months ended December 31, 2018, no direct customers or indirect channel partners accounted for more than 10% of total revenue.

Historically, the Company has not experienced any significant failure of its customers' ability to meet their payment obligations nor does the Company anticipate material non-performance by its customers in the future; accordingly, the Company does not require collateral from its customers. However, if the Company's assumptions are incorrect, there could be an adverse impact on its allowance for doubtful accounts.

NOTE 4 – SHARE-BASED COMPENSATION

The following is a summary of share-based compensation expense including restricted stock units granted pursuant to the Company's 2007 Equity Incentive Plan, as amended (Amended 2007 Plan), and employee stock purchases made under the Company's 2011 Employee Stock Purchase Plan, as amended, (ESPP), based on estimated fair values within the applicable cost and expense lines identified below (in thousands):



	Three Months Ended				Nine Months Ended
	December 31,				December 31,
	2019		2018		2019		2018
Cost of product revenue	$	231	$	375	$	843	$	1,188
Cost of service revenue	1,275		1,519		4,584		4,694
Research and development	3,437		3,979		12,076		13,544
Sales and marketing	3,910		4,649		13,333		15,051
General and administrative	2,508		3,237		9,125		9,665
	$	11,361	$	13,759	$	39,961	$	44,142

On September 12, 2019, the Company’s stockholders approved the 2019 Equity Incentive Plan (2019 Plan), which replaced the Company’s Amended 2007 Plan. The 2019 Plan permits the granting of incentive and nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and other stock awards, collectively referred to as "share-based awards." Periodically, the Company grants share-based awards to employees and officers of the Company and its subsidiaries. The Company accounts for these share-based awards in accordance with GAAP, which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to its employees and directors. Share-based award grants are generally measured at fair value on the date of grant based on the number of shares granted and the quoted price of the Company’s common stock. Such value is recognized as a cost of revenue or an operating expense over the corresponding vesting period. At September 12, 2019, there was a total of 6,794,651 shares reserved for issuance under the 2019 Plan, which consisted of 5,500,000 new shares plus 1,294,651 shares that remained available for grant under the Amended 2007 Plan as of September 12, 2019, the effective date of the 2019 Plan.

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The aggregate number of shares available for issuance under the 2019 Plan will increase by 2.76 shares for each share: (i) subject to an award granted under the Amended 2007 Plan or 2019 Plan that are not issued because such award expires or otherwise terminates without all of the shares covered by such award having been issued; (ii) any shares subject to an award under the Amended 2007 Plan or 2019 Plan that are not issued because such award is settled in cash; (iii) any shares issued pursuant to an award granted under the Amended 2007 Plan or 2019 Plan that are forfeited back to or repurchased by the Company because of failure to vest; and (iv) any shares that are reacquired or withheld by the Company to satisfy tax withholding obligations in connection with common stock issued pursuant to restricted stock, restricted stock units, performance stock awards, or other stock awards granted under the Amended 2007 Plan and 2019 Plan. Furthermore, the share reserve under the 2019 Plan is reduced by one share for each share of common stock issued pursuant to a stock option or stock appreciation right and 2.76 shares for each share of common stock issued pursuant to restricted stock, restricted stock units, performance stock awards, or other stock awards granted under the 2019 Plan on or after September 12, 2019. At December 31, 2019, there were 6,902,159 shares of common stock available for grant under the 2019 Plan.

The 2019 Plan is administered by the Compensation Committee of the Board of Directors. The Compensation Committee operates under guidelines established by the Board of Directors. The Compensation Committee has the authority to select the employees and consultants to whom awards are granted (except for directors and executive officers) and determine the terms of each award, including the number of shares of common stock subject to the award.

Share-based awards generally vest over four years. The exercise price of stock options shall not be less than 100% of the fair market value of the common stock at the date of grant (110% for incentive stock options granted to holders of more than 10% of the voting stock of NetScout). The term of stock options granted cannot exceed seven years (five years for incentive stock options granted to holders of more than 10% of the voting stock of NetScout).

Employee Stock Purchase Plan – The Company maintains the ESPP for all eligible employees as described in the Company's Annual Report on Form 10-K for the year ended March 31, 2019. Under the ESPP, shares of the Company's common stock may be purchased on the last day of each bi-annual offering period at 85% of the fair value on the last day of such offering period. The offering periods run from March 1st through August 31st and from September 1st through the last day of February each year. During the nine months ended December 31, 2019, employees purchased 297,635 shares under the ESPP and the value per share was $22.15.

NOTE 5 – CASH, CASH EQUIVALENTS, RESTRICTED CASH AND MARKETABLE SECURITIES

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents and those investments with original maturities greater than three months to be marketable securities. Cash and cash equivalents consisted of U.S. government and municipal obligations, commercial paper, money market instruments and cash maintained with various financial institutions at December 31, 2019 and March 31, 2019.

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows (in thousands):



	December 31, 2019		March 31, 2019		December 31, 2018		March 31, 2018
Cash and cash equivalents	$	287,660	$	409,632	$	369,054	$	369,821
Restricted cash	1,000		188		187		910
Total cash, cash equivalents and restricted cash	$	288,660	$	409,820	$	369,241	$	370,731

The Company's restricted cash includes cash balances which are legally or contractually restricted. The Company's restricted cash is included within prepaid and other current assets and consists of amounts related to holdbacks associated with prior acquisitions.

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Marketable Securities

The following is a summary of marketable securities held by NetScout at December 31, 2019, classified as short-term and long-term (in thousands):



	Amortized Cost		Unrealized Gains		Fair Value
Type of security:
U.S. government and municipal obligations	$	27,139	$	48	$	27,187
Commercial paper	24,911		—		24,911
Corporate bonds	4,167		9		4,176
Total short-term marketable securities	56,217		57		56,274
U.S. government and municipal obligations	2,549		12		2,561
Total long-term marketable securities	2,549		12		2,561
Total marketable securities	$	58,766	$	69	$	58,835

The following is a summary of marketable securities held by NetScout at March 31, 2019, classified as short-term and long-term (in thousands):