NetScout Q2: Revenue Up 1.4%, Margins Expand, Guidance Holds

NetScout Systems grew fiscal second-quarter revenue 1.4% to $222.2 million and lifted non-GAAP diluted earnings per share to $0.71 from $0.62 a year ago, while reaffirming its full-year outlook. President and CEO Anil Singhal said the results matched expectations and that first-half performance kept the company on track for its fiscal 2027 objectives.

The quarter ended September 30, 2026 reflected the timing of government-related orders that landed earlier than anticipated and benefited the first quarter. Product revenue fell 5.1% to $89.9 million; service revenue rose 6.4% to $132.3 million. Adjusted net income climbed to $52.8 million from $45.1 million.

In short: modest top line, better profits, no change to the plan.

Where did the margin expansion come from?

Non-GAAP operating margin widened to 28.3% from 26.5%, on a 2.7% decline in operating expenses to $116.9 million. EVP and CFO Tony Piazza credited continued cost discipline plus one timing effect: the company shifted its ENGAGE user summit into the third quarter from the second quarter last year.

Non-GAAP gross margin slipped to 80.9% from 81.4%, reflecting overhead costs tied to a DDoS asset acquisition (DDoS: distributed denial-of-service attacks that flood networks with traffic).

First-half revenue rose 6.6% to $432.6 million, with non-GAAP diluted EPS of $1.23 versus $0.95. Service Assurance revenue grew 8.2%, helped by the timing of federal orders; cybersecurity revenue gained 3.8%.

Piazza said federal revenue ran in the low teens as a percentage of first-half revenue, above its usual mid-to-high single-digit share. The federal pipeline for the second half looks good, he said, but order timing and size are less predictable.

The takeaway: half the margin story is discipline, the other half is calendar luck.

What did management guide for the rest of the year?

NetScout held its fiscal 2027 revenue forecast at $885 million to $915 million and non-GAAP EPS guidance at $2.65 to $2.80 per diluted share. The outlook assumes a non-GAAP effective tax rate of roughly 20% and 74–75 million weighted average diluted shares.

For the third quarter, the company expects revenue of $240 million to $250 million and non-GAAP EPS of $0.90 to $0.95. Piazza flagged a hurdle: the year-earlier quarter included roughly $15 million in orders pulled forward from the fourth quarter. Strip that out, he said, and the outlook implies low- to mid-single-digit growth.

Free cash flow was a use of $17.8 million in the quarter on working capital timing. NetScout bought back about 2 million shares for roughly $77 million and said it intends to stay active in the market for the rest of the fiscal year, subject to conditions. It ended the quarter with $571.3 million in cash and marketable securities, down from $705.1 million at the end of fiscal 2026, with no balance drawn on its $600 million revolving credit facility.

Bottom line: the balance sheet is funding buybacks, not leverage.

How big is the AI opportunity right now?

Singhal said customer adoption of AI remains early, but NetScout has seen a "dramatic increase" in its sales funnel for Smart Data and Omnis products. He declined to give a fiscal 2027 growth estimate for those offerings, citing long sales cycles, and said the company may share more near the end of the fiscal year.

The company recently introduced nGenius Copilot, a conversational AI extension to nGeniusONE, and announced connectivity that lets AI assistants and agents access its operational data. Piazza said some Omnis AI solutions went first to a select group of pilot customers before a broader rollout at ENGAGE.

Singhal expects the newer AI products to show more visible impact in the next fiscal year, with customer governance issues and hardware investment stretching sales cycles. He named AI and Omnis as potential upside sources; Piazza added long-term cybersecurity opportunities and said he expects cybersecurity revenue to grow mid-single digits in fiscal 2027. Starting fiscal 2028, NetScout will rename Service Assurance as Network Observability.

What else moved the quarter?

• Service provider spending stays disciplined, with consolidation creating challenges, management said.
• Business in selected Middle Eastern countries has been affected by war and other factors, Singhal said; enterprise demand and pipeline remain healthy, per Piazza.
• Rising server prices have created supply-chain challenges; NetScout temporarily increased inventory to cut exposure and expects levels to normalize.
• COO Sanjay Munshi resigned effective October 22, with leadership team members absorbing his duties.

The open question for investors is whether the AI funnel converts before the federal tailwind fades.