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GUAR DIANS OF TH E
CONNECTED WO RLD
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A S S U R I N G
A N D
S E C U R I N G
T H E C O N N E C T E D W O R L D
In an increasingly connected world and with remote work being part of the “new normal,” NETSCOUT SYSTEMS, INC.
(NASDAQ: NTCT) understands that the stakes have never been higher — network and application downtime as well as
degradations in digital service quality and security breaches can instantly impact revenue, disrupt operations, erode
profitability and harm reputations. That’s why the world’s largest and most innovative service providers, enterprises and
government agencies trust NETSCOUT to help assure and secure the performance of their networks and their user
experience while driving ROI on their infrastructure investments, maximizing digital performance, and protecting against
attacks that threaten availability or compromise critical business assets.
NETSCOUT assures digital business services against disruptions in availability, performance, and security. Regardless of
the infrastructure or environment — from on-premises to private and public cloud environments — NETSCOUT’s solutions
provide the real-time visibility required to manage performance and protect against an ever-expanding array of security
threats. With deployment flexibility spanning appliances, commercial off-the-shelf (COTS), virtual, or SaaS, NETSCOUT’s
solutions convert wire data into contextual, high-value “smart data” in real-time, enabling customers’ operations and
security teams to identify issues impacting their digital transformation initiatives, earlier and with more precision, to resolve
problems faster.
F I N A N C I A L P E R F O R M A N C E
Revenue
(Non-GAAP, $ in millions)
Income From Operations
(Non-GAAP, $ in millions)
Free Cash Flow2
($ in millions)
$200
17.7%
18.3%
20%
$911.5
$892.0
$100
$161.6
$163.3
$0
15%
10%
5%
0%
$205.1
$126.3
FY’191
FY’20
FY’19
FY’20
FY’193
FY’20
Op. Income
Op. Margin
1 FY’19 Revenue includes $18 million associated with the divested HNT tools business.
2 Free cash flow is defined as cash flow provided by operating activities less purchases of fixed and intangible assets.
3 Includes ~$17 million related to restructuring payments in conjunction with voluntary separation and other related workforce
reduction programs implemented in FY’19.
$ in millions except % and EPS
FY’194
FY’20
GAAP
Non-GAAP
GAAP
Non-GAAP
Revenue
$ 909.9
$ 911.5
$ 891.8
$ 892.0
Income from Operations
$ (71.6)
$ 161.6
$ 17.6
$ 163.3
Income from Operations %
-7.9%
17.7%
Net Income
Diluted Net Income per Share
Free Cash Flow
$ (73.3)
$ 109.2
$ (0.93)
$ 1.38
$ 126.3
-
2.0%
$ (2.8)
$ (0.04)
$ 205.1
18.3%
$ 119.1
$
1.57
-
4 FY’19 GAAP and Non-GAAP revenue numbers include $18 million associated with the divested HNT tool business. GAAP net income includes a
$45 million charge associated with the divested HNT tools business.
A reconciliation of each non-GAAP metric with the applicable GAAP metric is available on page R-1.
C O N N E C T E D F O R G O O D
As an important element of our corporate responsibility, we allocate a
significant portion of our corporate philanthropy resources to our “Heart of
Giving” program, which enables our employees around the world to plan and
participate in hands-on community service projects.
To learn more about our philanthropic activities, please visit www.netscout.com
and go to the Company section of the site.
NETSCOUT employees organize a drive to fill a bus with clothes,
toiletries, and supplies for local school programs.
01
T O O U R S T O C K H O L D E R S :
As we prepare this year’s annual report, we find ourselves in a much different world than a year
ago due to the COVID-19 global pandemic. Given the environment as we completed our fiscal
year, we are pleased with our performance and achievements for fiscal year 2020.
Meeting Fiscal Year 2020 Objectives
A year ago, I wrote that our priority in fiscal year 2020 was to produce top-line growth in order to drive non-GAAP
operating leverage, diluted earnings per share (EPS) growth, and strong free cash flow. Entering the year, we were excited
about the ongoing adoption of our software-centric portfolio and were enthusiastic about the potential of our newest
product innovations. Furthermore, the most severe top-line headwinds we had been facing during the past few years had
substantially dissipated.
I am pleased to report that we achieved the majority of our financial objectives, despite the fact that the COVID-19
global pandemic impacted the last quarter of our fiscal year, leading to flat annual revenue on an organic basis, which
excludes the divested HNT tools business from the comparison. We drove a 35% year-over-year increase in sales of our
software-centric solution as we advanced its adoption to approximately 30% of our service assurance product revenue.
This growth, coupled with our strict cost management, enabled us to deliver on our goal of increased operating leverage.
We also exceeded our diluted EPS and free cash flow goals as a result of our strong operating leverage and disciplined
capital management approach. We delivered 14% growth in non-GAAP diluted EPS and a 62% increase in free cash flow.
At more than $200 million, our free cash flow was 172% of non-GAAP net income. This performance enabled us to return
$175 million to our shareholders through our share repurchase program during the fiscal year.
From a strategic perspective, we made important progress in fiscal year 2020 as we advanced our newest product
innovations and combined our service assurance and security organizations and technologies to allow us to begin to
deliver unique and valuable solutions to the market.
Looking Ahead to Fiscal Year 2021
We will undoubtedly continue to experience unprecedented, uncertain, and challenging times as the COVID-19 global
pandemic extends into our fiscal year 2021. It is during times like these that I find that our purpose as “Guardians of the
Connected World” is more relevant than ever. Our customers depend on NETSCOUT’s service assurance and security
solutions to assure and secure critical networks and infrastructure that connect people and support businesses around
the globe. It is essential that these infrastructures continue to perform, even as they are stressed with unparalleled
demand as much of the world works remotely. We are proud to provide such essential solutions and to support our
customers during these critical times.
While this pandemic has brought about extreme uncertainty in many facets of life and business, I am deeply certain of
two things:
• NETSCOUT can, and will, play a valuable role in getting the world through this crisis. Our unique solutions are
critical and valuable to our customers to solve their most pressing network and security challenges.
• NETSCOUT is a strong company and will emerge from this crisis even stronger. We have navigated many
challenging times during our 35 years in business and we are positioned well to do it again. We have great product
solutions, a dedicated and talented team, a solid balance sheet, and a strong financial profile that will provide us the
experience, liquidity, and flexibility necessary to weather this crisis.
02
Moving forward, we are well-positioned to fulfill our purpose as “Guardians of the Connected World.” We remain
encouraged about the opportunities we see, such as 5G in the service provider vertical and the advancement of digital
transformation, security and also 5G in the enterprise vertical. We are harnessing the power of wire data to provide an
integrated set of solutions based on “smart data.” In doing so, we are solving our customers’ most challenging network
and security issues in a way that creates tremendous value for them. As they continue to build on their investments with
us, they are reducing their cost of ownership and increasing their return on investment in our solutions. This gives them
the confidence to innovate as we provide them “Visibility Without Borders,” so that they can maintain control in their
ever-changing worlds.
We remain committed to our “Lean But Not Mean” culture and will prioritize the health, safety and security of our people,
partners, customers and stakeholders while also improving our operations and maintaining our disciplined approach to
managing capital and expenses. For fiscal year 2021, we expect to once again deliver operating leverage, grow earnings
per share, and produce strong free cash flow. We also plan to continue to innovate, advance, and invest in our technology
and solutions to ensure that we maintain our industry leadership throughout this crisis and well into the future.
In closing, I would like to thank all the first responders who are working tirelessly to keep us safe, my fellow Guardians at
NETSCOUT for their commitment and dedication, as well as our customers and stakeholders for their continued support.
I look forward to sharing our continued progress and achievements with you over the course of fiscal year 2021 and hope
that you and your families remain healthy and safe. I am confident that we will get through this global crisis together and
emerge as a stronger Company and world.
Sincerely,
Anil Singhal
Co-Founder, President, Chief Executive Officer, and Chairman of the Board
W E A R E G U A R D I A N S
Today’s digital world moves at the speed of light. Modern
technology allows communication to travel and information
to be shared instantly across the globe. The connected world
is only as strong as the people who protect it. NETSCOUT
Guardians are an elite force of trailblazers, innovators, and
problem solvers who take on the responsibility of tackling
the world’s most pressing network challenges.
03
A few Guardians from our NETSCOUT Arbor Security team.
T R E N D S :
D I G I T A L T R A N S F O R M A T I O N ,
5 G , A N D S E C U R I T Y
NETSCOUT’s service assurance and security solutions are enabling the world’s largest and most innovative organizations
to optimize network performance, ensure delivery of mission-critical services and applications, gain insight into the end-user
experience and protect the network for attack as they navigate the latest technology trends.
ENTERPRISE
Enterprises worldwide are accelerating the advancement of major digital transformation initiatives for business continuity and
contingency planning, to improve the delivery of new products and services, to enhance mission-critical operational workflows
and to drive operational and capital efficiency — all while taking overall quality, performance, and security to new levels. To
keep pace with this innovation, CIOs and IT operations teams are turning to NETSCOUT for a holistic approach to real-
time network, application and infrastructure performance management based on end-to-end visibility into all service delivery
interdependencies. This holistic approach includes assurance across physical and virtual, on-premises and off-premises, and in
private and public clouds. We refer to this as “Visibility Without Boarders” and believe it allows organizations the confidence to
innovate while maintaining control in their ever-changing worlds.
NETSCOUT’s ability to capture and analyze wire data in real-time is helping drive increased collaboration between network and
security operations teams as well. NETSCOUT recently began integrating the Company’s historical strength in packet forensics
with Arbor’s robust catalog of known security threats. The addition of Arbor’s threat catalog enables network and security teams
to work faster and more efficiently to identify and investigate potential network-based security breaches. NETSCOUT recently
launched Arbor Threat Analytics and Sightline with Sentinel as solutions to leverage this powerful combination. Today these
technologies are unleashing the next generation of smart distributed denial of service (DDoS) solutions. Finally, as enterprises
start to take advantage of 5G networks and technologies, NETSCOUT can bridge the 5G gap for them by leveraging our
expertise in both the enterprise and the service provider verticals.
SERVICE PROVIDER
Across fixed line, 3G, 4G and now 5G network architectures, NETSCOUT’s service assurance solutions are helping digital
service providers gain end-to-end, real-time, reliable visibility into their network and the services they deliver over them. As a
result, service providers gain timely insight into network problems, quickly pinpoint issues, automate key processes, and better
understand the subscriber experience. As tier-one operators across North America and other major geographic regions invest
in 5G, NETSCOUT is 5G ready. We are well-positioned to leverage our incumbency to help carriers in each phase of the
network lifecycle from planning and launch to monetization and optimization.
Carriers worldwide also rely on NETSCOUT’s Arbor family of market-leading smart DDoS solutions to detect and mitigate an
ever-expanding range of distributed denial of service (DDoS) attacks that are aimed at disrupting network or service availability.
As DDoS attacks continue to increase in frequency, volume and complexity, NETSCOUT’s enhanced capabilities are enabling
service providers to realize significant benefits, including increased efficiency of their DDoS defenses and broader network
infrastructure; greater insight into their network topologies, customers and traffic patterns via powerful, big data analytics
and visualizations; and opportunities to monetize their investment in NETSCOUT Arbor technology through managed DDoS
services for their enterprise customers.
04
Reconciliation of GAAP to Non-GAAP Financial Measures
(in millions, except % and EPS data)
GAAP revenue
Product
Service
Total GAAP revenue
Non-GAAP adjustments
tt
Non-GAAP revenue
Non-GAAP product
Non-GAAP service
Total non-GAAP revenue
Total GAAP cost of revenue
Non-GAAP adjustments
tt
Total non-GAAP cost of revenue
Gross profit - GAAP
Non-GAAP adjustments
tt
Gross profit - non-GAAP
Non-GAAP gross profio t margin
Total operating expenses - GAAP
Non-GAAP adjustments
Total operating expenses - non-GAAP
Income from operations - GAAP
Non-GAAP adjustments
Income from operations - non-GAAP
Non-GAAP income from operations margin
Net income - GAAP
Non-GAAP adjustments
Net income - non-GAAP
Diluted net income per share - GAAP
Share impact of non-GAAP adjustments identified above
Diluted net income per share - non-GAAP
Diluted weighted average common shares outstanding - GAAP
Diluted weighted average common shares outstanding - non-GAAP
Net cash provided by operating activities
Purchase of fixed assets and intangible assets
Free cash flow
Certain numbers may not total due to rounding.
NETSCOUT
FY’19
Reported
NETSCOUT
FY’20
Reported
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
467.3
442.6
909.9
1.6
467.7
46
443.8
911.5
254.1
(38.7)
215.4
655.8
40.3
696.1
76.4%
727.4
(192.8)
534.5
(71.6)
233.2
161.6
17.7%
(73.3)
182.6
109.2
(0.93)
2.31
1.38
78.6
79.3
149.8
(23.5)
126.3
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
438.3
453.5
891.8
0.2
438.3
453.7
892.0
242.2
(31.9)
210.3
649.6
32.1
681.7
76.4%
632.0
(113.6)
518.4
17.6
145.7
163.3
18.3%
(2.8)
121.9
119.1
(0.04)
1.61
1.57
75.2
75.8
225.0
(19.9)
205.1
Non-GAAP adjustments include revenue related to deferred revenue revaluation as well as expenses related to the
amortization of acquired intangible assets, stock-based compensation, certain expenses relating to acquisitions including
depreciation costs, compensation for post-combination services, business development and integration costs, expenses tied
to implementing new accounting standards, restructuring costs, charges tied to the impairment of intangible assets, loss
related to divested assets and income associated with transitional services agreements. For the specific detail on the value
of each non-GAAP adjustment, please refer to the Company’s quarterly earnings press releases available on the IR section of
www.netscout.com.
R-1
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(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:53)(cid:72)(cid:86)(cid:87)(cid:85)(cid:88)(cid:70)(cid:87)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:75)(cid:68)(cid:85)(cid:74)(cid:72)(cid:86)
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(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:19)(cid:17)(cid:25)(cid:3)(cid:3)
(cid:3)(cid:3)(cid:21)(cid:17)(cid:26)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:16)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:19)(cid:17)(cid:28)(cid:3)
(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:19)(cid:17)(cid:22)(cid:3)
(cid:3)(cid:28)(cid:17)(cid:24)
(cid:3)(cid:21)(cid:17)(cid:21)
(cid:16)
(cid:3)(cid:20)(cid:17)(cid:21)
(cid:3)(cid:21)(cid:22)(cid:22)(cid:17)(cid:21)(cid:3)
(cid:3)(cid:20)(cid:23)(cid:24)(cid:17)(cid:26)(cid:3)
(cid:3)(cid:20)(cid:25)(cid:20)(cid:17)(cid:25)(cid:3)
(cid:3)(cid:11)(cid:26)(cid:22)(cid:17)(cid:22)(cid:12)
(cid:3)(cid:19)(cid:17)(cid:23)
(cid:3)(cid:20)(cid:17)(cid:21)
(cid:3)(cid:24)(cid:25)(cid:17)(cid:22)
(cid:3)(cid:20)(cid:19)(cid:24)(cid:17)(cid:24)(cid:3)
(cid:3)(cid:19)(cid:17)(cid:28)
(cid:3)(cid:19)(cid:17)(cid:28)
(cid:3)(cid:19)(cid:17)(cid:27)
(cid:3)(cid:20)(cid:27)(cid:17)(cid:26)
(cid:3)(cid:22)(cid:24)(cid:17)(cid:28)
(cid:3)(cid:19)(cid:17)(cid:28)
(cid:3)(cid:28)(cid:17)(cid:24)
(cid:3)(cid:11)(cid:19)(cid:17)(cid:19)(cid:12)
(cid:3)(cid:20)(cid:17)(cid:24)
(cid:3)(cid:11)(cid:23)(cid:28)(cid:17)(cid:28)(cid:12)
(cid:3)(cid:3)(cid:20)(cid:27)(cid:21)(cid:17)(cid:25)(cid:3)
(cid:3)(cid:3)(cid:20)(cid:19)(cid:28)(cid:17)(cid:21)
(cid:3)(cid:11)(cid:19)(cid:17)(cid:28)(cid:22)(cid:12)
(cid:3)(cid:21)(cid:17)(cid:22)(cid:20)
(cid:3)(cid:20)(cid:17)(cid:22)(cid:27)
(cid:3)(cid:26)(cid:27)(cid:17)(cid:25)
(cid:26)(cid:28)(cid:17)(cid:22)
(cid:7)
(cid:7)
(cid:7)
(cid:7)
(cid:7)
(cid:3)(cid:20)(cid:25)(cid:22)(cid:17)(cid:22)(cid:3)
(cid:3)(cid:11)(cid:21)(cid:17)(cid:27)(cid:12)
(cid:16)
(cid:3)(cid:19)(cid:17)(cid:21)
(cid:3)(cid:24)(cid:19)(cid:17)(cid:28)
(cid:3)(cid:27)(cid:28)(cid:17)(cid:24)
(cid:3)(cid:19)(cid:17)(cid:23)
(cid:3)(cid:19)(cid:17)(cid:19)
(cid:3)(cid:19)(cid:17)(cid:25)
(cid:3)(cid:21)(cid:17)(cid:26)
(cid:16)
(cid:3)(cid:19)(cid:17)(cid:22)
(cid:16)
(cid:16)
(cid:3)(cid:19)(cid:17)(cid:27)
(cid:3)(cid:11)(cid:21)(cid:22)(cid:17)(cid:23)(cid:12)
(cid:3)(cid:20)(cid:21)(cid:20)(cid:17)(cid:28)(cid:3)
(cid:3)(cid:20)(cid:20)(cid:28)(cid:17)(cid:20)(cid:3)
(cid:3)(cid:11)(cid:19)(cid:17)(cid:19)(cid:23)(cid:12)
(cid:3)(cid:20)(cid:17)(cid:25)(cid:20)
(cid:3)(cid:20)(cid:17)(cid:24)(cid:26)
(cid:3)(cid:26)(cid:24)(cid:17)(cid:21)
(cid:26)(cid:24)(cid:17)(cid:27)
Notice of 2020 Annual Meeting
and
Proxy Statement
July 22, 2020
Dear Stockholder:
You are cordially invited to attend the 2020 Annual Meeting of Stockholders of NetScout Systems, Inc. on
Thursday, September 10, 2020 at 10:00 a.m. local time at NetScout Systems, Inc., 310 Littleton Road, Westford,
Massachusetts 01886 (“Annual Meeting”).
At the Annual Meeting, you will be asked to:
1.
2.
3.
4.
5.
elect three Class III directors nominated by our Board of Directors;
approve an amendment and restatement of the NetScout Systems, Inc. 2019 Equity Incentive Plan to,
among other things, increase the number of shares authorized for issuance under the plan by 4,700,000
shares;
ratify the selection of PricewaterhouseCoopers LLP as our independent registered public accounting
firm for the fiscal year ending March 31, 2021;
approve, on an advisory basis, the compensation of our named executive officers; and
consider any other business properly brought before the meeting or any adjournment.
The accompanying proxy statement describes these matters in more detail.
We are closely monitoring developments related to COVID-19. If it becomes necessary to change the date,
time, location, or means of holding the Annual Meeting (including by means of remote communication), we will
announce the change in advance and will provide information on how to participate by press release, posted on
our website, and filed as additional proxy materials.
It is important that your shares be voted regardless of whether you attend the meeting. Please follow the
voting instructions on the Notice of Internet Availability of Proxy Materials that you received. If you received a
proxy card or voting instruction form, please complete the proxy card or voting instruction form promptly. If
your shares are held in a bank or brokerage account, you may be eligible to vote electronically or by telephone –
please refer to your voting instruction form. If you attend the meeting, you may vote in person even if you have
previously returned your vote in accordance with the foregoing. We appreciate your cooperation.
Very truly yours,
Anil K. Singhal
Chairman, President, and Chief Executive Officer
NETSCOUT SYSTEMS, INC.
310 Littleton Road
Westford, MA 01886
NOTICE OF THE 2020 ANNUAL MEETING OF STOCKHOLDERS
To be held September 10, 2020
To the Stockholders of NetScout Systems, Inc.:
The 2020 Annual Meeting of Stockholders of NetScout Systems, Inc. (“Annual Meeting”) will be held on
Thursday, September 10, 2020, at 10:00 a.m. local time at NetScout Systems, Inc., 310 Littleton Road, Westford,
Massachusetts 01886, for the following purposes:
1.
2.
3.
4.
To elect three Class III directors nominated by our Board of Directors, each to serve for a three year
term or until their successors are elected and qualified;
To approve an amendment and restatement of the NetScout Systems, Inc. 2019 Equity Incentive Plan
to, among other things, increase the number of shares authorized for issuance under the plan by
4,700,000 shares;
To ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public
accounting firm for the fiscal year ending March 31, 2021;
To approve, on an advisory basis, the compensation of our named executive officers, as disclosed in
our proxy statement, in accordance with Securities and Exchange Commission rules; and
5.
To consider any other business properly brought before the meeting or any adjournment.
Stockholders of record at the close of business on July 17, 2020, the record date for determining
stockholders entitled to vote at the Annual Meeting, will be entitled to vote at the meeting and any adjournments.
We are mailing our stockholders a Notice of Internet Availability of Proxy Materials, or Notice, instead of a
paper copy of our proxy statement and our Annual Report to Stockholders for the fiscal year ended March 31,
2020 (the “2020 Annual Report”). Stockholders who have requested a paper copy of our proxy materials will
continue to receive them by mail. The Notice contains instructions on how to access those documents over the
internet and how to request a paper copy of our proxy statement, our 2020 Annual Report, and a form of proxy
card or voting instruction card.
All stockholders are cordially invited to attend the meeting in person. However, to assure your
representation at the meeting, you are urged to complete, sign, date, and return the proxy card mailed or made
available to you or to vote over the telephone or the internet as instructed in these materials so that your shares
can be voted at the Annual Meeting in accordance with your instructions. If your shares are held in a bank or
brokerage account, you may be eligible to vote electronically or by phone; please refer to your Notice. If you
attend the meeting, you may vote in person even if you have previously returned your vote in accordance with
one of the foregoing methods.
Important notice regarding the availability of proxy materials for the Annual Meeting to be held on
September 10, 2020. Our proxy statement and the 2020 Annual Report are available free of charge at
www.edocumentview.com/NTCT.
By Order of the Board of Directors,
Anil K. Singhal
Chairman, President, and Chief Executive Officer
Westford, Massachusetts
July 22, 2010
NETSCOUT SYSTEMS, INC.
310 Littleton Road
Westford, MA 01886
PROXY STATEMENT
July 22, 2020
Questions and Answers about these Proxy Materials and Voting
What is the purpose of the Annual Meeting?
The purpose of the 2020 Annual Meeting of Stockholders of NetScout Systems, Inc., a Delaware
corporation, or the Annual Meeting, is to:
•
•
•
•
•
elect three Class III directors nominated by our Board of Directors, or our Board, each to serve for a
three year term or until their successors are elected and qualified;
approve the amendment and restatement of the NetScout Systems, Inc. 2019 Equity Incentive Plan
(“Amended and Restated 2019 Plan”);
ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public
accounting firm for the fiscal year ending March 31, 2021;
approve, on an advisory basis, the compensation of our named executive officers, as defined and
disclosed in this proxy statement in accordance with Securities and Exchange Commission, or SEC,
rules, or our Named Executive Officers; and
consider any other business properly brought before the Annual Meeting or any adjournment.
Why did I receive a notice regarding the availability of proxy materials on the internet?
We intend to mail the Notice of Internet Availability of Proxy Materials, or the Notice, on or about July 22,
2020 to all stockholders of record as of the close of business on July 17, 2020, or the Record Date, who are
entitled to vote at the Annual Meeting, and we will make available the proxy statement and form of proxy to such
stockholders on such date. Unless the context suggests otherwise, references in this proxy statement to
“NetScout,” the “Company,” “we,” “us,” and “our” refer to NetScout Systems, Inc. and, where appropriate, its
subsidiaries. The matters to be voted on at the Annual Meeting are set forth in the Notice of the Annual Meeting
of Stockholders and further described below.
We are providing access to our proxy materials over the internet. Accordingly, we have sent you the Notice
because our Board is soliciting your proxy to vote at the Annual Meeting, including at any adjournments or
postponements of the Annual Meeting. All stockholders will have the ability to access the proxy materials on the
website referred to in the Notice or request to receive a printed set of the proxy materials. The proxy materials
include the proxy statement, form of proxy, and our Annual Report to Stockholders for the fiscal year ended
March 31, 2020, which contains financial statements for the fiscal year ended March 31, 2020.
You are invited to attend the Annual Meeting on Thursday, September 10, 2020 at 10:00 a.m. local time at
NetScout Systems, Inc., 310 Littleton Road, Westford, Massachusetts 01886. We are closely monitoring
developments related to COVID-19. If it becomes necessary to change the date, time, location, or means of
holding the Annual Meeting (including by means of remote communication), we will announce the change in
advance and will provide information on how to participate by press release, posted on our website, and filed as
additional proxy materials. If the Annual Meeting is held by means of remote communication, stockholders will
be afforded the same rights as if the Annual Meeting were held in person, including the ability to vote shares
electronically during the meeting and ask questions in accordance with the rules of conduct for the meeting.
1
How does the Board recommend that I vote?
The Board recommends that you vote “FOR” the election of the three nominees to serve as Class III
directors on our Board, each for a three year term; “FOR” the approval of the Amended and Restated 2019 Plan;
“FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public
accounting firm for the fiscal year ending March 31, 2021, and “FOR” the approval, on an advisory basis, of the
compensation of our named executive officers.
What if another matter is properly brought before the meeting?
The Board knows of no other matters that will be presented for consideration at the Annual Meeting. If any
other matters are properly brought before the meeting, it is the intention of the persons named in the proxy to
vote on those matters in accordance with their best judgment.
Will I receive any proxy materials by mail?
We may send you a proxy card, along with a second Notice by mail, before the Annual Meeting.
Who can vote?
Stockholders of record as of the close of business on the Record Date, may vote. As of the Record Date,
72,455,152 shares of our common stock were issued and outstanding. Holders of common stock are entitled to
one vote per share on proposals presented at the Annual Meeting.
Can I vote my shares by filling out and returning the Notice?
No. The Notice identifies the items to be voted on at the Annual Meeting, but you cannot vote by marking
the Notice and returning it. The Notice provides instructions on how to vote by telephone or through the internet,
by requesting and returning a printed proxy card, or by submitting a ballot in person at the Annual Meeting.
What does it mean if I receive more than one Notice?
If you receive more than one Notice, your shares may be registered in more than one name or in different
accounts. Please follow the voting instructions on each of the Notices to ensure that all of your shares are voted.
Who is paying for this proxy solicitation?
We will pay for the entire cost of soliciting proxies. In addition to these proxy materials, our directors,
officers, and employees may also solicit proxies in person, by telephone, or by other means of communication.
Directors, officers and employees will not be paid any additional compensation for soliciting proxies. We may
also reimburse brokerage firms, banks, and other agents for the cost of forwarding proxy materials to beneficial
owners.
What is the difference between holding shares as a stockholder of record and as a beneficial owner?
If your shares are registered directly in your name with our transfer agent, Computershare Inc., you are
considered a “stockholder of record” of those shares.
If your shares are held in an account at a bank, broker, or other intermediary, you are not a stockholder of
record but instead are a “beneficial owner” or a “street name owner” of shares. In this case, the intermediary
would be considered the stockholder of record for purposes of voting at the Annual Meeting. As a beneficial
owner, you have the right to direct your bank, broker, or other intermediary, which we collectively refer to as
your “Broker,” to vote the shares held in your account.
2
How do I vote my shares?
You may either vote “FOR” all the nominees to the Board or you may “WITHHOLD” your vote for any
nominee you specify. For each of the other matters to be voted on, you may vote “FOR” or “AGAINST” the
proposal, or “ABSTAIN.”
The procedures for voting are as follows:
Stockholder of Record: Shares Registered in Your Name
If you are a stockholder of record, you may vote in person at the Annual Meeting or vote by proxy over the
phone, through the internet, or using a proxy card that you may request or that we may elect to deliver at a later
time. Whether or not you plan to attend the Annual Meeting, we urge you to vote by proxy to ensure your vote is
counted. You may still attend the Annual Meeting and vote in person even if you have already voted by proxy.
•
•
•
•
To vote in person, come to the annual meeting, and we will give you a ballot when you arrive.
To vote using the proxy card, simply complete, sign, and date the proxy card that may be delivered and
return it promptly in the envelope provided. If we receive your signed proxy card before the Annual
Meeting, we will vote your shares as you direct.
To vote over the telephone, dial toll free 1-800-652-8683 using a touch-tone phone and follow the
recorded instructions. You will be asked to provide the company number and control number from the
Notice. Your telephone vote must be received by 11:59 p.m., Eastern time on September 9, 2020 to be
counted.
To vote through the internet, go to www.envisionreports.com/NTCT to complete an electronic proxy
card. You will be asked to provide the company number and control number from the Notice. Your
internet vote must be received by 11:59 p.m., Eastern time on September 9, 2020 to be counted.
Beneficial Owner: Shares Registered in the Name of Broker
If you are a beneficial owner of shares registered in the name of your Broker, you should have received a
Notice containing voting instructions from your Broker rather than from us. Simply follow the voting instructions
in the Notice to ensure that your vote is counted. To vote in person at the Annual Meeting, you must obtain a
valid proxy from your Broker.
Internet proxy voting allows you to vote your shares online, with procedures designed to ensure the
authenticity and correctness of your proxy vote instructions. Please be aware that you bear costs associated with
your internet access.
What happens if I do not vote?
Stockholder of Record: Shares Registered in Your Name
If you are a stockholder of record and do not vote by telephone, through the internet, by completing the
proxy card that may be delivered to you or in person at the Annual Meeting, your shares will not be voted.
Beneficial Owner: Shares Registered in the Name of Broker
If you are a beneficial owner of shares held in street name and you do not instruct your Broker how to vote
your shares, your Broker may still be able to vote your shares in its discretion. In this regard, under the rules of
the New York Stock Exchange, or NYSE, Brokers that are subject to NYSE rules may use their discretion to vote
your “uninstructed” shares with respect to matters considered to be “routine” under NYSE rules, but not with
respect to “non-routine” matters. Proposals 1, 2 and 4 are considered to be “non-routine” under NYSE rules,
3
meaning that your broker may not vote your shares on those proposals in the absence of your voting instructions.
However, Proposal 3 is considered to be a “routine” matter under NYSE rules, meaning that if you do not return
voting instructions to your broker by its deadline, your shares may be voted by your broker in its discretion on
Proposal 3.
What if I return a proxy card or otherwise vote but do not make specific choices?
Our Board named Anil K. Singhal and Jean Bua as attorneys-in-fact in the proxies. If your proxy has been
properly executed and returned in time to be counted at the Annual Meeting, the shares represented by your
proxy will be voted in accordance with your voting instructions. If you have returned a signed proxy but have not
indicated your vote, your proxy will be voted “FOR” the election of the three Class III directors nominated by
our Board, each to serve for a three year term, “FOR” the Amended and Restated 2019 Plan, “FOR” the
ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting
firm for the fiscal year ending March 31, 2021, and “FOR” the approval, on an advisory basis, of the
compensation of our Named Executive Officers. Our Board knows of no other matters to be presented at the
Annual Meeting. For other matters that may properly come before the Annual Meeting, the attorneys-in-fact will
use their judgment in voting your shares.
May I change or revoke my proxy?
You may revoke your proxy before it is voted at the Annual Meeting. If you are a stockholder of record, you
may do so by (1) filing a written notice of revocation (dated after the original proxy) with the Secretary of
NetScout before the vote at the Annual Meeting, (2) completing a later-dated proxy, including by internet or
phone, and delivering it to the Secretary of NetScout before the vote at the Annual Meeting, or (3) attending the
Annual Meeting and voting in person. Stockholders of record should deliver any written notice of revocation
before the Annual Meeting, to NetScout Systems, Inc., 310 Littleton Road, Westford, MA 01886, Attention:
Secretary. If you hold shares through a Broker, you must contact that Broker directly to revoke any prior voting
instructions.
How are votes counted?
Votes will be counted by the inspector of election appointed for the meeting, who will separately count, with
respect to the proposal to elect directors, votes “FOR” or “WITHHOLD” and broker non-votes; and, with respect
to the other proposals, votes “FOR” or “AGAINST,” abstentions and, if applicable, broker non-votes.
What are “broker non-votes”?
As discussed above, when a beneficial owner of shares held in “street name” does not give instructions to
the Broker or nominee holding the shares as to how to vote on matters deemed by the NYSE to be “non-routine,”
the Broker or nominee cannot vote the shares. These unvoted shares are counted as “broker non-votes.”
What is the quorum requirement?
A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present if a majority of the
issued and outstanding shares of our common stock entitled to vote at the Annual Meeting are present at the
meeting in person or represented by proxy. On the Record Date, there were 72,455,152 shares outstanding and
entitled to vote.
Your shares will be counted toward the quorum only if you submit a valid proxy (or one is submitted on
your behalf by your broker, bank, or other nominee) or if you vote in person at the meeting. Abstentions and
broker non-votes will be counted towards the quorum requirement. If there is no quorum, the chairman of the
meeting or the holders of a majority of the voting power of the shares of stock entitled to vote who are present, in
person or by proxy, may adjourn the Annual Meeting to another place, date or time.
4
What vote is required to approve each proposal?
Proposal 1: Election of Directors: For the election of directors, the three nominees to serve as Class III
directors receiving the most “FOR” votes from the holders of shares present in person or represented by proxy
and entitled to vote on the election of directors (also known as a “plurality” of the votes cast) will be elected.
Only votes “FOR” will affect the outcome. Withheld votes and broker non-votes will have no effect.
Proposal 2: Amendment and Restatement of the NetScout Systems, Inc. 2019 Equity Incentive Plan:
The affirmative vote of the holders of a majority of the shares present or represented by proxy and voting on this
proposal is required to approve the Amended and Restated 2019 Plan. Abstentions and broker non-votes will not
be counted towards the vote total and will have no effect on the results of this vote.
Proposal 3: Ratification of Appointment of Independent Registered Public Accounting Firm: The
affirmative vote of a majority of the shares present or represented by proxy and voting on this proposal is
required to ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public
accounting firm for the fiscal year ending March 31, 2021. Abstentions and broker non-votes will not be counted
towards the vote total and will have no effect on the results of this vote. However, this proposal is considered a
routine matter, and therefore no broker non-votes are expected to exist in connection with this proposal. We are
not required to obtain the approval of our stockholders to appoint PricewaterhouseCoopers LLP as our
independent registered public accounting firm. However, if our stockholders do not ratify the appointment of
PricewaterhouseCoopers LLP as our independent registered public accounting firm for our fiscal year ending
March 31, 2021, the Audit Committee of our Board will consider the results of this vote when selecting auditors
in the future.
Proposal 4: Advisory Vote on Executive Compensation: The affirmative vote of a majority of the shares
present or represented and voting on this proposal is required to approve, on an advisory basis, the compensation
of our Named Executive Officers. Abstentions and broker non-votes will not be counted towards the vote total
and will have no effect on the results of this vote.
When are stockholder proposals and director nominations for next year’s annual meeting due?
To be considered for inclusion in next year’s proxy materials, your proposal must be submitted in writing to
our principal executive offices at 310 Littleton Road, Westford, Massachusetts 01886, Attention: Secretary and
must be received by us no later than March 24, 2021. We suggest that you submit your proposals by registered
mail, return receipt requested. Proposals must satisfy the requirements set forth in Rule 14a-8 under the
Securities Exchange Act of 1934, as amended, or the Exchange Act.
If you wish to submit a proposal for next year’s annual meeting that is not to be included in next year’s
proxy materials or wish to nominate a director, you must submit such proposal or nomination in writing to our
executive offices at 310 Littleton Road, Westford, Massachusetts 01886, Attention: Secretary, and such proposal
or nomination must be received by us no earlier than the close of business of May 13, 2021 and no later than the
close of business of June 12, 2021 and must satisfy the requirements described below under “Stockholder
Recommendations for Nominees as Directors and the Proposal of Other Business.” If the date of next year’s
Annual Meeting is advanced by more than 30 days before or delayed by more than 60 days after the anniversary
of the 2020 Annual Meeting, any stockholder recommendation or proposal must be received by us no earlier than
the close of business on the 90th day prior to such advanced or delayed annual meeting date and no later than the
close of business on the later of (i) the 60th day prior to such advanced or delayed annual meeting date or (ii) the
10th day following the day on which the first public announcement of the meeting date is first made by us. You
are also advised to review our by-laws, which contain additional requirements about advance notice of
stockholder proposals and director nominations.
5
PROPOSAL 1
ELECTION OF DIRECTORS
The following table sets forth information regarding our continuing directors and the nominees standing for
election at the Annual Meeting:
Nominee or Director’s Name and
Year First Became Director
Nominees:
Joseph G. Hadzima, Jr. (1998)
Christopher Perretta (2014)
Susan L. Spradley (2018)
Continuing Directors:
Alfred Grasso (2018)
Michael Szabados (2019)
Vivian Vitale (2019)
Anil K. Singhal (1984)
John R. Egan (2000)
Robert E. Donahue (2013)
Positions with NetScout
Year Term
Will Expire Class
Director
Director
Director
Director
Vice Chairman, Chief Operating Officer
Director
Chairman, President, and Chief Executive Officer
Lead Independent Director
Director
2023
2023
2023
2021
2021
2021
2022
2022
2022
III
III
III
I
I
I
II
II
II
The Nominees for Class III Director are Messrs. Hadzima and Perretta and Ms. Spradley
Messrs. Hadzima and Perretta and Ms. Spradley are Class III directors whose current terms of service expire
at the Annual Meeting and who are nominees for re-election for terms that will expire upon the election and
qualification of directors at the annual meeting to be held in 2023. Messrs. Hadzima and Perretta were previously
elected by the stockholders in September 2017. Ms. Spradley was appointed to the Board in 2018 as a Class III
director and stands for election this year. Regarding Ms. Spradley’s appointment, our management and existing
directors provided the Nominating and Corporate Governance committee with a slate of potential candidates for
consideration, which included Ms. Spradley. After reviewing the potential candidates, the Nominating and
Corporate Governance Committee selected Ms. Spradley from such slate, performed further evaluation of her
particular experience, qualifications, attributes and skills, and then recommended her appointment to the Board.
Continuing Directors
The Board is also composed of three Class I directors, Messrs. Grasso and Szabados and Ms. Vitale, whose
terms expire at the annual meeting to be held in 2021, and three Class II directors, Messrs. Singhal, Egan, and
Donahue, whose terms expire at the annual meeting to be held in 2022.
As of the Record Date, the size of the Board has been fixed at nine members. NetScout’s by-laws and
certificate of incorporation divide the Board into three classes. The members of each class of directors serve for
staggered three-year terms.
Proposal and Recommendation
Our Board has nominated and recommended that Messrs. Hadzima and Perretta and Ms. Spradley be
re-elected as Class III directors, to hold office until the annual meeting to be held in the year 2023 or until their
successors have been duly elected and qualified or until their earlier resignation or removal.
The Board knows of no reason any nominee would be unable or unwilling to serve, but if any nominee
should be unable or unwilling to serve, the proxies will be voted for the election of such other person for the
office of director as the Board may recommend in the place of such nominee. Unless otherwise instructed, the
proxy holders will vote the proxies received by them for the nominees named above.
6
Vote Required
Directors are elected by a plurality of the votes cast by the stockholders entitled to vote at such election.
Accordingly, the three nominees receiving the highest number of affirmative votes will be elected.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” EACH OF THE
NOMINEES FOR DIRECTOR.
7
PROPOSAL 2
APPROVAL OF AN AMENDMENT AND RESTATEMENT OF THE 2019 EQUITY INCENTIVE PLAN
Introduction
The Board approved an amendment and restatement of the NetScout Systems, Inc. 2019 Equity Incentive
Plan (“2019 Plan”) on June 23, 2020, subject to approval by our stockholders. Throughout this proxy statement,
we refer to the 2019 Plan, as amended and restated by the Board on June 23, 2020, as the “Amended and
Restated 2019 Plan.”
The Amended and Restated 2019 Plan contains the following material changes from the 2019 Plan:
•
•
•
Subject to adjustment for certain changes in our capitalization, the aggregate number of shares of our
common stock that may be issued under the Amended and Restated 2019 Plan will not exceed
11,494,651 shares (plus the 2007 Plan Returning Shares (as defined below), as such shares become
available from time to time), which is an increase of 4,700,000 shares over the aggregate number of
shares of our common stock that may be issued under the 2019 Plan.
The 2019 Plan currently contains a “fungible share counting” structure, whereby the number of shares
of our common stock available for issuance under the 2019 Plan will be reduced by: (i) one share for
each share issued pursuant to a stock option or stock appreciation right with an exercise or strike price
that is at least 100% of the fair market value of our common stock on the date of grant (an
“Appreciation Award”) granted under the 2019 Plan; and (ii) 2.76 shares for each share issued pursuant
to an equity award that is not an Appreciation Award (a “Full Value Award”) granted under the 2019
Plan. The Amended and Restated 2019 Plan retains such fungible share counting structure, except that
the number of shares of our common stock available for issuance under the Amended and Restated
2019 Plan will be reduced by 2.32 shares for each share issued pursuant to an equity award that is a
Full Value Award granted under the Amended and Restated 2019 Plan on or after September 10, 2020.
As part of such fungible share counting structure, the number of shares of our common stock available
for issuance under the Amended and Restated 2019 Plan will be increased by: (i) one share for each
share that becomes available again for issuance under the terms of the Amended and Restated 2019
Plan subject to an Appreciation Award and (ii) 2.32 shares for each share that becomes available again
for issuance under the terms of the Amended and Restated 2019 Plan subject to a Full Value Award on
or after September 10, 2020.
The Amended and Restated 2019 Plan provides that no award granted on or after September 10, 2020
may vest until at least 12 months following the date of grant of such award, except that shares up to 5%
of the share reserve of the Amended and Restated 2019 Plan may be issued pursuant to awards granted
on or after September 10, 2020 that do not meet such vesting requirements. The 2019 Plan does not
contain such vesting requirements.
Why We Are Asking Our Stockholders to Approve the Amended and Restated 2019 Plan
We are market leaders in highly competitive technology markets. To continue to fortify and extend our
leadership, we must continue to attract and retain talented employees at all levels of our Company. Like many
other technology companies, equity awards are a critical component of our compensation philosophy and our
annual compensation structure. Having the ability to grant equity awards is essential for us to be able to attract,
motivate, and retain a talented workforce.
We are seeking stockholder approval of the Amended and Restated 2019 Plan to increase the number of
shares available for the grant of restricted stock unit awards and other equity awards by 4,700,000 shares, which
will enable us to have a competitive equity incentive program to compete for and retain and reward key talent.
Approval of the Amended and Restated 2019 Plan by our stockholders will allow us to continue to grant
restricted stock unit awards and other equity awards at levels determined appropriate by our Board or
8
Compensation Committee. The Amended and Restated 2019 Plan will also allow us to further use a broad array
of equity incentives in order to secure and retain the services of our employees, and to continue to provide long-
term incentives that align the interests of our employees with the interests of our stockholders.
Why You Should Vote for the Amended and Restated 2019 Plan
We Manage Our Equity Award Use Carefully and Our Dilution and Burn Rate Are Reasonable
While we recognize that equity awards may have a dilutive impact on existing stockholders, we believe that
we have demonstrated our ability to carefully manage the growth of our equity compensation program. In
particular, we believe that our current level of dilution and the pace at which we grant equity awards (referred to
as the “burn rate”) is reasonable and in line with those of our peer companies as demonstrated in the tables
below. We are committed to effectively monitoring our equity compensation share reserve, including our burn
rate, to ensure that we maximize stockholders’ value by granting the appropriate number of equity awards
necessary to attract, reward, and retain employees.
The following tables provide certain information regarding our equity incentive program.
Total number of shares of common stock subject to outstanding stock options
Total number of shares of common stock subject to outstanding full value awards
Total number of shares of common stock available for grant under the 2019 Plan(1)
Total number of shares of common stock outstanding
Per-share closing price of common stock as reported on Nasdaq Global Select Market
As of the
Record Date
0
5,832,615
1,946,289
72,455,152
$
27.07
(1) As of the Record Date, there were no shares of common stock available for grant under any of our other
equity incentive plans.
The following table shows our responsible historical dilution and burn rate percentages.
Full Dilution(1)
Gross Burn Rate (as discussed in greater detail below)(2)
Fiscal
Year
2018
Fiscal
Year
2019
Fiscal
Year
2020
10.38% 9.26% 13.01%
2.24% 2.77% 2.74%
(1) Full Dilution is calculated as (shares available for grant + shares subject to outstanding equity awards)/
(weighted average common stock outstanding + shares available for grant + shares subject to outstanding
equity awards).
(2) Gross Burn Rate is calculated as (shares subject to options granted + shares subject to other equity awards
granted)/weighted average common stock outstanding.
9
The following table provides detailed information regarding the activity related to (i) the 2019 Plan for
fiscal year 2020 on and after September 12, 2019 (which was our only equity incentive plan with shares available
for grant during such period), and (ii) the NetScout Systems, Inc. 2007 Equity Incentive Plan (the “2007 Plan”)
for fiscal years 2018 and 2019, as well as for fiscal year 2020 prior to September 12, 2019 (which was our only
equity incentive plan with shares available for grant during such periods).
Fiscal Year
2018
Fiscal Year
2019
Fiscal Year
2020
Total number of shares of common stock subject to stock options
granted
0
0
0
Total number of shares of common stock subject to full value awards
granted
1,962,590
2,178,339
2,062,110
Weighted-average number of shares of common stock outstanding
87,425,000
78,617,000
75,162,000
Burn Rate
2.24%
2.77%
2.74%
The Size of Our Share Reserve Increase Request Is Reasonable
If this Proposal 2 is approved by our stockholders, then subject to adjustment for certain changes in our
capitalization, we will have 4,700,000 new shares available for grant after the Annual Meeting, and absent any
unforeseen circumstances, we anticipate returning to stockholders for additional shares in 2022.
The Amended and Restated 2019 Plan Combines Compensation and Corporate Governance Best Practices
The Amended and Restated 2019 Plan retains all provisions from the 2019 Plan that are designed to protect
our stockholders’ interests and to reflect corporate governance best practices, and also includes a new provision
that requires that awards have a 12-month minimum vesting period, subject to certain exceptions. These
provisions include the following:
•
•
•
•
Repricing is not allowed. The Amended and Restated 2019 Plan prohibits the repricing of outstanding
stock options and stock appreciation rights and the cancellation of any outstanding stock options or
stock appreciation rights that have an exercise or strike price greater than the then-current fair market
value of our common stock in exchange for cash or other awards under the Amended and Restated
2019 Plan without prior stockholder approval.
Stockholder approval is required for additional shares. The Amended and Restated 2019 Plan does
not contain an annual “evergreen” provision. The Amended and Restated 2019 Plan authorizes a fixed
number of shares, so that stockholder approval is required to issue any additional shares, thereby
allowing our stockholders to have direct input on our equity compensation programs.
Fungible share counting structure. The Amended and Restated 2019 Plan contains a “fungible share
counting” structure, whereby the number of shares of our common stock available for issuance under
the Amended and Restated 2019 Plan will be reduced by: (i) one share for each share issued pursuant
to an Appreciation Award; (ii) 2.76 shares for each share issued pursuant to a Full Value Award
granted prior to September 10, 2020; and (iii) 2.32 shares for each share issued pursuant to a Full Value
Award granted on or after September 10, 2020. This structure helps to ensure that we are using the
share reserve effectively and with regard to the value of each type of equity award.
No liberal share counting of Appreciation Awards. The following shares do not become available
again for issuance under the Amended and Restated 2019 Plan: (i) shares that are reacquired or
withheld (or not issued) by us to satisfy the exercise or strike price of an Appreciation Award;
(ii) shares that are reacquired or withheld (or not issued) by us to satisfy a tax withholding obligation in
connection with an Appreciation Award; (iii) shares repurchased by us on the open market with the
10
proceeds of the exercise or strike price of an Appreciation Award; and (iv) in the event that a stock
appreciation right is settled in shares, the gross number of shares subject to such stock appreciation
right.
No discounted stock options or stock appreciation rights. All stock options and stock appreciation
rights granted under the Amended and Restated 2019 Plan must have an exercise or strike price equal
to or greater than the fair market value of our common stock on the date the stock option or stock
appreciation right is granted.
Limit on non-employee director compensation. The aggregate value of all cash and equity-based
compensation paid or granted by us to any individual for service as a non-employee director of our
Board with respect to any fiscal year of the Company will not exceed $750,000, calculating the value
of any equity awards based on the grant date fair value of such awards for financial reporting purposes.
Restrictions on dividends. The Amended and Restated 2019 Plan provides that (i) no dividends or
dividend equivalents may be paid with respect to any shares of our common stock subject to an equity
award before the date such shares have vested, (ii) any dividends or dividend equivalents that are
credited with respect to any such shares will be subject to all of the terms and conditions applicable to
such shares under the terms of the applicable equity award agreement (including any vesting
conditions), and (iii) any dividends or dividend equivalents that are credited with respect to any such
shares will be forfeited to us on the date such shares are forfeited to or repurchased by us due to a
failure to vest.
Specific disclosure of equity award vesting upon a change in control. The Amended and Restated
2019 Plan specifically provides that in the event of a change in control of the Company, if the surviving
or acquiring corporation (or its parent company) does not assume or continue outstanding equity
awards under the Amended and Restated 2019 Plan, or substitute similar equity awards for such
outstanding equity awards, then with respect to any such equity awards that have not been assumed,
continued or substituted and that are held by participants whose continuous service has not terminated
prior to the change in control, the vesting of such equity awards will be accelerated in full (and with
respect to any performance-based equity awards, vesting will be deemed to be satisfied at the greater of
(i) the target level of performance or (ii) the actual level of performance measured in accordance with
the applicable performance goals as of the date of the change in control).
No liberal change in control definition. The definition of a “change in control” in the Amended and
Restated 2019 Plan requires the consummation of an actual transaction in order for the change in
control provisions in the Amended and Restated 2019 Plan to be triggered.
•
•
•
•
•
• Minimum vesting requirements. The Amended and Restated 2019 Plan provides that no award granted
on or after September 10, 2020 may vest until at least 12 months following the date of grant of such
award, except that shares up to 5% of the share reserve of the Amended and Restated 2019 Plan may be
issued pursuant to awards granted on or after September 10, 2020 that do not meet such vesting
requirements.
Stockholder Approval
If this Proposal 2 is approved by our stockholders, the Amended and Restated 2019 Plan will become
effective as of the date of the Annual Meeting. In the event that our stockholders do not approve this Proposal 2,
the Amended and Restated 2019 Plan will not become effective and the 2019 Plan will continue in its current
form.
Description of the Amended and Restated 2019 Plan
The material features of the Amended and Restated 2019 Plan are described below. The following
description of the Amended and Restated 2019 Plan is a summary only and is qualified in its entirety by
11
reference to the complete text of the Amended and Restated 2019 Plan. Stockholders are urged to read the actual
text of the Amended and Restated 2019 Plan in its entirety, which is attached to this proxy statement as
Appendix A.
Purpose
The Amended and Restated 2019 Plan is designed to secure and retain the services of our employees,
directors, and consultants, and to provide incentives for such individuals to exert maximum efforts for the
success of the Company and its affiliates, while providing a means by which such individuals may be given an
opportunity to benefit from increases in the value of our common stock. We also believe that such long-term
equity awards align the interests of employees with the interests of our stockholders.
Types of Awards
The Amended and Restated 2019 Plan provides for the grant of incentive stock options, nonstatutory stock
options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and other stock awards.
Shares Available for Awards
Subject to adjustment for certain changes in our capitalization, the aggregate number of shares of our
common stock that may be issued under the Amended and Restated 2019 Plan will not exceed 11,494,651 shares
(which is the sum of (i) 1,294,651 shares (the number of unallocated shares that were available for grant under
the 2007 Plan as of the effective date of the 2019 Plan), (ii) 5,500,000 additional shares that were reserved as of
the effective date of the 2019 Plan, and (iii) 4,700,000 newly requested shares), plus the 2007 Plan Returning
Shares (as defined below), as such shares become available from time to time.
The term “2007 Plan Returning Shares” refers to the following shares of our common stock subject to any
outstanding award granted under the 2007 Plan: (i) any shares subject to such award 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 such award that are not issued because such award is settled in cash; (iii) any shares
issued pursuant to such award that are forfeited back to or repurchased by us because of a failure to vest; and
(iv) any shares that are reacquired or withheld (or not issued) by us to satisfy a tax withholding obligation in
connection with any such award that is a Full Value Award.
The following shares of our common stock (collectively, the “Amended and Restated 2019 Plan Returning
Shares”) will also become available again for issuance under the Amended and Restated 2019 Plan: (i) any shares
subject to an award granted under the Amended and Restated 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 granted under the Amended and Restated 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 and Restated
2019 Plan that are forfeited back to or repurchased by us because of a failure to vest; and (iv) any shares that are
reacquired or withheld (or not issued) by us to satisfy a tax withholding obligation in connection with any such
award granted under the Amended and Restated 2019 Plan that is a Full Value Award.
The following shares of our common stock will not become available again for issuance under the Amended
and Restated 2019 Plan: (i) any shares that are reacquired or withheld (or not issued) by us to satisfy the exercise
or strike price of an Appreciation Award granted under the Amended and Restated 2019 Plan or the 2007 Plan
(including any shares subject to such award that are not delivered because such award is exercised through a
reduction of shares subject to such award); (ii) any shares that are reacquired or withheld (or not issued) by us to
satisfy a tax withholding obligation in connection with an Appreciation Award granted under the Amended and
Restated 2019 Plan or the 2007 Plan; (iii) any shares repurchased by us on the open market with the proceeds of
the exercise or strike price of an Appreciation Award granted under the Amended and Restated 2019 Plan or the
2007 Plan; and (iv) in the event that a stock appreciation right granted under the Amended and Restated 2019
Plan or the 2007 Plan is settled in shares, the gross number of shares subject to such award.
12
The number of shares of our common stock available for issuance under the Amended and Restated 2019
Plan will be reduced by: (i) one share for each share issued pursuant to an Appreciation Award granted under the
Amended and Restated 2019 Plan; (ii) 2.76 shares for each share issued pursuant to a Full Value Award granted
under the Amended and Restated 2019 Plan prior to September 10, 2020; and (iii) 2.32 shares for each share
issued pursuant to a Full Value Award granted under the Amended and Restated 2019 Plan on or after
September 10, 2020.
The number of shares of our common stock available for issuance under the Amended and Restated 2019
Plan will be increased by: (i) one share for each 2007 Plan Returning Share or Amended and Restated 2019 Plan
Returning Share subject to an Appreciation Award; (ii) 2.76 shares for each 2007 Plan Returning Share or
Amended and Restated 2019 Plan Returning Share subject to a Full Value Award that returns to the Amended
and Restated 2019 Plan prior to September 10, 2020; and (iii) 2.32 shares for each 2007 Plan Returning Share or
Amended and Restated 2019 Plan Returning Share subject to a Full Value Award that returns to the Amended
and Restated 2019 Plan on or after September 10, 2020.
Eligibility
All of our (including our affiliates’) employees, non-employee directors and consultants are eligible to
participate in the Amended and Restated 2019 Plan and may receive all types of awards other than incentive
stock options. Incentive stock options may be granted under the Amended and Restated 2019 Plan only to our
(including our affiliates’) employees.
As of the Record Date, we (including our affiliates) had approximately 2,487 employees, seven
non-employee directors and 263 consultants.
Non-Employee Director Compensation Limit
The aggregate value of all cash and equity-based compensation paid or granted by us to any individual for
service as a non-employee director of our Board with respect to any fiscal year of the Company will not exceed
$750,000, calculating the value of any equity awards based on the grant date fair value of such awards for
financial reporting purposes.
Administration
The Amended and Restated 2019 Plan will be administered by our Board, which may in turn delegate
authority to administer the Amended and Restated 2019 Plan to a committee. Our Board has delegated concurrent
authority to administer the Amended and Restated 2019 Plan to our Compensation Committee, but may, at any
time, re-vest in itself some or all of the power delegated to our Compensation Committee. Our Board and
Compensation Committee are each considered to be a Plan Administrator for purposes of this Proposal 2.
Subject to the terms of the Amended and Restated 2019 Plan, the Plan Administrator may determine the
recipients, the types of awards to be granted, the number of shares of our common stock subject to awards or the
cash value of awards, and the terms and conditions of awards granted under the Amended and Restated 2019
Plan, including the period of their exercisability and vesting. The Plan Administrator also has the authority to
provide for accelerated exercisability and vesting of awards. Subject to the limitations set forth below, the Plan
Administrator also determines the fair market value applicable to awards and the exercise or strike price of stock
options and stock appreciation rights granted under the Amended and Restated 2019 Plan.
The Plan Administrator may also delegate to one or more officers the authority to designate employees who
are not officers (within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended) to be
recipients of certain awards and the number of shares of our common stock subject to such awards. Under any
such delegation, the Plan Administrator will specify the total number of shares of our common stock that may be
subject to the awards granted by such officer. The officer may not grant an award to himself or herself.
13
Repricing; Cancellation and Re-Grant of Awards
Under the Amended and Restated 2019 Plan, the Plan Administrator does not have the authority to reprice
any outstanding stock option or stock appreciation right by reducing the exercise or strike price of the stock
option or stock appreciation right or to cancel any outstanding stock option or stock appreciation right that has an
exercise or strike price greater than the then-current fair market value of our common stock in exchange for cash
or other awards without obtaining the approval of our stockholders. Such approval must be obtained within 12
months prior to such an event.
Acceleration upon Death or Disability
Under the Amended and Restated 2019 Plan, unless specifically provided otherwise in the applicable award
agreement, if a participant’s service relationship with us or any of our affiliates (referred to in this Proposal 2 as
“continuous service”) terminates as a result of the participant’s death or disability, each of the participant’s
awards will become fully vested (and exercisable, if applicable) as of the date of such termination, to the extent
that such awards are outstanding and unvested as of such date.
Dividends and Dividend Equivalents
The Amended and Restated 2019 Plan provides that dividends or dividend equivalents may be paid or
credited with respect to any shares of our common stock subject to an award, as determined by the Plan
Administrator and contained in the applicable award agreement; provided, however, that (i) no dividends or
dividend equivalents may be paid with respect to any such shares before the date such shares have vested, (ii) any
dividends or dividend equivalents that are credited with respect to any such shares will be subject to all of the
terms and conditions applicable to such shares under the terms of the applicable award agreement (including any
vesting conditions), and (iii) any dividends or dividend equivalents that are credited with respect to any such
shares will be forfeited to us on the date such shares are forfeited to or repurchased by us due to a failure to vest.
Minimum Vesting Requirements
The Amended and Restated 2019 Plan provides that no award granted on or after September 10, 2020 may
vest until at least 12 months following the date of grant of such award, except that shares up to 5% of the share
reserve of the Amended and Restated 2019 Plan may be issued pursuant to awards granted on or after
September 10, 2020 that do not meet such vesting requirements.
Stock Options
Stock options may be granted under the Amended and Restated 2019 Plan pursuant to stock option
agreements. The Amended and Restated 2019 Plan permits the grant of stock options that are intended to qualify
as incentive stock options (“ISOs”) and nonstatutory stock options (“NSOs”).
The exercise price of a stock option granted under the Amended and Restated 2019 Plan may not be less
than 100% of the fair market value of our common stock on the date of grant and, in some cases (see
“Limitations on Incentive Stock Options” below), may not be less than 110% of such fair market value.
The term of stock options granted under the Amended and Restated 2019 Plan may not exceed seven years
from the date of grant and, in some cases (see “Limitations on Incentive Stock Options” below), may not exceed
five years from the date of grant. Except as otherwise provided in a participant’s stock option agreement or other
written agreement with us or one of our affiliates, if a participant’s continuous service terminates (other than for
cause and other than upon the participant’s death or disability), the participant may exercise any vested stock
options for up to three months following the participant’s termination of continuous service. Except as otherwise
provided in a participant’s stock option agreement or other written agreement with us or one of our affiliates, if a
14
participant’s continuous service terminates due to the participant’s disability or death (or the participant dies
within a specified period, if any, following termination of continuous service), the participant, or his or her
beneficiary, as applicable, may exercise any vested stock options for up to 12 months following the participant’s
termination due to the participant’s disability or for up to 18 months following the participant’s death. Except as
explicitly provided otherwise in a participant’s stock option agreement or other written agreement with us or one
of our affiliates, if a participant’s continuous service is terminated for cause (as defined in the Amended and
Restated 2019 Plan), all stock options held by the participant will terminate upon the participant’s termination of
continuous service and the participant will be prohibited from exercising any stock option from and after such
termination date. Except as otherwise provided in a participant’s stock option agreement or other written
agreement with us or one of our affiliates, the term of a stock option may be extended if the exercise of the stock
option following the participant’s termination of continuous service (other than for cause and other than upon the
participant’s death or disability) would be prohibited by applicable securities laws or if the sale of any common
stock received upon exercise of the stock option following the participant’s termination of continuous service
(other than for cause) would violate our insider trading policy. In no event, however, may a stock option be
exercised after its original expiration date.
Acceptable forms of consideration for the purchase of our common stock pursuant to the exercise of a stock
option under the Amended and Restated 2019 Plan will be determined by the Plan Administrator and may
include payment: (i) by cash, check, bank draft or money order payable to us; (ii) pursuant to a program
developed under Regulation T as promulgated by the Federal Reserve Board; (iii) by delivery to us of shares of
our common stock (either by actual delivery or attestation); (iv) by a net exercise arrangement (for NSOs only);
or (v) in other legal consideration approved by the Plan Administrator.
Stock options granted under the Amended and Restated 2019 Plan may vest and become exercisable in
cumulative increments, as determined by the Plan Administrator at the rate specified in the stock option
agreement (subject to the vesting acceleration provision described in “Acceleration upon Death or Disability”
above and the limitations described in “Minimum Vesting Requirements” above). Shares covered by different
stock options granted under the Amended and Restated 2019 Plan may be subject to different vesting schedules
as the Plan Administrator may determine.
The Plan Administrator may impose limitations on the transferability of stock options granted under the
Amended and Restated 2019 Plan in its discretion. Generally, a participant may not transfer a stock option
granted under the Amended and Restated 2019 Plan other than by will or the laws of descent and distribution or,
subject to approval by the Plan Administrator, pursuant to a domestic relations order or an official marital
settlement agreement. However, the Plan Administrator may permit transfer of a stock option in a manner that is
not prohibited by applicable tax and securities laws. In addition, subject to approval by the Plan Administrator, a
participant may designate a beneficiary who may exercise the stock option following the participant’s death.
Notwithstanding the foregoing, no stock option may be transferred to any financial institution without prior
stockholder approval.
Limitations on Incentive Stock Options
The aggregate fair market value, determined at the time of grant, of shares of our common stock with
respect to ISOs that are exercisable for the first time by a participant during any calendar year under all of our
stock plans may not exceed $100,000. The stock options or portions of stock options that exceed this limit or
otherwise fail to qualify as ISOs are treated as NSOs. No ISO may be granted to any person who, at the time of
grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of
any affiliate unless the following conditions are satisfied:
•
•
the exercise price of the ISO must be at least 110% of the fair market value of our common stock on
the date of grant; and
the term of the ISO must not exceed five years from the date of grant.
15
Subject to adjustment for certain changes in our capitalization, the aggregate maximum number of shares of
our common stock that may be issued pursuant to the exercise of ISOs under the Amended and Restated 2019
Plan is 11,000,000 shares.
Stock Appreciation Rights
Stock appreciation rights may be granted under the Amended and Restated 2019 Plan pursuant to stock
appreciation right agreements. Each stock appreciation right is denominated in common stock share equivalents.
The strike price of each stock appreciation right will be determined by the Plan Administrator, but will in no
event be less than 100% of the fair market value of our common stock on the date of grant. The term of stock
appreciation rights granted under the Amended and Restated 2019 Plan may not exceed seven years from the date
of grant. The Plan Administrator may also impose restrictions or conditions upon the vesting of stock
appreciation rights that it deems appropriate (subject to the vesting acceleration provision described in
“Acceleration upon Death or Disability” above and the limitations described in “Minimum Vesting
Requirements” above). The appreciation distribution payable upon exercise of a stock appreciation right may be
paid in shares of our common stock, in cash, in a combination of cash and stock, or in any other form of
consideration determined by the Plan Administrator and set forth in the stock appreciation right agreement. Stock
appreciation rights will be subject to the same conditions upon termination of continuous service and restrictions
on transfer as stock options under the Amended and Restated 2019 Plan.
Restricted Stock Awards
Restricted stock awards may be granted under the Amended and Restated 2019 Plan pursuant to restricted
stock award agreements. A restricted stock award may be granted in consideration for cash, check, bank draft or
money order payable to us, the participant’s services performed for us or any of our affiliates, or any other form
of legal consideration acceptable to the Plan Administrator. Shares of our common stock acquired under a
restricted stock award may be subject to forfeiture to or repurchase by us in accordance with a vesting schedule
to be determined by the Plan Administrator (subject to the vesting acceleration provision described in
“Acceleration upon Death or Disability” above and the limitations described in “Minimum Vesting
Requirements” above). Rights to acquire shares of our common stock under a restricted stock award may be
transferred only upon such terms and conditions as are set forth in the restricted stock award agreement;
provided, however, that no restricted stock award may be transferred to any financial institution without prior
stockholder approval. Upon a participant’s termination of continuous service for any reason, any shares subject
to restricted stock awards held by the participant that have not vested as of such termination date may be
forfeited to or repurchased by us.
Restricted Stock Unit Awards
Restricted stock unit awards may be granted under the Amended and Restated 2019 Plan pursuant to
restricted stock unit award agreements. Payment of any purchase price may be made in any form of legal
consideration acceptable to the Plan Administrator. A restricted stock unit award may be settled by the delivery
of shares of our common stock, in cash, in a combination of cash and stock, or in any other form of consideration
determined by the Plan Administrator and set forth in the restricted stock unit award agreement. Restricted stock
unit awards may be subject to vesting in accordance with a vesting schedule to be determined by the Plan
Administrator (subject to the vesting acceleration provision described in “Acceleration upon Death or Disability”
above and the limitations described in “Minimum Vesting Requirements” above). Except as otherwise provided
in a participant’s restricted stock unit award agreement or other written agreement with us or one of our affiliates,
restricted stock units that have not vested will be forfeited upon the participant’s termination of continuous
service for any reason.
Other Stock Awards
Other forms of stock awards valued in whole or in part by reference to, or otherwise based on, our common
stock may be granted either alone or in addition to other stock awards under the Amended and Restated 2019
16
Plan. Subject to the terms of the Amended and Restated 2019 Plan (including the vesting acceleration provision
described in “Acceleration upon Death or Disability” above and the limitations described in “Minimum Vesting
Requirements” above), the Plan Administrator will have sole and complete authority to determine the persons to
whom and the time or times at which such other stock awards will be granted, the number of shares of our
common stock to be granted and all other terms and conditions of such other stock awards.
Clawback/Recoupment
Awards granted under the Amended and Restated 2019 Plan will be subject to recoupment in accordance
with any clawback policy that we are required to adopt pursuant to the listing standards of any national securities
exchange or association on which our securities are listed or as is otherwise required by the Dodd-Frank Wall
Street Reform and Consumer Protection Act or other applicable law. In addition, the Plan Administrator may
impose other clawback, recovery, or recoupment provisions in a participant’s award agreement or other written
agreement with us or one of our affiliates, including a reacquisition right in respect of previously acquired shares
or other cash or property upon the occurrence of cause.
Changes to Capital Structure
In the event of certain capitalization adjustments, the Plan Administrator will appropriately adjust: (i) the
class(es) and maximum number of securities subject to the Amended and Restated 2019 Plan; (ii) the class(es)
and maximum number of securities that may be issued pursuant to the exercise of ISOs; and (iii) the class(es) and
number of securities and price per share of stock subject to outstanding stock awards.
Change in Control
The following provisions will apply to outstanding awards under the Amended and Restated 2019 Plan in
the event of a change in control (as defined in the Amended and Restated 2019 Plan and described below) unless
otherwise provided in the instrument evidencing the award, in any other written agreement between us or one of
our affiliates and the participant, or in our director compensation policy.
In the event of a change in control, any surviving or acquiring corporation (or its parent company) may
assume or continue any or all outstanding awards under the Amended and Restated 2019 Plan, or may substitute
similar stock awards for such outstanding awards (including, but not limited to, awards to acquire the same
consideration paid to the stockholders of the Company pursuant to the change in control), and any reacquisition
or repurchase rights held by the Company in respect of shares issued pursuant to any outstanding awards under
the Amended and Restated 2019 Plan may be assigned by the Company to the surviving or acquiring corporation
(or its parent company). The terms of any such assumption, continuation or substitution will be set by the Plan
Administrator.
In the event of a change in control in which the surviving or acquiring corporation (or its parent company)
does not assume or continue outstanding awards under the Amended and Restated 2019 Plan, or substitute
similar stock awards for such outstanding awards, then with respect to any such awards that have not been
assumed, continued or substituted and that are held by participants whose continuous service has not terminated
prior to the effective time of the change in control (the “Current Participants”), the vesting (and exercisability, if
applicable) of such awards will be accelerated in full (and with respect to any such awards that are subject to
performance-based vesting conditions or requirements, vesting will be deemed to be satisfied at the greater of
(i) the target level of performance or (ii) the actual level of performance measured in accordance with the
applicable performance goals as of the date of the change in control) to a date prior to the effective time of the
change in control (contingent upon the closing or completion of the change in control) as the Plan Administrator
will determine (or, if the Plan Administrator does not determine such a date, to the date that is five days prior to
the effective time of the change in control), and such awards will terminate if not exercised (if applicable) prior
to the effective time of the change in control in accordance with the exercise procedures determined by the Plan
17
Administrator, and any reacquisition or repurchase rights held by the Company with respect to such awards will
lapse (contingent upon the closing or completion of the change in control).
In the event of a change in control in which the surviving or acquiring corporation (or its parent company)
does not assume or continue outstanding awards under the Amended and Restated 2019 Plan, or substitute
similar stock awards for such outstanding awards, then with respect to any such awards that have not been
assumed, continued or substituted and that are held by participants other than the Current Participants, such
awards will terminate if not exercised (if applicable) prior to the effective time of the change in control in
accordance with the exercise procedures determined by the Plan Administrator; provided, however, that any
reacquisition or repurchase rights held by the Company with respect to such awards will not terminate and may
continue to be exercised notwithstanding the change in control.
Notwithstanding the foregoing, in the event any outstanding award under the Amended and Restated 2019
Plan held by a participant will terminate if not exercised prior to the effective time of a change in control, the
Plan Administrator may provide that the participant may not exercise such award but instead will receive a
payment, in such form as may be determined by the Plan Administrator, equal in value to the excess, if any, of
(i) the value of the property the participant would have received upon the exercise of such award immediately
prior to the effective time of the change in control, over (ii) any exercise price payable by the participant in
connection with such exercise.
Unless provided otherwise in the participant’s award agreement, in any other written agreement or plan with
us or one of our affiliates, or in our director compensation policy, outstanding awards under the Amended and
Restated 2019 Plan will not be subject to additional acceleration of vesting and exercisability upon or after a
change in control.
For purposes of the Amended and Restated 2019 Plan, a “change in control” generally means the
consummation of any of the following events: (i) any merger or consolidation after which the voting securities of
the Company outstanding immediately prior thereto represent (either by remaining outstanding or by being
converted into voting securities of the surviving or acquiring entity) less than 50% of the combined voting power
of the voting securities of the Company or such surviving or acquiring entity outstanding immediately after such
event; (ii) any sale of all or substantially all of the assets or capital stock of the Company (other than in a spin-off
or similar transaction); or (iii) any other acquisition of the business of the Company, as determined by the Plan
Administrator; provided, however, that no change in control (or any analogous term) will be deemed to occur
upon an announcement or commencement of a tender offer or upon a “potential” takeover or upon stockholder
approval of a merger or other transaction, in each case without a requirement that the change in control actually
occur.
Plan Amendments and Termination
The Plan Administrator has the authority to amend or terminate the Amended and Restated 2019 Plan at any
time. However, except as otherwise provided in the Amended and Restated 2019 Plan or an award agreement, no
amendment or termination of the Amended and Restated 2019 Plan may materially impair a participant’s rights
under his or her outstanding awards without the participant’s consent.
We will obtain stockholder approval of any amendment to the Amended and Restated 2019 Plan as required
by applicable law and listing requirements. No incentive stock options may be granted under the Amended and
Restated 2019 Plan after July 9, 2029, which is the tenth anniversary of the date the 2019 Plan was originally
adopted by our Board.
U.S. Federal Income Tax Consequences
The following is a summary of the principal United States federal income tax consequences to participants
and us with respect to participation in the Amended and Restated 2019 Plan. This summary is not intended to be
18
exhaustive and does not discuss the income tax laws of any local, state or foreign jurisdiction in which a
participant may reside. The information is based upon current federal income tax rules and therefore is subject to
change when those rules change. Because the tax consequences to any participant may depend on his or her
particular situation, each participant should consult the participant’s tax adviser regarding the federal, state, local
and other tax consequences of the grant or exercise of an award or the disposition of stock acquired under the
Amended and Restated 2019 Plan. The Amended and Restated 2019 Plan is not qualified under the provisions of
Section 401(a) of the Internal Revenue Code of 1986, as amended, or the Code, and is not subject to any of the
provisions of the Employee Retirement Income Security Act of 1974. Our ability to realize the benefit of any tax
deductions described below depends on our generation of taxable income as well as the requirement of
reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of our tax reporting
obligations.
Nonstatutory Stock Options
Generally, there is no taxation upon the grant of an NSO if the stock option is granted with an exercise price
equal to the fair market value of the underlying stock on the grant date. Upon exercise, a participant will
recognize ordinary income equal to the excess, if any, of the fair market value of the underlying stock on the date
of exercise of the stock option over the exercise price. If the participant is employed by us or one of our affiliates,
that income will be subject to withholding taxes. The participant’s tax basis in those shares will be equal to their
fair market value on the date of exercise of the stock option, and the participant’s capital gain holding period for
those shares will begin on that date.
We will generally be entitled to a tax deduction equal to the taxable ordinary income realized by the
participant.
Incentive Stock Options
The Amended and Restated 2019 Plan provides for the grant of stock options that are intended to qualify as
“incentive stock options,” as defined in Section 422 of the Code. Under the Code, a participant generally is not
subject to ordinary income tax upon the grant or exercise of an ISO. If the participant holds a share received upon
exercise of an ISO for more than two years from the date the stock option was granted and more than one year
from the date the stock option was exercised, which is referred to as the required holding period, the difference, if
any, between the amount realized on a sale or other taxable disposition of that share and the participant’s tax
basis in that share will be long-term capital gain or loss.
If, however, a participant disposes of a share acquired upon exercise of an ISO before the end of the
required holding period, which is referred to as a disqualifying disposition, the participant generally will
recognize ordinary income in the year of the disqualifying disposition equal to the excess, if any, of the fair
market value of the share on the date of exercise of the stock option over the exercise price. However, if the sales
proceeds are less than the fair market value of the share on the date of exercise of the stock option, the amount of
ordinary income recognized by the participant will not exceed the gain, if any, realized on the sale. If the amount
realized on a disqualifying disposition exceeds the fair market value of the share on the date of exercise of the
stock option, that excess will be short-term or long-term capital gain, depending on whether the holding period
for the share exceeds one year.
For purposes of the alternative minimum tax, the amount by which the fair market value of a share of stock
acquired upon exercise of an ISO exceeds the exercise price of the stock option generally will be an adjustment
included in the participant’s alternative minimum taxable income for the year in which the stock option is
exercised. If, however, there is a disqualifying disposition of the share in the year in which the stock option is
exercised, there will be no adjustment for alternative minimum tax purposes with respect to that share. In
computing alternative minimum taxable income, the tax basis of a share acquired upon exercise of an ISO is
increased by the amount of the adjustment taken into account with respect to that share for alternative minimum
tax purposes in the year the stock option is exercised.
19
We are not allowed a tax deduction with respect to the grant or exercise of an ISO or the disposition of a
share acquired upon exercise of an ISO after the required holding period. If there is a disqualifying disposition of
a share, however, we will generally be entitled to a tax deduction equal to the taxable ordinary income realized
by the participant, provided that either the employee includes that amount in income or we timely satisfy our
reporting requirements with respect to that amount.
Stock Appreciation Rights
Generally, if a stock appreciation right is granted with an exercise price equal to the fair market value of the
underlying stock on the grant date, the recipient will recognize ordinary income equal to the fair market value of
the stock or cash received upon such exercise.
We will generally be entitled to a tax deduction equal to the taxable ordinary income realized by the
recipient of the stock appreciation right.
Restricted Stock Awards
Generally, the recipient of a restricted stock award will recognize ordinary income at the time the stock is
received equal to the excess, if any, of the fair market value of the stock received over any amount paid by the
recipient in exchange for the stock. If, however, the stock is not vested when it is received (for example, if the
employee is required to work for a period of time in order to have the right to sell the stock), the recipient
generally will not recognize income until the stock becomes vested, at which time the recipient will recognize
ordinary income equal to the excess, if any, of the fair market value of the stock on the date it becomes vested
over any amount paid by the recipient in exchange for the stock. A recipient may, however, file an election with
the Internal Revenue Service, within 30 days following his or her receipt of the stock award, to recognize
ordinary income, as of the date the recipient receives the award, equal to the excess, if any, of the fair market
value of the stock on the date the award is granted over any amount paid by the recipient for the stock.
The recipient’s basis for the determination of gain or loss upon the subsequent disposition of shares acquired
from a restricted stock award will be the amount paid for such shares plus any ordinary income recognized either
when the stock is received or when the stock becomes vested.
We will generally be entitled to a tax deduction equal to the taxable ordinary income realized by the
recipient of the restricted stock award.
Restricted Stock Unit Awards
Generally, the recipient of a restricted stock unit award structured to comply with the requirements of
Section 409A of the Code or an exemption to Section 409A of the Code will recognize ordinary income at the
time the stock is delivered equal to the excess, if any, of the fair market value of the stock received over any
amount paid by the recipient in exchange for the stock. To comply with the requirements of Section 409A of the
Code, the stock subject to a restricted stock unit award may generally only be delivered upon one of the
following events: a fixed calendar date (or dates), separation from service, death, disability or a change in
control. If delivery occurs on another date, unless the restricted stock unit award otherwise complies with or
qualifies for an exemption to the requirements of Section 409A of the Code, in addition to the tax treatment
described above, the recipient will owe an additional 20% federal tax and interest on any taxes owed.
The recipient’s basis for the determination of gain or loss upon the subsequent disposition of shares acquired
from a restricted stock unit award will be the amount paid for such shares plus any ordinary income recognized
when the stock is delivered.
We will generally be entitled to a tax deduction equal to the taxable ordinary income realized by the
recipient of the restricted stock unit award.
20
Section 162(m) Limitations
Under Section 162(m) of the Code (“Section 162(m)”), compensation paid to any publicly held
corporation’s “covered employees” that exceeds $1 million per taxable year for any covered employee is
generally non-deductible. Awards granted under the Amended and Restated 2019 Plan will be subject to the
deduction limit under Section 162(m) and will not be eligible to qualify for the performance-based compensation
exception under Section 162(m) pursuant to the transition relief provided by the Tax Cuts and Jobs Act. For
further information regarding the deduction limit under Section 162(m) and such transition relief, see the section
entitled “Compensation Discussion and Analysis – Regulatory Requirements – Tax Deductibility of Executive
Compensation.”
New Plan Benefits under Amended and Restated 2019 Plan
The following table is provided in accordance with SEC rules regarding compensation plans subject to
stockholder approval and sets forth certain information regarding benefits or amounts that will be received by or
allocated to certain individuals under the Amended and Restated 2019 Plan.
Amended and Restated 2019 Plan
Name and Position
Anil K. Singhal
Chairman, Chief Executive Officer, and President
Michael Szabados
Chief Operating Officer
Jean Bua
Executive Vice President, Chief Financial Officer, Chief Accounting Officer, and
Treasurer
John W. Downing
Executive Vice President, Worldwide Sales Operations
All current executive officers as a group
All current directors who are not executive officers as a group
All employees, including all current officers who are not executive officers, as a group
Number of Shares
(1)
(1)
(1)
(1)
(1)
49,000 per fiscal year
(2)
(1)
(1)Awards granted under the Amended and Restated 2019 Plan to our executive officers and other employees are
discretionary and are not subject to set benefits or amounts under the terms of the Amended and Restated
2019 Plan, and our Board and Compensation Committee have not granted any awards under the Amended
and Restated 2019 Plan subject to stockholder approval of this Proposal 2. Accordingly, the benefits or
amounts that will be received by or allocated to our executive officers and other employees under the
Amended and Restated 2019 Plan are not determinable.
(2) Awards granted under the Amended and Restated 2019 Plan to our non-employee directors are discretionary
and are not subject to set benefits or amounts under the terms of the Amended and Restated 2019 Plan.
However, pursuant to our current compensation arrangements for non-employee directors, each of our
current non-employee directors is eligible to receive an annual restricted stock unit award for 7,000 shares.
After the Annual Meeting, any such awards will be granted under the Amended and Restated 2019 Plan if
this Proposal 2 is approved by our stockholders. For additional information regarding our current
compensation arrangements for non-employee directors, please see the information following the Director
Compensation Table for Fiscal Year 2020 in “Compensation and Other Information Concerning Directors
and Executive Officers” below.
21
Plan Benefits under 2019 Plan
The following table is provided in accordance with SEC rules regarding compensation plans subject to
stockholder approval and sets forth, for each of the individuals and various groups indicated, the total number of
shares of our common stock subject to awards that have been granted (even if not currently outstanding) under
the 2019 Plan since its approval by our stockholders in 2019 through the Record Date.
2019 Plan
Name and Position
Anil K. Singhal
Chairman, Chief Executive Officer, and President
Michael Szabados
Chief Operating Officer
Jean Bua
Executive Vice President, Chief Financial Officer, Chief Accounting Officer, and Treasurer
John W. Downing
Executive Vice President, Worldwide Sales Operations
All current executive officers as a group
All current directors who are not executive officers as a group
Each nominee for election as a director
Joseph G. Hadzima, Jr.
Christopher Perretta
Susan L. Spradley
Each associate of any executive officers, current directors or director nominees
Each other person who received or is to receive 5% of awards
All employees, including all current officers who are not executive officers, as a group
Number of Shares
60,000
35,000
30,000
30,000
155,000
49,000
7,000
7,000
7,000
—
—
1,931,437
Vote Required
The affirmative vote of the holders of a majority of the shares present or represented and voting on this
proposal is required to approve the Amended and Restated 2019 Plan.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE
APPROVAL OF THE AMENDED AND RESTATED 2019 PLAN.
22
PROPOSAL 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Audit Committee of the Board has appointed PricewaterhouseCoopers LLP to serve as our independent
registered public accounting firm for the fiscal year ending March 31, 2021. PricewaterhouseCoopers LLP has
served as our auditors since 1993. We expect that a member of PricewaterhouseCoopers LLP will attend the
Annual Meeting, will have an opportunity to make a statement if so desired, and will be available to respond to
appropriate questions from our stockholders. We are incorporated in Delaware, and Delaware law does not
require the ratification of the Audit Committee’s appointment, but the Audit Committee will consider the results
of this vote when selecting auditors in the future.
Vote Required
The affirmative vote of the holders of a majority of the shares present or represented and voting on this
proposal is required to approve the ratification of the appointment of PricewaterhouseCoopers LLP as our
independent registered public accounting firm for the fiscal year ending March 31, 2021.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE
RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS OUR
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.
23
PROPOSAL 4
ADVISORY VOTE ON EXECUTIVE COMPENSATION
We encourage stockholders to review the Compensation Discussion and Analysis, or “CD&A,” included
below. The CD&A provides additional details of our executive compensation program, including our
compensation philosophy and objectives, the individual elements of our executive compensation program, and
details on the administration of our executive compensation program. In addition, we have included the amounts
of compensation of our Named Executive Officers for fiscal years 2018, 2019, and 2020 in the compensation
tables below and in the related disclosures contained in this proxy statement.
At our 2017 Annual Meeting of Stockholders, our stockholders indicated their preference that the Company
solicit a non-binding advisory vote on the compensation of our Named Executive Officers, commonly referred to
as a “say-on-pay” vote, every year. The Board adopted a policy to hold annual “say-on-pay” votes that is
consistent with that preference. Therefore, we are asking stockholders to approve, on an advisory basis, the
compensation of our Named Executive Officers as disclosed in this proxy statement in accordance with SEC
rules. This vote is not intended to address any specific item of compensation but rather the overall compensation
of our Named Executive Officers and the philosophy, policies, and practices described in this proxy statement. At
the 2019 Annual Meeting of Stockholders, or the 2019 Annual Meeting, our stockholders approved our
say-on-pay proposal with 94% of the total votes cast voting in favor.
The Compensation Committee carefully considers the results of the advisory vote on our say-on-pay
proposal in the context of its annual review of executive compensation and the on-going work of the
Compensation Committee. Additionally, the Compensation Committee engages the services of an independent
compensation consultant to review and make recommendations regarding various aspects of our compensation
program.
The goal of our executive officer compensation program is to retain and reward highly qualified, talented
leaders who create long-term stockholder value. In addition, our program is designed to align management’s
interests with those of our stockholders and to motivate senior executives to increase our long-term growth and
profitability. Our compensation philosophy has not significantly changed in recent years.
As described more fully in the CD&A, we continue to emphasize pay-for-performance. For example, as in
the past, for the fiscal year ending March 31, 2021, our Named Executive Officers will not be eligible for their
targeted annual incentive bonus unless a threshold profitability (non-GAAP earnings per share, or EPS) target is
met. Further, the Compensation Committee, with respect to the Named Executive Officers other than the CEO,
and the Board, with respect to the CEO, determined that one-third of the shares subject to the RSUs granted to
our Named Executive Officers will be granted based on the achievement of corporate and individual performance
goals in the prior fiscal year. Other points that underscore the continued alignment between stockholders’
interests and executive officer performance include, among other items:
•
•
•
•
•
•
no guaranteed annual incentive bonus;
limits, or caps, on annual incentive bonus;
no tax gross-ups;
prohibition of hedging and pledging of company stock for our directors, executive officers, and
employees;
significant proportion of total compensation in the form of long-term equity awards; and
meaningful minimum stock holding requirements.
24
Accordingly, the Board is asking our stockholders to indicate their support for the compensation of our
Named Executive Officers as described in this proxy statement by casting a non-binding advisory vote “FOR”
the following resolution:
RESOLVED, that the Company’s stockholders approve, on an advisory basis, the compensation of the
named executive officers as disclosed in the Company’s Proxy Statement for the 2020 Annual Meeting of
Stockholders pursuant to the compensation disclosure rules of the Securities and Exchange Commission.
This “say-on-pay” vote is advisory and, therefore, not binding on us, our Compensation Committee, or our
Board. Our Board and compensation committee value the opinions of our stockholders and, to the extent there is
any significant vote against the Named Executive Officer compensation as disclosed in this proxy statement, we
will consider our stockholders’ concerns and our Compensation Committee will evaluate whether any actions are
necessary to address those concerns.
Vote Required
The affirmative vote of the holders of a majority of the shares present or represented and voting on this
proposal is required to approve, on an advisory basis, the compensation of our Named Executive Officers as
disclosed in this proxy statement.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE
ADVISORY APPROVAL OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS.
25
DIRECTORS AND EXECUTIVE OFFICERS
Age
Positions
66 Chairman, President, Chief Executive Officer, and Director
68 Vice Chairman, Chief Operating Officer, and Director
62 Executive Vice President, Worldwide Sales
62 Executive Vice President, Chief Financial Officer, Chief
Accounting Officer, and Treasurer
72 Director
62 Lead Independent Director
61 Director
68 Director
62 Director
59 Director
67 Director
Name
Anil K. Singhal
Michael Szabados
John W. Downing
Jean Bua
Robert E. Donahue
John R. Egan
Alfred Grasso
Joseph G. Hadzima, Jr.
Christopher Perretta
Susan L. Spradley
Vivian Vitale
Executive Officers
Anil Singhal co-founded the Company in June 1984 and has served as NetScout’s Chief Executive Officer
and as a director on NetScout’s Board since inception. In January 2007, Mr. Singhal was appointed Chairman of
the Board, and has been serving as NetScout’s President, CEO, and Chairman since that time. In his current role,
Mr. Singhal is focused on providing strategic leadership and vision, as well as setting operational priorities for
NetScout’s management team. Mr. Singhal’s vision of “traffic-based instrumentation” has guided NetScout’s
product direction and focus for the past three decades, helping to shape the evolution for the industry in the
process. Under Mr. Singhal’s leadership, NetScout has grown substantially during the past three decades,
completing its initial public offering in 1999, and acquiring the Danaher Communications Business in 2015 for
$2.3 billion, which, at the time, nearly tripled the size of the Company in terms of revenue, free cash flow, and
employees. He is credited with numerous innovations in the field of network traffic monitoring and analysis that
have helped NetScout earn numerous industry accolades. During the past decade, Mr. Singhal has also been an
instrumental part of a number of strategic acquisitions that have fortified and enhanced NetScout’s technology,
customer base, and go-to-market capabilities. Mr. Singhal has earned notable recognition for his entrepreneurial
success, including the TiE (The Indus Entrepreneur) Boston Lifetime Achievement in 2013, Enterprise Bank’s
2013 George L. Duncan Award of Excellence and Ernst & Young’s New England Entrepreneur of the Year in
1997. Mr. Singhal holds a BSEE from BITS, Pilani, India and an MS in Computer Science from the University of
Illinois, Urbana-Champaign. The Company’s Nominating and Corporate Governance Committee believes that
Mr. Singhal’s experience serving as the Company’s Chief Executive Officer since the Company’s founding,
combined with his business expertise, industry-specific knowledge, and technical know-how, qualify him to
serve as a director of the Company.
Michael Szabados has served as NetScout’s Chief Operating Officer since April 2007 and as Vice Chairman
of NetScout’s Board since he was appointed as a director in February 2019. As Chief Operating Officer,
Mr. Szabados is focused on executing NetScout’s vision and strategy. During his tenure, he has been critical in
helping lead NetScout’s key functional areas as NetScout nearly tripled in size. During his tenure, NetScout
successfully completed and integrated six acquisitions before the 2015 $2.3 billion acquisition of the Danaher
Communications Business. His career at NetScout began in 1997 when he joined the Company as Vice President,
Marketing, charged with increasing the Company’s overall visibility and market awareness. His responsibilities
expanded in 2001 to encompass product development, manufacturing, and customer support when he was
promoted to Senior Vice President, Product Operations. A veteran of the enterprise networking industry,
Mr. Szabados held senior leadership roles with companies including UB Networks, SynOptics/Bay Networks and
MIPS Corporation following engineering and product management roles at Intel Corporation and later at Apple.
Mr. Szabados holds a BSEE from UC Irvine and an MBA from UC Santa Clara. The Nominating and Corporate
Governance Committee believes that Mr. Szabados’ experience serving as the Company’s Chief Operating
26
Officer and in other functional roles, along with his business experience and industry and technical experience,
qualify him to serve as a director of the Company.
Jean Bua has served as NetScout’s Executive Vice President, Chief Financial Officer, Chief Accounting
Officer, and Treasurer since September 2015 and served as NetScout’s Senior Vice President, Chief Financial
Officer, Chief Accounting Officer, and Treasurer from November 2011 until September 2015. She joined the
Company in September 2010 as Vice President, Finance. In her current role, Ms. Bua is responsible for
accounting, tax, treasury, investor relations, financial planning and analysis, real estate development, and
compliance. Ms. Bua has played a key role in executing on the financial aspects of NetScout’s strategy. During
her tenure, NetScout successfully completed and integrated five acquisitions before the $2.3 billion acquisition of
the Danaher Communications Business in 2015. In May 2017, Ms. Bua joined the board of CoreSite Realty
Corporation, a publicly-traded provider of data center and interconnection solutions across the U.S. In November
2018, Ms. Bua also joined the board of AstroNova, Inc., a publicly-traded provider of data visualization
technology. Before joining NetScout, Ms. Bua served as Executive Vice President, Finance & Treasurer of
American Tower Corporation, where she was a critical contributor to multiple equity and debt financings and
numerous acquisitions that helped the company to more than double in revenue and become a leading provider of
infrastructure for the wireless telecommunications industry. Prior to American Tower, Ms. Bua spent nine years
at Iron Mountain, Inc., in various capacities including as Senior Vice President, Chief Accounting Officer, and
Worldwide Controller. During her tenure, Iron Mountain successfully consolidated the records management
industry, growing from annual revenue of $100 million to over $2 billion through more than 100 acquisitions.
Previously, she held senior positions at Duracraft Corp. and Keithley Instruments. She was a management
consultant at Ernst & Young and an auditor at KPMG. Ms. Bua earned her Bachelor of Science in Business
Administration, summa cum laude, from Bryant College and her Masters of Business Administration from the
University of Rhode Island.
John W. Downing has served as NetScout’s Executive Vice President, Worldwide Sales Operations since
September 2015, and served as Senior Vice President, Worldwide Sales Operations from 2007 until September
2015. In this role, Mr. Downing is responsible for directing NetScout’s sales leadership in both the service
provider and enterprise markets. Under Mr. Downing’s direction, NetScout has built long-term relationships with
leading telecommunications service providers, government agencies, and many of the world’s largest
corporations. He joined NetScout in 2000 as Vice President, Sales Operations, instituting and refining key
go-to-market programs and sales processes that have underpinned the Company’s revenue growth during the past
19 years. Prior to NetScout, from April 1998 until September 2000, Mr. Downing served as Vice President of
Sales at Genrad Corporation, a $300 million manufacturer of electronic testing equipment and production
solutions and was Vice President of North American Sales from January 1996 until March 1998. Mr. Downing
earned a Bachelor of Science in Engineering (BSE) in Computer Science and Applied Mathematics from Tufts
University and a Master’s in Business Administration from Suffolk University.
Non-Employee Directors
Robert E. Donahue has been a NetScout director since March 2013. He served on the board of directors of
Sycamore Networks, Inc., an intelligent optical networking and multiservice access provider, from July 2007
until October 2014. Mr. Donahue served on the board of directors of Cybersource Corporation, a leading
provider of electronic payment and risk management solutions, from November 2007 to August 2010. From
August 2004 to November 2007, Mr. Donahue served as the President and Chief Executive Officer of
Authorize.Net Holdings, Inc. (formerly Lightbridge Inc.), a leading transaction processing company, before it
was acquired by Cybersource Corporation in November 2007. Mr. Donahue also served as a member of
Authorize.Net’s board of directors from January 2004 until November 2007. The Company’s Nominating and
Corporate Governance Committee believes that Mr. Donahue’s industry knowledge and his service on other
public company boards provide deep experience to the Company and qualify him to serve as a director of the
Company.
27
John R. Egan has been a NetScout director since October 2000 and serves as NetScout’s Lead Independent
Director. Mr. Egan is a founding managing partner of Egan-Managed Capital, L.P., a Boston-based venture
capital fund specializing in New England, information technology, and early-stage investments, which began in
the fall of 1996, and is a managing partner of Carruth Associates. From 1992 until 2016, he was a member of the
Board of Directors at EMC Corporation, a publicly-held provider of computer storage systems and software,
prior to its acquisition by Dell. From 2007 until 2016, Mr. Egan also served as a member of the Board of
Directors at VMWare, a leader in virtualization and cloud infrastructure. Since 2011, Mr. Egan has served as a
member of the Board of Directors and currently serves as Non-Executive Chairman of the Board of Directors and
serves on the Nominating and Corporate Governance Committee at Progress Software Corp., a global software
company. Since 2012, Mr. Egan has served as Lead Director of the Board of Directors of Verint Systems, Inc., a
publicly-held provider of systems to the internet security market, where he is currently the Chairman of the
Corporate Governance and Nominating Committee and a member of the Compensation Committee. Mr. Egan
formerly served on the Board of Trustees at Boston College until 2018 and currently serves as a director for two
other privately held companies. The Company’s Nominating and Corporate Governance Committee believes that
Mr. Egan’s extensive understanding and involvement in the information technology industry together with his
executive leadership roles and his service on other public company boards provide deep experience to the
Company and qualify him to serve as a director of the Company.
Alfred Grasso has been a NetScout director since April 2018. Mr. Grasso is the past President and Chief
Executive Officer of the MITRE Corporation, a position he held from 2006 to 2017, and he continues to serve as
a Consultant for the company. Mr. Grasso’s experience includes service on the boards of a number of
scientifically-driven organizations and non-profit institutions. Mr. Grasso was elected to the Board of Trustees of
Riverside Research in 2019. He is a member of the Defense Science Board and a former member of the Army
Science Board. He currently serves as the industry co-chair of the National Academy of Science’s Government,
University, and Industry Research Roundtable and he is a member of the Virginia Tech Hume Center Advisory
Board. Mr. Grasso is a Permanent Director and Executive Committee member of the Armed Forces
Communications and Electronics Association (AFCEA) International’s Board of Directors and served as
Chairman from 2012 to 2014 and vice chairman from 2010 to 2012. Mr. Grasso is the former President of the
Board of the National GEM Consortium, a non-profit organization that promotes the participation of under-
represented groups in the science, technology, engineering, and math fields. He has served as a Trustee of the
George Mason University Foundation, a member of the Stevens Institute Systems Engineering Research Center
Advisory Board, the University of Virginia’s Department of Systems and Information Engineering Advisory
Board, Howard University’s College of Engineering, Architecture and Computer Sciences Board of Visitors, and
the Northern Virginia Technology Council. The Company’s Nominating and Corporate Governance Committee
believes that Mr. Grasso’s experience as Chief Executive Officer of the MITRE Corporation provides deep
government sector and global business experience to the Company, and his board and leadership experience with
numerous other scientific, technical, and other organizations, qualify him to serve as a director of the Company.
Joseph G. Hadzima, Jr. has been a NetScout director since July 1998. Mr. Hadzima has been a Managing
Director of Main Street Partners, LLC, a venture capital investing and technology commercialization company,
since April 1998. Since 2000, he has also been President of IPVision, Inc., a Main Street Partners portfolio
company that provides intellectual property analysis systems and services. In 2019, Mr. Hadzima co-founded
Neurostim Technologies, a company commercializing a low cost neurostimulation patch technology for the
treatment of the symptoms of various chronic medical conditions. Mr. Hadzima is also a Senior Lecturer at MIT
Sloan School of Management, of counsel at a law firm, and serves as a director on two private company boards.
The Company’s Nominating and Corporate Governance Committee believes that Mr. Hadzima’s experience with
emerging technology companies, his prior legal experience, and his service on other boards provide the Company
with valuable business perspective and insight into emerging technologies that may affect the business and
strategies of the Company and qualify him to serve as a director of the Company.
Christopher Perretta has been a NetScout director since September 2014. Most recently, Mr. Perretta served
as chief information and operations officer at MUFG Americas Holdings Corporation and its U.S. banking
28
subsidiary, MUFG Union Bank, N.A. from April 2016 to January 2019. Previously, he served as Executive Vice
President and Chief Information Officer at State Street Corporation from September 2007 until April 2016 and as
a member of State Street Corporation’s Management Committee from February 2013 until April 2016. From
December 1996 to September 2007, Mr. Perretta served in various roles at General Electric Corporation,
including as Chief Information Officer for the North American Consumer Financial Services unit, Chief
Technology Officer for General Electric Capital, and, from January 2003 to September 2007, as Chief
Information Officer of General Electric Commercial Finance. Mr. Perretta has also served as a member of the
board of directors of a privately-held technology company and the Advanced Cyber Security Center. The
Company’s Nominating and Corporate Governance Committee believes that Mr. Perretta’s experience with
various Fortune 500 companies and his service on other boards provide the Company with valuable business
perspective and insight into global issues that may affect the business and strategies of the Company and qualify
him to serve as a director of the Company.
Susan L. Spradley has been a NetScout director since April 2018. Ms. Spradley is a partner in the Tap
Growth Group, a position she has held since August 2017, and the Chief Executive Officer of Motion
Intelligence, Inc., a private company, which she joined in December 2017. From January 2013 to January 2017,
she served in various roles at Viavi Solutions Inc. (formerly JDS Uniphase), most recently as Executive Vice
President and General Manager of Product Line Management and Design. Prior to 2013, Ms. Spradley served as
Chief Executive Officer and Executive Director of US Ignite, a White House and National Science Foundation
initiative focused on applications for smart city implementation. Ms. Spradley also held senior leadership roles at
Nokia Siemens Networks, and Nortel Networks prior to that. Ms. Spradley currently serves on the Board of
Directors of Qorvo, Inc. (Nasdaq: QRVO), a provider of innovative RF solutions, and Avaya Holdings Corp.
(NYSE: AVYA), a digital communications software, services and devices company, and serves as Chairman of
the Board of Directors of US Ignite. The Nominating and Corporation Governance Committee believes that
Ms. Spradley’s executive experience, as well as her experience with technology companies and service on other
public company boards, provide valuable insights into issues that affect the Company’s business and qualify her
to serve as a director of the Company.
Vivian Vitale has been a NetScout director since February 2019. Ms. Vitale operates a consulting practice
assisting organizations in the development of human resources and people management practices, a role she has
held since April 2018. From April 2012 until March 2018, she served as Executive Vice President of Human
Resources at Veracode, Inc., continuing in her role through Veracode, Inc.’s acquisition by CA Technologies in
March 2017. Prior to 2012, Ms. Vitale served as Senior Vice President at Care.com, an on-line provider of
support services to families. Ms. Vitale has also held senior leadership roles at RSA Security, Unica Corporation,
and IBM prior to that. Ms. Vitale is also a member of the Board of Directors of Progress Software Corporation
and is a member of its Compensation Committee. Ms. Vitale currently serves on the Board of Directors of Vera3,
an investment firm, and on the Advisory Board of Surprise HR, an early stage company which provides an
employee recognition product. Ms. Vitale holds a bachelor’s degree in communications from the University of
Connecticut and a master’s degree in corporate and political communication from Fairfield University. The
Nominating and Corporation Governance Committee believes that Ms. Vitale’s extensive experience and insight
in talent management and human resources operations qualifies her to serve as a director of the Company.
There are no family relationships among any of our executive officers and directors.
29
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of our common stock as of the
Record Date by each Named Executive Officer named in the Summary Compensation Table, each director and
nominee for director, all executive officers and directors as a group, all those known by us to be beneficial
owners of more than 5% of our common stock.
Name and Address of Beneficial Owner
Anil K. Singhal(2)
Michael Szabados(3)
Jean Bua(4)
John W. Downing(5)
Robert E. Donahue(6)
John R. Egan(7)
Alfred Grasso(8)
Joseph G. Hadzima, Jr.(9)
Christopher Perretta(10)
Susan L. Spradley(11)
Vivian Vitale(12)
BlackRock, Inc.(13)
55 East 52nd Street
New York, New York 10055
The Vanguard Group(14)
100 Vanguard Boulevard
Malvern, PA 19335
Neuberger Berman Group LLC and affiliates(16)
1290 Avenue of the Americas
New York, New York 10104
Dimensional Fund Advisors LP(15)
Building One
6300 Bee Cave Road
Austin, Texas, 78746
Capital Ventures International and affiliates(17)
Windward 1
Regatta Office Park, West Bay Road
Grand Cayman E9 KY1-1103
CIBC Private Wealth Management(18)
3290 Northside Parkway, 7th Floor
Atlanta, GA 30327
AllianceBernstein L.P.(19)
1345 Avenue of the Americas
New York, New York 10105
Brown Capital Management, LLC(20)
1201 N. Calvert Street
Baltimore, Maryland 21202
All executive officers and directors as a group (11 persons)(21)
30
Number of Shares
Beneficially Owned(1)
Percentage of Class
Beneficially Owned
2,571,882
3.55%
69,666
83,472
114,744
31,977
95,740
16,000
127,798
27,771
16,000
10,970
*
*
*
*
*
*
*
*
*
*
8,568,002
11.83
6,606,113
6,058,983
9.12
8.36
6,019,915
8.31
5,979,994
4,571,790
4,246,606
4,176,867
3,166,020
8.25
6.31
5.86
5.76
4.36
(2)
Represents less than one percent of class.
*
(1) Under applicable SEC rules and regulations, a person is considered to beneficially own our common stock if
such person either has the sole or shared power with any other person to either vote or dispose of such
common stock. As a result, more than one person may be reported as the beneficial owner of any particular
share of our common stock. Beneficial ownership is determined in accordance with the rules of the SEC.
Shares of common stock issuable by the Company to a person or entity named below pursuant to restricted
stock units which may vest within 60 days of the Record Date are deemed to be beneficially owned and
outstanding for purposes of calculating the number of shares and the percentage beneficially owned by that
person or entity. However, these shares are not deemed to be beneficially owned and outstanding for
purposes of computing the percentage beneficially owned by any other person or entity. Unless otherwise
noted, the address of each person listed on the table is c/o NetScout Systems, Inc., 310 Littleton Road,
Westford, MA 01886, and each person has either sole or shared voting or dispositive power over the shares
shown below as beneficially owned by such person.
Includes 45,000 shares issuable upon the vesting of restricted stock units within 60 days of the Record Date
and 143,390 shares held by a charitable foundation of which Mr. Singhal and his spouse are trustees. As of
the Record Date, Mr. Singhal’s spouse did not beneficially own at least five percent of the Company’s
outstanding common stock, and therefore the 1,074,028 shares held by trusts of which Mr. Singhal’s spouse
is deemed the beneficial owner are reported herein by Mr. Singhal. This amount does not include an
aggregate of 776,887 shares held in a trust for the benefit of Mr. Singhal’s children for which neither
Mr. Singhal nor his spouse is a trustee, and 66,134 shares held in a trust for the benefit of Mr. Singhal’s
nieces and nephews for which neither Mr. Singhal nor his spouse is a trustee.
Includes 26,250 shares issuable upon the vesting of restricted stock units within 60 days of the Record Date.
(3)
Includes 22,500 shares issuable upon the vesting of restricted stock units within 60 days of the Record Date.
(4)
Includes 22,500 shares issuable upon the vesting of restricted stock units within 60 days of the Record Date.
(5)
Includes 7,000 shares issuable upon the vesting of restricted stock units within 60 days of the Record Date.
(6)
Includes 7,000 shares issuable upon the vesting of restricted stock units within 60 days of the Record Date.
(7)
Includes 7,000 shares issuable upon the vesting of restricted stock units within 60 days of the Record Date.
(8)
(9)
Includes 7,000 shares issuable upon the vesting of restricted stock units within 60 days of the Record Date.
(10) Includes 7,000 shares issuable upon the vesting of restricted stock units within 60 days of the Record Date.
(11) Includes 7,000 shares issuable upon the vesting of restricted stock units within 60 days of the Record Date.
(12) Includes 7,000 shares issuable upon the vesting of restricted stock units within 60 days of the Record Date.
(13) This information is based solely on a Schedule 13G/A filed with the SEC on February 4, 2020 (the
“BlackRock 13G”). According to the Blackrock 13G, as of December 31, 2019, BlackRock, Inc. had the
sole power to vote 8,381,543 shares and sole dispositive power over 8,568,002 shares. Various persons have
the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of the
common stock reported on the BlackRock 13G. The BlackRock 13G provides information only as of
December 31, 2019 and, consequently, the beneficial ownership of the aforementioned entity may have
changed between December 31, 2019 and the Record Date.
(14) This information is based solely on a Schedule 13G/A filed with the SEC on February 12, 2020 (the
“Vanguard 13G”). According to the Vanguard 13G, as of December 31, 2019, The Vanguard Group had
sole power to vote 68,723 shares, shared power to vote 11,193 shares, sole dispositive power over 6,534,745
shares and shared dispositive power over 71,368 shares. According to the Vanguard 13G, as of
December 31, 2019, The Vanguard Fiduciary Trust Company (“VFTC”), a wholly owned subsidiary of The
Vanguard Group, Inc., was the beneficial owner of 60,175 shares as a result of its serving as investment
manager of collective trust accounts and Vanguard Investments Australia, Ltd. (“VIA”), a wholly owned
subsidiary of The Vanguard Group, Inc., was the beneficial owner of 19,741 shares as a result of its serving
as investment manager of Australian investment offerings. The Vanguard 13G provides information only as
of December 31, 2019 and, consequently, the beneficial ownership of the aforementioned entity may have
changed between December 31, 2019 and the Record Date.
(15) This information is based solely on a Schedule 13G filed with the SEC on February 12, 2020 (the
“Dimensional 13G”). According to the Dimensional 13G, as of December 31, 2019, Dimensional Fund
31
Advisors LP had the sole power to vote 5,884,774 shares and sole dispositive power over 6,019,915 shares.
Dimensional Fund Advisors LP, an investment adviser registered under Section 203 of the Investment
Advisors Act of 1940, furnishes investment advice to four investment companies registered under the
Investment Company Act of 1940, and serves as investment manager or sub-adviser to certain other
commingled funds, group trusts and separate accounts (such investment companies, trusts and accounts,
collectively referred to as the “Funds”). In certain cases, subsidiaries of Dimensional Fund Advisors LP may
act as an adviser or sub-adviser to certain Funds. In its role as investment advisor, sub-adviser and/or
manager, Dimensional Fund Advisors LP or its subsidiaries (collectively, “Dimensional”) may possess
voting and/or investment power over the securities of the Issuer that are owned by the Funds, and may be
deemed to be the beneficial owner of the shares of the Issuer held by the Funds. However, all securities
reported in the Dimensional 13G are owned by the Funds. Dimensional disclaims beneficial ownership of
such securities. In addition, the filing of the Dimensional 13G shall not be construed as an admission that
the reporting person or any of its affiliates is the beneficial owner of any securities covered by the
Dimensional 13G for any other purposes than Section 13(d) of the Securities Exchange Act of 1934. The
Dimensional 13G provides information only as of December 31, 2019 and, consequently, the beneficial
ownership of the aforementioned entity may have changed between December 31, 2019 and the Record
Date.
(16) This information is based solely on a Schedule 13G/A filed with the SEC on February 13, 2020 by
Neuberger Berman Group LLC on behalf of itself and on behalf of Neuberger Berman Investment Advisers
LLC and Neuberger Berman Equity Funds (the “Neuberger 13G”). According to the Neuberger 13G, as of
December 31, 2019, Neuberger Berman Group LLC had the shared power to vote or direct the vote of
6,010,208 shares and shared power to dispose of or direct the disposition of 6,058,983 shares, Neuberger
Berman Investment Advisers LLC had the shared power to vote or direct the vote of 6.010,208 shares and
shared power to dispose of or direct the disposition of 6,058,983 shares, and Neuberger Berman Equity
Funds had the shared power to vote or direct the vote of 4,242,241 shares and shared power to dispose of or
direct the disposition of 4,242,241 shares. Neuberger Berman Group LLC and its affiliates may be deemed
to be beneficial owners of securities for purposes of Exchange Act Rule 13d-3 because they or certain
affiliated persons have shared power to retain, dispose of or vote the securities of unrelated clients.
Neuberger Berman Group LLC or its affiliated persons do not, however, have any economic interest in the
securities of those clients. The clients have the sole right to receive and the power to direct the receipt of
dividends from or proceeds from the sale of such securities. No one client has an interest of more than 5%
of the issuer. In addition to the holdings of individual advisory clients, Neuberger Berman Investment
Advisers LLC serves as investment manager of Neuberger Berman Group LLC’s various registered mutual
funds which hold such shares. The holdings belonging to clients of Neuberger Berman Trust Co N.A.,
Neuberger Berman Trust Co of Delaware N.A., Neuberger Berman Asia Ltd., Neuberger Berman Breton
Hill ULC, NB Alternatives Advisers LLC and Neuberger Berman Investment Advisers LLC are also
aggregated to comprise the holdings referenced in the Neuberger 13G.
This amount also includes shares from individual client accounts over which Neuberger Berman Investment
Advisers LLC has shared power to dispose but does not have voting power over these shares. The holdings
of Neuberger Berman Trust Co N.A., Neuberger Berman Trust Co of Delaware N.A., Neuberger Berman
Asia Ltd., Neuberger Berman Breton Hill ULC, NB Alternatives Advisers LLC and Neuberger Berman
Investment Advisers LLC, are also aggregated to comprise the holdings referenced in the Neuberger 13G.
Neuberger Berman Trust Co N.A., Neuberger Berman Trust Co of Delaware N.A., Neuberger Berman Asia
Ltd., Neuberger Berman Breton Hill ULC, NB Alternatives Advisers LLC and Neuberger Berman
Investment Advisers LLC and certain affiliated persons may be deemed to beneficially own the securities
covered by the Neuberger 13G in their various fiduciary capacities by virtue of the provisions of Exchange
Act Rule 13d-3. Neuberger Berman Group LLC, through its subsidiaries Neuberger Berman Fixed Income
Holdings LLC, NB Alternatives Holdings LLC and Neuberger Trust Holdings LLC controls Neuberger
Berman Trust Co N.A., Neuberger Berman Trust Co of Delaware N.A., Neuberger Berman Asia Ltd.,
Neuberger Berman Breton Hill ULC, NB Alternatives Advisers LLC and Neuberger Berman Investment
Advisers LLC and certain affiliated persons. Each of Neuberger Berman Group LLC, Neuberger Berman
32
Fixed Income Holdings LLC, NB Alternatives Holdings LLC, Neuberger Trust Holdings LLC, Neuberger
Berman Trust Co N.A., Neuberger Berman Trust Co of Delaware N.A., Neuberger Berman Asia Ltd.,
Neuberger Berman Breton Hill ULC, NB Alternatives Advisers LLC and Neuberger Berman Investment
Advisers LLC and certain affiliated persons disclaim beneficial ownership of the securities covered by the
Neuberger 13G. The Neuberger 13G provides information only as of December 31, 2019 and, consequently,
the beneficial ownership of the aforementioned entities may have changed between December 31, 2019 and
the Record Date.
(17) This information is based solely on a Schedule 13G/A filed with the SEC on February 12, 2016. Capital
Ventures International has the sole power to vote 5,337,701 of such shares, shared power to vote 5,979,994
of such shares, sole dispositive power over 5,337,701 of such shares and shared dispositive power over
5,979,994 of such shares. Susquehanna Advisors Group, Inc. has shared power to vote 5,979,994 of such
shares and shared dispositive power over 5,979,994 of such shares. G1 Execution Services, LLC has the sole
power to vote 139 of such shares, shared power to vote 5,979,994 of such shares, sole dispositive power
over 139 of such shares and shared dispositive power over 5,979,994 of such shares. Susquehanna
Fundamental Investments, LLC has shared power to vote 5,979,994 of such shares and shared dispositive
power over 5,979,994 of such shares. Susquehanna Securities has the sole power to vote 642,154 of such
shares, shared power to vote 5,979,994 of such shares, sole dispositive power over 642,154 of such shares
and shared dispositive power over 5,979,994 of such shares. Susquehanna Advisors Group, Inc. is the
investment manager to Capital Ventures International and as such may exercise voting and dispositive
power over the 5,337,701 shares directly owned by Capital Ventures International. G1 Execution Services,
LLC and Susquehanna Securities are affiliated independent broker-dealers which, together with Capital
Ventures International, Susquehanna Advisors Group, Inc. and Susquehanna Fundamental Investments,
LLC may be deemed a group and therefore deemed to share voting and dispositive power over all such
shares, although each has disclaimed beneficial ownership of shares held by the others.
(18) This information is based solely on a Schedule 13G/A filed with the SEC on February 3, 2020 (the “CIBC
13G”). According to the CIBC 13G, as of December 31, 2019, CIBC Private Wealth Management had the
sole power to vote 4,571,790 shares and sole dispositive power over 4,571,790 shares. The CIBC 13G
provides information only as of December 31, 2019 and, consequently, the beneficial ownership of the
aforementioned entity may have changed between December 31, 2019 and the Record Date.
(19) This information is based solely on a Schedule 13G filed with the SEC on February 18, 20209 (the
“AllianceBernstein 13G”). According to the AllianceBernstein 13G, as of December 31, 2019,
AllianceBernstein L.P. had the sole power to vote 3,584,903 shares, sole dispositive power over 4,170,426
shares and shared dispositive power over 76,180 shares. The AllianceBernstein 13G provides information
only as of December 31, 2019 and, consequently, the beneficial ownership of the aforementioned entity may
have changed between December 31, 2019 and the Record Date.
(20) This information is based solely on a Schedule 13G/A filed with the SEC on February 14, 2020 (the “Brown
13G”). According to the Brown 13G, as of December 31, 2019, Brown Capital Management, LLC had the
sole power to vote 2,604,264 shares and sole dispositive power over 4,176,867 shares. The Brown 13G
provides information only as of December 31, 2019 and, consequently, the beneficial ownership of the
aforementioned entity may have changed between December 31, 2019 and the Record Date.
(21) Includes an aggregate of 165,250 shares issuable upon the vesting of restricted stock units within 60 days of
the Record Date.
33
Board Leadership Structure
CORPORATE GOVERNANCE
The Board is currently chaired by the President and Chief Executive Officer of the Company, Mr. Singhal.
The Board believes combining the position of Chief Executive Officer and Chairman is in the best interest of the
Company and its stockholders. As one of the co-founders of the Company, Mr. Singhal provides extensive
technology vision, industry expertise, and leadership; historical knowledge of the Company, its customers, and
solutions; and a deep understanding of the opportunities and challenges facing the Company today. Those
attributes, together with his combined role, place him in the best position to ensure that the Board and
management act with a common purpose to execute the Company’s strategic initiatives and business plans. To
reinforce director independence and provide for leadership separate from the Chairman, our Board appointed
Mr. Egan as Lead Independent Director.
Director Independence
Our Board has determined that each of Messrs. Donahue, Egan, Grasso, Hadzima and Perretta, Ms. Spradley
and Ms. Vitale is independent within the meaning of the director independence standards of The Nasdaq Stock
Market LLC, or Nasdaq, and the SEC. Furthermore, our Board has determined that each current member of our
Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee of our
Board, and each director who served as a member of any of the foregoing committees of the Board during the
fiscal year ended March 31, 2020 is independent within the meaning of the Company’s, Nasdaq’s, and the SEC’s
independence standards, as applicable.
Executive Sessions of Independent Directors
Our Board holds executive sessions of the independent members of our Board following each regularly
scheduled in-person meeting of our Board. The Lead Independent Director, currently Mr. Egan, chairs the
executive sessions.
Policies Governing Director Nominations
Director Qualifications
Our Nominating and Corporate Governance Committee is responsible for reviewing with our Board the
appropriate qualities, skills, and characteristics desired of Board members in the context of the needs of the
business and current make-up of our Board. This assessment includes consideration of the following minimum
qualifications that our Nominating and Corporate Governance Committee believes must be met by all directors:
•
•
•
•
•
•
directors must be individuals of the highest ethical character and integrity and share our values as
reflected in our Code of Business Conduct;
directors must have reputations, both personal and professional, consistent with our image and
reputation;
directors must be free of conflicts of interest that would interfere with the proper performance of the
responsibilities of a director;
directors must have the ability to exercise sound business judgment;
directors must be willing and able to devote sufficient time to the affairs of the Company and be
diligent in fulfilling the responsibilities of a director and/or committee member, as the case may be;
directors must have substantial business or professional experience and expertise and be able to offer
meaningful and practical advice and guidance to our management based on that experience and
expertise; and
34
•
directors must have a commitment to enhancing stockholder value.
The Nominating and Corporate Governance Committee also considers numerous other qualities, skills, and
characteristics when evaluating director nominees, such as:
•
•
•
•
an understanding of and experience in the network application/performance management solutions
market, the market for networking solutions generally, and related accounting, legal, finance, product,
sales and/or marketing matters;
experience on other public or private company boards, unless a director otherwise provides
complementary capabilities or qualifies as an “audit committee financial expert” under the rules of the
SEC;
leadership experience with public companies or other major organizations; and
diversity of the Board, taking into account the business and professional experience, educational
background, reputation, industry expertise across various market segments and technologies relevant to
our business, as well as other relevant attributes of the candidates.
Board members are expected to prepare for, attend, and participate in Board meetings and meetings of
committees on which they serve. In addition, directors must stay abreast of our business and markets.
Process for Identifying and Evaluating Director Nominees
The Board is responsible for nominating persons for election as directors of the Company. Our Board
delegates the initial selection process to our Nominating and Corporate Governance Committee, with the
expectation that other members of our Board, and of management, will take part in the process as appropriate.
Generally, the Nominating and Corporate Governance Committee identifies candidates for director
nominees in consultation with management, through the use of search firms or other advisers, or through such
other methods as our Nominating and Corporate Governance Committee deems to be helpful to identify
candidates. The Nominating and Corporate Governance Committee seeks to identify and recruit diverse
candidates (including women and minority candidates), as part of the search process for new Board members.
Once candidates have been identified, our Nominating and Corporate Governance Committee confirms that the
candidates meet all of the minimum qualifications for director nominees established by the Nominating and
Corporate Governance Committee and set forth in the Corporate Governance Guidelines. The Nominating and
Corporate Governance Committee may gather information about the candidates through interviews,
questionnaires, background checks, or any other means that the Nominating and Corporate Governance
Committee deems to be helpful in the evaluation process. The Nominating and Corporate Governance Committee
then meets to discuss and evaluate the qualities and skills of each candidate in light of the criteria set forth above
or established by the Nominating and Corporate Governance Committee from time to time, both on an individual
basis and taking into account the overall composition and needs of our Board. Based on the results of the
evaluation process, the Nominating and Corporate Governance Committee recommends candidates for our
Board’s approval as director nominees for election to the Board. The Nominating and Corporate Governance
Committee also recommends candidates for the Board’s appointment to the committees of our Board.
Stockholder Recommendations for Nominees as Directors, Director Nominations and the Proposal of
Other Business
Our Nominating and Corporate Governance Committee will consider recommendations for candidates for
nominees as directors and proposals for business other than director recommendations that are properly
submitted by stockholders. Any recommendation of a nominee for the Board or any proposal for business other
than director recommendations by our stockholders with respect to our Annual Meeting of Stockholders for the
fiscal year ended March 31, 2021 (“2021 Annual Meeting”) must be submitted in writing to our principal
executive offices at 310 Littleton Road, Westford, Massachusetts 01886, attention: Secretary, and must be
35
received by us and comply with the requirements set forth in our Corporate Governance Guidelines. Stockholders
may also nominate directors or submit proposals for business other than director nominations by following the
detailed requirements set forth in our by-laws, as the same may be amended from time to time.
Any communication with respect to nominees as directors should (i) describe why the candidate meets the
Board’s criteria described above; (ii) include the candidate’s and recommender’s names and addresses and
provide biographical information about the recommended candidate that would be required to be disclosed in
solicitations of proxies for election of directors; (iii) include the proposed nominee’s written consent to serve as a
nominee, if nominated, and as a director, if elected; and (iv) contain any additional information otherwise
required by Regulation 14A under the Exchange Act.
Any communication with respect to the proposal of business other than director nominations should include,
among other matters required by our by-laws, a brief description of the business desired to be brought before the
meeting, the reasons for conducting such business at the meeting and any material interest in such business of
such stockholder or any stockholder associated person (as defined in our by-laws), if any, on whose behalf the
proposal is made.
The requirements for stockholder director nominations and proposals other than director nominations appear
in our by-laws. Only such individuals who are nominated in accordance with the procedures described above and
in our by-laws will be eligible for election by stockholders as directors and only such business brought before the
meeting in accordance with the procedures set forth above and in our by-laws will be conducted at a meeting of
stockholders. We have not received any stockholder recommendations or nominations with respect to our Annual
Meeting.
To be considered for inclusion in next year’s proxy materials, your proposal must be submitted in writing to
our principal executive offices at 310 Littleton Road, Westford, Massachusetts 01886, attention: Secretary, and
must be received by us no later than March 24, 2021. Proposals must satisfy the procedures set forth in Rule
14a-8 under the Exchange Act. If you wish to submit a proposal for the 2021 Annual Meeting but not have it
included in next year’s proxy materials for such meeting or wish to nominate a director, you must submit such
proposal or nomination in writing to our principal executive offices at the address noted above, which must be
received by us no earlier than the close of business of May 13, 2021 and no later than the close of business of
June 12, 2021 and must satisfy the requirements described above and in our by-laws. In order to curtail
controversy as to the date on which a proposal was received by us, we suggest that you submit your proposals by
registered mail, return receipt requested.
Policy Governing Security Holder Communications with the Board of Directors
The Board provides to every stockholder the ability to communicate with the Board as a whole and with
individual directors through an established process for security holder communication (as that term is defined by
the rules of the SEC) as follows:
For communications directed to the Board as a whole or to a specific member of the Board, stockholders
may send such communications to the attention of the Chairman of the Board with respect to general
communications or to the attention of the specific director, in each case, by one of the three methods listed
below:
By U.S. mail (including courier or other expedited delivery service): NetScout Systems, Inc., 310 Littleton
Road, Westford, MA 01886 Attn: [Chairman of the Board]/[Individual Director], c/o Investor Relations
By facsimile: (978) 614-4004, Attn: [Chairman of the Board]/[Individual Director], c/o Investor Relations
By email: ir@netscout.com
36
We will forward any such stockholder communications to the Chairman of our Board, as a representative of
our Board, and/or to the director to whom the communication is addressed.
Policy Governing Director Attendance at Annual Meetings of Stockholders
Our policy is that one of the regularly scheduled in-person meetings of our Board will be scheduled on the
same day as our annual meeting of stockholders, and all directors are encouraged to attend our annual meeting of
stockholders. All of the members of our Board attended the 2019 Annual Meeting, either in-person or via
teleconference.
Code of Ethics
We have adopted a code of ethics as defined by regulations promulgated under the Securities Act of 1933,
as amended, and the Exchange Act, which applies to all of the employees, officers, and directors of the Company
and our subsidiaries, including our principal executive officer, principal financial officer, principal accounting
officer, and controller, and persons performing similar functions. A current copy of the Code of Business
Conduct is available at the Corporate Governance section of our website at http://ir.netscout.com/. NetScout
intends to disclose amendments to or waivers from provisions of the Code of Business Conduct that apply to our
principal executive officer, principal financial officer, principal accounting officer, or controller, and persons
performing similar functions, by posting such information on our website, available at http://ir.netscout.com/.
For more corporate governance information, you are invited to visit the Corporate Governance section of
our website, available at http://ir.netscout.com/. Contents of our website are not part of or incorporated by
reference into this proxy statement.
Majority Vote Policy
It is the policy of NetScout that any nominee for election to the Board who receives a greater number of
votes “withheld” from his or her election than votes “for” such election shall submit his or her offer of
resignation for consideration by the Nominating and Corporate Governance Committee. The Nominating and
Corporate Governance Committee shall consider all of the relevant facts and circumstances and recommend to
the Board the action to be taken with respect to such offer of resignation. The Board will then act on the
Nominating and Corporate Governance Committee’s recommendation.
37
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The table below indicates the composition of each of the committees of our Board of Directors:
Audit
Committee
Compensation
Committee
Nomination &
Governance
Committee
Finance
Committee
INDEPENDENT DIRECTORS
Robert E. Donahue
John R. Egan
Alfred Grasso
Joseph G. Hadzima, Jr.
Christopher Perretta
Susan L. Spradley
Vivian Vitale
INSIDE DIRECTORS
Anil K. Singhal
Michael Szabados
L
V
Chairperson
Member
Financial Expert L
Lead Independent Director
Chairman of the Board
V Vice Chair of the Board
Board of Directors
The Board met eight times during the fiscal year ended March 31, 2020, or fiscal year 2020. Each of the
directors attended at least 75% of the aggregate of (i) total number of meetings of our Board and (ii) the total
number of meetings held by all committees of the Board on which such director served during fiscal year 2020.
The Board has standing Audit, Compensation, Nominating and Corporate Governance, and Finance Committees.
38
Audit Committee
Current Members
Messrs. Donahue (Chair)
Egan
Hadzima
Spradley
Ms.
Meetings
Eight meetings during the fiscal
year ended March 31, 2020.
A copy of the Audit Committee
Charter can be found at
http://ir.netscout.com/
Audit Committee Designated
“Financial Expert” is
Mr. Donahue.
Responsibilities
Discharging the responsibilities of the Board relating to, among other
items:
• Reviewing and overseeing the financial reports we provide to the
SEC, our stockholders, and general public, and our accounting
policies, internal accounting controls, internal control over financial
reporting, auditing functions, and financial reporting practices
• Appointing, and ensuring the independence of, our independent
auditor and thereby furthering the integrity of our financial reporting
• Establishing and overseeing procedures designed to facilitate the
receipt, retention, and handling of complaints regarding disclosure
controls and procedures, internal control over financial reporting and
accounting, internal accounting control, or auditing matters; and the
receipt of confidential, anonymous submissions by our employees of
concerns regarding questionable accounting or auditing matters
• Reviewing and monitoring our compliance with the related party
transaction approval policy
• Reviewing and monitoring our compliance programs and related
enterprise risk management programs
• Reviewing and overseeing our internal audit function
Independence: Our Board has determined that each current member of
our Audit Committee is, and each member of our Audit Committee
during fiscal year 2020 was, independent within the meaning of Nasdaq’s
director independence standards and the SEC’s heightened director
independence standards for audit committee members.
39
Compensation Committee
Current Members
Ms. Vitale (Chair)
Messrs. Donahue
Egan
Grasso
Perretta
Meetings
Six meetings during the fiscal year
ended March 31, 2020.
Responsibilities
Discharging the responsibilities of the Board relating to, among other
items:
• Establishing the compensation of our executive officers other than
the Chief Executive Officer
• Reviewing and making recommendations to the Board with respect
to the compensation of our Chief Executive Officer
• Administering our incentive compensation, stock plans, benefit
plans, and human resources activities
A copy of the Compensation
Committee Charter can be found at
http://ir.netscout.com/
• Reviewing with our management and recommending for inclusion in
our proxy statements and incorporation by reference in our Annual
Reports on Form 10-K the Compensation Disclosure and Analysis
Ms. Vitale was appointed to the
Compensation Committee,
including as Chair in September
2019.
• Reviewing and considering the results of any advisory vote on
executive compensation
• Managing compensation policy and practice-related risk
• Monitoring and providing strategic guidance regarding human
capital and talent management
Independence: The Board has determined that each current member of
our Compensation Committee is, and each member of our Compensation
Committee during fiscal year 2020 was, independent within the meaning
of Nasdaq’s director independence standards and is a “non-employee
director” as defined by applicable SEC rules and regulations.
40
Nominating and Corporate Governance Committee
Current Members
Messrs. Hadzima (Chair)
Grasso
Perretta
Spradley
Vitale
Mss.
Meetings
Two meetings during the fiscal year
ended March 31, 2020.
A copy of the Nominating and
Corporate Governance Committee
Charter can be found at
http://ir.netscout.com/
Ms. Vitale was appointed to the
Nominating and Corporate
Governance Committee in
September 2019.
Finance Committee
Current Members
Messrs. Grasso (Chair)
Donahue
Egan
Hadzima
Meetings
Two meetings during the fiscal
year ended March 31, 2020.
Responsibilities
Discharging the responsibilities of the Board relating to, among other
items:
•
Identifying individuals qualified to become directors
• Recommending to our Board the director nominees for election
• Monitoring compliance with and periodically reviewing our Code of
Business Conduct and Corporate Governance Guidelines
• Monitoring and providing strategic guidance to the Company’s
Environment, Social, and Governance (ESG)/Corporate
Responsibility programs
Independence: The Board has determined that each current member of
the Nominating and Corporate Governance Committee is, and each
member of our Nominating and Corporate Governance Committee during
fiscal year 2020 was, independent within the meaning of Nasdaq’s
director independence standards.
Responsibilities
Discharging the responsibilities of the Board relating to, among other
items:
• Considering strategic initiatives and other opportunities that may
become available to the Company from time to time and such other
tasks as the Board may designate from time to time
• Reviewing and overseeing other designated strategic finance matters
Independence: The Board has determined that each member of the
Finance Committee is independent within the meaning of Nasdaq’s
director independence standards.
41
Report of Audit Committee of the Board of Directors1
The Audit Committee has reviewed and discussed the audited financial statements for the fiscal year ended
March 31, 2020 with our management and PricewaterhouseCoopers LLP (“PwC”), our independent registered
public accounting firm. Management is responsible for the preparation, presentation, and integrity of the
financial statements, accounting and financial reporting principles and internal control over financial reporting.
PwC is responsible for performing an independent audit of the financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (“PCAOB”) and for expressing opinions on the
conformity of the financial statements with accounting principles generally accepted in the United States.
The Audit Committee has discussed with PwC the matters required to be discussed by Auditing Standard
No. 1301, Communications with Audit Committees, as adopted by PCAOB and has received the written
disclosures and the letter from PwC required by applicable requirements of the PCAOB regarding the
independent auditor’s communications with the Audit Committee concerning independence. The Audit
Committee has also discussed with PwC their independence.
Based on its reviews and discussions referred to above, the Audit Committee recommended to the Board
that the audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended
March 31, 2020 for filing with the SEC.
Respectfully submitted by the Audit Committee
Robert E. Donahue, Chair
John R. Egan
Joseph G. Hadzima, Jr.
Susan L. Spradley
The Board’s Role in Risk Oversight
The Board administers risk management and oversight through the Board as a whole, as well as through
various Board committees that address risks inherent in their respective areas of oversight. The Board seeks to
ensure that risk management principles are incorporated in our strategic planning and management processes and
oversees our enterprise risk management program. This comprehensive approach is reflected in the reporting
processes by which our management provides timely and comprehensive information to the Board to support the
Board’s role in oversight, approval, and decision-making.
The Board monitors the information it receives and requests from management and provides oversight and
guidance to our senior management team concerning the assessment and management of risk. The Board
approves the Company’s high-level goals, strategies, and policies to set the tone and direction for appropriate risk
taking within the business. The Board and its committees then emphasize this tone and direction in its oversight
of management’s implementation of our goals, strategies, and policies. In addition, the Board has been
considering issues and risks raised by the COVID-19 pandemic, including with respect to our operations,
financial position, liquidity and personnel management. The Board discusses and reviews relevant risks, helps
management identify key risk and business continuity indicators, and determines what, if any, additional actions
should be taken to mitigate these risks.
Our senior executives regularly attend meetings of the Board and its committees and provide the Board and
its committees with reports regarding our operations, strategies, and objectives, and the risks inherent within
them. Board and committee meetings also provide a forum for directors to discuss issues with, request additional
1 The material in this report is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be
incorporated by reference in any filing of the Company under the Securities Act or the Exchange Act, other
than our Annual Report on Form 10-K, where it shall be deemed “furnished,” whether made before or after the
date hereof and irrespective of any general incorporation language in any such filing.
42
information from, and provide guidance to, senior management. In addition, our directors have direct access to
senior management to discuss any matters of interest, including those related to risk. Those members of
management most knowledgeable of the issues regularly attend Board and committee meetings to provide
additional insight into items being discussed, including risk exposures.
The Board has delegated oversight for matters involving certain specific areas of risk exposure to its three
principal committees. Each committee reports to the Board at regularly scheduled Board meetings, and more
frequently if appropriate, with respect to the matters and risks for which the committee provides oversight. Each
committee is also authorized and empowered to retain independent advisors as the committee deems appropriate
to discharge its responsibilities under such committee’s charter.
The Audit Committee oversees the integrity of our financial statements, reporting process and internal
controls, the relationship with our independent registered public accounting firm, including their qualifications,
independence and performance, and the Company’s corporate finance matters, including its capital structure. The
Audit Committee also provides oversight with respect to our risk management process and litigation and
compliance programs, discussing with management our significant financial risk exposures, steps management
has taken to monitor, control, and report such exposures, and our policies with respect to risk assessment and risk
management.
The Audit Committee oversees our enterprise risk management program, in which the Company has
identified strategic, operational, financial, and legal risks as well as emerging risks, considering the likelihood
and magnitude of such risks and other criteria management deems appropriate in consultation with the Audit
Committee. Under the program, management identifies and evaluates the effectiveness of risk management and
mitigation methods and periodically reports to the Audit Committee and at least annually to the Board to allow
the Audit Committee and Board to monitor and manage our ongoing enterprise risk management process.
Our Compensation Committee is responsible primarily for the design and oversight of our executive
compensation policies, plans, and practices. A key objective of the Compensation Committee is to ensure that the
Company’s overall executive compensation program appropriately links pay to performance and aligns the
interests of our executives with our stockholders. The Compensation Committee also monitors the design and
administration of our overall incentive compensation programs to ensure that they include appropriate safeguards
to avoid encouraging unnecessary or excessive risk taking by Company employees. Elements of our executive
compensation program that mitigate excessive risk taking, such as our combination of short and long-term
incentives, are described below in the Compensation Discussion and Analysis.
The Nominating and Corporate Governance Committee oversees risks related to our corporate governance,
including Board and director performance, director succession, director education, and our Corporate
Governance Guidelines and other governance documents. The Nominating and Corporate Governance
Committee also oversees our overall compliance program.
43
COMPENSATION AND OTHER INFORMATION
CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
The following summary compensation table sets forth the total compensation paid or accrued for the fiscal
year ended March 31, 2020 to our Chief Executive Officer, Chief Financial Officer, and each of our two other
most highly compensated executive officers during the fiscal year ended March 31, 2020. The executives listed
below may be referred to as our “Named Executive Officers.”
Summary Compensation Table for Fiscal Year 2020
Name and Principal Position
Fiscal Year Salary($)(1)
Stock
Awards(2)($)
Non-Equity
Incentive Plan
Compensation($)
All Other
Compensation(3)($) Total($)
Anil K. Singhal
Chairman, Chief Executive
Officer, and President
Michael Szabados
Chief Operating Officer
Jean Bua
Executive Vice President, Chief
Financial Officer, Chief
Accounting Officer, and Treasurer
John W. Downing(4)
Executive Vice President,
Worldwide Sales Operations
2020
2019
2018
2020
2019
2018
2020
2019
2018
2020
2019
2018
518,750
500,000
456,250
378,750
360,000
338,750
348,750
330,000
313,752
1,580,400
1,836,000
2,085,000
921,900
1,071,000
1,216,250
790,200
918,000
1,042,500
633,800
333,200
0
327,016
168,008
0
301,014
154,008
0
258,750
240,000
239,375
790,200
918,000
1,042,500
355,433
230,447
103,687
83,359
76,334
71,747
28,531
25,233
21,944
20,245
23,252
14,210
15,461
15,164
16,376
2,816,309
2,745,534
2,612,997
1,656,197
1,624,241
1,576,944
1,460,209
1,425,260
1,370,462
1,419,844
1,403,611
1,401,938
(1) Each NEO’s salary was increased by $25,000 as of July 1, 2019. The data presented in the “Salary” column
reflects 3 months at the NEO’s prior salary, and 9 months at the NEO’s new salary. As of July 1, 2019, the
NEO’s salaries were as follows: Mr. Singhal - $525,000; Mr. Szabados - $385,000; Ms. Bua - $355,000; and
Mr. Downing - $265,000.
(2) Amounts shown represent the aggregate full grant date fair value of RSUs calculated in accordance with
FASB ASC 718. The grant date fair value of the RSU awards was calculated by multiplying the closing
price of our common stock on the Nasdaq Global Select Market on the date of grant by the number of RSUs
granted. The fair value shown above may not be indicative of the value realized on the date the RSUs vest
due to variability in the share price of our common stock
Includes 401(k) contributions made by the Company on behalf of the Named Executive Officer. See the All
Other Compensation Table below for additional information. The present value of Mr. Singhal’s retirement
benefits remained the same at $1,237,949 in fiscal year 2020.
(3)
(4) The information presented for Mr. Downing under the “Non-Equity Incentive Plan Compensation” column
consists of sales commissions and annual incentive bonus awards for the fiscal years ended March 31, 2019
and 2020, and sales commissions for the fiscal year ended March 31, 2018.
Option Awards. We did not make any option grants during the fiscal years ended March 31, 2018, 2019 or
2020 to any of our Named Executive Officers. Therefore, we have omitted this column.
Nonqualified Deferred Compensation Earnings. We currently do not provide a non-qualified defined
contribution plan or other deferred compensation plan to any of our Named Executive Officers.
44
All Other Compensation Table for Fiscal Year 2020
Name
Anil K. Singhal
Michael Szabados
Jean Bua
John W. Downing
Fiscal Year Car Usage($)
2020
2020
2020
2020
19,994
—
—
—
Financial and
Legal
Counseling($)
36,780
1,000
—
—
401(k)
Match($) Other(1)($) Total($)
8,588
8,588
8,813
8,690
17,997
18,943
11,432
6,771
83,359
28,531
20,245
15,461
(1) This column reports the total amount of other benefits provided, none of which individually exceeded the
greater of $25,000 or 10% of the total amount of All Other Compensation for the Named Executive Officer.
These other benefits include the value of supplemental life insurance premiums, personal use of sporting
event tickets and spousal attendance at Company sponsored events.
Grants of Plan-Based Awards in Fiscal Year 2020
The following table sets forth grants of plan-based awards to each of our Named Executive Officers for the
fiscal year ended March 31, 2020:
Name
Anil K. Singhal
Michael Szabados
Jean Bua
John W. Downing
Estimated Possible
Payouts
Under Non-Equity
Incentive
Plan Awards
Grant
Date
Grant
Type
Threshold
($)
Target
($)
Maximum
($)(1)
7/30/19 RSU
7/9/19 Cash
7/30/19 RSU
7/9/19 Cash
7/30/19 RSU
7/9/19 Cash
7/30/19 RSU
7/9/19 Cash
—
—
—
—
476,000
952,000
240,012
480,024
220,011
440,022
310,000(4) 620,000
All other
Stock
Awards:
Number
of shares
of stock
or
units(#)(2)
Grant Date
Fair Value
of Stock
and Option
Awards
($)(3)
60,000
1,580,400
35,000
921,900
30,000
790,200
30,000
790,200
(1) Actual non-equity incentive plan awards are made based on various factors including the Company’s overall
performance, as described more fully in the Compensation Discussion and Analysis. As described below,
the possible award could exceed 100% of an individual’s target annual incentive bonus if the Company
exceeded its goals and the individual met or exceeded his or her goals, but, in no event will any individual
receive more than 200% of his or her target annual incentive bonus.
(2) The reported RSUs were granted pursuant to the 2007 Plan and vest in four equal annual installments with
the first installment vesting on July 30, 2020.
(3) Amounts shown represent the aggregate full grant date fair value calculated in accordance with FASB ASC
718. The grant date fair value of the RSU awards was calculated by multiplying the closing price of our
common stock on the Nasdaq Global Select Market on the date of grant by the number of RSUs granted.
The fair value shown above may not be indicative of the value realized on the date the RSUs vest due to
variability in the share price of our common stock.
(4) Represents a target annual incentive bonus of $166,250 and target commission payment of $143,750.
During the fiscal year ended March 31, 2020, we did not make any “other stock awards” or “other option
awards” and have therefore omitted those columns.
45
Name
Anil K. Singhal
Michael Szabados
Jean Bua
John W. Downing
Outstanding Equity Awards at Fiscal Year 2020 End Table
Stock Awards
Number of
Shares or Units
of Stock That
Have Not
Vested(#)(1)
Market Value of
Shares or Units
of Stock That
Have Not
Vested($)
60,000
45,000
30,000
15,000
35,000
26,250
17,500
8,750
30,000
22,500
15,000
7,500
30,000
22,500
15,000
7,500
1,420,200
1,065,150
710,100
355,050
828,450
621,338
414,225
207,113
710,100
532,575
355,050
177,525
710,100
532,575
355,050
177,525
Grant
Date
7/30/19
7/25/18
8/1/17
6/1/16
7/30/19
7/18/18
8/1/17
6/1/16
7/30/19
7/18/18
8/1/17
6/1/16
7/30/19
7/18/18
8/1/17
6/1/16
(1) The reported RSUs were granted pursuant to our the 2007 Plan and vest in four equal annual installments
with the first installment vesting on the one year anniversary of the grant date, provided that for the RSUs
granted in fiscal year 2019, the first installment vested on August 20, 2019.
46
Option Exercises and Stock Vested in Fiscal Year 2020 Table
The following table sets forth option exercises and vested stock awards for each of our Named Executive
Officers for the fiscal year ended March 31, 2020:
Name
Anil K. Singhal
Michael Szabados
Jean Bua
John W. Downing
Stock Awards
Number of
Shares
Acquired on
Vesting(#)
Value
Realized on
Vesting($)(1)
15,000
15,000
15,000
12,500
8,750
8,750
8,750
7,500
7,500
7,500
7,500
7,500
7,500
7,500
7,500
7,500
367,650
332,700
332,700
270,625
214,463
194,075
194,075
162,375
183,825
166,350
166,350
162,375
183,825
166,350
166,350
162,375
(1) Value is calculated by multiplying the number of shares times the closing price of a share of our common
stock on the vesting date.
Potential Payments Upon Termination or Change of Control
The table below sets forth the estimated amount of payments and other benefits each Named Executive
Officer would be entitled to receive upon the occurrence of the indicated event, assuming that the event occurred
on March 31, 2020. The information is provided relative to the Named Executive Officer’s termination or change
of control arrangements as of the Record Date and assumes such arrangements were actually in effect as of
March 31, 2020. The values relating to vesting of restricted stock unit awards are based upon a per share fair
market value of our common stock of $23.67, the closing price reported on the Nasdaq Global Select Market on
March 31, 2020. Actual payments made at any future date will vary based on various factors including, salary
and annual incentive bonus levels, the vesting schedules of the various equity-based awards, and the price of our
common stock at the time of termination or change of control. For purposes of the payments associated with a
change of control set forth in following table, we have assumed that the respective Named Executive Officer was
terminated on March 31, 2020 and that such arrangements were actually in effect as of such date.
47
Please refer to the heading “Post-Termination Compensation” below in the Compensation Discussion and
Analysis for a discussion of the particular terms of the applicable termination or change or control arrangements
reflected in the table below.
Name
Anil K. Singhal
Michael Szabados
Jean Bua
John W. Downing
Termination Event*
Termination without cause by the
Company at any time, or termination by
Mr. Singhal for any reason prior to or
following a change of control
Termination without cause or resignation
for good reason other than in the context
of a change of control
Termination without cause or resignation
for good reason within one year
following a change of control
Termination without cause or resignation
for good reason other than in the context
of a change of control
Termination without cause or resignation
for good reason within one year
following a change of control
Termination without cause or resignation
for good reason other than in the context
of a change of control
Termination without cause or resignation
for good reason within one year
following a change of control
Salary and
Other
Cash
Payments
($)
Vesting
of
RSUs
($)(4)
Health
and
Dental
Benefits
($)
1,400,000(1)
— 143,000
385,000(2)
—
—
625,009(3) 828,450
—
355,000(2)
—
—
574,994(3) 710,100
—
265,000(2)
—
—
575,011(3) 710,100
—
*
All agreements include a clawback provision releasing the Company from its obligation to make additional
payments and requiring the relevant executive to repay the Company for amounts paid in the event an
investigation by Company reveals the executive engaged in fraudulent, dishonest, or criminal acts. The
agreements provide for notice and an opportunity to cure.
(1) See description of Mr. Singhal’s employment arrangement under “Post-Termination Compensation” for
details regarding these potential payments.
(2) Payments to be made in equal installments over a 12-month period following termination. In the event of
death within the 12-month period, payments will be accelerated and made in a lump sum payment to the
deceased’s estate within 30 days.
(3) Represents one year current base salary plus the prorated amount of the officer’s annual incentive bonus
target, based on the months elapsed in the year of termination (which may not be less than 50% of such
officer’s annual incentive bonus target). This amount to be paid in equal installments over the 12-month
period following termination.
(4) Upon a termination without cause or a resignation for good reason within one year following a change in
control, Ms. Bua and Messrs. Szabados and Downing are entitled to acceleration of certain unvested equity-
based awards. All of such unvested equity-based awards with respect to such Named Executive Officers are
assumed to have accelerated as of March 31,2020. There were no outstanding stock options for the Named
Executive Officers on March 31, 2020. For vesting of RSUs, the amount shown in this column represents
the fair market value of unvested RSUs based on $23.67, the closing price for our common stock on
March 31, 2020.
48
Pay Ratio
Under SEC rules, we are providing information regarding the relationship between the annual total
compensation of Mr. Singhal, in his role as Chief Executive Officer, and the annual total compensation of our
“median employee.” For our last completed fiscal year, which ended March 31, 2020:
• The median of the annual total compensation of all employees (other than Mr. Singhal and including
our consolidated subsidiaries) was approximately $151,467.
• Mr. Singhal’s annual total compensation, as reported in the Summary Compensation Table included in
this Proxy Statement, was $2,816,309.
• Based on the above, for fiscal year 2020, the ratio of Mr. Singhal’s annual total compensation to the
median of the annual total compensation of all employees was approximately 18.6 to 1.
This pay ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K
under the Securities Act of 1933, as amended, and based upon our reasonable judgment and assumptions. The
SEC rules do not specify a single methodology for identification of the median employee or calculation of the
pay ratio, and other companies may use assumptions and methodologies that are different from those used by us
in calculating their pay ratio. Accordingly, the pay ratio disclosed by other companies may not be comparable to
our pay ratio as disclosed above.
The methodology we used to calculate the pay ratio is described below.
• We determined the median of the annual total compensation of our employees as of January 1, 2020 at
which time we (including our consolidated subsidiaries) had approximately 2,519 full-time and part-
time employees.
• We then compared the sum of (i) the annual base salary of each of these employees for fiscal year
2020, plus (ii) the total annual incentive bonus or commission, as applicable, earned by each of these
employees for fiscal year 2020 as reflected in our payroll records, plus (iii) the aggregate grant date fair
value of equity awards granted to these employees in fiscal year 2020, to determine the median
employee. Compensation paid in foreign currency was converted to U.S. dollars using a spot exchange
rate.
Once we identified our median employee, we calculated the median employee’s annual total compensation
in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, yielding the median annual total
compensation disclosed above. With respect to Mr. Singhal’s annual total compensation, we used the amount
reported in the “Total” column of our Summary Compensation Table.
Pension Benefits Table for Fiscal Year 2020
The following table sets forth the payments or other benefits at, following, or in connection with retirement
of our Named Executive Officers.
Name
Anil K. Singhal
Fiscal
Year
2020
2019
2018
Number of Years of
Credited
Service(#)
Present Value of
Accumulated
Benefit($)
Payments During
Last Fiscal Year($)
13.25
12.25
11.25
1,237,949
1,237,949
1,600,000
—
—
—
In January of 2007, we entered into an agreement with Mr. Singhal that provides retirement benefits. Total
future severance payments are projected at $1,400,000. Mr. Singhal’s retirement benefits also include a projected
49
$143,000 in payments for future health benefits. These benefits are an unfunded obligation. The present value of
Mr. Singhal’s retirement benefits remained the same at $1,237,949 in fiscal year 2020.
Non-Qualified Deferred Compensation Table for Fiscal Year 2020
We do not provide a non-qualified defined contribution plan or other deferred compensation plan to any of
our Named Executive Officers and have therefore omitted this table.
Name
Robert E. Donahue(3)
John R. Egan(4)
Alfred Grasso(5)
Joseph G. Hadzima, Jr.(6)
Christopher Perretta(7)
Susan L. Spradley(8)
Vivian Vitale(9)
Director Compensation Table for Fiscal Year 2020
Fees Earned or
Paid in Cash($)(1)
Stock Awards($)(2)
All Other
Compensation($)
106,000
131,000
88,000
93,000
76,000
81,000
73,000
156,730
156,730
156,730
156,730
156,730
156,730
156,730
Total($)
262,730
287,730
244,730
249,730
232,730
237,730
229,730
(1) Amounts represent the aggregate dollar amount of fiscal year 2020 fees earned or paid in cash for services
as a director, including annual retainer fees and committee fees.
(2) Amounts shown do not reflect compensation actually received by the listed directors but represent the
aggregate full grant date fair value of restricted stock unit awards granted to our non-employee directors
calculated in accordance with FASB ASC 718. The grant date fair value of the RSU awards was calculated
by multiplying the closing price of our common stock on the Nasdaq Global Select Market on the date of
grant by the number of RSUs granted. The fair value shown above may not be indicative of the value
realized on the date the RSUs vest due to variability in the share price of our common stock.
(3) As of March 31, 2020, Mr. Donahue held unvested RSUs covering 7,000 shares of our common stock. The
RSUs vest in full at the Annual Meeting.
(4) As of March 31, 2020, Mr. Egan held unvested RSUs covering 7,000 shares of our common stock. The
RSUs vest in full at the Annual Meeting.
(5) As of March 31, 2020, Mr. Grasso held unvested RSUs covering 7,000 shares of our common stock. The
RSUs vest in full at the Annual Meeting.
(6) As of March 31, 2020, Mr. Hadzima held unvested RSUs covering 7,000 shares of our common stock. The
RSUs vest in full at the Annual Meeting.
(7) As of March 31, 2020, Mr. Perretta held unvested RSUs covering 7,000 shares of our common stock. The
RSUs vest in full at the Annual Meeting.
(8) As of March 31, 2020, Ms. Spradley held unvested RSUs covering 7,000 shares of our common stock. The
RSUs vest in full at the Annual Meeting.
(9) As of March 31, 2020, Ms. Vitale held unvested RSUs covering 7,000 shares of our common stock. The
RSUs vest in full at the Annual Meeting.
Non-employee directors are compensated $60,000 annually for their services and do not receive any
additional compensation for any regular Board meetings attended. The cash component of annual compensation
is paid on a quarterly basis. The lead non-employee director receives an additional annual retainer of $35,000.
Non-employee directors will receive $15,000 annually for serving on the Audit Committee, $10,000 annually for
serving on the Compensation Committee, $6,000 annually for serving on the Nominating and Corporate
Governance Committee, and $6,000 annually for serving on the Finance Committee. In addition, directors who
are chairpersons of a particular committee are also given additional annual compensation of $15,000 for the
Audit Committee, $10,000 for the Compensation Committee, $6,000 for the Nominating and Corporate
50
Governance Committee, and $6,000 for the Finance Committee. Non-employee directors are also reimbursed for
their reasonable out-of-pocket expenses incurred in attending meetings of the Board or of any committee and for
attendance at approved director education programs.
Non-employee directors are each granted annual equity-based awards in the form of 7,000 restricted stock
units. These restricted stock unit awards vest 100% on the date of our annual meeting provided that during such
year, such director attends at least 75%, collectively, of the meetings of the Board and any committee of the
Board of which such director is a member. In the event that the foregoing attendance requirements are not met,
then 100% of these restricted stock units will vest on the third anniversary of the date of grant. No other equity
awards are given to our non-employee directors. The Amended and Restated 2019 Plan being submitted to our
stockholders for approval at the 2020 Annual Meeting does not amend the current provision of that 2019 Plan
that provides that the aggregate value of all cash and equity-based compensation paid or granted, as applicable,
by the Company to any individual for service as a Non-Employee Director with respect to any fiscal year of the
Company will not exceed $750,000.
Stock Plans
2019 Equity Incentive Plan. The 2019 Plan was adopted by the Board on July 9, 2019, and approved by our
stockholders at the 2019 Annual Meeting. Following the approval of the 2019 Plan by the stockholders at our
2019 Annual Meeting, the 2019 Plan became effective, and no additional equity awards will be granted under the
2007 Plan.
The 2019 Plan allows us to grant restricted stock units, stock, stock options, and other equity interests to our
and our subsidiaries’ employees, officers, directors, consultants, and advisors. Under the 2019 Plan, we may
grant options that are intended to qualify as incentive stock options within the meaning of Section 422 of the
Code, options not intended to qualify as incentive stock options, restricted stock, and other stock-based awards.
Incentive stock options may be granted only to our employees. The maximum number of shares as to which
equity awards may be granted under the 2019 Plan as of the Record Date is 1,946,289 shares (subject to certain
adjustments under the 2019 Plan).
The 2019 Plan is administered by our Compensation Committee. Subject to the provisions of the 2019 Plan,
our Compensation Committee has the authority to select the persons to whom awards are granted and to
determine the terms of each award, including the number of shares of common stock subject to the award.
Payment of the exercise price of an award may be made in cash or, if approved by the Compensation
Committee, shares of common stock, a combination of cash and stock, a promissory note, or by any other method
approved by the Compensation Committee. Unless otherwise permitted by the Compensation Committee, awards
are not assignable or transferable except by will or the laws of descent and distribution and, during the
participant’s lifetime, may be exercised only by the participant.
The Compensation Committee may, in its sole discretion, amend, modify or terminate any award granted or
made under the 2019 Plan, so long as such amendment, modification or termination would not materially and
adversely affect the participant. The Compensation Committee may also provide that any option shall become
immediately exercisable, in full or in part, or that any restricted stock granted under the 2019 Plan shall be free of
some or all restrictions.
For a summary of the material features of the 2019 Plan Amendment, please see the description of the 2019
Plan Amendment in Proposal 2.
Amended and Restated 2007 Equity Incentive Plan. As stated above, we no longer grant awards under our
2007 Plan. Other than restricted stock units, there are no other awards outstanding under the 2007 Plan. The 2007
Plan is also administered by our Compensation Committee. Unless otherwise permitted by the Compensation
51
Committee, awards are not assignable or transferable except by will or the laws of descent and distribution and,
during the participant’s lifetime, may be exercised only by the participant.
As of the Record Date, restricted stock units representing 5,832,615 shares of common stock were
outstanding under the 2019 Plan and the 2007 Plan.
The Compensation Committee may, in its sole discretion, amend, modify or terminate any award granted or
made under the 2007 Plan, so long as such amendment, modification or termination would not materially and
adversely affect the participant. The Compensation Committee may also provide that restricted stock granted
under the 2007 Plan shall be free of some or all restrictions.
2011 Employee Stock Purchase Plan. The 2011 Employee Stock Purchase Plan, or the 2011 Purchase Plan,
was adopted by the Board in June 2011 and was approved by our stockholders at the September 7, 2011 annual
meeting of stockholders. A total of 5,500,000 shares of common stock are reserved for issuance under the 2011
Purchase Plan, including the 3,000,000 share increase approved by our stockholders at the 2018 Annual Meeting.
The 2011 Purchase Plan grants eligible employees the opportunity to purchase our common stock through regular
payroll deductions.
Under the 2011 Purchase Plan, eligible enrolled employees may, during the offering period, purchase shares
of common stock through regular payroll deductions, not to exceed 20% of an individual employee’s
compensation during the offering period. The purchase price per share during an offering period is determined by
the Board at the beginning of the offering period, but may not be less than 85% of the lesser of (i) the fair market
value per share of our common stock on that purchase date or (ii) the fair market value per share of our common
stock on the first day of the offering period. However, no employee is eligible to participate in the 2011 Purchase
Plan if, immediately after the grant of purchase rights, the employee would own, directly or indirectly, stock
possessing 5% or more of the total combined voting power or value of all classes of our stock, including any
stock which such employee may purchase under all outstanding purchase rights and options. In addition, no
employee may purchase more than $25,000 worth of our common stock, valued at the time each purchase right is
granted, for each calendar year during which those purchase rights are outstanding.
The Board administers the 2011 Purchase Plan and retains the power to interpret both the 2011 Purchase
Plan and the purchase rights granted thereunder, including eligibility to participate and the particular provisions
of each offering of rights. The Board, in its sole discretion, has the power to delegate administration of the 2011
Purchase Plan to a committee composed of one or more members of the Board.
As of the Record Date, 2,313,482 shares remain available for purchase under the 2011 Purchase Plan.
52
The following table sets forth securities authorized for issuance under our stock equity incentive plans as of
fiscal year ended March 31, 2020:
Equity Compensation Plan Information
Number of securities
to be issued
upon exercise of
outstanding
options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and
rights
(a)
4,274,473
—
4,274,473
(b)
0.00
—
0.00
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding
securities
reflected in column
(a))
(c)
6,967,333
—
6,967,333
Plan category
Equity compensation plans approved by security
holders
Equity compensation plans not approved by security
holders
Total
Stock Ownership Policy
In 2010, the Compensation Committee approved a Stock Ownership Policy for certain of the Company’s
executive officers and directors. The Stock Ownership Policy, which the Board amended in 2016, states that
within four years of the date the policy became effective, or within four years after becoming an executive officer
or director, the executive officers and directors will be subject to the following minimum stock ownership
requirements:
Title
Chief Executive Officer
Chief Operating Officer
Officers who are Executive Vice Presidents
Directors
Ownership Guideline(1)
4x annual base salary
3x annual base salary
2x annual base salary
4x annual board retainer
(1) The ownership guideline for each participant will be converted into a number of shares on the first day of
each fiscal year based on the average closing price of a share of NetScout stock for the previous fiscal year.
The Compensation Committee is responsible for monitoring compliance with the guidelines. As of
March 31, 2020 each officer and director had met the requirements of the Stock Ownership Policy. Shares that
count toward the ownership target include all shares directly or beneficially owned by the director or executive
officer, shares held in trust for the benefit of the director or executive officer, and unvested restricted stock units
granted under Company’s plans (restricted stock units will be applied toward the ownership requirements based
on the value of restricted stock units after taking into account any required share withholding). The
Compensation Committee expects to continue to review and make changes to the policy, as appropriate.
Prohibition on Hedging and Pledging
Our Amended and Restated Insider Trading and Trading Window Policy expressly states that our directors,
officers, and employees are prohibited from trading in derivative securities of NetScout at any time. This
prohibition includes purchasing any financial instrument or entering into any transaction that is designed to
hedge or offset any decrease in the market value of our common stock or other equity securities, including, but
not limited to, put options, call options, exchange funds, prepaid variable forward contracts, equity swaps,
collars, and other derivative instruments, as well as through the establishment of a short position in Company
securities. In addition, the policy prohibits short sales and pledges of Company securities, as well as the purchase
of Company securities on margin.
53
401(k) Plan
We maintain a 401(k) plan qualified under Section 401 of the Code. All of our U.S. employees who are at
least 18 years of age and work at least 20 hours per week are eligible to participate in the 401(k) plan. Under the
401(k) plan, a participant may contribute a maximum of 80% of his or her pre-tax salary, commissions, and
bonuses through payroll deductions, up to the statutorily prescribed annual limit, to the 401(k) plan. During the
plan year ended December 31, 2019, we matched 50% of employee contributions up to 6% of compensation.
Employer contributions vest over four years at a rate of 25% per year of service. In addition, at the
discretion of our Board, we may, but have not done so to date, make profit-sharing contributions to the 401(k)
plan for all eligible employees.
Employment and Other Agreements
Mr. Singhal assumed the role of Chairman of our Board, effective January 19, 2007. In conjunction with his
additional responsibilities, we entered into a new employment agreement with Mr. Singhal, which provides that
he will receive an annual base salary of at least $300,000. The employment agreement provides for a three-year
term commencing January 19, 2007 with automatic one-year renewals. During the term of this agreement,
Mr. Singhal will also be eligible to receive an annual incentive bonus award based on Company performance and
individual objectives. The employment agreement is terminable at will by either party and provides that if we
elect not to renew the agreement for any reason, or if Mr. Singhal’s employment is terminated by us without due
cause as defined in the agreement, by Mr. Singhal at any time following the consummation of a sale of the
Company, or upon the death or disability of Mr. Singhal, then Mr. Singhal, or his estate, is entitled to receive in a
lump sum, a payment equal to the net present value of $16,208 per month for seven years. If Mr. Singhal
terminates his employment with us for any reason prior to the consummation of a sale of the Company, he is
entitled to such lump sum payment. Mr. Singhal will also receive continued health and dental benefits during
such period. Mr. Singhal’s employment agreement was amended in May 2012 to address technical requirements
of Section 409A of the Internal Revenue Code of 1986, as amended.
We also entered into amended and restated severance agreements in May 2012, which were amended in
January 2015, with our Named Executive Officers other than Mr. Singhal, each of which are described under the
heading “Post-Termination Compensation” in the Compensation Discussion and Analysis.
Each of these agreements was approved by a majority of our Board and by a majority of the disinterested
members of our Board. All future transactions, if any, with our executive officers, directors, and affiliates will be
approved in accordance with our related party transaction policy discussed below under “Transactions with
Related Persons.”
Compensation Discussion and Analysis
Business Context
We are an industry leader with over 35 years of experience in providing service assurance and security
solutions that are used by customers worldwide to assure and secure their digital business services against
disruption. Service providers and enterprises, including local, state and federal government agencies, rely on our
solutions to achieve the visibility necessary to optimize network performance, ensure the delivery of high-
quality, mission-critical applications and services, gain timely insight into the end user experience and protect the
network from attack. With our offerings, customers can quickly, efficiently and effectively identify and resolve
issues that result in downtime, interruptions to services, poor service quality, or compromised security, thereby
driving compelling returns on their investments in their network and broader technology initiatives. Some of the
more significant technology trends and catalysts for our business include the evolution of customers’ digital
transformation initiatives, the rapidly evolving security threat landscape, business intelligence and analytics
advancements, and the 5G evolution in both the service provider and enterprise verticals.
54
Our revenue in fiscal year 2020 was approximately $892 million, which was lower than our revenue in
fiscal year 2019 of approximately $910 million, but approximately the same as our revenue in fiscal year 2019
when excluding the handheld network test (HNT) tools business that we divested during fiscal year 2019. Our
employee base decreased during fiscal year 2020 to approximately 2,500 employees, as we continued to manage
costs and headcount prudently.
Over the last few years, we have navigated challenging market conditions, particularly in our service
provider customer vertical, while completing major integration initiatives, advancing key product development
programs, implementing important go-to-market activities, and reducing overall operating costs, all without
compromising our ability to address the near and longer-term needs of our customers worldwide.
During fiscal year 2020, we continued to make substantial operational and strategic progress toward
enhancing our market leadership by strengthening our technology and increasing our product and service
offerings, which we believe sets the stage for future revenue growth, continued profit margin expansion, and
earnings per share gains, and allow us to continue to generate robust free cash flow. We continued our transition
to software-centric offerings and away from traditional appliance-based instrumentation, particularly in our
service assurance business, and we funded key development, support, and sales programs. We remained focused
on controlling our cost structure through headcount management and cost controls. In addition, the divestiture of
our HNT tools business in fiscal year 2019 contributed to reduced operating costs.
During the last quarter of fiscal year 2020, we, like many other companies, were forced to address and
respond to the impact of the COVID-19 global pandemic. The pandemic, and the containment and mitigation
measures associated with it, have led to adverse impacts on the U.S. and global economies. To protect our
employees, contractors, suppliers and our local communities, and to limit the effect of the COVID-19 pandemic
on our operations, we enacted our business continuity plans and directed our employees to work remotely, with
limited exceptions for site-essential personnel (with protective measures and protocols in place). While
COVID-19 did not have a material adverse effect on our reported results for the fourth quarter of fiscal year
2020, it did impact the timing of some transactions. We have commenced the process of having our employees
return to work on-site in phases in accordance with prevailing health and science guidance, and in a manner that
seeks to protect our employees, contractors, customers, suppliers, and local communities, as well as in
accordance with federal, state, and local guidelines, and in accordance with foreign governmental guidance in the
countries in which we operate.
Executive Summary – Executive Compensation Objectives
We use our compensation program to achieve the following objectives:
•
•
•
•
•
provide compensation opportunities that attract, motivate, and retain the best talent possible to serve
our customers and achieve our strategic objectives;
align management’s interests with our success by linking compensation and performance, with such
performance measures based on the attainment of both our corporate goals and individual goals, and by
including long-term equity incentives;
increase our revenue, increase our profitability and, accordingly, increase stockholder value;
foster an environment of teamwork and shared success among executives and the entire NetScout
workforce; and
reward effective management of financial and operational risk.
Executive Summary—Fiscal Year 2020 Executive Compensation Highlights
Our compensation programs are structured to provide strong pay-for-performance alignment. While we
faced pressure on revenues as the COVID-19 pandemic disrupted our business operations and the operations of
55
our customers, suppliers, and partners during the fourth quarter of fiscal year 2020, we nevertheless achieved
many of our strategic objectives during fiscal year 2020, and we delivered non-GAAP EPS that exceeded our
target by approximately 10%. In recognition of the Company’s strong overall performance in delivering solid
earnings per share growth and its continued operational and strategic progress, particularly in the face of
disruption caused by the COVID-19 pandemic, the Compensation Committee determined that the Company-wide
bonus pool should be funded at 140% of the target bonus opportunity. The Compensation Committee further
determined, for our Named Executive Officers other than the Chief Executive Officer, and the Board determined,
for our Chief Executive Officer, that each Named Executive Officer would be eligible for an annual incentive
bonus payout of up to 137% of his or her target annual incentive bonus opportunity, in accordance with our
pay-for-performance philosophy.
Consistent with our pay-for-performance philosophy and as more fully described below, for fiscal year
2020, we:
•
•
•
•
increased base salaries in July 2019 for each of our Named Executive Officers by $25,000 over their
base salaries for fiscal year 2019, representing the first increase in the base salary of any Named
Executive Officer since fiscal year 2018, and bringing the salaries of our Named Executive Officers
closer to, although still below, the 25th percentile of the peer group market data;
maintained target annual incentive bonus opportunities at the same level as in fiscal year 2019 for each
of our Named Executive Officers;
approved RSU awards with grant date fair values that were 14% lower than the grant date fair values of
RSU awards made in fiscal year 2019, in accordance with our long-term equity compensation
objectives and consistent with our pay-for-performance philosophy; and
approved annual incentive bonus payouts between 133% and 137% of target for our Named Executive
Officers after assessing our performance for fiscal year 2020, as further described below.
Executive Compensation Overview
The goal of our executive officer compensation program is to retain and reward highly qualified, talented
leaders who create long-term stockholder value. In addition, our program is designed to align management’s
interests with those of our stockholders and to motivate senior executives to increase our long-term growth and
profitability. We continue to emphasize pay-for-performance. For example, as in the past, for fiscal year 2021,
our Named Executive Officers will not be eligible for their target annual incentive bonus unless a threshold
profitability (non-GAAP EPS) target is met (except for Mr. Downing, our EVP Worldwide Sales, with respect to
the portion of his short-term cash incentive compensation that consists of sales commissions). Further, the
Compensation Committee, and the Board with respect to the CEO, previously determined that one-third of the
shares subject to the RSUs granted to our Named Executive Officers would be granted based on the achievement
of corporate and individual performance goals in the prior fiscal year. Please see “GAAP vs. Non-GAAP
Measures” in Appendix B for a reconciliation between the non-GAAP measures and GAAP results.
As further described below, as a result of our financial performance in which we exceeded our earnings per
share target, but fell slightly short of our revenue target (by approximately 1%), in an unprecedented global
economic environment that was severely impacted by the COVID-19 pandemic, each of our Named Executive
Officers received between 133% and 137% of his or her total annual incentive bonus target for fiscal year 2020.
The actual payout percentage for each Named Executive Officer was determined based on the Compensation
Committee’s judgment after considering the attainment and importance of such Named Executive Officer’s
performance objectives.
56
Executive Compensation Highlights
At the 2019 Annual Meeting, our stockholders approved our say-on-pay proposal with 94% of the total
votes cast voting in favor. The Compensation Committee carefully considers the results of the advisory vote on
our say-on-pay proposal in the context of its annual review of executive compensation and the on-going work of
the Compensation Committee. The Compensation Committee and the Board focus significant time and attention
on the issues raised by our stockholders. In particular, the Compensation Committee reviews specific feedback
when and if it is received from our investors and proxy advisory firms on certain compensation practices and
related disclosures.
Corporate Performance Overview
Despite the widespread economic impact of the COVID-19 pandemic, our fiscal year 2020 financial
performance delivered solid diluted earnings per share growth, even as our organic revenues remained relatively
flat from the prior fiscal year. Although we did experience some order delays in the fourth quarter of fiscal year
2020 related to the pandemic, we were able to effectively control costs and minimize the impact of the pandemic
on our operations, as we implemented our business continuity plans, which enabled us to ensure the safety of our
employees as we effectively operated with most of our employees working remotely.
We continued our transition to software-centric offerings and away from traditional appliance-based
instrumentation, particularly in our service assurance business. Overall, our “software only” product line grew
approximately 35%, which helped us improve our operating margin and EPS and generate strong cash flow. We
delivered these results while continuing to fund key development, support, and sales programs. In addition, we
were able to return approximately $175 million to our stockholders during fiscal year 2020 through our share
repurchase program.
More specifically, for fiscal year 2020:
Total Revenue
• Total revenue (GAAP) was $891.8 million in fiscal year 2020 versus total revenue (GAAP) of
$909.9 million in fiscal year 2019. Fiscal year 2020 non-GAAP total revenue was $892.0 million
versus $911.5 million in fiscal year 2019. Note that non-GAAP revenue for fiscal year 2019 included
$18 million from the divested HNT tools business.
Product Revenue
•
Product revenue (GAAP) in fiscal year 2020 was $438.3 million, compared with $467.2 million in
fiscal year 2019.
• Non-GAAP product revenue in fiscal year 2020 was $438.3 million versus $467.7 million in fiscal
year 2019. Non-GAAP product revenue for the HNT tools business for fiscal year 2019 was
$13.4 million.
Service Revenue
•
Service revenue (GAAP) was $453.5 million in fiscal year 2020 versus $442.6 million fiscal year
2019.
• Non-GAAP service revenue in fiscal year 2020 was $453.7 million, compared with $443.8 million in
fiscal year 2019. The HNT tools business non-GAAP service revenue in fiscal year 2019 was
$4.6 million.
57
Operating Income
•
Income from operations (GAAP) in fiscal year 2020 was $17.6 million, compared with a loss from
operations (GAAP) of $71.6 million in fiscal year 2019. The fiscal year 2019 loss from operations
included approximately $45 million in charges associated with the sale of the HNT tools business.
• Non-GAAP income from operations for fiscal year 2020 was $163.3 million with a non-GAAP
operating margin of 18.3%, compared with non-GAAP income from operations in fiscal year 2019
of $161.6 million and a non-GAAP operating margin of 17.7%.
Net Income and Net Income Per Share
• Net loss (GAAP) in fiscal year 2020 was $2.8 million, or a loss of $0.04 per share (diluted)
compared with a net loss (GAAP) of $73.3 million, or a loss of $0.93 per share (diluted) in fiscal
year 2019. The fiscal year 2019 net loss included approximately $45 million in charges associated
with the sale of the HNT tools business. Non-GAAP net income in fiscal year 2020 was
$119.1 million, or $1.57 per share (diluted) versus non-GAAP net income in fiscal year 2019 of
$109.2 million, or $1.38 per share (diluted).
Stock Repurchase
• During fiscal year 2020, we continued our share repurchase program and repurchased a total of
7,116,159 shares of our common stock at an average price of $24.59 per share, totaling
approximately $175.0 million in the aggregate.
Please see our Annual Report on Form 10-K for the fiscal year ended March 31, 2020 for additional
information about our corporate performance.
Despite the challenges we faced during fiscal year 2020, including those caused by the COVID-19
pandemic in the later part of our fiscal year, our revenue performance was relatively flat compared with our
revenue performance during fiscal year 2019, excluding revenues from our divested HNT tools business in fiscal
year 2019, and we generated solid earnings per share growth compared to the prior year. We have positioned
ourselves to move forward as a company that can meet the increasing demands of our customers for service
assurance and security solutions to assure and secure the critical networks and infrastructure that connect people
and support businesses around the globe. We are committed to helping our customers advance their digital
transformation, security and 5G initiatives with a broader set of solutions that we expect to further expand in
fiscal year 2021.
Compensation Governance Highlights
Í Design executive compensation program to
È No excessive change in control or
What We Do
What We Don’t Do
align pay with performance
Í Maintain executive stock ownership
severance payments
È No tax gross-ups
guidelines
Í Maintain appropriate stock trading policies
Í Mitigate inappropriate risk taking
Executive Compensation Objectives
È No hedging and pledging permitted for
officers and directors as part of Insider
Trading Policy
È No guaranteed annual incentive bonuses
We use our compensation program to achieve the following objectives:
•
provide compensation opportunities that attract, motivate, and retain the best talent possible to serve
our customers and achieve our strategic objectives;
58
•
•
•
•
align management’s interests with our success, by linking compensation and performance, based on the
attainment of both our corporate goals and individual goals and by including long-term equity
incentives;
increase our revenue, increase our profitability, and accordingly increase stockholder value;
foster an environment of teamwork and shared success among executives and the entire NetScout
workforce; and
reward effective management of financial and operational risk.
Compensation Philosophy
The Compensation Committee reviews our compensation program, including elements of compensation, the
mix of long-term versus short-term compensation and the mix of cash versus equity compensation, over the
course of several meetings each year to evaluate whether the program supports our long-term goals. The
Compensation Committee considers our past financial performance and future goals, individual performance and
experience, and overall compensation levels when making compensation decisions. In addition, the
Compensation Committee uses the following principles to guide its decisions regarding Named Executive
Officer compensation.
Pay-for-performance
Alignment with Stockholders’ Interests
Internal Parity
External Competitiveness
Total compensation should reflect a “pay-for-performance” philosophy
in which a substantial portion of each Named Executive Officer’s
compensation should be tied to the achievement of performance
objectives of both the company and the individual. Cash compensation
includes annual incentive bonus awards, which are dependent in part
upon achievement of Company-wide profitability targets (non-GAAP
EPS). In connection with annual incentive bonus awards, Named
Executive Officers also have individual goals that require each of them
to meet the same revenue target. Past performance by each Named
Executive Officer is considered in determining the size of annual
grants of long-term incentive equity awards. In fiscal year 2020, and as
set out in last year’s proxy statement and discussed further under
“Equity Awards” below, the Compensation Committee determined
that one-third of the shares of the RSUs granted to our Named
Executive Officers would be granted based on the achievement of
corporate and individual performance goals.
Total compensation levels should include a component that reflects
our overall performance through the use of equity-based awards in
order to align Named Executive Officer and stockholder interests.
To the extent practicable, and based on individual performance and
position, base salaries and short-term and long-term incentive targets
for similarly-situated Named Executive Officers within the company
should be comparable to avoid divisiveness and encourage
teamwork, collaboration, and a cooperative working environment.
Named Executive Officers’ total compensation should be
competitive with peer companies so that we can attract and retain
high performing key executive talent. To achieve this goal, our
Compensation Committee periodically reviews the compensation
practices of other companies in our peer group, as discussed below in
the “Use of Third Party Data/Peer Group” section below.
59
Elements of Our Executive Compensation Program
Compensation for our Named Executive Officers currently consists of three principal elements that are
designed to achieve our compensation objectives and reward performance in a simple and straightforward
manner: base salaries, annual incentive bonus awards, and long-term equity awards. The purpose and key
characteristics of each of these elements are summarized below.
Base Salary
Purpose
Key Characteristics
•
Provides a fixed level of compensation for
performing the essential day-to-day elements
of the job
• Reflects each Named Executive Officer’s
qualifications, experience, and
responsibilities compared to executives at
similar companies
• Gives executives a degree of certainty in
light of having a majority of their
compensation at risk
•
• Compensation Committee determines base
salary levels for Named Executive Officers
other than our CEO, and makes
recommendations to the Board in the case
of our CEO
For Named Executive Officers other than
our CEO, typically determined after
considering the evaluations and
recommendations made by our CEO, who
applies his own judgment in making
recommendations after reviewing our
performance, the performance of each
Named Executive Officer against corporate
and individual goals, the executive’s career
with the Company, the amounts of current
and long-term compensation, market data
from our peer group and special
circumstances such as strategic alliances or
acquisitions
• While we do not target a specific percentile
for base salaries relative to our peer group,
fiscal year 2020 base salaries for all of our
Named Executive Officers were increased
by $25,000, which was the first increase in
base salary for any Named Executive
Officer since fiscal year 2018
Annual Incentive Bonus Awards (Cash)
Purpose
Key Characteristics
•
Provides an incentive to executives to
achieve both financial operating goals and
individual performance goals that are
designed to help accomplish our strategic
plan, which include financial and
non-financial objectives
• Target amounts generally established
•
shortly after the start of each fiscal year,
and, consistent with our
pay-for-performance approach
In no event will any Named Executive
Officer receive more than 200% of his or
her annual incentive bonus target
• Corporate performance goals generally
consist of Board-approved revenue and
non-GAAP EPS targets
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Purpose
Key Characteristics
• Executive officers are eligible for annual
incentive bonus awards only after NetScout
meets or exceeds a threshold profitability
target (non-GAAP EPS), except for
Mr. Downing, our EVP Worldwide Sales,
with respect to the portion of his short-term
cash incentive compensation that consists of
sales commissions
•
If NetScout meets or exceeds the threshold
non-GAAP EPS target, executive officers’
annual incentive bonus awards are then
determined based on attainment of
individual goals, contribution to the
Company-wide goals, including revenue,
and satisfaction of other criteria as may be
determined by the Compensation
Committee
•
Paid annually shortly after the end of the
fiscal year to which they relate
Long-Term Equity Incentives
Purpose
Key Characteristics
• Motivates executive officers to achieve our
• Restricted stock unit awards generally
business objectives and manage risk by tying
compensation to the performance of our
common stock over the long term, which
aligns the interests of management and
stockholders
• Motivates our executive officers to remain
with the Company by mitigating swings in
incentives during periods when market
volatility affects our stock price
• Attracts highly qualified individuals who can
contribute to our success
vesting over four years; the ultimate value
realized varies with our success as
measured by our common stock price
• Generally granted to executive officers at
their appointment and then annually,
depending upon performance
• The Compensation Committee also reviews,
with the use of tally sheets, previous equity
grants to executive officers and considers
the level of outstanding awards as a factor
in its determinations
• To further our long-term incentive goals,
we have a Stock Ownership Policy for
certain executive officers and directors, as
described in this proxy statement under
“Stock Ownership Policy”
• One-third of the shares subject to the RSUs
granted to our Named Executive Officers
are granted based on the achievement of
corporate and individual performance goals
for the prior fiscal year
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Other Compensation
Purpose
Key Characteristics
•
Provides benefits that promote employee
health and welfare, which assists in attracting
and retaining our executive officers
•
Provides benefits that are common and
appropriate for similarly-situated
executives of public companies,
including health insurance and our 401(k)
plan
• Executive officers are also eligible for
life insurance policies that provide for
three times cash compensation (salary
and annual incentive bonus target) up to a
$1.5 million cap. Mr. Singhal is entitled
to other benefits discussed below
Executive Compensation Review and Process
General
The Compensation Committee meets at least four times annually to coincide with regularly scheduled Board
meetings and usually holds several additional meetings during the year. The Compensation Committee met six
times during the fiscal year ended March 31, 2020. Each year, the Compensation Committee reviews
compensation objectives and practices in connection with the annual review and approval of executive officer
compensation. The Compensation Committee exercises discretion and has ultimate authority with respect to
executive compensation matters, except in the case of the compensation of the Chief Executive Officer, which is
approved by the full Board after receiving a recommendation from the Compensation Committee.
Role of Senior Management
The Compensation Committee views the compensation determination process as an important opportunity
to engage in strategic discussions with the Chief Executive Officer on the appropriate factors and criteria that
should be focused on for the attainment of long-term stockholder value. Our Chief Executive Officer often
participates in discussions and deliberations regarding the compensation of our executive officers, and he
provides recommendations with respect to such executives. The other executives do not play a role in
determining their compensation, other than in discussing their performance with the Chief Executive Officer and
the Chief Operating Officer, who makes his own recommendations to the Chief Executive Officer for the Chief
Executive Officer’s consideration. The Chief Operating Officer has no role in determining his own
compensation, other than providing the Chief Executive Officer with an assessment of his own performance. Our
Chief Executive Officer is not present and does not participate in discussions or deliberations regarding his own
compensation, performance, or objectives, whether at Compensation Committee or Board meetings.
Role of Compensation Consultants
In fiscal year 2020, our Compensation Committee engaged Pay Governance, an independent compensation
consulting firm, to assist with peer group analysis and to collect compensation information pertaining to
executive officer compensation matters. The Compensation Committee has determined that Pay Governance is
free from conflicts of interest.
62
Use of Third Party Data/Peer Group Data
The Compensation Committee determines and periodically reevaluates our peer group based on the
following criteria: revenue, market capitalization, net income, number of employees, and similar industry/related
technology. Additional factors that have been considered in the past when selecting peer group companies have
included revenue growth over one and three years and total stockholder return over one and three years.
The Compensation Committee considers peer group data as one of several factors when examining and
making decisions about officer compensation. The Compensation Committee believes the data is helpful but
considers such information as part of a range of factors in determining appropriate compensation levels.
Generally, the data are used to compare the compensation of our named executive officers with that of the
officers of our peer group companies. The comparison is not intended to determine compensation in any
formulaic way.
Evaluation of Executive Performance
The Compensation Committee reviews annually, over a series of meetings, the performance and
compensation of each of our executive officers. The Compensation Committee takes into account our financial
performance and future expectations, individual performance and experience, and overall compensation levels.
The Compensation Committee has not typically assigned specific weights, formulas, or rankings to these factors,
but instead makes a determination based on consideration of all of these factors as well as the progress made with
respect to our long-term goals and strategies, except that, with respect to individual goals, weights are assigned to
each Named Executive Officer’s individual goals which are considered generally as part of the Compensation
Committee’s evaluation of performance. Further, the Compensation Committee does place greater emphasis on
the achievement of our overall corporate financial targets in making its determinations and considers those
financial targets as shared objectives for all executives.
For those individual goals that are capable of direct measurement, the Compensation Committee considers
the percentage of goal achievement during the year, including both internal and external factors affecting the
Company. For goals that are qualitative in nature or do not lend themselves to direct financial or numerical
measurement, the Compensation Committee relies primarily on its judgment, knowledge of the business, and
information obtained through interactions with management throughout the year, recognizing that the degree of
achievement of qualitative criteria can still be assessed.
Establishing Performance Goals
The corporate level performance goals and the individual performance goals are normally set shortly after
the beginning of each fiscal year. Discussions of next year’s goals typically begin during the fourth quarter of the
current fiscal year, in conjunction with management’s development of proposed strategic and operating plans and
budget for the next fiscal year. The Compensation Committee establishes goals for executive officers consistent
with NetScout’s strategic plan, financial goals, and operating budget for the year. Accordingly, the Compensation
Committee generally has the expectation that achievement will be challenging but achievable.
With respect to specific corporate goals, the Compensation Committee establishes a threshold goal, which is
typically a profitability (non-GAAP EPS) target, which we must achieve before full company-wide bonus
accruals are made for the fiscal year. The company typically focuses its profitability target on our publicly-
communicated earnings per share guidance for the fiscal year. In the event that revenue performance falls below
guidance, the total company-wide bonus pool will be reduced, to zero if necessary, in order to strive to meet the
non-GAAP EPS guidance. In the event of over performance with respect to profitability, either due to higher
revenue, changes in product mix, decisions to reduce investment in certain areas, or unanticipated one-time
events such as tax refunds, the additional funds will be allocated between the company-wide bonus pool and
stockholders in the form of increases to EPS.
63
In addition, the Chief Executive Officer works with each Named Executive Officer to establish individual
annual performance goals and then presents proposed goals for each Named Executive Officer to the
Compensation Committee for review and evaluation. The Compensation Committee or the Board provides
advice and comments on the individual executive goals and approves the final goals. The Compensation
Committee believes that the Chief Executive Officer should initially evaluate and report to the Compensation
Committee the day-to-day performance of the executives who report to him. As such, the Compensation
Committee considers the advice of the Chief Executive Officer in making its own evaluation and assessment of
such executives.
The Compensation Committee makes a determination of each executive’s compensation based on
consideration of all of these factors as well as the progress made with respect to our long-term goals and
strategies.
Fiscal Year 2020 Compensation Decisions
Peer Group
As one of the considerations in its deliberations on compensation matters, the Compensation Committee
reviews competitive market data for executive compensation levels from a peer group of companies. While the
Compensation Committee believes it is in the best interests of our stockholders to ensure that our executive
compensation is competitive with that of other companies of similar size and complexity, the Compensation
Committee does not use peer group data to set compensation levels at specific percentiles.
Peer companies are identified based on comparability to NetScout across a range of factors including
revenue, market capitalization, net income, number of employees, and similar industry/related technology.
Additional factors that have been considered in the past when selecting peer group companies have included
revenue growth over one and three years and total stockholder return over one and three years. In selecting the
peer group, the Compensation Committee generally targets companies with revenues ranging from
approximately .40 to 2.5 times that of NetScout. The companies included in our peer group for fiscal year 2020
were the same as in fiscal year 2019 except for the following changes. For fiscal year 2020, our peer group was
revised to exclude CA Technologies, which was acquired, and Citrix Systems, Inc., ServiceNow, Inc., and Ciena
Corporation, based on revenue size considerations. In addition, the peer group for fiscal year 2020 was revised to
include NETGEAR Inc., FireEye, Inc. and Commvault Systems, Inc., based on their comparability in terms of
revenue, market capitalization, and technology focus.
Akamai Technologies, Inc.
Commvault Systems, Inc.
Extreme Networks Inc.
F5 Networks, Inc.
FireEye, Inc.
Infinera Corporation
National Instruments Corp.
NETGEAR, Inc.
PTC Inc.
Splunk Inc.
Synchronoss Technologies, Inc.
Verint Systems Inc.
VeriSign, Inc.
ViaSat Inc.
Viavi Solutions Inc.
For fiscal year 2021, our peer group has been revised to exclude Akamai Technologies, Inc. based on
revenue size considerations, and to include Box, Inc., Tenable Holdings, Inc., Forescout Technologies, Inc., and
Rapid7, Inc., based on their comparability in terms of revenue, market capitalization, employees, and technology
focus.
Base Salaries and Annual Incentive Bonus Target Percentages
Previously, for fiscal year 2019, the Compensation Committee, with respect to the Named Executive
Officers other than the Chief Executive Officer, and the Board, with respect to the Chief Executive Officer,
determined that base salaries and bonus targets should remain unchanged from fiscal year 2018. In addition, the
Compensation Committee determined that, with respect to each Named Executive Officer’s annual incentive
bonus award, in no event would any Named Executive Officer receive more than 200% of his or her annual
64
incentive bonus target. For fiscal year 2020, the Compensation Committee reviewed Company and individual
Named Executive Officer performance, as well as peer group market data. In consideration of these factors, the
Committee approved for each Named Executive Officer other than the Chief Executive Officer, and the Board
approved for the Chief Executive Officer, effective July 1, 2019, a $25,000 increase to the base salary of each
Named Executive Officer, while the dollar value of each Named Executive Officer’s target annual incentive
bonus remained the same. In approving the adjustments, the Committee and the Board considered that each of
our Named Executive Officers was positioned below the 25th percentile of the peer group market data both prior
to and after taking the increases into account.
FY2019
Sum of
Base
Salary
plus
Target
Bonus
FY2020
Base
Salary
FY2020
Bonus
Target
FY2020 Sum
of Base
Salary plus
Target
Bonus
FY2019
Base
Salary
FY2019
Bonus
Target
$500,000
$476,000
$976,000
$525,000 $476,000
$1,001,000
$360,000
$240,012
$600,012
$385,000 $240,012
$ 625,012
$330,000
$220,011
$550,011
$355,000
$220,011
$ 575,011
Executive Officer
Anil K. Singhal
Michael Szabados
Jean Bua
John W. Downing*
$240,000
$310,000
$550,000
$265,000
$310,000
$ 575,000
Annual
Total
Cash
Target
Increase
%
2.6%
4.2%
4.5%
4.5%
*
The information presented for Mr. Downing under each of the “FY2019 Bonus Target” and “FY2020 Bonus
Target” columns includes an annual incentive bonus target amount and a commission target amount.
Corporate Performance Goals and Achievement
For fiscal year 2020, the Compensation Committee established an annual threshold non-GAAP EPS target
equal to the mid-point of our guidance range of between $1.40 to $1.45 per share. The Company’s non-GAAP
revenue target for executive compensation purposes in fiscal year 2020 was equal to the mid-point of our
guidance range, which was between $895 million to $915 million. In addition, the Compensation Committee
established a target for new business bookings against which to evaluate the commission portion of
Mr. Downing’s annual incentive bonus target. For the fiscal year 2020 annual incentive bonus award, as in prior
years, the threshold non-GAAP EPS target must first be achieved in order for any annual incentive bonus to be
paid for fiscal year 2020 (except for Mr. Downing, with respect to the portion of his short-term cash incentive
compensation that consists of sales commissions). The Company’s share repurchase activity was reviewed and
considered by the Committee in assessing whether the fiscal year 2020 non-GAAP EPS targets were met. For
fiscal year 2020, the Company exceeded the threshold non-GAAP EPS target by approximately 10%, which led
to funding the Company-wide bonus pool at 140% of the target bonus opportunity. The Company missed the
non-GAAP revenue target by approximately 1%, but, in light of the disruption caused by the COVID-19
pandemic, and in recognition of the Company’s strong overall performance in delivering solid earnings per share
growth, the Compensation Committee, for our Named Executive Officers other than the Chief Executive Officer,
and the Board, for our Chief Executive Officer, determined that the bonus payout for each Named Executive
Officers should be between 133% and 137% of his or her target, in accordance with our pay-for-performance
philosophy. The actual payout percentage for each Named Executive Officer was determined based on the
Compensation Committee’s judgment after considering the attainment and importance of such Named Executive
Officer’s performance objectives.
Individual Performance Goals and Achievement
The following lists the fiscal year 2020 individual performance goals for each of our Named Executive
Officers. Except as provided below, the Compensation Committee determined the goals were achieved for each
Named Executive Officer, and the Board determined the goals were largely achieved for our Chief Executive
Officer, with the understanding that all Named Executive Officers also shared the corporate-wide financial goals.
65
Anil Singhal, CEO
• Goal: Achieve the mid-point of non-GAAP revenue guidance of $895 million to $915 million and
achieve the mid-point of non-GAAP EPS guidance of $1.40 to $1.45 per share.
Outcome: Non-GAAP EPS threshold achieved. Non-GAAP revenue target missed by approximately
1%.
• Goal: Develop/elevate strategic go-to-market partnerships with the top market leaders in IT
infrastructure.
Outcome: Achieved the development and implementation of go-to market partnerships with relevant
IT infrastructure market leaders.
• Goal: Develop and present to the Board our cyber security strategy in the first quarter.
Outcome: Partially achieved. Cyber security strategy was significantly changed from the strategy
developed during fiscal year 2019 based on market input.
• Goal: Launch a company-wide leadership development program.
Outcome: Achieved the launch of the leadership development program, with the pilot group of
employees having completed at least 75% of the program by the end of fiscal year 2020.
Michael Szabados (COO)
• Goal: Achieve the mid-point of non-GAAP revenue guidance of $895 million to $915 million and
achieve the mid-point of non-GAAP EPS guidance of $1.40 to $1.45 per share.
Outcome: Non-GAAP EPS threshold achieved. Non-GAAP revenue target missed by approximately
1%.
• Goal: Grow the company’s brand recognition and reputation as a leader is both service assurance and
cyber security.
Outcome: Largely achieved through successful print and digital campaigns as measured by surveys of
readership.
• Goal: Continue to develop and elevate our selling and marketing partnerships with leading cloud
companies.
Outcome: Achieved through implementation of strategic partnerships with four leading cloud
companies.
• Goal: Follow up the successful integration of our IT infrastructure and substantially consolidate ERP
systems.
Outcome: Partially achieved with plan to complete ERP system consolidation during fiscal year 2021.
John Downing (EVP Worldwide Sales)
• Goal: Achieve the mid-point of non-GAAP revenue guidance of $895 million to $915 million and
achieve the mid-point of non-GAAP EPS guidance of $1.40 to $1.45 per share.
Outcome: Non-GAAP EPS threshold achieved. Non-GAAP revenue target missed by
approximately 1%.
• Goal: Drive a specified amount of new business bookings above current levels, leveraging the
integration of the sales force and expanded product lines.
Outcome: Partially achieved new business sales goal, as the COVID-19 pandemic impacted sales
during the fourth quarter of fiscal year 2020.
• Goal: Complete integration of legacy sales teams.
66
Outcome: Achieved the integration of the legacy sales teams, resulting in increased morale and
productivity.
• Goal: Continue the transition from hardware to software revenue.
Outcome: Achieved the enablement of our continued transition from hardware to software revenue as
measured by increasing the percentage of higher margin commercial off-the-shelf hardware platform
and virtualization revenue.
Jean Bua (EVP and CFO)
• Goal: Achieve the mid-point of non-GAAP revenue guidance of $895 million to $915 million and
achieve the mid-point of non-GAAP EPS guidance of $1.40 to $1.45 per share.
Outcome: Non-GAAP EPS threshold achieved. Non-GAAP revenue target missed by approximately
1%.
• Goal: Implement a tax restructuring plan.
Outcome: Completed tax restructuring and tax-efficiently repatriated cash.
• Goal: Develop operational roles and responsibilities in support of the integration of business units.
Outcome: Achieved through oversight of design and execution of support of customer fulfillment,
control of prioritization of transactions and accurate reporting on progress of bookings and anticipated
revenue.
• Goal: Support the newly established business units.
Outcome: Achieved through designing the financial organization to respond to the needs of newly
established business units and centralizing financial planning and analysis to scale for the new
organization.
Annual Incentive Bonus Payout Amounts
In determining the annual incentive bonus target amounts for executive officers, the Compensation
Committee considered our financial performance and each officer’s non-financial individual leadership, ongoing
development and execution of our strategy, non-financial individual goal achievement, experience, and
responsibility. The Compensation Committee considered that the Company fell slightly below its non-GAAP
revenue targets, which was an individual goal for each Named Executive Officer despite exceeding its
non-GAAP EPS target, recognizing the impact that the COVID-19 pandemic had on fourth quarter revenues.
While the Company-wide bonus pool was set at 140% of the target bonus opportunity, in light of the fact
that non-GAAP revenue fell slightly below the targeted amount, the Compensation Committee determined that
Ms. Bua should receive 137% of her annual incentive bonus target, and that Messrs. Szabados and Downing
should each receive 136% of their annual incentive bonus targets. The Compensation Committee also
determined, and recommended to the Board, which approved the recommendation, that Mr. Singhal should
receive 133% of his annual incentive bonus target. The total bonus amounts for all Named Executive Officers are
provided in the Summary Compensation Table. In the case of Mr. Downing, the information presented in the
“Non-Equity Incentive Plan Compensation” column also includes his sales commissions.
Equity Awards
Beginning with grants made for fiscal year 2019, the Compensation Committee and the Board sought to
enhance our long-term equity program’s alignment with stockholders’ interest by adding a performance-based
component to a significant portion of the long-term equity incentives for Named Executive Officers. As part of
this alignment, the Compensation Committee (and the Board with respect to the CEO) approved an increase in
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the individual Named Executive Officer grant amount guidelines by 50%. This change recognized the
Company’s dramatic growth in revenue, employees, and complexity in recent years. The Compensation
Committee also determined that for the equity grants for our Named Executive Officers, one-third (as measured
by number of RSUs to be granted) of the equity awards granted to our Named Executive Officers will be
awarded as a result of prior year performance against corporate and individual performance goals as also set out
in last year’s proxy statement. These performance awards will be time-based and vest 25% on the first
anniversary of the date of grant, with the balance vesting in equal increments annually over the following three
years. Such awards will be granted based on corporate and individual performance, including whether the
Company achieves a pre-established non-GAAP EPS profitability target each year with respect to that year’s
grant. If the Company fails to achieve the target, this performance-related portion of that year’s RSU award will
be appropriately reduced for each Named Executive Officer. The Compensation Committee and the Board will
also consider the achievement of individual goals to determine whether this portion of the equity grant will be
made to individual Named Executive Officers.
The Compensation Committee believes that the annual grants are appropriate in furtherance of our
philosophy that total executive compensation should be more heavily weighted toward long-term incentive
compensation to ensure that the interests of our executives are aligned with those of our stockholders. In
addition, the Compensation Committee felt it was important to ensure that Ms. Bua and Messrs. Singhal,
Szabados and Downing have a significant ongoing equity stake in the Company so that each has appropriate
incentives and has long-term interests that are aligned with those of our stockholders. Finally, the Compensation
Committee and Board believe that incorporating an equity component based on performance is responsive to
feedback received from our stakeholders during our engagement process. The Compensation Committee will
continue to consider over the course of the year the appropriate structure for long-term equity incentives that will
continue the Company’s ongoing practice of, and commitment to, rewarding long-term performance, and how to
implement such long-term compensation.
The fiscal year 2020 equity awards for each Named Executive Officer, including Mr. Singhal, resulted in
RSUs equal to the following number of shares of our common stock pursuant to our 2007 Plan. The grant date
fair value of these grants during fiscal year 2020 was 14% lower than the grant date fair value of the grants in
fiscal year 2019 as a result of the Compensation Committee’s assessment of fiscal year 2019 performance when
determining the size of the fiscal year 2020 grants.
Name
Anil Singhal
Michael Szabados
Jean Bua
John W. Downing
Other Benefits
RSU Grant
(shares)
60,000
35,000
30,000
30,000
NetScout also maintains various broad-based employee benefit plans. Executive officers participate in these
plans on the same terms as eligible, non-executive employees, subject to legal limits on the amounts that may be
contributed or paid to executive officers under these plans. One exception to this broad-based eligibility is that
executive officers at the vice president level and above are eligible for life insurance policies that provide for
three times cash compensation (salary and annual incentive bonus target) up to a $1.5 million cap with evidence
of insurability, which differs from the two times salary and annual incentive bonus target and $750,000 cap
available to non-sales employees and two times salary and commission and $750,000 cap available to sales
employees.
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We also offer a 401(k) plan that allows all U.S. employees to invest in a wide array of funds on a pre-tax
basis. The 401(k) plan allows U.S. employees to contribute the lesser of 80% of their eligible compensation or
$19,500 (or $25,000 for individuals at least 50 years of age) for calendar year 2020. NetScout matches 50% of
each employee’s contribution up to 6% of such employee’s annual salary. The matching amount vests 25% per
year over four years. After four years of service, the employee match is 100% vested. Employees in the U.S. are
eligible to participate on the 401(k) plan on date of hire.
Under his current employment agreement, Mr. Singhal is entitled to the following benefits: disability
insurance of no less than 100% of base salary, paid vacation, group life insurance not to exceed $1.5 million, and
NetScout’s generally available medical, dental, and vision plans as well as any other benefits generally available
to senior executives of NetScout. In addition, NetScout will reimburse Mr. Singhal for tax and estate planning
and for leasing and maintaining a car. For fiscal year 2020, for the Chief Executive Officer, the information
presented in the “All Other Compensation” column of the Summary Compensation Table is largely composed of
tax and estate planning expenses during the fiscal year and a car lease.
The Compensation Committee believes that these types of benefits are highly effective in retaining qualified
executive officers because they provide the executive officers with longer-term security and protection for the
future. The Company believes that providing these benefits is a relatively inexpensive way to enhance the
competitiveness of the executives’ compensation packages and furthers the Company’s goal of retaining and
rewarding highly qualified executives. The Company generally believes that all the perquisites have greater value
to the executives than the cost to the Company to provide them, thus providing a return on the cost of providing
such benefits.
Fiscal Year 2021 Compensation Decisions
In light of the uncertainty surrounding the COVID-19 global pandemic, the Committee, with respect to the
Named Executive Officers other than the Chief Executive Officer, and the Board, with respect to the Chief
Executive Officer, did not recommend any changes to the base salaries and annual incentive bonus targets for our
Named Executive Officers.
As the COVID-19 situation is rapidly evolving, it is not possible, with reasonable accuracy, to estimate the
impact of the pandemic on future financial performance, and thus, we have deferred providing fiscal year 2021
guidance until there is greater visibility on the duration, magnitude, and effects of the COVID-19 global
pandemic. As in the past, the fiscal year 2021 compensation of our Named Executive Officers will be tied in part
to the attainment of non-GAAP EPS and non-GAAP revenue targets. The specific metrics are not being disclosed
given that we have not provided public financial guidance as discussed above.
The company-wide bonus pool for fiscal year 2021 will be fully accrued after the non-GAAP EPS target
approved by the Committee is achieved. Named Executive Officers will not receive their annual incentive bonus
target unless the corporate profitability (non-GAAP EPS) target has been achieved. In the event of revenue
performance below the low end of the target range approved by the Committee, the bonus pool will be reduced to
meet the non-GAAP EPS target range approved by the Committee. In the event of over performance with respect
to profitability, either due to higher revenue, changes in product mix, decisions to reduce investment in certain
areas, or unanticipated one-time events such as tax refunds, the additional funds will be allocated between the
company-wide bonus pool and stockholders in the form of increases to non-GAAP EPS. In no event will any
Named Executive Officer receive more than 200% of his or her annual incentive bonus target.
Following consideration of the company-wide performance targets approved by the Committee, the Named
Executive Officers’ annual incentive bonus target will be based upon the attainment of the individual goals
discussed below:
Anil Singhal (CEO)
• Achieve non-GAAP revenue and non-GAAP EPS within the target range.
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• Oversee an effective, rapid response to the COVID-19 pandemic that maintains the Company’s
strategic growth initiatives.
• Develop a succession plan that identifies readiness and gaps, and extend the Company’s leadership
development program to additional employees.
Michael Szabados (COO)
• Achieve non-GAAP revenue and non-GAAP EPS within the target range.
• Build on the Company’s brand as “Guardians of the Connected World” through modern marketing
channels to yield a pre-determined increase in brand recognition, as measured by perception studies.
• Operationalize the product planning and new product introduction process in order to document and
train all product, engineering, and marketing managers.
John Downing (EVP Worldwide Sales)
• Achieve non-GAAP revenue and non-GAAP EPS within the target range.
•
Implement focused overlays to sales structure to build expertise in the sales organization with respect
to the Company’s strategic growth initiatives.
• Achieve a pre-determined amount of pipeline growth to position for higher growth targets in fiscal year
2022.
Jean Bua (EVP and CFO)
• Achieve non-GAAP revenue and non-GAAP EPS within the target range.
• Develop statutory reporting and tax strategy alternatives to support the integration of product
technologies between business units.
• Review the impact of the COVID-19 pandemic on the Company’s capital structure programs and
develop appropriate capital structure forecasts and responses to the pandemic.
Certain specific revenue, strategic initiatives and booking targets are not disclosed because it would be
competitively harmful to do so. We will disclose certain of the specific metrics at the end of the performance
period when doing so would not be competitively harmful.
Equity Awards
The Compensation Committee believes that the annual grants are appropriate in furtherance of our
philosophy that total executive compensation should be more heavily weighted toward long-term incentive
compensation to ensure that the interests of our executives are aligned with those of our stockholders. In
addition, the Compensation Committee felt it was important to ensure that Ms. Bua and Messrs. Singhal,
Szabados and Downing have a significant ongoing equity stake in the Company so that each has appropriate
incentives and has long-term interests that are aligned with those of our stockholders. Finally, the Compensation
Committee and Board believe that incorporating an equity component based on performance is responsive to
feedback received from our stakeholders during our engagement process.
Post-Termination Compensation
Mr. Singhal’s 2007 employment agreement provides that if any of the following three events occur
(1) NetScout terminates Mr. Singhal’s employment for any reason other than due cause (as defined in the
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agreement), (2) Mr. Singhal terminates his employment for any reason at any time following the consummation
of a sale of NetScout, or (3) upon the death or disability of Mr. Singhal, then Mr. Singhal, or his estate, is entitled
to receive in a lump sum, a payment equal to the net present value of $16,208 per month for a period of seven
years. If Mr. Singhal terminates his employment with NetScout for any reason prior to the consummation of a
sale of NetScout, he is entitled to such lump sum payment for seven years. Mr. Singhal will also receive
continued health and dental benefits during such period. Mr. Singhal’s severance benefits, including health and
dental benefits, are fully vested, and we have projected its future payments for this unfunded obligation at
approximately $1.5 million in the aggregate.
In May 2012, NetScout entered into amended and restated severance agreements with its Named Executive
Officers, other than its Chief Executive Officer. These agreements are intended to help NetScout retain key
executives and to reinforce the continued attention and dedication of management in event of a change of control
and to provide protection so that such executives can act in the best interests of NetScout without distraction. For
each of the Named Executive Officers, other than the Chief Executive Officer, the amended and restated
severance agreements provide certain payments in the event that such officer is terminated without cause (as
defined in the applicable agreement) or resigns for good reason (as defined in the applicable agreement) at any
time prior to a change in control of NetScout (as defined in the applicable agreement) or within one year
thereafter. In such event, such officer will receive 12 months of his or her then current salary, and, if such
termination occurs after a change of control, such officer will also receive a prorated amount of his or her annual
incentive bonus target, based on the months elapsed in such year that in any event will not be less than 50% of
his or her annual incentive bonus target and accelerated vesting of any outstanding unvested equity awards under
the 2007 Plan and the 2019 Plan, or any successors thereto, that would have vested or become exercisable within
one year of such termination.
With respect to the severance agreement with Mr. Downing, if such termination occurs after a change of
control, such payments will also include accrued but unpaid sales commissions plus a prorated amount of his
maximum target sales commissions (without double counting for previously paid commissions) that in any event
will not be less than 50% of his maximum target sales commissions.
Each of the amended and restated severance agreements listed above contain a one year initial term with one
year automatic renewal terms unless NetScout or the respective executive officer elects not to renew the
agreement.
The agreements also contain forfeiture provisions requiring repayment of severance amounts if it is
ultimately determined that the executive officer committed certain prohibited conduct while employed by
NetScout or materially breached any of the officer’s agreements with NetScout.
Regulatory Requirements
Tax Deductibility of Executive Compensation
Under Section 162(m) of the Internal Revenue Code (“Section 162(m)”), compensation paid to any publicly
held corporation’s “covered employees” that exceeds $1 million per taxable year for any covered employee is
generally non-deductible.
Prior to the enactment of the Tax Cuts and Jobs Act, Section 162(m) provided a performance-based
compensation exception, pursuant to which the deduction limit under Section 162(m) did not apply to any
compensation that qualified as “performance-based compensation” under Section 162(m). Pursuant to the Tax
Cuts and Jobs Act, the performance-based compensation exception under Section 162(m) was repealed with
respect to taxable years beginning after December 31, 2017, except that certain transition relief is provided for
compensation paid pursuant to a written binding contract which was in effect on November 2, 2017 and which is
not modified in any material respect on or after such date.
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Compensation paid to each of the Company’s “covered employees” in excess of $1 million per taxable year
generally will not be deductible unless it qualifies for the performance-based compensation exception under
Section 162(m) pursuant to the transition relief described above. Because of certain ambiguities and uncertainties
as to the application and interpretation of Section 162(m), as well as other factors beyond the control of the
Compensation Committee, no assurance can be given that any compensation paid by the Company will be
eligible for such transition relief and be deductible by the Company in the future. Although the Compensation
Committee will continue to consider tax implications as one factor in determining executive compensation, the
Compensation Committee also looks at other factors in making its decisions and retains the flexibility to provide
compensation for the Company’s named executive officers in a manner consistent with the goals of the
Company’s executive compensation program and the best interests of the Company and its stockholders, which
may include providing for compensation that is not deductible by the Company due to the deduction limit under
Section 162(m). The Compensation Committee also retains the flexibility to modify compensation that was
initially intended to be exempt from the deduction limit under Section 162(m) if it determines that such
modifications are consistent with the Company’s business needs.
Other Key Regulations Affecting Compensation Plans
Post-termination compensation is designed to minimize the effect of additional taxes imposed by
Section 409A of the Code.
Management of Risk
Following review and discussion, the Compensation Committee believes that any risks arising from our
compensation policies and practices for our employees will not have a material adverse effect on NetScout. In
addition, the Compensation Committee believes that the mix and design of the elements of executive
compensation do not encourage management to assume excessive risks. The considerations which led the
Compensation Committee to this conclusion include the following:
• We provide executives with a reasonable base salary. We believe these base salary levels mitigate risk-
taking behavior by providing reasonable predictability in the level of income earned by each executive
and alleviating pressure on executives to focus exclusively on stock price performance to the detriment
of other important business metrics.
• We use a mixture of compensation elements that is intended to discourage short-term risk taking.
Further, the executive team overall has a long tenure and significant experience, enabling it to deal with
business cycles.
•
Short-term incentives in the form of annual incentive bonus payouts are generally established at 100%
of the target amount, unless the Compensation Committee or the Board determines that extraordinary
performance warrants a higher payout, a process that the Compensation Committee believes mitigates
the likelihood that our executives will take excessive risks.
• Equity incentive awards are generally granted annually and generally vest over four years, so
executives have a significant amount of unvested awards that could decrease significantly in value if
our business is not managed for the long-term. As noted, there are Stock Holding Guidelines designed
to reinforce that long-term view.
• We have a robust system of internal controls and a comprehensive compliance program, which
includes extensive training of all employees, which we believe promotes a culture of ethical behavior
and compliance, as well as an appropriate attitude toward risk-taking. The Compensation Committee
retains discretion to adjust compensation based on adherence to our values and compliance with
programs, among other things.
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Report of Compensation Committee of the Board of Directors2
The Compensation Committee has reviewed the Compensation Discussion and Analysis portion of this
proxy statement and discussed such section with management. Based on its review and discussions and its
ongoing involvement with executive compensation matters, the Compensation Committee recommended to the
Board that the CD&A portion of this proxy statement be included in NetScout’s proxy statement and
incorporated into NetScout’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020. This report
is provided by the following independent directors, who comprise the Compensation Committee:
Vivian Vitale, Chair
Robert E. Donahue
John R. Egan
Alfred Grasso
Christopher Perretta
Compensation Committee Interlocks and Insider Participation
None of Ms. Vitale or Messrs. Donahue, Egan, Grasso, or Perretta was, during the past fiscal year, an officer
or employee of NetScout or any of our subsidiaries, was formerly an officer of NetScout or any of our
subsidiaries, or had any relationship with us requiring disclosure herein. During the past fiscal year, none of our
executive officers served as:
•
•
•
a member of the compensation committee (or other board committee performing equivalent functions
or, in the absence of any such committee, the entire board of directors) of another entity, of whose
executive officers served on our Compensation Committee;
a director of another entity, one of whose executive officers served on our Compensation Committee;
or
a member of the compensation committee (or other board committee performing equivalent functions
or, in the absence of any such committee, the entire board of directors) of another entity, one of whose
executive officers served as one of our directors.
Transactions with Related Persons
We have a written policy with respect to “Related Persons Transactions.” Except as specifically provided
below, all “Related Person Transactions” require approval or ratification by either our Audit Committee
(provided that the transaction involves terms comparable to terms that could be obtained in an arms-length
dealing with unrelated third parties), the majority of disinterested members of our Board, or, in the case of
transactions that involve compensation, our Compensation Committee or our Board. Like other Company
policies, our Policy with respect to Related Person Transactions is managed on a day to day basis by our
management team, including our General Counsel, and to the extent necessary, related matters are discussed with
our Board (or a committee thereof) or our outside counsel.
For NetScout, a “Related Person Transaction” is broadly defined as any transaction between NetScout and
any Related Person (as defined below), including any transactions requiring disclosure under Item 404 of
Regulation S-K under the Exchange Act. A Related Party Transaction will require disclosure to our Audit
Committee but will not require Audit Committee approval if (i) such transaction is available to all of our
employees generally, (ii) if such transaction, when aggregated with any other similar transactions with such
person during such fiscal year, involves less than $5,000 or (iii) such transaction is an ordinary course,
2 The material in this report is not “soliciting material,” is furnished to, but not deemed “filed” with, the SEC
and is not deemed to be incorporated by reference in any filing of the Company under the Exchange Act, other
than the Company’s Annual Report on Form 10-K, where it shall be deemed to be “furnished,” whether made
before or after the date hereof and irrespective of any general incorporation language in any such filing.
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commercial transaction with an entity in which a Related Person serves as an officer or director and such
transaction is the result of arms-length negotiation not involving such Related Person.
A “Related Person” means:
i.
ii.
iii.
iv.
a director or executive officer of NetScout, as well as any nominee for director proposed to be elected
at the next annual meeting of stockholders;
a stockholder owning in excess of five percent of NetScout (or its controlled affiliates);
an immediate family member of the persons listed in i and ii above (“immediate family” as defined
under Item 404 of Regulation S-K under the Securities Exchange Act of 1934); or
an entity which someone listed in i, ii, or iii above has more than a 10% ownership interest or control
of such entity.
Our Board has determined that our Audit Committee is generally best suited to review and approve Related
Person Transactions. If Audit Committee approval is not practicable (because, for example, it involves terms that
are not comparable to terms that could be obtained from an arms-length dealing with an unrelated third parties or
because of logistical difficulties), or if a transaction involves compensation, such approval may be obtained as
provided above. Such Related Person Transactions may be presented for approval or preliminarily entered into
by our management subject to ratification by the applicable committee or our Board, provided that if ratification
does not occur, our management is obliged to take all reasonable efforts to cancel or annul such transaction.
In determining whether or not to approve a Related Person Transaction, the applicable committee or our
Board will also consider whether such transaction would affect the status of a member of our Board as an
“independent director” as promulgated by the SEC, the Financial Industry Regulatory Authority, any exchange
upon which our securities are traded, or any governmental or regulatory body exercising authority over us. If the
result of any such Related Person Transaction is that a majority of our Board would no longer be deemed to be
“independent directors” then such transaction will not be approved. Other than as described under “Employment
and Other Agreements” and “Post Termination Compensation” above, the Company is not party to any Related
Person Transactions with respect to the fiscal year ended March 31, 2020, and no such transactions are currently
contemplated.
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DELINQUENT SECTION 16(A) REPORTS
Section 16(a) of the Exchange Act requires our directors, executive officers, and holders of more than 10%
of our common stock, or collectively, Reporting Persons, to file with the SEC initial reports of ownership and
reports of changes in ownership of our common stock. Such persons are required by SEC regulations to furnish
us with copies of all such filings. Based on our review of the copies of such filings received by us with respect to
the fiscal year ended March 31, 2020 and written representations from certain Reporting Persons, we believe that
all Section 16(a) filing requirements were complied with on a timely basis during the fiscal year ended March 31,
2020, except that one report with respect to RSUs that vested on August 1, 2019, but which were not delivered
until August 6, 2019 for each of Messrs. Singhal, Szabados, and Downing and Ms. Bua was filed after the
applicable due date due to an administrative error.
AUDITORS FEES AND SERVICES
The following sets forth the aggregate fees billed to us by our independent registered public accounting firm
during the fiscal years ended March 31, 2020 and March 31, 2019:
Audit Fees
Fees for audit services were approximately $2,525,012 and $2,305,800 for the fiscal years ended March 31,
2020 and March 31, 2019, respectively, including fees associated with the integrated audit of the consolidated
financial statements included in our Annual Report on Form 10-K, the reviews of our Quarterly Reports on Form
10-Q, and statutory audits required of our foreign subsidiaries.
Audit-Related Fees
Fees for audit-related services were approximately $386,350 and $171,550 for the fiscal years ended
March 31, 2020 and March 31, 2019, respectively, including fees associated with services related to review of
accounting for significant transactions.
Tax Fees
Total fees for tax services were approximately $117,861 and $108,261 for the fiscal years ended March 31,
2020 and March 31, 2019, respectively, consisting of tax compliance and preparation fees and other domestic and
international tax advisory services.
All Other Fees
Total all other fees were approximately $2,700 and $2,756 for the fiscal years ended March 31, 2020 and
March 31, 2019, respectively, consisting of fees related to research and compliance tools.
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services
Our Audit Committee has implemented procedures under our Audit Committee Pre-Approval Policy for
Audit and Non-Audit Services, or the Pre-Approval Policy, to ensure that all audit and permitted non-audit
services provided to us are pre-approved by the Audit Committee. Specifically, the Audit Committee
pre-approves the use of our independent registered public accounting firm for specific audit and non-audit
services within approved monetary limits. All of the services provided by PricewaterhouseCoopers LLP during
fiscal year 2020 were pre-approved in accordance with this policy. If a proposed service has not been
pre-approved pursuant to the Pre-Approval Policy, then it must be specifically pre-approved by our Audit
Committee before it may be provided by our independent registered public accounting firm. Any pre-approved
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services exceeding the pre-approved monetary limits require specific approval by our Audit Committee. All of
the audit-related, tax, and all other services provided by our independent registered public accounting firm in
fiscal years 2020 and 2019 were approved by the Audit Committee by means of specific pre-approvals or
pursuant to the procedures contained in the Pre-Approval Policy. All non-audit services provided in fiscal years
2020 and 2019 were reviewed with our Audit Committee, which concluded that the provision of such services by
our independent registered public accounting firm was compatible with the maintenance of that firm’s
independence in the conduct of its auditing functions.
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HOUSEHOLDING OF PROXY MATERIALS
The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery
requirements for Notices of Internet Availability of Proxy Materials or other Annual Meeting materials with
respect to two or more stockholders sharing the same address by delivering a single Notice of Internet
Availability of Proxy Materials or other Annual Meeting materials addressed to those stockholders.
A number of brokers with account holders who are stockholders will be “householding” the Company’s
proxy materials. A single Notice of Internet Availability of Proxy Materials will be delivered to multiple
stockholders sharing an address unless contrary instructions have been received from the affected stockholders.
Once you have received notice from us (if you are a stockholder of record) or from your broker (if you are a
beneficial owner) that we or they will be “householding” communications to your address, “householding” will
continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to
participate in “householding” and would prefer to receive a separate Notice of Internet Availability of Proxy
Materials, or if you currently receive multiple copies and would like to request “householding” of your
communications, please notify your broker or the Company. Direct your written or oral request to the Company
to our principal executive offices, 310 Littleton Road, Westford, Massachusetts 01886, Attn: Investor Relations,
telephone: (979) 614-4000. In addition, we will promptly deliver, upon written or oral request to the address or
telephone number above, a separate copy of the Notice of Internet Availability of Proxy Materials or other
Annual Meeting materials, as applicable, to a stockholder at a shared address to which a single copy of the
documents was delivered.
OTHER MATTERS
The Board knows of no other matters that will be presented for consideration at the Annual Meeting. If any
other matters are properly brought before the meeting, it is the intention of the persons named in the proxy to
vote on such matters in accordance with their best judgment.
Our proxy statement, the proxy card, and our Annual Report to Stockholders for the fiscal year
ended March 31, 2020 are all available free of charge upon written request to: Investor Relations, 310
Littleton Road, Westford Massachusetts 01886.
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APPENDIX A
AMENDED AND RESTATED NETSCOUT SYSTEMS, INC.
2019 EQUITY INCENTIVE PLAN
ADOPTED BY THE BOARD OF DIRECTORS: JULY 9, 2019
APPROVED BY THE STOCKHOLDERS: SEPTEMBER 12, 2019
AMENDED AND RESTATED BY THE BOARD OF DIRECTORS: JUNE 23, 2020
APPROVED BY THE STOCKHOLDERS: SEPTEMBER
, 2020
1. GENERAL.
(a) Successor to and Continuation of Prior Plan. The Plan is intended as the successor to and
continuation of the NetScout Systems, Inc. 2007 Equity Incentive Plan (the “Prior Plan”). Following the
Effective Date, no additional awards may be granted under the Prior Plan. Any unallocated shares remaining
available for grant under the Prior Plan as of 12:01 a.m. Eastern Time on the Effective Date (the “Prior Plan’s
Available Reserve”) will cease to be available under the Prior Plan at such time and will be added to the Share
Reserve (as defined in Section 3(a)(i)) and be then immediately available for grant and issuance pursuant to
Awards granted under this Plan. From and after 12:01 a.m. Eastern Time on the Effective Date, all outstanding
awards granted under the Prior Plan (each, a “Prior Plan Award”) will remain subject to the terms of the Prior
Plan; provided, however, that the following shares of Common Stock subject to any outstanding Prior Plan
Award (collectively, the “Prior Plan’s Returning Shares”) will immediately be added to the Share Reserve (as
defined in Section 3(a)(i)) as and when such shares become the Prior Plan’s Returning Shares and will become
available for grant and issuance pursuant to Awards granted under this Plan: (i) any shares subject to such award
that are not issued because such award or any portion thereof expires or otherwise terminates without all of the
shares covered by such award having been issued; (ii) any shares subject to such award that are not issued
because such award or any portion thereof is settled in cash; (iii) any shares issued pursuant to such award that
are forfeited back to or repurchased by the Company because of the failure to meet a contingency or condition
required for the vesting of such shares; and (iv) any shares that are reacquired or withheld (or not issued) by the
Company to satisfy a tax withholding obligation in connection with any such award that is a Full Value Award
granted under the Prior Plan. All Awards granted on or after 12:01 a.m. Eastern Time on the Effective Date will
be subject to the terms of this Plan.
(b) Eligible Award Recipients. Subject to Section 4, Employees, Directors and Consultants are eligible to
receive Awards.
(c) Available Awards. The Plan provides for the grant of the following types of Awards: (i) Incentive
Stock Options; (ii) Nonstatutory Stock Options; (iii) Stock Appreciation Rights; (iv) Restricted Stock Awards;
(v) Restricted Stock Unit Awards; and (vi) Other Stock Awards.
(d) Purpose. The Plan, through the granting of Awards, is intended to help the Company and any Affiliate
secure and retain the services of eligible award recipients, provide incentives for such persons to exert maximum
efforts for the success of the Company and any Affiliate, and provide a means by which such persons may
benefit from increases in value of the Common Stock.
2. ADMINISTRATION.
(a) Administration by Board. The Board will administer the Plan. The Board may delegate
administration of the Plan to a Committee or Committees, as provided in Section 2(c).
(b) Powers of Board. The Board will have the power, subject to, and within the limitations of, the express
provisions of the Plan:
(i) To determine (A) who will be granted Awards, (B) when and how each Award will be granted,
(C) what type of Award will be granted, (D) the provisions of each Award (which need not be identical),
A-1
including when a Participant will be permitted to exercise or otherwise receive cash or Common Stock under the
Award, (E) the number of shares of Common Stock subject to, or the cash value of, an Award, and (F) the Fair
Market Value applicable to an Award.
(ii) To construe and interpret the Plan and Awards granted under it, and to establish, amend and
revoke rules and regulations for administration of the Plan and Awards. The Board, in the exercise of these
powers, may correct any defect, omission or inconsistency in the Plan or in any Award Agreement, in a manner
and to the extent it will deem necessary or expedient to make the Plan or Award fully effective.
(iii) To settle all controversies regarding the Plan and Awards granted under it.
(iv) To accelerate, in whole or in part, the time at which an Award may be exercised or vest (or at
which cash or shares of Common Stock may be issued in settlement thereof).
(v) To suspend or terminate the Plan at any time. Except as otherwise provided in the Plan (including
Section 2(b)(viii)) or an Award Agreement, suspension or termination of the Plan will not materially impair a
Participant’s rights under an outstanding Award without his or her written consent.
(vi) To amend the Plan in any respect the Board deems necessary or advisable, including, without
limitation, by adopting amendments relating to Incentive Stock Options and certain nonqualified deferred
compensation under Section 409A of the Code and/or to make the Plan or Awards granted under the Plan
compliant with the requirements for Incentive Stock Options or exempt from or compliant with the requirements
for nonqualified deferred compensation under Section 409A of the Code, subject to the limitations, if any, of
applicable law. However, if required by applicable law or listing requirements, and except as provided in
Section 9(a) relating to Capitalization Adjustments, the Company will seek stockholder approval of any
amendment of the Plan that (A) materially increases the number of shares of Common Stock available for
issuance under the Plan, (B) materially expands the class of individuals eligible to receive Awards under the
Plan, (C) materially increases the benefits accruing to Participants under the Plan, (D) materially reduces the
price at which shares of Common Stock may be issued or purchased under the Plan, or (E) materially expands the
types of Awards available for issuance under the Plan. Except as otherwise provided in the Plan (including
Section 2(b)(viii)) or an Award Agreement, no amendment of the Plan will materially impair a Participant’s
rights under an outstanding Award without his or her written consent.
(vii) To submit any amendment to the Plan for stockholder approval, including, but not limited to,
amendments to the Plan intended to satisfy the requirements of (A) Section 422 of the Code regarding incentive
stock options or (B) Rule 16b-3.
(viii) To approve forms of Award Agreements for use under the Plan and to amend the terms of any
one or more outstanding Awards, including, but not limited to, amendments to provide terms more favorable to
the Participant than previously provided in the Award Agreement, subject to any specified limits in the Plan that
are not subject to Board discretion; provided, however, that except as otherwise provided in the Plan (including
this Section 2(b)(viii)) or an Award Agreement, no amendment of an outstanding Award will materially impair a
Participant’s rights under such Award without his or her written consent.
Notwithstanding the foregoing or anything in the Plan to the contrary, unless prohibited by applicable law,
the Board may amend the terms of any outstanding Award or the Plan, or may suspend or terminate the Plan,
without the affected Participant’s consent, (A) to maintain the qualified status of the Award as an Incentive Stock
Option under Section 422 of the Code, (B) to change the terms of an Incentive Stock Option, if such change
results in impairment of the Award solely because it impairs the qualified status of the Award as an Incentive
Stock Option under Section 422 of the Code, (C) to clarify the manner of exemption from, or to bring the Award
or the Plan into compliance with, Section 409A of the Code or (D) to comply with other applicable laws or listing
requirements.
A-2
(ix) Generally, to exercise such powers and to perform such acts as the Board deems necessary or
expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan
or Awards.
(x) To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in
the Plan by Employees, Directors or Consultants who are foreign nationals or employed outside the United States
(provided that Board approval will not be necessary for immaterial modifications to the Plan or any Award
Agreement that are required for compliance with the laws of the relevant foreign jurisdiction).
(c) Delegation to Committee.
(i) General. The Board may delegate some or all of the administration of the Plan to a Committee or
Committees. If administration of the Plan is delegated to a Committee, the Committee will have, in connection
with the administration of the Plan, the powers theretofore possessed by the Board that have been delegated to
the Committee, including the power to delegate to a subcommittee of the Committee any of the administrative
powers the Committee is authorized to exercise (and references in this Plan to the Board will thereafter be to the
Committee or subcommittee, as applicable). Any delegation of administrative powers will be reflected in
resolutions, not inconsistent with the provisions of the Plan, adopted from time to time by the Board or
Committee (as applicable). The Committee may, at any time, abolish the subcommittee and/or revest in the
Committee any powers delegated to the subcommittee. The Board may retain the authority to concurrently
administer the Plan with the Committee and may, at any time, revest in the Board some or all of the powers
previously delegated.
(ii) Rule 16b-3 Compliance. The Committee may consist solely of two or more Non-Employee
Directors in accordance with Rule 16b-3.
(d) Delegation to an Officer. The Board may delegate to one or more Officers the authority to do one or
both of the following: (i) designate Employees who are not Officers to be recipients of Options and SARs (and,
to the extent permitted by applicable law, other Awards) and, to the extent permitted by applicable law, the terms
of such Awards; and (ii) determine the number of shares of Common Stock to be subject to such Awards granted
to such Employees; provided, however, that the Board resolutions regarding such delegation will specify the total
number of shares of Common Stock that may be subject to the Awards granted by such Officer and that such
Officer may not grant an Award to himself or herself. Any such Awards will be granted on the form of Award
Agreement most recently approved for use by the Committee or the Board, unless otherwise provided in the
resolutions approving the delegation of authority. The Board may not delegate authority to an Officer who is
acting solely in the capacity of an Officer (and not also as a Director) to determine the Fair Market Value of the
Common Stock pursuant to Section 13(v)(iii).
(e) Effect of Board’s Decision. All determinations, interpretations and constructions made by the Board
in good faith will not be subject to review by any person and will be final, binding and conclusive on all persons.
(f) Cancellation and Re-Grant of Awards. Neither the Board nor any Committee will have the authority
to (i) reduce the exercise or strike price of any outstanding Option or SAR or (ii) cancel any outstanding Option
or SAR that has an exercise or strike price (per share) greater than the then-current Fair Market Value of the
Common Stock in exchange for cash or other Awards under the Plan, unless the stockholders of the Company
have approved such an action within 12 months prior to such an event.
(g) Acceleration upon Death or Disability. Unless specifically provided otherwise in the applicable
Award Agreement, if a Participant’s Continuous Service terminates as a result of the Participant’s death or
Disability, each of the Participant’s Awards will become fully vested (and exercisable, if applicable) as of the
date of such termination, to the extent that such Awards are outstanding and unvested as of the date of such
termination.
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(h) Dividends and Dividend Equivalents. Dividends or dividend equivalents may be paid or credited, as
applicable, with respect to any shares of Common Stock subject to an Award, as determined by the Board and
contained in the applicable Award Agreement; provided, however, that (i) no dividends or dividend equivalents
may be paid with respect to any such shares before the date such shares have vested under the terms of such
Award Agreement, (ii) any dividends or dividend equivalents that are credited with respect to any such shares
will be subject to all of the terms and conditions applicable to such shares under the terms of such Award
Agreement (including, but not limited to, any vesting conditions), and (iii) any dividends or dividend equivalents
that are credited with respect to any such shares will be forfeited to the Company on the date, if any, such shares
are forfeited to or repurchased by the Company due to a failure to meet any vesting conditions under the terms of
such Award Agreement.
(i) Minimum Vesting Requirements. No Award granted on or after September 10, 2020 may vest (or, if
applicable, be exercisable) until at least 12 months following the date of grant of the Award; provided, however,
that shares of Common Stock up to 5% of the Share Reserve (as defined in Section 3(a)(i)) may be issued
pursuant to Awards granted on or after September 10, 2020 that do not meet such vesting (and, if applicable,
exercisability) requirements.
3.
SHARES SUBJECT TO THE PLAN.
(a) Share Reserve.
(i) Subject to Section 3(a)(iii) and Section 9(a) relating to Capitalization Adjustments, the aggregate
number of shares of Common Stock that may be issued pursuant to Awards from and after the Effective Date will
not exceed (A) 11,494,651 shares (which number is the sum of (i) the number of shares (1,294,651) subject to the
Prior Plan’s Available Reserve, (ii) an additional 5,500,000 shares that were approved at the Company’s 2019
Annual Meeting of Stockholders, and (iii) an additional 4,700,000 shares that were approved at the Company’s
2020 Annual Meeting of Stockholders), plus (B) the Prior Plan’s Returning Shares, if any, which become
available for issuance under this Plan from time to time (such aggregate number of shares described in (A) and
(B), the “Share Reserve”).
(ii) Subject to Section 3(b), the number of shares of Common Stock available for issuance under the
Plan will be reduced by: (A) one share for each share of Common Stock issued pursuant to an Appreciation
Award granted under the Plan; (B) 2.76 shares for each share of Common Stock issued pursuant to a Full Value
Award granted under the Plan prior to September 10, 2020; and (C) 2.32 shares for each share of Common Stock
issued pursuant to a Full Value Award granted under the Plan on or after September 10, 2020.
(iii) Subject to Section 3(b), the number of shares of Common Stock available for issuance under the
Plan will be increased by: (A) one share for each Prior Plan’s Returning Share or 2019 Plan Returning Share (as
defined in Section 3(b)(i)) subject to an Appreciation Award; (B) 2.76 shares for each Prior Plan’s Returning
Share or 2019 Plan Returning Share subject to a Full Value Award that returns to the Plan prior to September 10,
2020; and (C) 2.32 shares for each Prior Plan’s Returning Share or 2019 Plan Returning Share subject to a Full
Value Award that returns to the Plan on or after September 10, 2020.
(iv) For clarity, the Share Reserve in this Section 3(a) is a limitation on the number of shares of
Common Stock that may be issued pursuant to the Plan. Accordingly, this Section 3(a) does not limit the granting
of Awards except as provided in Section 7(a). Shares may be issued in connection with a merger or acquisition as
permitted by Nasdaq Listing Rule 5635(c) or, if applicable, NYSE Listed Company Manual Section 303A.08,
AMEX Company Guide Section 711 or other applicable rule, and such issuance will not reduce the number of
shares available for issuance under the Plan.
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(b) Reversion of Shares to the Share Reserve.
(i) Shares Available for Subsequent Issuance. The following shares of Common Stock
(collectively, the “2019 Plan Returning Shares”) will become available again for issuance under the Plan:
(A) any shares subject to an Award that are not issued because such Award or any portion thereof expires or
otherwise terminates without all of the shares covered by such Award having been issued; (B) any shares subject
to an Award that are not issued because such Award or any portion thereof is settled in cash; (C) any shares
issued pursuant to an Award that are forfeited back to or repurchased by the Company because of the failure to
meet a contingency or condition required for the vesting of such shares; and (D) any shares that are reacquired or
withheld (or not issued) by the Company to satisfy a tax withholding obligation in connection with any Full
Value Award granted under the Plan.
(ii) Shares Not Available for Subsequent Issuance. The following shares of Common Stock will
not become available again for issuance under the Plan: (A) any shares that are reacquired or withheld (or not
issued) by the Company to satisfy the exercise or strike price of any Appreciation Award granted under the Plan
or Prior Plan (including any shares subject to such award that are not delivered because such award is exercised
through a reduction of shares subject to such award (i.e., “net exercised”)); (B) any shares that are reacquired or
withheld (or not issued) by the Company to satisfy a tax withholding obligation in connection with any
Appreciation Award granted under the Plan or Prior Plan; (C) any shares repurchased by the Company on the
open market with the proceeds of the exercise or strike price of any Appreciation Award granted under the Plan
or Prior Plan; and (D) in the event that a Stock Appreciation Right granted under the Plan or a stock appreciation
right granted under the Prior Plan is settled in shares of Common Stock, the gross number of shares of Common
Stock subject to such award.
(c)
Incentive Stock Option Limit. Subject to the Share Reserve and Section 9(a) relating to
Capitalization Adjustments, the aggregate maximum number of shares of Common Stock that may be issued
pursuant to the exercise of Incentive Stock Options will be 11,000,000 shares.
(d) Non-Employee Director Compensation Limit. The aggregate value of all cash and equity-based
compensation (including Awards and any other equity-based awards) paid or granted, as applicable, by the
Company to any individual for service as a Non-Employee Director with respect to any fiscal year of the
Company will not exceed $750,000, calculating the value of any equity-based awards based on the grant date fair
value of such awards for financial reporting purposes.
(e) Source of Shares. The stock issuable under the Plan will be shares of authorized but unissued or
reacquired Common Stock, including shares repurchased by the Company on the open market or otherwise.
4. ELIGIBILITY.
(a) Eligibility for Specific Awards. Incentive Stock Options may be granted only to employees of the
Company or a “parent corporation” or “subsidiary corporation” thereof (as such terms are defined in Sections
424(e) and 424(f) of the Code). Awards other than Incentive Stock Options may be granted to Employees,
Directors and Consultants; provided, however, that Awards may not be granted to Employees, Directors and
Consultants who are providing Continuous Service only to any “parent” of the Company, as such term is defined
in Rule 405, unless (i) the stock underlying such Awards is treated as “service recipient stock” under
Section 409A of the Code (for example, because the Awards are granted pursuant to a corporate transaction such
as a spin off transaction) or (ii) the Company, in consultation with its legal counsel, has determined that such
Awards are otherwise exempt from or alternatively comply with Section 409A of the Code.
(b) Ten Percent Stockholders. A Ten Percent Stockholder will not be granted an Incentive Stock Option
unless the exercise price (per share) of such Option is at least 110% of the Fair Market Value of the Common
Stock on the date of grant of such Option and the Option is not exercisable after the expiration of five years from
the date of grant.
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5.
PROVISIONS RELATING TO OPTIONS AND STOCK APPRECIATION RIGHTS.
Each Option or SAR Agreement will be in such form and will contain such terms and conditions as the
Board deems appropriate. All Options will be separately designated Incentive Stock Options or Nonstatutory
Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates will be
issued for shares of Common Stock purchased on exercise of each type of Option. If an Option is not specifically
designated as an Incentive Stock Option, or if an Option is designated as an Incentive Stock Option but some
portion or all of the Option fails to qualify as an Incentive Stock Option under the applicable rules, then the
Option (or portion thereof) will be a Nonstatutory Stock Option. The terms and conditions of separate Option or
SAR Agreements need not be identical; provided, however, that each Award Agreement will conform to (through
incorporation of the provisions hereof by reference in the applicable Award Agreement or otherwise) the
substance of each of the following provisions:
(a) Term. Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders, no Option or
SAR will be exercisable after the expiration of seven years from the date of its grant or such shorter period
specified in the Award Agreement.
(b) Exercise or Strike Price. Subject to the provisions of Section 4(b) regarding Ten Percent
Stockholders, the exercise or strike price (per share) of each Option or SAR will be not less than 100% of the
Fair Market Value of the Common Stock on the date the Award is granted. Notwithstanding the foregoing, an
Option or SAR may be granted with an exercise or strike price (per share) less than 100% of the Fair Market
Value of the Common Stock on the date the Award is granted if such Award is granted pursuant to an assumption
of, or substitution for, another option or stock appreciation right pursuant to a Change in Control and in a manner
consistent with the provisions of Section 409A of the Code and, if applicable, Section 424(a) of the Code. Each
SAR will be denominated in shares of Common Stock equivalents.
(c) Payment of Exercise Price for Options. The exercise price of an Option may be paid, to the extent
permitted by applicable law and as determined by the Board in its sole discretion, by one or more of the methods
of payment set forth below that are specified in the Option Agreement. The Board has the authority to grant
Options that do not permit all of the following methods of payment (or that otherwise restrict the ability to utilize
certain methods) and to grant Options that require the consent of the Company to utilize a particular method of
payment.
(i) By cash (including electronic funds transfers), check, bank draft or money order payable to the
Company;
(ii) Pursuant to a program developed under Regulation T as promulgated by the Federal Reserve
Board that, prior to the issuance of the Common Stock subject to the Option, results in either the receipt of cash
(or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the
Company from the sales proceeds;
(iii) By delivery to the Company (either by actual delivery or attestation) of shares of Common
Stock;
(iv)
If an Option is a Nonstatutory Stock Option, by a “net exercise” arrangement pursuant to which
the Company will reduce the number of shares of Common Stock issuable upon exercise by the largest whole
number of shares with a Fair Market Value that does not exceed the aggregate exercise price; provided, however,
that the Company will accept a cash or other payment from the Participant to the extent of any remaining balance
of the aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued. Shares
of Common Stock will no longer be subject to an Option and will not be exercisable thereafter to the extent that
(A) shares issuable upon exercise are used to pay the exercise price pursuant to the “net exercise,” (B) shares are
delivered to the Participant as a result of such exercise, and (C) shares are withheld to satisfy tax withholding
obligations; or
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(v)
In any other form of legal consideration that may be acceptable to the Board and specified in the
applicable Award Agreement.
(d) Exercise and Payment of a SAR. To exercise any outstanding SAR, the Participant must provide
written notice of exercise to the Company in compliance with the provisions of the Award Agreement evidencing
such SAR. The appreciation distribution payable on the exercise of a SAR will be not greater than an amount
equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the SAR) of a number
of shares of Common Stock equal to the number of Common Stock equivalents in which the Participant is vested
under such SAR, and with respect to which the Participant is exercising the SAR on such date, over (B) the
aggregate strike price of the number of Common Stock equivalents with respect to which the Participant is
exercising the SAR on such date. The appreciation distribution may be paid in Common Stock, in cash, in any
combination of the two or in any other form of consideration, as determined by the Board and contained in the
Award Agreement evidencing such SAR.
(e) Transferability of Options and SARs. The Board may, in its sole discretion, impose such limitations
on the transferability of Options and SARs as the Board will determine. In the absence of such a determination
by the Board to the contrary, the restrictions set forth in this Section 5(e) on the transferability of Options and
SARs will apply. Notwithstanding the foregoing or anything in the Plan or an Award Agreement to the contrary,
no Option or SAR may be transferred to any financial institution without prior stockholder approval.
(i) Restrictions on Transfer. An Option or SAR will not be transferable, except by will or by the
laws of descent and distribution (and pursuant to Sections 5(e)(ii) and 5(e)(iii) below), and will be exercisable
during the lifetime of the Participant only by the Participant. Subject to the foregoing paragraph, the Board may,
in its sole discretion, permit transfer of the Option or SAR in a manner that is not prohibited by applicable tax
and securities laws. Except as explicitly provided in the Plan, neither an Option nor a SAR may be transferred for
consideration.
(ii) Domestic Relations Orders. Subject to the approval of the Board or a duly authorized Officer,
an Option or SAR may be transferred pursuant to the terms of a domestic relations order, official marital
settlement agreement or other divorce or separation instrument as permitted by Treasury Regulations
Section 1.421-1(b)(2). If an Option is an Incentive Stock Option, such Option may be deemed to be a
Nonstatutory Stock Option as a result of such transfer.
(iii) Beneficiary Designation. Subject to the approval of the Board or a duly authorized Officer, a
Participant may, by delivering written notice to the Company, in a form approved by the Company (or the
designated broker), designate a third party who, upon the death of the Participant, will thereafter be entitled to
exercise the Option or SAR and receive the Common Stock or other consideration resulting from such exercise.
In the absence of such a designation, upon the death of the Participant, the executor or administrator of the
Participant’s estate will be entitled to exercise the Option or SAR and receive the Common Stock or other
consideration resulting from such exercise. However, the Company may prohibit designation of a beneficiary at
any time, including due to any conclusion by the Company that such designation would be inconsistent with the
provisions of applicable laws.
(f) Vesting. The total number of shares of Common Stock subject to an Option or SAR may vest and
become exercisable in periodic installments that may or may not be equal. The Option or SAR may be subject to
such other terms and conditions on the time or times when it may or may not be exercised as the Board may
deem appropriate. The vesting provisions of individual Options or SARs may vary. The provisions of this
Section 5(f) are subject to Sections 2(g) and 2(i) and any Option or SAR provisions governing the minimum
number of shares of Common Stock as to which an Option or SAR may be exercised.
(g) Termination of Continuous Service. Except as otherwise provided in the applicable Award
Agreement or other written agreement between a Participant and the Company or an Affiliate, if a Participant’s
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Continuous Service terminates (other than for Cause and other than upon the Participant’s death or Disability),
the Participant may exercise his or her Option or SAR (to the extent that the Participant was entitled to exercise
such Option or SAR as of the date of termination of Continuous Service), but only within such period of time
ending on the earlier of (i) the date that is three months following such termination of Continuous Service (or
such longer or shorter period specified in the Award Agreement), and (ii) the expiration of the term of the Option
or SAR as set forth in the Award Agreement. If, after such termination of Continuous Service, the Participant
does not exercise his or her Option or SAR (as applicable) within the applicable time period, the Option or SAR
(as applicable) will terminate.
(h) Extension of Termination Date. Except as otherwise provided in the applicable Award Agreement or
other written agreement between a Participant and the Company or an Affiliate, if the exercise of an Option or
SAR following the termination of a Participant’s Continuous Service (other than for Cause and other than upon
the Participant’s death or Disability) would be prohibited at any time solely because the issuance of shares of
Common Stock would violate the registration requirements under the Securities Act, then the Option or SAR will
terminate on the earlier of (i) the expiration of a total period of time (that need not be consecutive) equal to the
applicable post-termination exercise period after the termination of the Participant’s Continuous Service during
which the exercise of the Option or SAR would not be in violation of such registration requirements or (ii) the
expiration of the term of the Option or SAR as set forth in the applicable Award Agreement. In addition, except
as otherwise provided in the applicable Award Agreement or other written agreement between a Participant and
the Company or an Affiliate, if the sale of any Common Stock received upon exercise of an Option or SAR
following the termination of a Participant’s Continuous Service (other than for Cause) would violate the
Company’s insider trading policy, then the Option or SAR will terminate on the earlier of (i) the expiration of a
total period of time (that need not be consecutive) equal to the applicable post-termination exercise period after
the termination of the Participant’s Continuous Service during which the sale of the Common Stock received
upon exercise of the Option or SAR would not be in violation of the Company’s insider trading policy or (ii) the
expiration of the term of the Option or SAR as set forth in the applicable Award Agreement.
(i) Disability of Participant. Except as otherwise provided in the applicable Award Agreement or other
written agreement between a Participant and the Company or an Affiliate, if a Participant’s Continuous Service
terminates as a result of the Participant’s Disability, the Participant may exercise his or her Option or SAR (to the
extent that the Participant was entitled to exercise such Option or SAR as of the date of termination of
Continuous Service), but only within such period of time ending on the earlier of (i) the date that is 12 months
following such termination of Continuous Service (or such longer or shorter period specified in the Award
Agreement), and (ii) the expiration of the term of the Option or SAR as set forth in the Award Agreement. If,
after such termination of Continuous Service, the Participant does not exercise his or her Option or SAR (as
applicable) within the applicable time period, the Option or SAR (as applicable) will terminate.
(j) Death of Participant. Except as otherwise provided in the applicable Award Agreement or other
written agreement between a Participant and the Company or an Affiliate, if (i) a Participant’s Continuous
Service terminates as a result of the Participant’s death, or (ii) a Participant dies within the period (if any)
specified in the Award Agreement for exercisability after the termination of the Participant’s Continuous Service
(for a reason other than death), then the Participant’s Option or SAR may be exercised (to the extent that the
Participant was entitled to exercise such Option or SAR as of the date of death) by the Participant’s estate, by a
person who acquired the right to exercise the Option or SAR by bequest or inheritance, or by a person designated
to exercise the Option or SAR upon the Participant’s death, but only within such period of time ending on the
earlier of (i) the date that is 18 months following the date of death (or such longer or shorter period specified in
the Award Agreement), and (ii) the expiration of the term of the Option or SAR as set forth in the Award
Agreement. If, after the Participant’s death, the Option or SAR (as applicable) is not exercised within the
applicable time period, the Option or SAR (as applicable) will terminate.
(k) Termination for Cause. Except as explicitly provided otherwise in the applicable Award Agreement
or other individual written agreement between a Participant and the Company or an Affiliate, if a Participant’s
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Continuous Service is terminated for Cause, the Participant’s Option or SAR will terminate immediately upon
such termination of Continuous Service, and the Participant will be prohibited from exercising his or her Option
or SAR from and after the time of such termination of Continuous Service.
(l) Non-Exempt Employees. If an Option or SAR is granted to an Employee who is a non-exempt
employee for purposes of the Fair Labor Standards Act of 1938, as amended, the Option or SAR will not be first
exercisable for any shares of Common Stock until at least six months following the date of grant of the Option or
SAR (although the Award may vest prior to such date). Consistent with the provisions of the Worker Economic
Opportunity Act, (i) if such non-exempt employee dies or suffers a Disability, (ii) upon a Change in Control, or
(iii) upon the Participant’s retirement (as such term may be defined in the Participant’s Award Agreement, in
another written agreement between the Participant and the Company or an Affiliate, or, if no such definition, in
accordance with the Company’s or Affiliate’s then current employment policies and guidelines), the vested
portion of any Options and SARs may be exercised earlier than six months following the date of grant. The
foregoing provision is intended to operate so that any income derived by a non-exempt employee in connection
with the exercise or vesting of an Option or SAR will be exempt from his or her regular rate of pay. To the extent
permitted and/or required for compliance with the Worker Economic Opportunity Act to ensure that any income
derived by a non-exempt employee in connection with the exercise, vesting or issuance of any shares under any
other Award will be exempt from the employee’s regular rate of pay, the provisions of this Section 5(l) will apply
to all Awards and are hereby incorporated by reference into such Award Agreements.
6.
PROVISIONS OF AWARDS OTHER THAN OPTIONS AND SARS.
(a) Restricted Stock Awards. Each Restricted Stock Award Agreement will be in such form and will
contain such terms and conditions as the Board deems appropriate. To the extent consistent with the Company’s
bylaws, at the Board’s election, shares of Common Stock underlying a Restricted Stock Award may be (i) held in
book entry form subject to the Company’s instructions until any restrictions relating to the Restricted Stock
Award lapse, or (ii) evidenced by a certificate, which certificate will be held in such form and manner as
determined by the Board. The terms and conditions of separate Restricted Stock Award Agreements need not be
identical; provided, however, that each Restricted Stock Award Agreement will conform to (through
incorporation of the provisions hereof by reference in the applicable Award Agreement or otherwise) the
substance of each of the following provisions:
(i) Consideration. A Restricted Stock Award may be awarded in consideration for (A) cash
(including electronic funds transfers), check, bank draft or money order payable to the Company, (B) past
services to the Company or an Affiliate or (C) any other form of legal consideration (including future services)
that may be acceptable to the Board, in its sole discretion, and permissible under applicable law.
(ii) Vesting. Subject to Sections 2(g) and 2(i), shares of Common Stock awarded under a Restricted
Stock Award Agreement may be subject to forfeiture to or repurchase by the Company in accordance with a
vesting schedule to be determined by the Board.
(iii) Termination of Continuous Service. If a Participant’s Continuous Service terminates, the
Company may receive through a forfeiture condition or a repurchase right any or all of the shares of Common
Stock held by the Participant that have not vested as of the date of such termination under the terms of the
Participant’s Restricted Stock Award Agreement.
(iv) Transferability. Rights to acquire shares of Common Stock under a Restricted Stock Award
Agreement will be transferable by the Participant only upon such terms and conditions as are set forth in the
Restricted Stock Award Agreement, as the Board will determine in its sole discretion, so long as Common Stock
awarded under the Restricted Stock Award Agreement remains subject to the terms of the Restricted Stock
Award Agreement. Notwithstanding the foregoing or anything in the Plan or a Restricted Stock Award
Agreement to the contrary, no Restricted Stock Award may be transferred to any financial institution without
prior stockholder approval.
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(b) Restricted Stock Unit Awards. Each Restricted Stock Unit Award Agreement will be in such form
and will contain such terms and conditions as the Board deems appropriate. The terms and conditions of separate
Restricted Stock Unit Award Agreements need not be identical; provided, however, that each Restricted Stock
Unit Award Agreement will conform to (through incorporation of the provisions hereof by reference in the
applicable Award Agreement or otherwise) the substance of each of the following provisions:
(i) Consideration. At the time of grant of a Restricted Stock Unit Award, the Board will determine
the consideration, if any, to be paid by the Participant upon delivery of each share of Common Stock subject to
the Restricted Stock Unit Award. The consideration to be paid (if any) by the Participant for each share of
Common Stock subject to a Restricted Stock Unit Award may be paid in any form of legal consideration that
may be acceptable to the Board, in its sole discretion, and permissible under applicable law.
(ii) Vesting. Subject to Sections 2(g) and 2(i), at the time of the grant of a Restricted Stock Unit
Award, the Board may impose such restrictions on or conditions to the vesting of the Restricted Stock Unit
Award as it, in its sole discretion, deems appropriate.
(iii) Payment. A Restricted Stock Unit Award may be settled by the delivery of shares of Common
Stock, their cash equivalent, any combination thereof or in any other form of consideration, as determined by the
Board and contained in the Restricted Stock Unit Award Agreement.
(iv) Additional Restrictions. At the time of the grant of a Restricted Stock Unit Award, the Board,
as it deems appropriate, may impose such restrictions or conditions that delay the delivery of the shares of
Common Stock (or their cash equivalent) subject to the Restricted Stock Unit Award to a time after the vesting of
the Restricted Stock Unit Award.
(v) Termination of Continuous Service. Except as otherwise provided in the applicable Restricted
Stock Unit Award Agreement or other written agreement between a Participant and the Company or an Affiliate,
if a Participant’s Continuous Service terminates, any portion of the Participant’s Restricted Stock Unit Award
that has not vested as of the date of such termination will be forfeited upon such termination.
(c) Other Stock Awards. Other forms of Awards valued in whole or in part by reference to, or otherwise
based on, Common Stock, including the appreciation in value thereof (e.g., options or stock appreciation rights
with an exercise or strike price (per share) less than 100% of the Fair Market Value of the Common Stock on the
date of grant) may be granted either alone or in addition to Awards granted under Section 5 and this Section 6.
Subject to the provisions of the Plan (including, but not limited to, Sections 2(g), 2(h) and 2(i)), the Board will
have sole and complete authority to determine the persons to whom and the time or times at which such Other
Stock Awards will be granted, the number of shares of Common Stock (or the cash equivalent thereof) to be
granted pursuant to such Other Stock Awards and all other terms and conditions of such Other Stock Awards.
7. COVENANTS OF THE COMPANY.
(a) Availability of Shares. The Company will keep available at all times the number of shares of
Common Stock reasonably required to satisfy then-outstanding Awards.
(b) Securities Law Compliance. The Company will seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan the authority required to grant Awards and to issue and sell shares of
Common Stock upon exercise of the Awards; provided, however, that this undertaking will not require the
Company to register under the Securities Act the Plan, any Award or any Common Stock issued or issuable
pursuant to any such Award. If, after reasonable efforts and at a reasonable cost, the Company is unable to obtain
from any such regulatory commission or agency the authority that counsel for the Company deems necessary for
the lawful issuance and sale of Common Stock under the Plan, the Company will be relieved from any liability
for failure to issue and sell Common Stock upon exercise of such Awards unless and until such authority is
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obtained. A Participant will not be eligible for the grant of an Award or the subsequent issuance of cash or
Common Stock pursuant to the Award if such grant or issuance would be in violation of any applicable securities
law.
(c) No Obligation to Notify or Minimize Taxes. The Company will have no duty or obligation to any
Participant to advise such holder as to the time or manner of exercising an Award. Furthermore, the Company
will have no duty or obligation to warn or otherwise advise such holder of a pending termination or expiration of
an Award or a possible period in which the Award may not be exercised. The Company has no duty or obligation
to minimize the tax consequences of an Award to the holder of such Award.
8. MISCELLANEOUS.
(a) Use of Proceeds from Sales of Common Stock. Proceeds from the sale of shares of Common Stock
issued pursuant to Awards will constitute general funds of the Company.
(b) Corporate Action Constituting Grant of Awards. Corporate action constituting a grant by the
Company of an Award to any Participant will be deemed completed as of the date of such corporate action,
unless otherwise determined by the Board, regardless of when the instrument, certificate or letter evidencing the
Award is communicated to, or actually received or accepted by, the Participant. In the event that the corporate
records (e.g., Board consents, resolutions or minutes) documenting the corporate action constituting the grant
contain terms (e.g., exercise price, vesting schedule or number of shares) that are inconsistent with those in the
Award Agreement or related grant documents as a result of a clerical error in the papering of the Award
Agreement or related grant documents, the corporate records will control and the Participant will have no legally
binding right to the incorrect term in the Award Agreement or related grant documents.
(c) Stockholder Rights. No Participant will be deemed to be the holder of, or to have any of the rights of
a holder with respect to, any shares of Common Stock subject to an Award unless and until (i) such Participant
has satisfied all requirements for exercise of, or the issuance of shares of Common Stock under, the Award
pursuant to its terms, and (ii) the issuance of the Common Stock subject to such Award has been entered into the
books and records of the Company.
(d) No Employment or Other Service Rights. Nothing in the Plan, any Award Agreement or any other
instrument executed thereunder or in connection with any Award granted pursuant thereto will confer upon any
Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the
Award was granted or will affect the right of the Company or an Affiliate to terminate (i) the employment of an
Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms
of such Consultant’s agreement with the Company or an Affiliate, or (iii) the service of a Director pursuant to the
bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which
the Company or the Affiliate is incorporated, as the case may be.
(e) Change in Time Commitment. In the event a Participant’s regular level of time commitment in the
performance of his or her services for the Company or any Affiliate is reduced (for example, and without
limitation, if the Participant is an Employee of the Company and the Employee has a change in status from a full-
time Employee to a part-time Employee or takes an extended leave of absence) after the date of grant of any
Award to the Participant, the Board has the right in its sole discretion to (i) make a corresponding reduction in
the number of shares or cash amount subject to any portion of such Award that is scheduled to vest or become
payable after the date of such change in time commitment, and (ii) in lieu of or in combination with such a
reduction, extend the vesting or payment schedule applicable to such Award. In the event of any such reduction,
the Participant will have no right with respect to any portion of the Award that is so reduced or extended.
(f)
Incentive Stock Option Limitation. To the extent that the aggregate Fair Market Value (determined at
the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first
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time by any Participant during any calendar year (under all plans of the Company and any Affiliates) exceeds
$100,000 (or such other limit established in the Code) or otherwise does not comply with the rules governing
Incentive Stock Options, the Options or portions thereof that exceed such limit (according to the order in which
they were granted) or otherwise do not comply with such rules will be treated as Nonstatutory Stock Options,
notwithstanding any contrary provision of the applicable Option Agreement(s).
(g)
Investment Assurances. The Company may require a Participant, as a condition of exercising or
acquiring Common Stock under any Award, (i) to give written assurances satisfactory to the Company as to the
Participant’s knowledge and experience in financial and business matters and/or to employ a purchaser
representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and
business matters and that he or she is capable of evaluating, alone or together with the purchaser representative,
the merits and risks of exercising the Award and (ii) to give written assurances satisfactory to the Company
stating that the Participant is acquiring Common Stock subject to the Award for the Participant’s own account
and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing
requirements, and any assurances given pursuant to such requirements, will be inoperative if (A) the issuance of
the shares upon the exercise or acquisition of Common Stock under the Award has been registered under a then
currently effective registration statement under the Securities Act or (B) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not be met in the circumstances
under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place
legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to
comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the
Common Stock.
(h) Withholding Obligations. Unless prohibited by the terms of an Award Agreement, the Company
may, in its sole discretion, satisfy any federal, state, local or foreign tax withholding obligation relating to an
Award by any of the following means or by a combination of such means: (i) causing the Participant to tender a
cash payment; (ii) withholding shares of Common Stock from the shares of Common Stock issued or otherwise
issuable to the Participant in connection with the Award; (iii) withholding cash from an Award settled in cash;
(iv) withholding payment from any amounts otherwise payable to the Participant; or (v) by such other method as
may be set forth in the Award Agreement.
(i) Electronic Delivery. Any reference herein to a “written” agreement or document will include any
agreement or document delivered electronically, filed publicly at www.sec.gov (or any successor website thereto)
or posted on the Company’s intranet (or other shared electronic medium controlled by the Company to which the
Participant has access).
(j) Deferrals. To the extent permitted by applicable law, the Board, in its sole discretion, may determine
that the delivery of Common Stock or the payment of cash, upon the exercise, vesting or settlement of all or a
portion of any Award may be deferred and may establish programs and procedures for deferral elections to be
made by Participants. Deferrals by Participants will be made in accordance with Section 409A of the Code.
Consistent with Section 409A of the Code, the Board may provide for distributions while a Participant is still an
employee or otherwise providing services to the Company or an Affiliate. The Board is authorized to make
deferrals of Awards and determine when, and in what annual percentages, Participants may receive payments,
including lump sum payments, following the Participant’s termination of Continuous Service, and implement
such other terms and conditions consistent with the provisions of the Plan and in accordance with applicable law.
(k) Section 409A. Unless otherwise expressly provided for in an Award Agreement, the Plan and Award
Agreements will be interpreted to the greatest extent possible in a manner that makes the Plan and the Awards
granted hereunder exempt from Section 409A of the Code, and, to the extent not so exempt, in compliance with
Section 409A of the Code. If the Board determines that any Award granted hereunder is not exempt from and is
therefore subject to Section 409A of the Code, the Award Agreement evidencing such Award will incorporate the
terms and conditions necessary to avoid the consequences specified in Section 409A(a)(1) of the Code, and to the
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extent an Award Agreement is silent on terms necessary for compliance with Section 409A of the Code, such
terms are hereby incorporated by reference into the Award Agreement. Notwithstanding anything to the contrary
in this Plan (and unless the Award Agreement specifically provides otherwise), if the shares of Common Stock
are publicly traded, and if a Participant holding an Award that constitutes “deferred compensation” under
Section 409A of the Code is a “specified employee” for purposes of Section 409A of the Code, no distribution or
payment of any amount under such Award that is due because of a “separation from service” (as defined in
Section 409A of the Code without regard to alternative definitions thereunder) will be issued or paid before the
date that is six months and one day following the date of such Participant’s “separation from service” or, if
earlier, the date of the Participant’s death, unless such distribution or payment may be made in a manner that
complies with Section 409A of the Code, and any amounts so deferred will be paid in a lump sum on the day
after such six-month period elapses, with the balance paid thereafter on the original schedule.
(l) Clawback/Recovery. All Awards granted under the Plan will be subject to recoupment in accordance
with any clawback policy that the Company is required to adopt pursuant to the listing standards of any national
securities exchange or association on which the Company’s securities are listed or as is otherwise required by the
Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law. In addition, the Board
may impose such other clawback, recovery or recoupment provisions in an Award Agreement or other written
agreement between a Participant and the Company or an Affiliate as the Board determines necessary or
appropriate, including, but not limited to, a reacquisition right in respect of previously acquired shares of
Common Stock or other cash or property upon the occurrence of Cause. No recovery of compensation under such
a clawback policy will be an event giving rise to a right to resign for “good reason” or “constructive termination”
(or similar term) under any agreement with the Company or an Affiliate.
9. ADJUSTMENTS UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS.
(a) Capitalization Adjustments. In the event of a Capitalization Adjustment, the Board will appropriately
and proportionately adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to
Section 3(a); (ii) the class(es) and maximum number of securities that may be issued pursuant to the exercise of
Incentive Stock Options pursuant to Section 3(c); and (iii) the class(es) and number of securities and price per
share of stock subject to outstanding Awards. The Board will make such adjustments and its determination will
be final, binding and conclusive.
(b) Dissolution or Liquidation. Except as otherwise provided in the applicable Award Agreement or
other written agreement between a Participant and the Company or an Affiliate, in the event of a dissolution or
liquidation of the Company, all outstanding Awards (other than Awards consisting of vested and outstanding
shares of Common Stock not subject to a forfeiture condition or the Company’s right of repurchase) will
terminate immediately prior to the completion of such dissolution or liquidation, and the shares of Common
Stock subject to a forfeiture condition or the Company’s right of repurchase may be reacquired or repurchased by
the Company notwithstanding the fact that the holder of such Award is providing Continuous Service.
(c) Change in Control. In the event of a Change in Control, the provisions of this Section 9(c) will apply
to each outstanding Award unless otherwise provided in the instrument evidencing the Award, in any other
written agreement between the Company or any Affiliate and the Participant, or in any director compensation
policy of the Company.
(i) Awards May Be Assumed. In the event of a Change in Control, any surviving corporation or
acquiring corporation (or the surviving or acquiring corporation’s parent company) may assume or continue any
or all outstanding Awards or may substitute similar stock awards for any or all outstanding Awards (including,
but not limited to, awards to acquire the same consideration paid to the stockholders of the Company pursuant to
the Change in Control), and any reacquisition or repurchase rights held by the Company in respect of Common
Stock issued pursuant to any outstanding Awards may be assigned by the Company to the surviving corporation
or acquiring corporation (or the surviving or acquiring corporation’s parent company). For clarity, in the event of
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a Change in Control, any surviving corporation or acquiring corporation (or the surviving or acquiring
corporation’s parent company) may choose to assume or continue only a portion of an outstanding Award, to
substitute a similar stock award for only a portion of an outstanding Award, or to assume or continue, or
substitute similar stock awards for, the outstanding Awards held by some, but not all, Participants. The terms of
any such assumption, continuation or substitution will be set by the Board.
(ii) Awards Held by Current Participants. In the event of a Change in Control in which the
surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) does
not assume or continue outstanding Awards, or substitute similar stock awards for outstanding Awards, then with
respect to any such Awards that have not been assumed, continued or substituted and that are held by Participants
whose Continuous Service has not terminated prior to the effective time of the Change in Control (referred to as
the “Current Participants”), the vesting (and exercisability, if applicable) of such Awards will be accelerated in
full (and with respect to any such Awards that are subject to performance-based vesting conditions or
requirements, vesting will be deemed to be satisfied at the greater of (x) the target level of performance or (y) the
actual level of performance measured in accordance with the applicable performance goals as of the date of the
Change in Control) to a date prior to the effective time of the Change in Control (contingent upon the closing or
completion of the Change in Control) as the Board will determine (or, if the Board does not determine such a
date, to the date that is five days prior to the effective time of the Change in Control), and such Awards will
terminate if not exercised (if applicable) prior to the effective time of the Change in Control in accordance with
the exercise procedures determined by the Board, and any reacquisition or repurchase rights held by the
Company with respect to such Awards will lapse (contingent upon the closing or completion of the Change in
Control).
(iii) Awards Held by Participants other than Current Participants. In the event of a Change in
Control in which the surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s
parent company) does not assume or continue outstanding Awards, or substitute similar stock awards for
outstanding Awards, then with respect to any such Awards that have not been assumed, continued or substituted
and that are held by Participants other than Current Participants, such Awards will terminate if not exercised (if
applicable) prior to the effective time of the Change in Control in accordance with the exercise procedures
determined by the Board; provided, however, that any reacquisition or repurchase rights held by the Company
with respect to such Awards will not terminate and may continue to be exercised notwithstanding the Change in
Control.
(iv) Payment for Awards in Lieu of Exercise. Notwithstanding the foregoing, in the event any
outstanding Award held by a Participant will terminate if not exercised prior to the effective time of a Change in
Control, the Board may provide that the Participant may not exercise such Award but instead will receive a
payment, in such form as may be determined by the Board, equal in value to the excess, if any, of (A) the value
of the property the Participant would have received upon the exercise of such Award immediately prior to the
effective time of the Change in Control, over (B) any exercise price payable by the Participant in connection with
such exercise. For clarity, such payment may be zero if the value of such property is equal to or less than the
exercise price. Payments under this provision may be delayed to the same extent that payment of consideration to
the holders of the Common Stock in connection with the Change in Control is delayed as a result of escrows,
earn outs, holdbacks or any other contingencies.
(d) No Additional Acceleration upon or after Change in Control. Unless provided otherwise in the
Award Agreement for an Award, in any other written agreement or plan between the Company or any Affiliate
and the Participant, or in any director compensation policy of the Company, an Award will not be subject to
additional acceleration of vesting and exercisability upon or after a Change in Control.
(e) Parachute Payments. Except as otherwise provided in the applicable Award Agreement or other
written agreement between a Participant and the Company or an Affiliate, if any payment or benefit the
Participant would receive pursuant to a Change in Control from the Company or otherwise (“Payment”) would
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(i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this
sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then such
Payment will be equal to the Reduced Amount. The “Reduced Amount” will be either (x) the largest portion of
the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest
portion, up to and including the total, of the Payment, whichever amount, after taking into account all applicable
federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest
applicable marginal rate), results in the Participant’s receipt, on an after-tax basis, of the greater amount of the
Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction
in payments or benefits constituting “parachute payments” is necessary so that the Payment equals the Reduced
Amount, reduction will occur in the following order: (A) reduction of cash payments; (B) cancellation of
accelerated vesting of equity awards other than stock options; (C) cancellation of accelerated vesting of stock
options; and (D) reduction of other benefits paid to the Participant. Within any such category of payments and
benefits (that is, (A), (B), (C) or (D)), a reduction will occur first with respect to amounts that are not “deferred
compensation” within the meaning of Section 409A of the Code and then with respect to amounts that are. In the
event that acceleration of compensation from a Participant’s equity awards is to be reduced, such acceleration of
vesting will be canceled, subject to the immediately preceding sentence, in the reverse order of the date of grant.
The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date
of the Change in Control will perform the foregoing calculations. If the accounting firm so engaged by the
Company is serving as accountant or auditor for the individual, entity or group effecting the Change in Control,
the Company will appoint a nationally recognized accounting firm to make the determinations required
hereunder. The Company will bear all expenses with respect to the determinations by such accounting firm
required to be made hereunder. The accounting firm engaged to make the determinations hereunder will provide
its calculations, together with detailed supporting documentation, to the Participant and the Company within 15
calendar days after the date on which the Participant’s right to a Payment is triggered (if requested at that time by
the Participant or the Company) or such other time as reasonably requested by the Participant or the Company.
Any good faith determinations of the accounting firm made hereunder will be final, binding and conclusive upon
the Participant and the Company.
10. TERMINATION OR SUSPENSION OF THE PLAN.
(a) Termination or Suspension. The Board may suspend or terminate the Plan at any time. No Incentive
Stock Option may be granted after the tenth anniversary of the earlier of (i) the Adoption Date or (ii) the date the
Plan is approved by the stockholders of the Company. No Awards may be granted under the Plan while the Plan
is suspended or after it is terminated.
(b) No Impairment of Rights. Suspension or termination of the Plan will not materially impair rights and
obligations under any Award granted while the Plan is in effect except with the written consent of the affected
Participant or as otherwise permitted in the Plan (including Section 2(b)(viii)) or an Award Agreement.
11. EFFECTIVE DATE OF PLAN.
This Plan will become effective on the Effective Date.
12. CHOICE OF LAW.
The laws of the State of Delaware will govern all questions concerning the construction, validity and
interpretation of this Plan, without regard to that state’s conflict of laws rules.
13. DEFINITIONS. As used in the Plan, the following definitions will apply to the capitalized terms indicated
below:
(a)
“Adoption Date” means July 9, 2019, which is the date the Plan was adopted by the Board.
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(b)
“Affiliate” means, at the time of determination, any “parent” or “subsidiary” of the Company as such
terms are defined in Rule 405. The Board will have the authority to determine the time or times at which “parent”
or “subsidiary” status is determined within the foregoing definition.
(c)
“Appreciation Award” means (i) a stock option or stock appreciation right granted under the Prior Plan
or (ii) an Option or Stock Appreciation Right, in each case with respect to which the exercise or strike price (per
share) is at least 100% of the Fair Market Value of the Common Stock subject to the stock option or stock
appreciation right, or Option or Stock Appreciation Right, as applicable, on the date of grant.
(d)
“Award” means an Incentive Stock Option, a Nonstatutory Stock Option, a Stock Appreciation Right,
a Restricted Stock Award, a Restricted Stock Unit Award or any Other Stock Award.
(e)
“Award Agreement” means a written agreement between the Company and a Participant evidencing
the terms and conditions of an Award.
(f)
“Board” means the Board of Directors of the Company.
(g)
“Capitalization Adjustment” means any change that is made in, or other events that occur with respect
to, the Common Stock subject to the Plan or subject to any Award after the Adoption Date without the receipt of
consideration by the Company through merger, consolidation, reorganization, recapitalization, reincorporation,
stock dividend, dividend in property other than cash, large nonrecurring cash dividend, stock split, reverse stock
split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or any
similar equity restructuring transaction, as that term is used in Statement of Financial Accounting Standards
No. 123 (revised). Notwithstanding the foregoing, the conversion of any convertible securities of the Company
will not be treated as a Capitalization Adjustment.
(h)
“Cause” will have the meaning ascribed to such term in any written agreement between a Participant
and the Company or an Affiliate defining such term and, in the absence of such agreement, such term means,
with respect to a Participant, the occurrence of one or more of the following: (i) the Participant’s theft,
dishonesty, willful misconduct, breach of fiduciary duty for personal profit, or falsification of any Company or
Affiliate documents or records; (ii) the Participant’s material failure to abide by the code of conduct or other
policies (including, without limitation, policies relating to confidentiality and reasonable workplace conduct) of
the Company or an Affiliate; (iii) the Participant’s unauthorized use, misappropriation, destruction or diversion
of any tangible or intangible asset or corporate opportunity of the Company or an Affiliate (including, without
limitation, the Participant’s improper use or disclosure of confidential or proprietary information of the Company
or an Affiliate); (iv) any intentional act by the Participant which has a material detrimental effect on the
reputation or business of the Company or an Affiliate; (v) the Participant’s repeated failure or inability to
perform any reasonable assigned duties after written notice from the Company or an Affiliate, and a reasonable
opportunity to cure, such failure or inability; (vi) any material breach by the Participant of any employment or
service agreement between the Participant and the Company or an Affiliate, which breach is not cured pursuant
to the terms of such agreement; or (vii) the Participant’s conviction (including any plea of guilty or nolo
contendere) of any criminal act involving fraud, dishonesty, misappropriation or moral turpitude, or which
impairs the Participant’s ability to perform his or her duties. The determination that a termination of a
Participant’s Continuous Service is either for Cause or without Cause will be made by the Company, in its sole
discretion. Any determination by the Company that the Continuous Service of a Participant was terminated with
or without Cause for the purposes of outstanding Awards held by the Participant will have no effect upon any
determination of the rights or obligations of the Company or the Participant for any other purpose.
(i)
“Change in Control” means the consummation of any of the following events:
(i)
any merger or consolidation after which the voting securities of the Company outstanding
immediately prior thereto represent (either by remaining outstanding or by being converted into voting securities
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of the surviving or acquiring entity) less than 50% of the combined voting power of the voting securities of the
Company or such surviving or acquiring entity outstanding immediately after such event;
(ii)
any sale of all or substantially all of the assets or capital stock of the Company (other than in a
spin-off or similar transaction); or
(iii)
any other acquisition of the business of the Company, as determined by the Board, in its sole
discretion; provided, however, that no Change in Control (or any analogous term) will be deemed to occur upon
an announcement or commencement of a tender offer or upon a “potential” takeover or upon stockholder
approval of a merger or other transaction, in each case without a requirement that the Change in Control actually
occur.
Notwithstanding the foregoing or any other provision of this Plan, (A) the term Change in Control will not
include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile
of the Company, and (B) the definition of Change in Control (or any analogous term) in an individual written
agreement between a Participant and the Company or an Affiliate will supersede the foregoing definition with
respect to Awards subject to such agreement; provided, however, that (1) if no definition of Change in Control
(or any analogous term) is set forth in such an individual written agreement, the foregoing definition will apply;
and (2) no Change in Control (or any analogous term) will be deemed to occur with respect to Awards subject to
such an individual written agreement without a requirement that the Change in Control (or any analogous term)
actually occur.
If required for compliance with Section 409A of the Code, in no event will an event be deemed a Change in
Control if such event is not also a “change in the ownership of” the Company, a “change in the effective control
of” the Company or a “change in the ownership of a substantial portion of the assets of” the Company, each as
determined under Treasury Regulations Section 1.409A-3(i)(5) (without regard to any alternative definition
thereunder). The Board may, in its sole discretion and without a Participant’s consent, amend the definition of
“Change in Control” to conform to the definition of a “change in control event” under Section 409A of the Code
and the regulations thereunder.
(j)
“Code” means the Internal Revenue Code of 1986, as amended, including any applicable regulations
and guidance thereunder.
(k)
“Committee” means a committee of one or more Directors to whom authority has been delegated by
the Board in accordance with Section 2(c).
(l)
“Common Stock” means the common stock of the Company.
(m)
“Company” means NetScout Systems, Inc., a Delaware corporation.
(n)
“Consultant” means any person, including an advisor, who is (i) engaged by the Company or an
Affiliate to render consulting or advisory services and is compensated for such services or (ii) serving as a
member of the board of directors of an Affiliate and is compensated for such services. However, service solely as
a Director, or payment of a fee for such service, will not cause a Director to be considered a “Consultant” for
purposes of the Plan. Notwithstanding the foregoing, a person is treated as a Consultant under this Plan only if a
Form S-8 Registration Statement under the Securities Act is available to register either the offer or the sale of the
Company’s securities to such person.
(o)
“Continuous Service” means that the Participant’s service with the Company or an Affiliate, whether
as an Employee, Director or Consultant, is not interrupted or terminated. A change in the capacity in which the
Participant renders service to the Company or an Affiliate as an Employee, Director or Consultant or a change in
the Entity for which the Participant renders such service, provided that there is no interruption or termination of
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the Participant’s service with the Company or an Affiliate, will not terminate a Participant’s Continuous Service;
provided, however, that if the Entity for which a Participant is rendering services ceases to qualify as an Affiliate,
as determined by the Board, in its sole discretion, such Participant’s Continuous Service will be considered to
have terminated on the date such Entity ceases to qualify as an Affiliate. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or to a Director will not constitute an interruption of
Continuous Service. To the extent permitted by law, the Board or the chief executive officer of the Company, in
that party’s sole discretion, may determine whether Continuous Service will be considered interrupted in the case
of (i) any leave of absence approved by the Board or chief executive officer, including sick leave, military leave
or any other personal leave, or (ii) transfers between the Company, an Affiliate or their successors.
Notwithstanding the foregoing, a leave of absence will be treated as Continuous Service for purposes of vesting
in an Award only to such extent as may be provided in the Company’s or Affiliate’s leave of absence policy, in
the written terms of any leave of absence agreement or policy applicable to the Participant, or as otherwise
required by law.
(p)
“Director” means a member of the Board.
(q)
“Disability” means, with respect to a Participant, the inability of such Participant to engage in any
substantial gainful activity by reason of any medically determinable physical or mental impairment that can be
expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12
months, as provided in Sections 22(e)(3) and 409A(a)(2)(c)(i) of the Code, and will be determined by the Board
on the basis of such medical evidence as the Board deems warranted under the circumstances.
(r)
“Effective Date” means the effective date of this Plan, which is the date of the Annual Meeting of
Stockholders of the Company held in 2019, provided that this Plan is approved by the Company’s stockholders at
such meeting.
(s)
“Employee” means any person employed by the Company or an Affiliate. However, service solely as a
Director, or payment of a fee for such services, will not cause a Director to be considered an “Employee” for
purposes of the Plan.
(t)
“Entity” means a corporation, partnership, limited liability company or other entity.
(u)
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder.
(v)
“Fair Market Value” means, as of any date, the value of the Common Stock determined as follows:
(i) Unless otherwise provided by the Board, if the Common Stock is listed on any established stock
exchange or traded on any established market, then the Fair Market Value of a share of Common Stock will be
the closing sales price for such stock as quoted on such exchange or market (or the exchange or market with the
greatest volume of trading in the Common Stock) on the date of determination, as reported in a source the Board
deems reliable.
(ii) Unless otherwise provided by the Board, if there is no closing sales price for the Common Stock
on the date of determination, then the Fair Market Value of a share of Common Stock will be the closing sales
price for such stock on the last preceding date for which such quotation exists.
(iii)
In the absence of such markets for the Common Stock, the Fair Market Value of a share of
Common Stock will be determined by the Board in good faith and in a manner that complies with Sections 409A
and 422 of the Code.
(w)
“Full Value Award” means (i) an award granted under the Prior Plan or (ii) an Award, in each case
that is not an Appreciation Award.
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(x)
“Incentive Stock Option” means an option granted pursuant to Section 5 that is intended to be, and
that qualifies as, an “incentive stock option” within the meaning of Section 422 of the Code.
(y)
“Non-Employee Director” means a Director who either (i) is not a current employee or officer of the
Company or an Affiliate, does not receive compensation, either directly or indirectly, from the Company or an
Affiliate for services rendered as a consultant or in any capacity other than as a Director (except for an amount as
to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act (“Regulation S-K”)), does not possess an interest in any other transaction for which disclosure
would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship for which
disclosure would be required pursuant to Item 404(b) of Regulation S-K, or (ii) is otherwise considered a
“non-employee director” for purposes of Rule 16b-3.
(z)
“Nonstatutory Stock Option” means an option granted pursuant to Section 5 that does not qualify as an
Incentive Stock Option.
(aa)
Exchange Act.
“Officer” means a person who is an officer of the Company within the meaning of Section 16 of the
(bb)
“Option” means an Incentive Stock Option or a Nonstatutory Stock Option to purchase shares of
Common Stock granted pursuant to the Plan.
(cc)
“Option Agreement” means a written agreement between the Company and a holder of an Option
evidencing the terms and conditions of an Option grant. Each Option Agreement will be subject to the terms and
conditions of the Plan.
(dd)
“Other Stock Award” means an award based in whole or in part by reference to the Common Stock
which is granted pursuant to the terms and conditions of Section 6(c).
(ee)
“Other Stock Award Agreement” means a written agreement between the Company and a holder of
an Other Stock Award evidencing the terms and conditions of an Other Stock Award grant. Each Other Stock
Award Agreement will be subject to the terms and conditions of the Plan.
(ff)
“Own,” or “Owned” A person or Entity will be deemed to “Own,” or to have “Owned” securities if
such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or
otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to
such securities.
(gg)
“Participant” means a person to whom an Award is granted pursuant to the Plan or, if applicable,
such other person who holds an outstanding Award.
(hh)
“Plan” means this NetScout Systems, Inc. 2019 Equity Incentive Plan.
(ii)
“Restricted Stock Award” means an award of shares of Common Stock which is granted pursuant to
the terms and conditions of Section 6(a).
(jj)
“Restricted Stock Award Agreement” means a written agreement between the Company and a holder
of a Restricted Stock Award evidencing the terms and conditions of a Restricted Stock Award grant. Each
Restricted Stock Award Agreement will be subject to the terms and conditions of the Plan.
(kk)
“Restricted Stock Unit Award” means a right to receive shares of Common Stock which is granted
pursuant to the terms and conditions of Section 6(b).
A-19
(ll)
“Restricted Stock Unit Award Agreement” means a written agreement between the Company and a
holder of a Restricted Stock Unit Award evidencing the terms and conditions of a Restricted Stock Unit Award
grant. Each Restricted Stock Unit Award Agreement will be subject to the terms and conditions of the Plan.
(mm)
“Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule
16b-3, as in effect from time to time.
(nn)
“Rule 405” means Rule 405 promulgated under the Securities Act.
(oo)
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
(pp)
“Stock Appreciation Right” or “SAR” means a right to receive the appreciation on Common Stock
that is granted pursuant to the terms and conditions of Section 5.
(qq)
“Stock Appreciation Right Agreement” or “SAR Agreement” means a written agreement between
the Company and a holder of a Stock Appreciation Right evidencing the terms and conditions of a Stock
Appreciation Right grant. Each Stock Appreciation Right Agreement will be subject to the terms and conditions
of the Plan.
(rr)
“Subsidiary” means, with respect to the Company, (i) any corporation of which more than 50% of the
outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such
corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation will have
or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly,
Owned by the Company, and (ii) any partnership, limited liability company or other entity in which the Company
has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of
more than 50%.
(ss)
“Ten Percent Stockholder” means a person who Owns (or is deemed to Own pursuant to
Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of
stock of the Company or any Affiliate.
A-20
GAAP vs. Non-GAAP Measures
APPENDIX B
We supplement the United States 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 total revenue, non-GAAP product
revenue, non-GAAP service revenue, non-GAAP gross profit, non-GAAP income from operations, non-GAAP
operating margin, non-GAAP earnings before interest and other expense, income taxes, depreciation and
amortization (EBITDA) from operations, non-GAAP net income, and non-GAAP net income per share (diluted).
Non-GAAP revenue (total, product and service) eliminates the GAAP effects of acquisitions by adding back
revenue related to deferred revenue revaluation, as well as revenue impacted by the amortization of acquired
intangible assets. Non-GAAP gross profit includes the aforementioned revenue adjustments and also removes
expenses related to the amortization of acquired intangible assets, share-based compensation, certain expenses
relating to acquisitions including depreciation costs, compensation for post-combination services and business
development and integration costs and adds back transitional service agreement income. Non-GAAP income
from operations includes the aforementioned adjustments and also removes restructuring charges, intangible
asset impairment charges, loss on divestiture and costs related to new accounting standard implementation.
Non-GAAP EBITDA from operations includes the aforementioned items related to non-GAAP income from
operations and also removes non-acquisition-related depreciation expense. Non-GAAP net income includes the
foregoing adjustments related to non-GAAP income from operations, net of related income tax effects in addition
to the provisional one-time impacts of the U.S. Tax Cuts and Jobs Act (TCJA) while removing transitional
service agreement income and changes in contingent consideration. 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.
These non-GAAP measures are not in accordance with GAAP, should not be considered an alternative for
measures prepared in accordance with GAAP (revenue, gross profit, operating profit, net income (loss) and
diluted net income (loss) 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 our 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 with 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.
B-1
2020 Annual Report
on Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
For the fiscal year ended March 31, 2020
OR
Commission file number 000-26251
NETSCOUT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
04-2837575
(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
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in RuleRR
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has fileff d 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 filff e such reports), and
(2) has been subject to such filff ing requirements for the past 90 days. Yes x No ¨
405 of the Securities Act. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
r) during the preceding 12 months (or for such shorter period that the registrant was
to Rule 405 of Regulation S-T (§ 232.405 of this chaptea
required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filff er, a non-accelerated filer, a smaller reporting
See the definitions of "large accelerated filer," "accelerated filff er," "smaller reporting company,"
m
company, or an emerging growth company.
and "emerging growth company"
m
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filff er x
Non-accelerated filer ¨
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 x
The aggregate market value of common stock held by non-affiliates of the registrant as of September 30, 2019 (based on the last reported
sale price on the Nasdaq Global Select Market as of such date) was approximately $$1,654,986,360. As of May 11, 2020, there were
72,220,906 shares of the registrant's common stock outstanding.
Portions of the Registrant’s Proxy Statement for the fiscal year 2020 Annual Meeting of Stockholders, which will be made availablea
the Company's website at ir.netscout.com and at the SEC's website at www.sec.gov, are incorporated by reference into Part III of this Annual
Report on Form 10-K. Except as expressly incorporated by reference, the proxy statement is not deemed to be part of this report.
on
DOCUMENTS INCORPORATED BY REFERENCE
NETSCOUT SYSTEMS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2020
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safetyt Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors and Executive Officers of the Registrant
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedule
Item 16.
Form 10-K Summary
Signatures
3
12
29
29
29
29
30
32
33
51
52
52
52
52
53
53
53
53
53
54
57
58
Unless the context suggests otherwise, references in this Annual Report on Form 10-K (Annual Report) to "NetScout," the
"Company," "we," "us," and "our" refer to NetScout Systems, Inc. and, where appropriate, our consolidated subsidiaries.
NetScout, the NetScout logo, Adaptia
this Annual Report are the property of NetScout Systems, Inc. and/or its subsidiaries and/or affilff
iates in the United States and/or
other countries. Any third-party trade names, trademarks and service marks appearing in this Annual Report are the property of
their respective holders.
ve Service Intelligence and other trademarks or service marks of NetScout appearing in
Cautionary Statement Concerning Forward-Looking Statements
This Annual Report contains forward-looking statements under Section 21E of the Exchange Act (as defined below) and
events or our future financial performance and are identified by
other federal securities laws. These statements relate to futuret
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. Factors that may cause such differences include, but are not limited to, the factors discussed under the heading "Risk
Factors" and in our other filings with the Securities and Exchange Commission (SEC). These factors may cause our actual
results to differ materially from any forward-looking statement. Moreover, we operate in a very competitive and rapidl
y
changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can
we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking statements we may make.
a
Except as required by law, we do not undertake any obligation to release publicly any revisions to these forward-looking
statements after completion of the filing of this Annual Report to reflect later events or circumstances or the occurrence of
unanticipated events.
PART I
Item 1. Business
ii
Overview
We are an industry leader with over 35 years of experience in providing service assurance and security solutions that are
used by customers worldwide to assure their digital business services against disruption. Service providers and enterprises,
including local, state and federal government agencies, rely on our solutions to achieve the visibility necessary to optimize
network performance, ensure the delivery of high-quality, mission-critical applications and services, gain timely insight into the
end user experience and protect the network from attack. With our offerings, customers can quickly, efficiently and effectively
identify and resolve issues that result in downtime, interruptions to services, poor service quality or compromised security,
thereby driving compelling returns on their investments in their network and broader technology initiatives. Some of the more
significant technology trends and catalyst for our business include the evolution of customers digital transformation initiatives,
the rapidly evolving security threat landscape,
business intelligence and analytics advancements, and the 5G evolution in both
a
the service provider and enterprise verticals.
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,
industry.
and our ability to achieve expense reductions and make improvements in a highly competitive
ff
Markets
Our service assurance solutions are used by enterprises (including government agencies) and service providers to
optimize network performance, quickly identify and resolve issues impacting application and service quality and gain insight
into the end user experience. Our security solutions are used by enterprises and service providers to identify and mitigate
advanced, volumetric and application-specific distributed denial of service (DDoS) attacks, as well as assist enterprise security
teams in rapidl
y finding and isolating advanced network threats.
a
rr
Enterpri
seii Market
Within the enterprise market, NetScout's nGeniusONE and ISNG offerings enable IT organizations to support a
growing range of performance management and security use cases including:
•
Network
Performance Management - Our nGeniusONE analytics and our ISNG real-time information platform
tt
provide the necessary insight to optimize network performance, restore service and understand the quality of the
users’ experience. By integrating certain acquired product lines and product features from the former Fluke Networks
Enterprise business with our core offerings, our customers can benefit from a consistent view across their traditional
wired network infrastructures, remote offices and wireless networks (WiFi).
3
•
•
•
•
•
ff
t
cation Performff
ion and Cloud Computing - We enablea
information
Applipp
ance Management: Data Center Transformat
technology (IT) organizations, from their development operations to their infrastructuret
teams, to manage the delivery
of services across virtual and physical environments, providing a comprehensive, unified real-time view into network,
application, server, and user communities' performance. We proactively detect emerging issues with the ability to
help analyze both physical and virtual
organizations to optimize datacenter infrastructure investments, protect against service degradations, and simplify the
operation of complex, multi-tier application environments in consolidated, state-of-the-art data centers. Our solutions
are often used by enterprises to support private cloud computing environments that are aimed at enabling greater,
more cost-effective accessibility to applications without compromising the reliabila
applications and the network. Our solutions portfolio also includes a range of new virtual appliances that can help
enterprise customers extend their monitoring of applications deeper into their traditional data centers, confidently
migrate applications into public cloud environments and gain a comprehensive, cohesive view into the resulting
hybrid cloud environment.
s
service delivery environments within the data center which enablea
ity and security of those
Unified Communications (UC)C - We deliver deep application-level unified visibility into voice, data and video
services side-by-side in order to understand the interrelationships of all UC services that traverse the network
infrastructuret
and assess quality and performance of the delivery of these services. As a result, our real-time,
actionable intelligence helps customers to deliver a high-quality UC experience as users make calls, video conference
and engage in instant messaging. We also help desktop, network, telecom, and application teams manage UC through
a common platform across complex, geographically dispersed, and multi-vendor environments.
ff
rr
e Performance
tt
-as-a-Service and Infrast
ructur
Management - We also provide enterprise customers with
Software
tt
active agent-based offerings that can help them determine availability and performance levels for software-as-a-
service (SaaS) applications, and gauge the health of servers, routers and switches as well as wireless and virtual
infrastructures.
infrastructuret
Deployed independently or as part of our broader service assurance solution, these products also play an important
role in helping enterprises deliver a superior user experience, achieve outstanding service quality and drive better
t
returns
As a result, customers can continuously monitor the performance of key business services and the
used to deliver them, regardless of how applications are deployed or where the user is located.
on their application and infrastructuret
investments.
t
t
Application and Desktopkk
Virtualization - We provide clear and actionablea
the operational benefits associated with Application and Desktop Virtual
identify and resolve service problems. We offer visibility across all virtual
including remote access, client, virtual
customers gain actionable metrics from monitoring and analyzing the consumption and performance of VDI services.
ization, and reduce the time it takes to
desktop infrastructure (VDI) tiers
ization, web, front-end application, and related database systems, and help
insights that help customers fully realize
t
t
t
CybCC ersecurity:tt DDoS Protection and Cyber Threat Analytics - Computer networks continue to be targeted for
cyberattacks that are aimed at disrupting, damaging or otherwise destroying an enterprise’s ability to conduct its
business or gaining unauthorized access to corporate applications and stealing valuablea
range of network security solutions under the NetScout Arbor
brand that enable enterprises to protect their networks
r
from high-volume and application-specific DDoS attacks, which are aimed at either overwhelming the network with
traffic or over-exercising specific functions or features
features. We are also developing new security solutions for enterprises that provide greater deep-dive forensic
capaa bili
ties as well as analytics that can provide visibility into anomalous behavior on the network that may be
a
indicative of an advanced threat. These new security analytics will enablea
their historical investments in NetScout’s service assurance solutions by using the Adaptive Service Intelligence
(ASI) data already being generated to support service assurance and security use cases.
of a website with the intention to disable those functions or
existing enterprise customers to leverage
information. We provide a
t
rr
Governmen
t Markets
Considered as part of our enterprise vertical, we have built a strong position with federal, state and local government
agencies, both in the United States and abroad. Similar to our enterprise customers, government agencies are focused on
streamlining and transforming IT into more efficient and more easily managed environments. To accomplish this, agencies are
turning to IT solutions that will help simplify managing and assuring their IT environments as well as reduce costs. However,
governmental markets differ from enterprise markets primarily due to their purchasing cycles being influenced by potential
changes in government administrators, budgetary priorities and allocated funding for key projects.
4
Telecommunication Service Providerdd Markets
Today’s service providers are focused on delivering a compelling set of services and ensuring a high-quality user
experience, while also striving to minimize operational complexity, control costs and improve automation. This, coupled with
the challenge of internet protocol (IP) transformation activities and complex technologies such as Long-Term Evolution (LTE),
Network Functions Virtualization (NFV), Internet Protocol Television (IP-TV), wireless network (WiFi) and cloud services
drives the need for a more automated and unified approach to managing service delivery and the subscriber experience. Our
service provider solutions support an expanding range of use cases including:
•
•
•
s mobile operators to build highly-scalable service delivery environments to offer new
city, assess overall network quality, take proactive steps to modify the network before issues
Service Assurance for Mobile, Fixeii d Line and Cable Operators - The fundamental transformation of the mobile
network to all-IP enablea
services to meet the growing subscriber demand for data, voice and video-centric services and to consolidate and
simplify network operations. Mobile operators use our offerings to gain real-time, detailed IP packet-level insight and
core-to-access visibility, which enables them to ensure services offered over the network meet certain pre-defined
quality levels for an optimal subscriber experience. NetScout’s service assurance solutions help service providers
effectively manage capaa
impact subscribers, and quickly identify and troubleshoot network problems. In addition to improving the overall
returnt
network quality and unique customer insights - both of which contribute to subscriber acquisition, retention and
monetization. The growing demand for high-bandwidth triple-play services, broadband connectivity, content
anywhere, IP-TV, on-demand video traffic, new extended WiFi initiatives and carrier Ethernet services presents fixed
line and cablea multi-system operators with significant revenue opportunit
ies. IP has become the de facto convergence
mechanism for access, distribution and core networks, enabling new service offerings and simplifying network
operations while reducing total cost of operations. For example, cablea
manage their local area WiFi connectivity services, ensure the high-quality delivery of video to consumers outside of
their homes as well as provide broadband and telephony services targeting small- and medium-sized businesses.
investments, mobile operators using our solutions also benefit from improved
operators use our solutions to monitor and
on their network infrastructuret
t
i
e for Service Providers - Service providers strive to understand how the performance of their
Business Intelligenc
networks impact customer experience, subscriber behavior and related usage trends. By combining network traffic
data with other information, including support requests, subscriber calling plans, demographic data and other details,
service providers can make more timely decisions about their offerings and sales and marketing initiatives to acquire,
retain and further monetize their subscribers. NetScout’s analytics deliver timely insights into a service provider’s
subscribers, services, networks, and applications, as well as easy export capaa bila
ities so that this information can be
integrated into their data lakes and third-party analytic platforms.
DDoSDD
Protection - Over the past decade, Internet Service Providers (ISPs), including leading telecommunications
providers, cable multi service operators and cloud providers, have seen significant increases in the sophistication,
scale and frequency of high-volume and application-specific DDoS attacks on their networks. DDoS attacks are
aimed at disrupting the online services of an ISP’s business customer by overwhelming the network with traffic or by
over-exercising specific functions or features
of a website with the intention to disable those functions or features.
NetScout Arbor DDoS solutions are used by a wide range of ISPs around the world to help protect their networks
against DDoS attacks, and to resell certain DDoS offerings to their enterprise customers.
t
Products Overview
Since our founding in 1984, we have been an industry innovator in using IP-based network traffic to help
organizations manage and optimize the delivery of services and applications over their networks, improve the end-user
experience and protect networks from unwanted security threats. Using our patented ASI technology, our solutions
instantaneously convert network traffic data, often referred to as wire data, into high-value metadata, or "smart data". Our
offerings can help customers quickly identify and troubleshoot network and application performance issues, defend their
networks from DDoS attacks, and rapidly find and isolate advanced network threats. Our solutions are typically deployed by
customers as integrated hardware and software, as software only that is then integrated into commercial off-the-shelf hardware
or in a virtual
landscape of IP networks, service and applications. In recent years, to further elevate our value proposition and address the
near- and long-term needs of customers and prospects, we have delivered majoa r product upgrades across our product lines by
integrating key functionality from acquired product lines, increasing the deployment flexibility of our solutions, and adding new
features and capabi
follows:
ized form factor. Our solutions help our customers meet the increasing demands and ever-changing technology
lities that enable us to address a broader range of use cases. Our primary products can be categorized as
a
t
5
Service Assurance Solutions for Network and Applipp
cationtt
Performan
ff
ce,e and Business Inteltt
lill geni
ce Analytics
•
•
t
tt
e and Analytic Modules - Our nGeniusONE management softwff
Additionally, we market a range of specialized platforms and analytic modules that can enablea
nGeniusONEOO Management Softwar
support our enterprise, service provider and government customers enablia
network and service delivery problems while facilitating the optimization and capac
infrastructures.
customers to analyze and troubleshoot traffic in radio access network and WiFi networks, as well as gain timely
insight into high-value services, applications and systems, and better understand the subscriber’s experience on the
network. nGeniusPULSE is an active testing tool that enablea
and determine application availability, reliability and performance. We also market our nGenius Business Analytics
solution, which enables service providers to quickly and efficff
iently analyze their network traffic to gain greater and
more timely insights into their subscribers, services, networks, and applications, as well as easily export our smart
data into their data lakes and into third-party analytic platforms.
ng them to predict, preempt, and resolve
s enterprises to identify infrastructure performance issues
ity planning of their network
are is used to
our
a
ii
itytt Products (Probes, Packet Flow Systems and Taps) - Our ISNG platform provides real-time collection and
Visibil
analysis of information-rich, high-volume packet-flow data from across the network that is displayed through the
nGeniusONE Service Assurance Solution. The ISNG is an advanced passive network probe that can be deployed as a
traditional appliance with integrated hardware and software, as software-only for use in commercial-off-the-shelf
hardware or in virtualized form factors. The virtualized form factor version of our intelligent data source, which is
marketed as vSTREAM, can be deployed to support NFV environments as well as to cost-effectively monitor
application performance in traditional data center, private cloud and public cloud environments. We also provide
comprehensive packet flow systems (also called network packet brokers or network visibility fabric switches), that
deliver targeted network traffic access to a range of monitoring and security tools and systems, including the
nGeniusONE Service Assurance platform. Additionally, we market a suite of test access points (TAPs) that enablea
full, non-disruptive access to network traffic with multiple link type and speed options.
Cybersecurityii Solutions
tt
•
•
ities to meet a
of customer needs, as well as specialized analytics and comprehensive threat intelligence information. Our
DDoS Protection – We provide security solutions that enable service providers and enterprises around the world to
protect their networks against DDoS attacks under the Arbor brand. Dozens of service provider customers around the
world also resell Arbor's solutions as a managed DDoS service to their enterprise customers. Our portfolio of DDoS
solutions offers complete deployment flexibility spanning on-premise offeri
broad arrayr
DDoS offerings for service providers include Arbor Sightline for DDoS visibility and threat detection product, Arbor
Threat Mitigation System for removing DDoS attack traffic from the network without disruption to key network
services and Arbor Insight for advanced analytical and forensic information. Our DDoS offerings for enterprises
include Arbor Edge Defense, a perimeter-based appliance for identifying and blocking incoming DDoS attacks and
outbound malicious communications, and Arbor Cloud, a global, cloud-based traffic scrubbing service that quickly
removes DDoS attack traffic. We plan to further enhance and expand these capaa bila
adoption of our solutions by service provider and enterprise customers.
ities in ways that will enablea
ngs and cloud-based capabil
greater
a
ff
Advanced Threat Detection – We are actively expanding our enterprise security offeri
ngs to better leverage the
investment that our enterprise customers have made in our traditional service assurance solutions. By collecting
network traffic via our probes, we can expand our value proposition by providing specialized analytics for both service
assurance and security. We have introduced and will continue to advance solutions such as new packet forensic
capaa bili
ties designed specifically for security operations teams as well as new anomalous behavior analytics that
a
security teams can use to identify and investigate potential advanced network threats.
ff
Integration with Third-Party Solutions
To have greater operational impact on assuring performance of applications and service delivery, we have integrated our
m
technology with third-party management consoles and business service management systems. This integration allows
organizations to receive alarms on impendi
order to perform detailed problem analysis and troubleshooting. The third-party solution providers that we have integrated our
solutions with include Cisco Systems, Cisco Sourcefire, Citrix Systems, Dell Technologies, Hewlett-Packard Company, IBM
Tivoli and VMWare. In addition, we have embedded NetScout Arbor
ities on a blade within Cisco's
market-leading ASR9000 router and will continue to evaluate partnership opportunities to integrate its DDoS capabila
other network equipment platforms.
ng performance problems and to link into the nGenius Service Assurance solution in
DDoS mitigation capabil
ities within
a
r
6
Growth Strategy
The following are key elements in our growth strategy for fiscal year 2021:
•
•
•
•
•
•
•
•
•
Drive Innovation - In order to support our customers' near-term and longer-term requirements, we plan to continue
innovating by enhancing and expanding our product portfolio. In particular, we continue to invest in research and
development, and leverage the strong technical and domain expertise across our organization. Our engineering teams
are focused on advancing technical innovation across our broad product portfolio. By capita
experience with global enterprise, service provider and government organizations with IP-based networks, we remain
well positioned to cross-leverage our technology development across all majora
platforms and relevant technologies to
address the evolving demands of current and prospective customers.
alizing on our extensive
ii
lity - By making our visibility products availablea
Deliver Pervasive Visibi
that can be deployed with commercial off-the-shelf servers and as virtual
for customers to deploy our technology more broadly across their hybrid network and IT
more affordablea
infrastructures.
By offering more cost-effective instrumentation options, we are well positioned to help customers
gain greater visibility into more places across their end-to-end network environments and address an even broader
range of service assurance and security use cases.
in multiple form factors, including software
appliances, we believe that it is easier and
t
t
Extension into Adjacent Markets - By enhancing and expanding our product portfolio and driving product integration
via internal development and acquisitions, we have expanded our reach into complementary adjacent markets such as
application performance management, infrastructure performance management and cybersecurity. We believe that
this element of our strategy is integral to gaining access to larger budgets, increasing spending from existing
customers, attracting new customers, and increasing our total addressablea market. In particular, we are broadening our
security solutions beyond the DDoS market with plans for new enterprise security offerings that can help our
customers extract more value from the network traffic that we are already collecting to support service assurance use
cases.
x
Existing Customer Relationships - We have an expansive, global customer base of service
Fortifyi and Expand
providers and enterprises that have purchased our products in support of majora
that they have implemented over the past decade. As a result, we believe we are well positioned to expand the scope
of many of these relationships as we identify new opportunities to support
projects.
new network and broader technology
technology and network initiatives
u
x
our Customer Base - The investments we have made over the past several years to expand our product
Expand
portfolio and support greater deployment flexibility also positions us to win new customers in established geographic
markets where we can leverage our global direct sales organization and an extensive network of value-added resellers
and systems integrators.
Increase Market Relevance and Awareness - We plan to continue to implement marketing campaigns aimed at
generating high-quality sales opportunities with both current and prospective enterprise and service provider
customers, promoting thought leadership and building the NetScout brand.
Extend our Technology Partner Alliance Ecosystem - We plan to continue to develop and fortify alliances with
complementary solutions providers that can help us support a larger, more global and more diverse customer base.
We also plan to continue to enhance our technology value, product capabi
lities and customer relevance through the
continued integration of our products into technology partner products.
a
Pursue Strategice
our capabi
a
us to meet the needs of a larger base of customers and prospects.
Acquisitions - We have completed many acquisitions since our inception that have helped broaden
lities, enhance our products and technologies, enable us to expand into adjad cent markets and better position
Improve Cost Structure and Drive Effiff ciencies - We plan to balance our investments in key technology, product
development, sales and marketing, and other initiatives that will enablea
an ongoing focus on controlling costs and driving efficiencies.
us to drive long-term profitable growth with
Support Services
ff
Customer satisfact
ion is a key driver of our success. Our support programs offer customers various levels of high-quality
support services to assist in the deployment and use of our solutions. We have support personnel strategically deployed across
the globe to deliver 24/7 support to our premium customers. Certain support
provided by qualified third-party support partners. In addition, many of our certified resellers provide Partner Enablea
to our end users. This is especially prevalent in international locations where time zones and language, among other factors,
make it more efficff
ient for end users to have the reseller provide initial support functions. Our support also includes updates to
services, such as on-site support activities, are
d Support
u
7
our software and firmware at no additional charge, if and when such updates are developed and made generally available to our
commercial customer base. If ordered, support commences upon expiration of the standard warranty for softff ware. For software,
which also includes firmware, the standard warranty commences upon shipment and expires 60 to 90 days thereafter. With
regard to hardware, the standard warranty commences upon shipment and expires 60 days to 12 months thereafter. We believe
our warranties are consistent with commonly accepted industry standards. We expect to continue to provide support services for
the acquired platforms under existing agreements and plan to explore opportunit
support obligations over the coming years.
ies to further simplify and standardize our
t
Manufacturing
Our manufacturing
t
operations consist primarily of final product assembly, configuration and testing. We purchase
components and subassemblies from suppliers and construct our hardware products in accordance with NetScout standard
specifications. We inspect, test and use process controls to ensure the quality and reliability of our products. We maintain an
ISO 9001 quality systems registration, a certification showing that our corporate procedures and manufacturing facilities
comply with standards for quality assurance and process control. We also maintain an ISO 9001:2000 quality systems
registration, a certification showing that our corporate procedures comply with standards for continuous improvem
customer satisfaction.
ent and
m
We generally use standard parts and components for our products, which can be sourced from various suppliers. We
have generally been able to obtain adequate supplies of component
components, such as computem
alternate suppliers that we believe can be qualified relatively quickly to fulfill our needs should an issue arise with the existing
supplier. Our reliance on single source suppliers is further described in Item 1A "Risk Factors."
r network interface cards, are currently purchased from a single supplier, we have identified
s in a timely manner from current suppliers. While certain
m
We manufacture our products based upon near-term demand estimates resulting from sales forecasts and historical
fulfillment information. However, since these forecasts have a high degree of variability because of factors that include time of
year, overall economic conditions and sales employe
m
advance of receipt of firm orders to ensure that we have sufficient stock to sa iti ysfy iincominging
ysystem hhas hthus far enablbla
supply hch iain perspec itive. hThe potentiiall iimpact of hthe COVID-19
supply
"Ri kisk Factors."
e incentives, we believe it is prudent to maintain inventory levels in
imize hthe effects of hthe didisruptiion caus ded byby hthe glgl b lobal COVID-19
dpandemiic from a
further ddesc ibribedd iin Item 1A
dorders. Our iinvent yory ma gnagement
dpandemiic on our b ibusiness iis f
ded us to
imi ini
h
Sales and Marketing
Sales
We sell our products, support and services through a direct sales force and an indirect reseller and distribution channel.
Our direct sales force generally uses a "high-touch" sales model that consists of face-to-face meetings with customers to
t
t
al expenditures
ly to understand their requirements and effecff
understand and identify their unique business challenges and requirements. In the current global pandemic environment, our
sales teams have been successful in engaging customers virtual
solutions. Our sales teams translate our customers' requirements into tailored business solutions that allow the customer to
maximize the performance of its infrastructure and service delivery environment. Due to the complexity of the systems and the
capita
involved, our sales cycles typically take between three and twelve months. We build strategic relationships
with our customers by continually enhancing our solution to help them address their evolving service delivery management
challenges. In addition to providing a comprehensive solution to meet these needs, we continually provide software
enhancements to our customers as part of their maintenance contracts with us. These enhancements are designed to provide
additional and ongoing value to our existing customers to promote loyalty and the expansion of their deployment of our
products. Existing customer growth is also driven by the expansion and changes in their networks as they add new
infrastructuret
elements, new users, new locations, new applications and experience increasing service traffic volumes. In fiscal
year 2020, we took steps to drive more effective cross-selling of our service assurance and security solutions into our installed
customer base by consolidating the previously separate security and service assurance salesforces and by realigning existing
sales resources accordingly.
tively design
We also maintain an indirect reseller and distribution channel. Sales to customers outside the United States are primarily
export sales through channel partners. Our channel partners assist us by improving our reach to customers, extending our
presence in new markets, and marketing and selling our products to a broad array of organizations globally. We sell through a
range of channel partners including value-added resellers, value-added distributors, resellers, and system integrators, to our
enterprise, service provider and government customers. Historically and currently, we have used indirect distribution channels
principally as intermediaries on contractual terms for customers with whom we do not have a contract. Our sales force meets
with end user customers to present our products and solutions, conduct demonstrations, provide evaluation equipment,
recommend detailed product solutions, develop product deployment designs and timelines, and assist in establishing financial
8
and other justifications for the proposed solution. During this selling process, a channel partner, who has contracts with both the
end customer and us, may be brought in to facilitate the transaction and to provide fulfillment services. In the case of
international channel partners, those services usually also include currency translation and support. In the U.S., fulfillment
services are usually limited to invoicing and cash collection. Under this approach, we have limited dependence upon channel
partners for the majora
contractual relationships, so dependence on any single channel partner is not significant.
elements of the selling process. In many cases, there are multiple channel partners with the required
During the fiscal years end dded Ma hrch 31, 2020, 2019
dand
2018 no direct customers or indirect channel partners accounted
,
for more than 10% of our total revenue.
Marketingii
Our marketing organization drives our market research, strategy, product positioning and messaging, and produces and
manages a variety of programs such as customer forums, trade shows, industry events, advertising, public and analyst relations,
social media, direct mail, seminars and webinars, sales promotions and other online marketing programs. These programs are
focused on promoting the sale and acceptance of our solutions to further build the NetScout brand as well as the ASI, nGenius,
Arbor and other applicable product brand names in the marketplace.
Key elements of our marketing strategy focus on thought leadership, market positioning, market education, go to market
strategies, reputation management, demand generation, and the acceleration of our strategic selling relationships with local and
global resellers, systems integrators, and our technology alliance partners. During fiscal year 2020, we continued to invest in the
promotion of the NetScout brand as well as the nGenius and Arbor brands as core solution-level brands in their respective
markets. We expect to continue these initiatives during fiscal year 2021.
Research and Development
Our continued success depends significantly on our ability to anticipate and create solutions that will meet emerging
customer requirements. We work closely with our largest enterprise and service provider customers to better understand and
address their near-term and longer-term requirements. By better understanding the key, time-sensitive needs of our global
customer base, we believe our development programs will continue to result in enhanced products that are able to meet the
increasing challenges of an increasingly complex and dynamic global network environment.
We have invested significant financial resources and personnel into the development of our products and technology. Our
continued investment in research and development is crucial to our business and our continued success in the market. We have
assembled a team of highly skilled engineers with expertise in various technologies associated with our business and the
technologies being deployed by our customers. We plan to continue to enhance and expand our product offerings and
capabi
a
to continue to invest and dedicate significant resources to our research and development activities for both our enterprise and
service provider customers.
lities from acquired product lines as appropriate. As a result, we plan
while integrating key capabi
lities in the near futuret
a
We predominantly develop our products internally, with some limited third-party contracting. We have also acquired
developed technology through business acquisitions. To promote industry standards and manifest technology leadership, we
participate in and support the activities and recommendations of industry standards bodies, and we also engage in close and
regular dialogue with our key customers and alliance partners. These activities provide early insight into the direction of
network and application performance requirements for current and emerging technologies.
Seasonality
We have experienced, and expect to continue to experience, quarterly variations in our order bookings as a result of a
number of factors, including the length of the sales cycle, complexity of customer environments, new product introductions and
their market acceptance and seasonal factors affected by customer projects and typical IT buying cycles. Due to these factors,
we historically have experienced stronger bookings during our fiscal third and fourth quarters than in our fiscal first and second
quarters.
Customers
We sell our products to enterprises, service providers and local, state and federal governmental agencies with large-and
medium-sized high-speed IP computer networks. Our enterprise customers cover a wide variety of industries, such as financial
services, technology, manufacturing, healthcare, utilities, education, transportation and retail as well as government and
associated agencies. Our telecommunications service provider customer group includes mobile operators, wireline operators,
cablea
operators, internet service providers, and cloud providers.
9
Backlog
We produce our products on the basis of our forecast of near-term demand and maintain inventory in advance of receipt
of firm orders from customers. We configure our products to customer specification
after receipt of the purchase order. Service engagements are also included in certain orders. Customers generally may
reschedule or cancel orders with little or no penalty. We believe that our backlog at any particular time is not meaningful
sales levels. Our combined product backlog at March 31, 2020 was $$29.4
because it is not necessarily indicative of futuret
ii yty of hthe bbacklogklog rellates to customiizatiion andd iint gegra ition
imilllliion compa dred to $$19.8
proje
projects andd
milestones. A majora
ity of revenue for these projects is expected to be recognized into revenue throughout fiscal year 2021.
ing. In some cases, we have begun these projects but have not yet hit billable
s and generally deliver products shortly
radio freque yncy propaggatiion mod ldeling.
imilllliion at Ma hrch 31, 2019. A majorjora
di
ff
Competition
We compete with many companies in the markets we serve. The service assurance market, including the network and
application performance management markets, is highly competitive, rapidly evolving, and fragmented with overlapping
technologies and a wide range of competitors, both large and small, who may deliver certain elements of our solution.
Consequently, there are a number of companies who have greater name recognition and substantially greater financial,
management, marketing, service, support, technical, distribution and other resources than we do. Additionally, certain
competitors, either due to their size and resources or due to their technological strengths, may be able to respond more
effectively than we can to new or changing opportunit
ies, technologies, standards and customer requirements.
a
t
Principal competitive factors in our service assurance market include scalability; ability to address a large number of
applications, locations and users; product performance; the ability to easily deploy into existing network environments; the
ability to offer virtualized solutions; and the ability to administer and manage the solution.
While we face multiple competitors within the service assurance industry, we believe that we compete favorablya
on the
basis of the following factors:
•
•
•
•
•
we provide a comprehensive service delivery management solution that is capablea
enterprise and service provider customers and can be scaled to meet the challenges of today's dynamic service
delivery environments;
of addressing the needs of both
we believe that our solutions provide superi
ability to recognize and track a large number of applications;
u
or data and compete favorably on a broad range of metrics including the
we believe our solutions possess the scalabila
ity to support high and increasing levels of data and network traffic;
our solutions look at both data and control plane traffic across an entire network; and
our ASI technology is optimized to provide real-time information about service performance and real-time alerts to
emerging service problems whereas traditional solutions are inherently latent, supporting only forensic-trouble
shooting afteff
r an issue has occurred.
In the enterprise market, our competitors include companies who provide network performance management, application
performance management, infrastructuret
(a Broadcom Inc. business), Cisco Systems, Dynatrace, Data Dog, ExtraHop, InfoVista, Keysight, SevOne, Viavi, Gigamon,
ThousandEyes, New Relic, Riverbed Technology, Splunk and SolarWinds. In addition, we both compete with and partner with
large enterprise management vendors, such as HP and IBM, who offer performance management solutions. We also competm e
with smaller, privately held competitors who often focus on specific vertical markets.
performance management and other related solutions such as Avaya, CA Technologies
In the service provider market, we compete with traditional probe vendors, network equipment manufacturers,
t
big data and
t
analytics vendors, and virtual
ization vendors. These vendors include Anritsu, Cisco, Empirix, Ericsson, Dell Technologies,
EXFO (which acquired Astellia in March 2018), Huawei, IBM, Niksun, Polystar (an Elisa Oyjyy business), Radcom, SevOne,
Splunk, Nokia and Viavi. We face additional competitive threats from startups and new entrants that seek to offer innovative
solutions in an industry characterized by rapida
technological change.
In the cybersecurity market, we face a range of competitors, including those that may have greater name recognition and
substantially greater financial, management, marketing, service, support, technical, distribution and other resources than we do.
We believe that the scalability of our solutions, flexible deployment, and price-performance of our cybersecurity solutions
positions us well to compete against both larger network equipment and security companies and smaller niche security solutions
vendors.
10
In the DDoS solutions market, we compete under the NetScout Arbor
r
brand with a broad range of vendors including
Radware, Akamai, F5 Networks, A10 Networks, Fortinet, Fastly, Cloudflare and Corero Network Security. In the market for
specialized threat analysis, packet forensics and protection solutions used to identify advanced network threats, we compete
with a range of vendors including Darktrace, Vectra Networks, FireEye, Cisco, Palo Alto Networks, RSA (a Dell Technologies
business) and other specialist providers.
Our ability to sustain a competitive advantage depends on our ability to deliver continued technology innovation and adapt
to meet the evolving needs of our customers. Competitive factors in our industry are further described in Item 1A "Risk
Factors."
Intellectual Property Rights
We rely on patent, copyright, trademark, and trade secret laws and contract rights to establish and maintain our rights in our
property rights are an important element in our success, our business as a whole
technology and products. While our intellectual
does not depend on any one particular patent, trademark, copyright, trade secret, license, or other intellectual property right.
t
t
t
We use contracts, statutory
laws, domestic and foreign intellectual
property registration processes, and international
t
property treaties to police and protect our intellectual property portfolio and rights from infringement. From a
intellectual
contractual perspective, we use license agreements and non-disclosure agreements to control the use of our intellectual property
and protect our trade secrets from unauthorized use and disclosure. In addition to license agreements, we rely on U.S. and
international copyright law to protect against unauthorized copying of software programs in the U.S. and abroad. We have
obtained U.S. and foreign trademark registrations to preserve and protect certain trademarks and trade names. We have also
filed and obtained U.S. patents and international counterparts to protect certain unique NetScout inventions from being
unlawfully exploited by other parties. However, there is no assurance that pending or futuret
that we will be able to obtain patents covering all of our products, or that we will be able to license, if needed, patents from
other companies on favorablea
Item 1A "Risk Factors."
ct to other risks and uncertainties described under
terms or at all. Our proprietary rights are subjeu
patent applications will be granted,
Employees
At March 31, 2020, we had a totall of 2,502 em lployeeo
s.
Corporate Information
ff
Our corporate headquarters are located at 310 Littleton Road, Westford, Massachusetts, and our telephone number is
(978) 614-4000. We were incorporated in Delaware in 1984.
Our internet address is http://www.NetScout.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act, are
made availablea
after such reports
free of charge on or through our website at ir.netscout.com as soon as reasonably practicablea
are filed with, or furnished to, the SEC. None of the information posted on our website is incorporated by reference into this
Report.
We webcast our earnings calls and certain events we participate in or host with members of the investment community.
on our investor relations website at ir.netscout.com//i// nvestors/events-and-presentations/events-
They are made availablea
calendar/default.aspx. Additionally, we provide notifications of news or announcements regarding our financial performance,
including SEC filings, investor events, press and earnings releases, as part of our investor relations website. The contents of
these sections of our investor relations website are not intended to be incorporated by reference into this report or in any other
report or document we file with the SEC.
11
Item 1A. Riskii Factors.
tt
In addition to the other information in this report, the following factors should be considered carefully in evaluating
NetScout and our business.
Our operating results and financial condition have varied in the past and may vary significantly in the future depending
on a number of factors. Except for the historical information in this report, the matters contained in this report include forward-
looking statements that involve risk and uncertainties. The following factors are among many that could cause actual results to
differ materially from those contained in or implied by forward-looking statements made in this report. These statements
involve the risks and uncertainties identified below as well as additional risks and uncertainties that are not yet identified or that
we currently think are immaterial but may also impact our business operations. Such factors are among many that may have a
material adverse impact upon our business, results of operations and financial condition.
You should consider carefully the risks and uncertainties described below, together with the information included
elsewhere in this Annual Report on Form 10-K and other documents we file with the SEC. The risks and uncertainties
described below are those that we have identified as material but are not the only risks and uncertainties facing us. Our business
is also subject to general risks and uncertainties that affect many other companies. Additional risks and uncertainties not
currently known to us or that we currently believe are immaterial also may impair our business, including our results of
operations, liquidity and financial condition.
Because of the following factors, as well as other variables affecting our results of operations, past financial performance
may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in
future periods.
Our business and operations, and the operations of our customers, may be adversely affected by epidemics and
pandemics, such as the COVID-19 outbreak, which the World Health Organization has declared a "pandemic."
COVID-19 and future epidemics and pandemics risk disrupting and adversely affecting our business operations and
financial results, as well as the markets and communities in which we and customers, suppliers and other business
partners operate.
We face risks related to epidemics, pandemics and other outbrea
commercial activity, economies, financial markets, and companim
"pandemic" by the World Health Organization on March 11, 2020. An epidemic or pandemic or other outbreak of
communicablea
business partners may be disrupted or prevented from conducting normal business activities for certain periods of time, the
durations of which are uncertain, and may otherwise experience significant impairments of business activities.
diseases, such as the current COVID-19 pandemic, poses the risk that we or our customers, suppliers, and other
ks of communicable diseases that adversely affect global
t
es. The recent outbreak of COVID-19 was declared a
The President of the United States has declared the COVID-19 pandemic a national emergency. In response to the
COVID-19 pandemic, many state, local, and foreign governments have put in place, and others in the future may put in place,
quarantines, executive orders, shelter-in-place orders, and similar government orders and restrictions to reduce the rate of
infection and control the spread of the disease. Such orders or restrictions, or the perception that such orders or restrictions
could occur, have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel
restrictions and cancellation of events, among other effects that could negatively impact productivity and disrupt our operations
and those of our suppliers, customers, and business partners.
To protect our employees, contractors, customers, suppliers, and our local communities, and limit the effecff
t of the
COVID-19 pandemic on our operations, we have directed NetScout employees at our locations globally to work remotely, with
limited exceptions for site-essential personnel (with protective measures and protocols in place), and we may take further
actions that alter our operations as may be required by federal, state, or local authorities, or by foreign governments in countries
in which we operate, or which we determine are in the best interests of our employees, suppliers, customers, business partners,
and stockholders. We expect that work from home requirements and other restrictions on our employees, suppliers, customers,
and business partners will change over time, whether becoming more or less restrictive, as the pandemic and global responses
progress.
There is a great deal of uncertainty as to when our employe
m
es will be able to return to work on-site. Similar to other
companies we have begun planning for our employe
local government guidelines, as well as in accordance with foreign governmental guidelines in the countries in which we
operate. Furthermore, any process we implement to enablea
es to return to work on-site in phases in accordance with federal, state and
our employees to return to work on-site will be in accordance with
m
12
prevailing health and science guidance, and in a manner that seeks to protect our employees, contractors, customers, suppliers
and our local communities.
As part of our existing business continuity planning, we had establia
shed infrastructuret
and protocols to enable our
employees to work from home, but we have never before required our employees to work remotely for such an extended period
of time. While we believe that our employees are able to and can continue to effectively work remotely, it is possible that the
disruptions to our business operations resulting from quarantines, self-isolations, or other movement and restrictions on the
ability of our employees to perform their jobs could affecff
t our ability to develop and design our products and services in a
timely manner or meet required milestones or customer commitments, and that this could have an adverse effecff
and operating results. In addition, although we have been able to adequately staff our facilities with site-critical personnel with
specific health and safety protocols, to satisfy our manufacturing
may determine that it is necessary to direct that employees engaged in manufacturing refrain from working on-site for an
indeterminate period of time, and that this could have an adverse effecff
obligations to our customers, it is possible that we or others
t on our revenue and operating results.
t on our revenue
t
Furthermore, global travel has been sharply curtailed, and in some cases prohibited. Our sales personnel often meet with
customers or prospective customers in person to provide greater personalized service. While our employees and customers have
adjusted to virtual
ity of our sales personnel to meet with customers or prospective customers at a customer
facility could have an adverse effecff
t on our revenue and operating results.
t meetings, the inabila
In addition, we rely on third-party suppliers and manufacturers in China and elsewhere. The COVID-19 outbrea
resulted in the extended shutdown of certain businesses throughout the world, which may result in disruptions or delays to our
supply chain. These may include disruptions from temporary closure of third-party supplier and manufacturer facilities,
interruptions in product supply or restrictions on the export or shipment of our products, as well as the import of products into
countries in which we operate. Although we have attempted to minimize the effecff
attempts will be insufficient, and that these disruptions will likely have an adverse effecff
ts of these disruptions, it is possible that these
t on our revenues and operating results.
k has
t
The impact of the COVID-19 outbreak has been widespread and has adversely affected the global economy. While the
potential impact and duration of the COVID-19 pandemic on the global economy and our business in particular may be difficult
to assess or predict, the pandemic has resulted in, and may continue to result in, significant disruption of global financial
markets, reducing our ability to access capia tal, which could in the futuret
or market correction resulting from the spread of COVID-19 could decrease technology spending, adversely affecff
for our products and services, and thus negatively affecff
t our liquidity. In addition, a recession
ting demand
ting our revenues and operating results.
negatively affecff
The global COVID-19 pandemic continues to rapidly evolve, and we will continue to monitor the COVID-19 situation
closely and respond appropriately. The extent to which COVID-19 impacts our results will depend on future developments,
which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of
COVID-19 and the length of, and effectiveness of, measures taken to contain it or treat its impacm t, as well as actions taken by
governmental authorities to address the economic impact of the outbrea
k.
t
To the extent the COVID-19 pandemic adversely affecff
ts our business and financial results, it may also have the effect of
heightening many of the other risks described in this "Risk Factors" section, such as those relating to our quarterly revenue and
operating results, the estimates made for our critical accounting policies, and the operation of internal controls over such
estimates, as well as on our liquidity and on our ability to satisfy our indebtedness obligations, including the compliance with
the covenants that apply to our indebtedness.
Our quarterly revenue and operating results may fluctuate.
Our quarterly revenue and operating results are difficult to predict and may fluctuat
t
e significantly from quarter to quarter
as a result of a variety of factors associated with our industry, many of which may be outside of our control, including the
following:
•
the rate of growth of, and changes in technology trends in, our market and other industries in which we currently
operate or may operate in the future;
technology spending by current and potential customers, and the timing and size of orders from customers, especially
in light of our lengthy sales cycle;
reduced demand for our products and uneven demand for service delivery and network and application performance
management solutions and network security solutions;
the timing and market acceptance of new products or product enhancements by us or our competitors;
the timing of hiring sales personnel and the speed at which such personnel become fully productive;
•
•
•
•
13
•
•
•
•
•
•
•
•
•
•
•
our ability to develop and manufacture new products and technologies in a timely manner, the competitive position of
our products, and the continued acceptance of our products by our customers and in the industries that we serve;
ts of new entrants and the effects of well-
changes in the number and size of our competitors, including the effecff
resourced competitors' increasing their investments in our markets, and changes in the prices and capabi
lities of
competitors' products;
customer ability to implement our products;
cancellation, deferral, or limitation of orders by customers;
changes in forei
gn currency exchange rates;
attrition of key employees and competition with other companies for employees with specific talents and experience;
the number, severity, and timing of cyber-related threat outbreaks (e.g., malware, attacks, ransomware, worms and
viruses);
the quality and level of our execution of our business strategy and operating plan, and the effecff
and marketing programs;
changes in accounting rules;
costs related to acquisitions; and
our ability to manage expenses.
tiveness of our sales
a
ff
Most of our expenses, such as employe
e compensation, benefits and rent, are relatively fixed in the short term. Moreover,
our expense levels are based, in part, on our expectations regarding future revenue levels. As a result, if revenue for a particular
quarter is significantly below our expectations, we may not be able to reduce operating expenses proportionately for that
quarter, and, therefore, this revenue shortfall would have a disproportionately negative impact on our operating results for that
quarter.
m
It may be necessary in the futuret
to undertake cost reduction initiatives to improve profitability, which could lead to a
deterioration of our competitive position. Any difficulties that we encounter as we reduce our costs could negatively impact our
results of operations and cash flows.
Our actual operating results may differ significantly from our guidance.
We release guidance regarding our futuret
performance on our quarterly earnings conference calls, quarterly earnings
releases, and otherwise. Such guidance, which includes forward-looking statements, reflects our management’s estimates as of
the date of release and is based on projections prepared by our management. We may also decide not to release, or to defer,
issuing guidance, where such guidance might not be appropriate or when we do not have sufficient visibility or clarity to issue
such guidance. In those situations, we expect to communicate our reasons for not releasing or deferring release of guidance.
Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are
inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond
our control and are based upon specific assumptions with respect to futuret
principal reason that we release guidance is to provide a basis for our management to discuss our business outlook with analysts
and investors. We are not responsible for any projections or reports published by any such analysts or investors.
business decisions, some of which will change. The
Guidance is necessarily speculative in nature, and it can be expected that some or all of the assumptim ons underlying the
guidance furnished by us will not materialize or will vary significantly from actual results. Accordingly, our guidance is only an
estimate of what management believes is realizablea
as of the date of release. Actual results may vary from our guidance and the
variations may be material. In light of the foregoing, investors are urged not to rely upon our guidance in making an investment
decision regarding our common stock.
Any failure to successfully implement our operating strategy or the occurrence of any of the events or circumstances set
forth in this "Risk Factors" section in this report could result in the actual operating results being different from our guidance,
and the differences may be adverse and material.
Our indebtedness may limit our operations and our use of our cash flow, and any failure to comply with the
covenants that apply to our indebtedness could adversely affect our liquidity and financial condition.
On January 16, 2018, we amended and expanded our existing credit facility (Amended Credit Agreement) with a
syndicate of lenders. The Amended Credit Agreement provides for a five-year $1.0 billion senior secured revolving credit
facility, including a letter of credit sub-facility of up to $75.0 million. We have used the new credit facility for working capia tal
purposes and to finance the repurchase of common stock under our previously announced accelerated stock repurchase plan.
The commitments under the Amended Credit Agreement will expire on January 16, 2023, and any outstanding loans will be
due on that date. As of the date of this report, we had approximatelyly $$450
imilllliion ini outstanding indebtedness under the
14
interest rate risk.
Amended Credit Agreement. Our debt level can have negative consequences, including exposing us to futuret
We may incur significantly more debt in the future,
and there can be no assurance that our cost of funding will not substantially
increase. Our current revolving credit facility also imposes certain restrictions on us; for a more detailed description please refer
to "Management's Discussion and Analysis of Financial Condition and Results of Operations." Upon an event of default, for
example, the administrative agent, with the consent of, or at the request of, the holders of more than 50% in principal amount of
the loans and commitments may terminate the commitments and accelerate the maturity of the loans and enforce certain other
remedies under the Amended Credit Agreement and other loan documents, which would adversely affect our liquidity and
financial condition. If we take on additional indebtedness, the risks described above could increase.
t
Interest on the outstanding balances under the Amended Credit Agreement is calculated based on the London Interbank
(FCA), which regulates LIBOR, announced
Offered Rate (LIBOR). On July 27, 2017, the U.K. Financial Conduct Authorityt
that it will no longer require banks to submi
t rates for the calculation of LIBOR after 2021. That announcement indicates that
u
the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. The Amended Credit Agreement
provides for the administrative agent under the agreement to determine if (i) adequate and reasonable means do not exist for
ascertaining the LIBOR rate or (ii) the FCA or governmental authority having jurisdiction over the administrative agent has
made a public statement identifying a specific date after which the LIBOR rate shall no longer be used for determining interest
rates for loans, and the administrative agent determines that both of these factors are unlikely to be temporary, then we and the
administrative agent would agree to transition to an alternate base rate borrowing or amend the credit agreement to establia
sh an
alternate interest rate to LIBOR that includes consideration of the then-prevailing market convention for determining interest
rates for syndicated loans in the United States at that time.
We are not able to predict whether LIBOR will actually cease to be availablea
after 2021 or whether there will be another
market benchmark in its place. Our Amended Credit Agreement defines an alternative rate to LIBOR which we have the option
to select, the Alternate Base Rate which is equal to the greatest of (1) JPMorgan's prime rate, or (2) 0.50% in excess of the New
York Federal Reserve Bank (NYFRB) rate. Any uncertainty regarding the continued use and reliabila
benchmark interest rate could adversely affect the performance of LIBOR relative to its historic values. If the methods of
calculating LIBOR change from current methods for any reason, or if LIBOR ceases to perform as it has historically, or if we
select an alternative benchmark rate our interest expense associated with our outstanding indebtedness or any future
indebtedness we incur may increase.
ity of LIBOR as a
Any failure to meet our debt obligations could damage our business.
, or if we use more cash than we generate in the future, our level of indebtedness at such time could
Our ability to meet our obligations under the Amended Credit Agreement will depend on market conditions and our
future performance, which is subject to economic, financial, competitive and other factors beyond our control. If we are unablea
to remain profitablea
adversely affecff
and by limiting or prohibiting our ability to obtain financing for additional capia tal expenditures,
corporate and other purposes. In addition, if we are unable to make payments as required under the Amended Credit
Agreement, we would be in default under the terms of the loans, which could seriously harm our business. If we incur
significantly more debt, this could intensify the risks described above.
t our operations by increasing our vulnerability to adverse changes in general economic and industryrr conditions
acquisitions and general
t
We may fail to secure necessary additional financing.
Our future success may depend in part on our ability to obtain additional financing to support our continued growth and
operations and any downgrades in our credit rating could affect our ability to obtain additional financing in the future or may
affect the terms of any such financing. If our existing sources of liquidity are insufficient to satisfy our operating requirements,
we may need to seek to raise capita
al by one or more of the following:
issuing additional common stock or other equity instruments;
acquiring additional bank debt;
issuing debt securities; or
obtaining lease financings.
•
•
•
•
However, we may not be able to obtain additional capia tal when we want or need it, or capita
al may not be available on
satisfactory terms. Furthermore, any additional capita
as new financial or operating covenants, or that may result in dilution to our stockholders.
al may have terms and conditions that adversely affecff
t our business, such
We expect that existing cash, cash equivalents, marketablea
securities, cash provided from operations and our bank credit
facilities will be sufficient to meet ongoing cash requirements. However, our failure to generate sufficient cash as our debt
15
becomes due or to renew credit lines prior to their expiration could materially adversely affecff
operating results and cash flows.
t our business, financial condition,
Our effective tax rate may fluctuate, which could increase our income tax expense and reduce our net income.
Our effecff
our control, including:
tive tax rate or the taxes we owe could be adversely affected by several factors, many of which are outside of
•
•
•
•
•
•
•
•
changes in the relative proportions of revenues and income before taxes in the various jurisdictions in which we
operate that have differing statutory tax rates;
changing tax laws, regulations, and interpretations in multiple jurisdictions in which we operate as well as the
requirements of certain tax rulings;
changes in the research and development tax credit laws;
earnings being lower than anticipated in jurisdictions where we have lower statutory rates and being higher than
anticipated in jurisdictions where we have higher statutt ory rates;
the valuation of generated and acquired deferred tax assets and the related valuation allowance on these assets;
transfer pricing adjustments;
the tax effecff
reporting periods; and
tax assessments or any related tax interest or penalties that could significantly affect our income tax expense for the
period in which the settlements take place.
ts of purchase accounting for acquisitions and restructuring charges that may cause fluctuat
t
ions between
We are subject to income taxes in the United States and in numerous foreign jurisdictions. From time to time, we may
receive notices that a tax authority in a particular jurisdiction believes that we owe a greater amount of tax than we have
reported to such authority.
While we regularly assess the likelihood of adverse outcomes from such examinations and the adequacy of our provision
for income taxes, there can be no assurance that such provision is sufficient and that a determination by a tax authority will not
tive tax rate could have a material and
have an adverse effecff
adverse effect on our financial condition and results of operations and the price of our common stock could decline if our
financial results are materially affecff
t on our results of operations. An adverse change in our effecff
ted by an adverse change in our effecff
tive tax rate.
We may be impacted by changes in taxation, trade and other regulatory requirements.
We are subject to income tax in local, national and international jurisdictions. In addition, our products are subject to
t
lvalue-add ddded taxes ((VAT)) iin ma yny jujurisdictions. We are also subjecb
t to the examination
and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. We
import and excise duties and/or sales or
of our tax returns
regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our
provision for taxes. Additionally, changes in or the improper application of import and excise duties and or sales taxes or VAT
may negatively impact our operating results. There can be no assurance as to the outcome of these examinations. Fluctuat
tax rates and duties, changes in tax legislation or regulation or adverse outcomes of these examinations could have a material
adverse effect on our results of operations, financial condition and cash flows.
t
ions in
There is increased uncertainty with respect to tax policy and trade relations between the U.S. and other countries.
Major developments in tax policy or trade relations, such as the imposition of unilateral tariffs on imported products, could
have a material adverse effect on our results of operations, financial condition and cash flows.
Our estimates and judgments related to critical accounting policies could be inaccurate.
We consider accounting policies related to revenue recognition, marketablea
securities, valuation of goodwill, intangible
assets and other acquisition and divestiture accounting items, and share-based compensation to be critical in fully understanding
and evaluating our financial results. Management makes judgments and creates estimates when applying these policies. These
estimates and judgments affect, among other things, the reported amounts of our assets, liabilities, revenue and expenses, the
amounts of charges accrued by us, and related disclosure of contingent assets and liabilities. We base our estimates on historical
experience and on various other assumptim ons that we believe to be reasonable under the circumstances and at the time they are
made. If our estimates or the assumptim ons underlying them are not correct, actual results may differ materially from our
estimates and we may need to, among other things, accrue additional charges or impaim r assets that could adversely impact our
business. As a result, our operating results and financial condition could be materially and adversely impacted in future periods.
16
Our disclosure controls and procedures and internal control over financial reporting may not be effective.
Our disclosure controls and procedures and internal control over financial reporting may not prevent all material errors
and intentional misrepresentations. Any system of internal control can only provide reasonable assurance that all control
objectives are met. Some of the potential risks involved could include, but are not limited to, management judgments, simple
errors or mistakes, misinterpretation and willful misconduct regarding controls. Under Section 404 of the Sarbanes-Oxley Act,
tiveness of our internal control over financial reporting. Compliance with
we are required to evaluate and determine the effecff
this provision requires management's attention and expense. Management's assessment of our internal control over financial
reporting may or may not identify weaknesses that need to be addressed in our internal control system. If we are unable to
conclude that our internal control over financial reporting is effective, investors could lose confidence in our reported financial
information which could have an adverse effecff
changes in operating conditions and changes in complim ance with policies and procedures currently in place may result in
inadequate disclosure controls and procedures and internal control over financial reporting in the future.
t on the market price of our stock or impact our borrowing ability. In addition,
t
Foreign currency exchange rates may adversely affect our financial statements.
An increasing portion of our revenue is derived from international operations. Our consolidated financial results are
reported in U.S. dollars. Most of the revenue and expenses of our foreign subsidiaries are denominated in local currencies.
Given that cash is typically received over an extended period of time for many of our license agreements and given that a
material and increasing portion of our revenue is generated outside of the United States, fluctuations in foreign exchange rates
(including the Euro) against the U.S. dollar could result in substantial changes in reported revenues and operating results due to
the foreign exchange impact upon translation of these transactions into U.S. dollars.
In the normal course of business, we employ various hedging strategies to partially mitigate these risks, including the use
ts of fluctuations from
of derivative instruments. These strategies may not be effecff
movements in foreign exchange rates, including the increased volatility in foreign exchange rates following the COVID-19
outbreak and future global pandemics and other events. Fluctuat
t
affect our business, financial condition, operating results and cash flow.
ions of the foreign exchange rates could materially adversely
tive in fully protecting us against the effecff
Additionally, sales and purchases in currencies other than the U.S. dollar expose us to fluctuat
ions in foreign currencies
relative to the U.S. dollar and may adversely affect our financial statements. Increased strength of the U.S. dollar increases the
effective price of our products sold in U.S. dollars into other countries, which may require us to lower our prices or adversely
t
affect sales to the extent we do not increase local currency prices. Decreased strength of the U.S. dollar could adversely affecff
the cost of materials, products and services we purchase overseas. Sales and expenses of our non-U.S. businesses are also
translated into U.S. dollars for reporting purposes and the strengthening or weakening of the U.S. dollar could result in
unfavorablea
business, and movements in the invoiced currency relative to the functional currency could also result in unfavorablea
ries owned and operated in foreign countries.
effects. We also face exchange rate risk from our investments in subsidia
s. In addition, we may invoice customers in a currency other than the functional currency of our
translation effect
u
ff
t
translation
If our products contain errors or quality issues, such issues may be costly to correct, revenue may be delayed, we
could be sued, and our reputation could be harmed.
Our products are inherently complex and, despite testing by our customers and us, errors or quality issues may be found
t
to eliminate errors and failures. Errors and failures in our products could result in loss of or delay in
r commencement of commercial shipments, especially when products are first introduced or when new
in our products afteff
versions are released. These errors may result from components supplied by third parties incorporated into our products, which
makes us dependent upon the cooperation and expertise of such third parties for the diagnosis and correction of such errors. If
errors are discovered, we may not be able to correct them in a timely manner or at all. In addition, we may need to make
significant expenditures
market acceptance of our products and could damage our reputation. Regardless of the source of these defects or errors, we may
need to divert the attention of our engineering personnel from our product development efforts
correction of these errors and defects. If one or more of our products fail, a customer may assert warranty and other contractual
claims for substantial damages against us. Our contracts with customers contain provisions relating to warranty disclaimers and
liability limitations, which may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert
management's attention and harm the market's perception of us and our products. In addition, if our business liability insurance
coverage proves inadequate or future coverage is unavailable on acceptablea
financial condition could be adversely impacted.
terms or at all, our business, operating results and
to address the detection and
ff
t
17
The occurrence or discovery of these types of errors or failures could have a material and adverse impact on our business,
operating results and financial condition. Any such errors, defects, or security vulnerabila
market's perception of our products and business.
ities could also adversely affecff
t the
If we fail to introduce new products and solutions or enhance our existing products and solutions to keep up with
rapid technological change, demand for our products and solutions may decline.
hThe ma krket for
appliicatiion andd net
l
kwork performance ma gnagement, se irvice assurance, cybe
cyberse
icuri yty
lsol
iutions, andd
hch ganges iin te hchnology,
nology, ev l iolvi gng i dindust yry
iquirements, increasing competition, and frequent product introductions and enhancements. Our success
busine
business iintelligelligence iis hihighlyghly compe iti itive andd hcharacte iriz ded byby ra idpida
hcha gnges iin customer re
is dependent upon our ability to meet our customers' needs, which are driven by changes in technologies, new application
technologies, new security risks and the emergence of new industry standards. In addition, new technologies may shorten the
life cycle for our products and solutions or could render our existing or planned products and services less competitive or
obsolete. We must address demand from our customers for advancements in our products and services applications in order to
support our customers' growing needs and requirements. In order to meet this challenge and remain competitive in the market,
we must introduce new enhancements and additional form factors to our existing product lines and service offerings. If we are
unable to develop, introduce and communicate new network and application performance management and service assurance
products, network security products, business intelligence products, and solutions or enhancements to existing products in a
timely and successful manner, this inabila
ity could have a material and adverse impact on our business, operating results and
financial condition.
standa drds,
d
As our success depends in part on our ability to develop product enhancements and new products and solutions that keep
pace with continuing changes in technology, cyber risk and customer preferences, we must devote significant resources to
research and development, development and introduction of new products and enhancements on a timely basis, and obtaining
market acceptance for our existing products and new products. We have introduced and intend to continue to introduce new
products and solutions, including increased migration to "software as a service" and software-deployed products. If the
introduction of these products and solutions is significantly delayed or if we are unsuccessful in bringing these products and
solutions to market, our business, operating results and financial condition could be materially and adversely impacted. We are
developing and are already deploying a number of new products as well as enhancements to our existing products and offerings,
including software only solutions and products availablea
in multiple form factors.
We must invest in research and development in order to remain competitive in our industry. However, there can be no
assurances that continued investment and increased research and development expenses will ultimately result in our maintaining
or increasing our market share, which could result in a decline in our operating results. The process of developing new solutions
is complem x and uncertain; we must commit significant resources to developing new services or features without knowing
whether our investments will result in services or features
increase without a corresponding increase in our revenues, it could have a material adverse effect on our operating results. Also,
we may not be able to successfully complete the development and market introduction of new products or product
enhancements in a timely manner. If we fail to develop and deploy new products and product enhancements on a timely basis,
or if we fail to gain market acceptance of our new products, our revenues will likely decline, and we may lose market share to
our competitors.
the market will accept. If our research and development expenses
t
The move to software focused products requires higher unit sales.
To address customer requirements for future technology changes such as "edge computing" and to reduce the
environmental impacts of our products, we have increased and are continuing to increase our software offeri
software products have a higher overall sales margin than that of bundled hardware and software products, the per unit revenue
for software-only sales is lower than for sales that include software/hardware bundles. Therefore, in order to increase overall
revenue, we will need to sell more units of software-only products to meet or exceed the revenues generated by software/
hardware bundled products.
ngs. While
ff
We face significant competition from other technology companies.
The service assurance, application performance ma gnagement, netw kork se
icuri yty andd b ibusiness iintelligelligence ma krkets are
a
pping
dand fraggmentedd ma krkets hthat hhave ove lrlapping
nologies
highlyy competiitiive,
highl
dand
smalll,
l
ysystem, net
rapidlydly ev l iolvi gng,
dand we expect compe iti ition on ff
kwork se
icuri yty andd b ibusiness iin ltelligligence
i
offeri gngs andd
i
dand compe ititors, b hboth lla grge
te hchnologi
ipricinging to iincrease. We b lbeliieve customers makke ser ivice ma gnagement
h
iprim iarilyly upon hthe f lfolllowinging factors:
purchasingsing dde ici isions bbasedd
•
•
product
product
itimeliliness of new
dand ser ivice performance, func iti
dproduct andd se irvice iin
dand
lonaliityy
dtroduc itions;
iprice;
18
•
•
•
•
•
•
dand use;
dand te hch inic lal support;
kwork capaa
net
ici yty;
ease of iinst lallla ition, iint gegra ition,
customer ser ivice
name andd reputatiion of ve dndor;
lqualiityy
dproduct
dand vallue of hthe
iwithh i dindust yry partners.
lalliliances
dand ser ivices; andd
We compete
i hwith a ggrowinging numbber of
providders of se irvice assurance,
i
appliicatiion performance ma gnagement
lsolutiions,
providders of b ibusiness iintelligelligence
l
llwell as
i
rings andd portablblea
uding
lsolutiions, iin lcluding
net
kwork eq iuipment, net
icuri yty offerings
addi ition, lle diadi gng net
kwork tr ffiaffic an lalyyzers andd
kwork se
bprobes, as
icuri yty andd se irvice assurance
dvendors
dproducts hiwhi hch thheyy lilicense from othher competitors. Some of our current and
net
kwork se
ser ivices. In ddi
offer hth ieir own managgement
potential competitors have greater name recognition and substantially greater financial, management, marketing, service,
support, technical, distribution and other resources than we do. In addition, some of our customers develop their own in-house
solutions to meet their technologicall ne deds.
com ipanies hthat are
grengthhen or maiintaiin hth ieir ma krket
com ipanies attempt to st
dand ggreater resources, our competiitors mayy bbe bablle to re
standa drds andd customer re
te h l
ipositiions iin an ev l iolvi gng i dindust yry. hTherefore, givegiven htheiir lla grger isize
hFurther, iin recent yyears some of our competiitors hhave bbeen ac
dpand iin hthe ma krkets iin hiwhi hch we operate. We expect hithis
spond more effectiivelyly hthan we can to new or hchanging
kseekiingg to enter or ex
dand ap liplica ition te h
trend to contiinue as
t
nging opport
iunit
iqui dred byby lla grger
iquirements.
chnologieogies,
chnol gyogy
l
i hwith
iies,
d
d
d
As a res lult of hthe competiitiive factors hihighlighlighteghtedd iin hthiis sectiion
dand iin
hother iriskk factors, we mayy not bbe blable to compete
isti gng or new competiitors gaingain ma krket hshare iin
effectiivelyly iwi hth our current or future competiitors. If we are
iexi
expe irience a dde lcliine iin our salles hthat co lduld dadvers lelyy affect our b ibusiness andd opera iti gng res lults. hiThis compe iti ition
iincreasedd
of ma krket hshare, anyy of hiwhi hch wouldld liklikelyely hhave a mate iriall andd dadverse iimpact on our b ibusiness, operatinging re lsults andd fifina
condi ition.
di
yany of our ma krkets, our compe iti itive posiitiion co lduld
unable to antiiciipate or react to hthese compe iti itive hch lallle gnges or ifif
dand faililure to iincrease, or hthe lloss
inci lal
couldd
l
couldd res lult iin
l
profit margirgins, iincrea dsed
dand ma krketinging expenses,
ipricinging pressure,
kweaken andd we
dreduc ded
lsales
bl
fi
Increased customer demands on our tec
ihnical support se
irvices
ymay adverselyy ffaffect our re
onships
i
lati
i
iwith our
customers and our fifinan icial results.
bl
ymay bbe
unable to res
dproducts. We
organiza ition to re lsolve iissues
We offer te hch inic lal support se irvices
pond
d
iwithh ma yny of our
accom dmodate hshort-term iincreases iin customer ddema dnd for support se irvices. We lalso mayy bbe unablblea
iwithh hcha gnges iin support se irvices pr
our support se irvices to compete
support organi
continued relationships with our customers. If we or our channel partners do not effecff
tive ongoing support,
our products, succeed in helping our customers quickly resolve post-deployment issues, and provide effecff
t our ability to sell our products to existing customers and would harm our reputation with existing and
it would adversely affecff
potential customers. Any failure to maintain high quality support and services would harm our operating results and reputation.
Further, if customers demand these services, and we cannot adequately meet their demand, or if we cannot realize revenues in
connection with our provision of services related to product support, it could have a material and adverse impact on our
financial condition and results of operations.
idovidedd byby competiitors. Our customers ddepe dnd on our
deployedd on htheiir netw korks. A highhigh llevel of support is critical for
iquicklykly enough
to modifydify hthe format of
tively assist our customers in deploying
dproducts deploye
lrelatinging to our
ough to
Failure to manage growth properly and to implement enhanced automated systems could adversely impact our
business.
The growth in size and complexity of our business and our customer base has been and will continue to be a challenge to
our management and operations. Additional growth will place significant demands on our management, infrastructure, and
other resources. To manage further growth effectively, we must hire, integrate, and retain highly skilled personnel qualified to
manage our expanded operations. We will also need to continue to improve our financial and management controls, reporting
systems, and procedures. If we are unable to manage our growth effectively, our costs, the quality of our products, the
effectiveness of our sales organization, attraction and retention of key personnel, our business, our operating results and
financial condition could be materially and adversely impacted. To manage our growth effectively, we may need to implement
new or enhanced automated infrastructuret
technology and systems.
Any disruptions or ineffectiveness relating to our systems implementations and enhancements could adversely affect our
ability to process customer orders, ship products, provide services and support to our customers, bill and track our customers,
fulfill contractual obligations, and otherwise run our business.
19
As a result of the diversification of our business, personnel growth, acquisitions and international expansion in recent
years, most of our employees are now based outside of our headquarters. If we are unable to appropriately increase
management depth and enhance succession planning, we may not be able to achieve our financial or operational goals. It is also
important to our continued success that we hire qualified employees, properly train them and manage out poorly performing
personnel, all while maintaining our corporate culture and spirit of innovation. If we are not successful at these efforts, our
growth and operations could be adversely affected.
As our business evolves, we must also expand and adapt our information technology (IT) and operational infrastructure.
Our business relies on our data systems, billing systems and other operational and financial reporting and control systems. All
of these systems have become increasingly complex due to the diversification and complexity of our business, acquisitions of
new businesses with different systems. To manage our technical support infrastructure effectively and improve our sales
efficiency, we will need to continue to upgrade and improve our data systems, billing systems, ordering processes, customer
relationship management systems, and other operational and financial systems, procedures and controls. These upgrades and
improvements may be difficult and costly, and they may require employees to dedicate a significant amount of time to
ient and cost-effective manner to
implement. If we are unablea
ted. If the third parties we rely on for hosted data
accommodate changing circumstances, our business may be adversely affecff
solutions for our internal network and information systems are subjeu
ct to a security breach or otherwise suffer disruptions that
impact the services we utilize, the integrity and availability of our internal information could be compromised causing the loss
of confidential or proprietary information, damage to our reputation and economic loss.
to adapt our systems and organization in a timely, efficff
We may not successfully complete acquisitions or integrate acquisitions we do make, which could impair our
ability to compete and could harm our operating results.
We may need to acquire complementary businesses, products or technologies to remain competitive or expand our
business. We actively investigate and evaluate potential acquisitions of complem mentary businesses, products and technologies in
the ordinary course of business. We may compete for acquisition opportunit
resources than we have. As a result, we may not succeed in acquiring some or all businesses, products or technologies that we
seek to acquire. Our inability to effectively consummate acquisitions on favorablea
terms could significantly impact our ability
to compete effectively in our targeted markets and could negatively affecff
ies with entities having significantly greater
t our results of operations.
t
Acquisitions that we do complete could adversely impact our business. The potential adverse consequences from
acquisitions include:
•
•
•
•
•
•
the potentially dilutive issuance of common stock or other equity instruments;
the incurrence of debt and amortization expenses related to acquired intangible assets;
the potentially costly and disruptive impact of assuming unfavorable pre-existing contractual
companies that we would not have otherwise entered into and potentially exiting or modifying such relationships;
the potential litigation or other claims in connection with, or inheritance of claims or litigation risk as a result of, an
acquisition including claims from terminated employees, customers, third parties or enforcement actions by various
regulators;
the incurrence of significant costs and expenses to complete the acquisition and integrate the acquired business; and
the potentially negative impact of poor performance of an acquisition on our earnings per share.
t
relationships of acquired
Acquisition transactions also involve numerous business risks. These risks from acquisitions include:
•
•
•
•
•
•
•
•
•
•
difficulties in assimilating the acquired operations, technologies, personnel and products;
difficulties in managing geographically dispersed operations;
difficulties in assimilating diverse financial reporting and management information systems as well as differing
ordering processes and customer relationship management systems;
difficulties in maintaining uniform standards, controls, procedures and policies;
the diversion of management's attention from other business concerns;
use of cash to pay for acquisitions that may limit other potential uses of our cash, including stock repurchases and
repayment of outstanding indebtedness;
substantial accounting charges for restructuring and related expenses, write-off of in-process research and
development, impairment of goodwill, amortization or impairment of intangible assets and share-based compensation
expense;
the potential disruption of our business;
the potential loss of key employees, customers, distributors or suppliers;
the inabila
ity to generate sufficient revenue to offset acquisition or investment costs; and
20
•
the potential for delays in customer purchases due to uncertainty and the inability to maintain relationships with
customers of the acquired businesses.
If we are not able to successfully manage these issues, the anticipated benefits and efficiencies of the acquisitions may not
be realized fully or at all, or may take longer to realize than expected, and our ability to compete, our revenue and gross margins
and our results of operations may be adversely affecff
ted.
Our ability to quickly and successfully recover from a disaster, public health crisis (including a global pandemic
such as COVID-19), or other business continuity event could affect our ability to deliver our products and cause
reputational harm to our business.
The occurrence of a natural
t
disaster, public health crisis (including a global pandemic such as COVID-19) or an act of
terrorism, or a decision or need to close any of our facilities without adequate notice or time for making alternative
arrangements could result in interruptions in the delivery of our products and services. Our central business functions, including
administration, human resources, finance services, legal, development, manufacturing and customer support depend on the
proper functioning of our computer, telecommunication and other technology systems and operations, some of which are
operated or hosted by third parties.
A disruption or failure of these systems or operations because of a disaster, public health crisis (including a global
pandemic such as COVID-19) or other business continuity event could cause data to be lost or otherwise delay our ability to
complete sales and provide the highest level of service to our customers. In addition, we could have difficulty producing
accurate financial statements on a timely basis, which could have an impact on our ability to make timely disclosures and could
adversely affecff
they are regularly backed-up, there are no assurances that data recovery in the event of a disaster would be effective or occur in
against damage from
an efficff
business continuity events that could have a significant disruptive effect on our operations. We could experience material
adverse interruptions to our operations or delivery of services to our clients in a disaster recovery scenario.
t the trading value of our stock. Although we endeavor to ensure there is redundancy in these systems and that
ient manner. Our operations are dependent upon our ability to protect our technology infrastructuret
Vulnerabilities and critical security defects, prioritization decisions regarding remedying vulnerabilities or security
defects, failure of third party providers to remedy vulnerabilities or security defects, or customers not deploying
security releases or deciding not to upgrade products, services or solutions could result in claims of liability against us,
damage our reputation or otherwise harm our business.
The products and services we sell to customers, and our cloud-based solutions, may contain vulnerabilities or critical
security defects which have not been remedied and cannot be disclosed without compromising security. We may also make
prioritization decisions in determining which vulnerabilities or security defects to fix, and the timing of these fixes, which could
result in an exploit that compromises security.
Customers also need to test security releases before they can be deployed which can delay implementation. In addition,
we rely on third-party providers of software and cloud-based services and we cannot control the rate at which they remedy
vulnerabilities. Customers may also not deploy a security release, or decide not to upgrade to the latest versions of our products,
services or cloud-based solutions containing the release, leaving them vulnerable.
An actual, alleged, or perceived security breach, cyberattack or incident against us could interrupt our operations,
create a perception that our products and services are vulnerable, and damage our brand and reputation, which could
reduce revenue, increase expenses, and expose us to legal claims or regulatory actions.
Our IT networks, software and systems, and those of our service providers and partners, may be vulnerablea
variety of security breaches, cyberattacks and other incidents, including but not limited to traditional computer “hackers,”
malicious code (such as viruses, ransomware and worms), data theft, phishing attempts and other social engineering schemes,
employee mistake, theft or misuse, denial of service attacks, and nation-state and nation-state-supported actors engaged in
attacks and intrusions. Although we have controls and security measures in place to prevent cyberattacks, experienced computer
hackers are increasingly organized and sophisticated. Malicious attack efforts
targeted attacks as a paid for service. In addition, the techniques they use to access or sabota
may not be recognized until launched against a target. As a provider of security solutions, we may be a more attractive target
for such attacks. Other individuals or entities, including employees or vendors, may also intentionally or unintentionally
provide unauthorized access to our IT environments or to our customers' IT environments.
operate on a large-scale and sometimes offer
ge networks change frequently and
to a wide
a
ff
If we, our service providers, or our partners were to experience a security breach, cyberattack or other incident, our
service availabila
ity, IT systems and networks could be impacted, we or our customers may experience system disruptions or
21
ities of our products could be exploited, the information stored on our networks or those of our
slowdowns, security vulnerabila
third-party service providers or partners could be accessed, publicly disclosed, altered, lost, or stolen, all of which could subject
us to liability and cause us financial harm. Any actual, alleged or perceived security breach or incident affecting us, our service
providers, our partners or our industry as a whole could result in damage to our reputation, negative publicity, loss of partners,
customers and sales, increased costs to remedy any problems and otherwise respond to any incident, regulatory investigations
and enforcement actions, costly litigation, and other liability. In addition, we could incur substantial costs and liabilities,
including but not limited to, expenses attributablea
other incident (including the cost of repairing any damage to our or our customers' systems), liabila
ity for stolen assets or
information, lost revenue and income resulting from any system or product downtime, increased costs for cybersecurity
protection, and costs to comply with any notification obligations resulting from any security incidents. Such outcomes could
t our business or
damage our reputation, cause customers and possibly investors to lose confidence in us, and adversely affecff
operating results.
to investigating, remediating and rectifying a security breach, cyberattack or
Additionally, efforts
ff
by hackers or others could cause interruptions, delays or cessation of our product licensing, or
modification of our software, which could cause us to lose existing or potential customers. If these efforts
third party obtains unauthorized access to our or our customers' IT environments, our business operations, and those of our
customers could be adversely affected, losses or theft of data could occur, our reputation and futuret
sales could be harmed,
governmental regulatory action or private or governmental litigation could be commenced against us and our business, and our
financial condition, operating results and cash flows could be materially adversely affecff
are successful and a
ted.
ff
Our reliance on sole source suppliers could adversely impact our business.
Specific components that are necessary for the hardware assembly of our instruments are obtained from separate sole
t
u
m
capaa bila
ers or a limited group of suppliers. These component
sh a variety of supply continuity practices. These practices may include,
ity to exercise control over pricing, quality and timely delivery of components. For most of our products, we do not have
ities to meet our customers' demands. It is our practice to mitigate these risks by partnering
s include our network interface cards and proprietary
source suppli
hardware. Our reliance on sole or limited suppliers involves several risks, including a lack of control over the manufacturing
t
process and inventory management and potential inability to obtain an adequate supply of required components and the
inabila
the internal manufacturing
with key suppliers, including distributors, to establia
among other approaches, establishing buffer supply requiring suppliers to maintain adequate stocks of materials, bonding
agreements with distributors, and use-based and kanban programs to set supply thresholds. We also enter into escrow
arrangements for certain technologies. Where possible, we use widely-available off the shelf hardware and work with large
suppliers with multiple factories and other risk management practices. However, failure of supply or failure to execute
effectively on any of these programs, including as a result of a public health crisis (included a global pandemic such as
COVID-19) could result in our inabila
require us to seek alternative sources of supply for these component
to continue to acquire from these suppliers on acceptablea
basis. Moreover, if we are unablea
suppliers cease to supply us with components for any reason, we may not be able to identify and integrate an alternative source
of supply in a timely fashion or at the same costs. Any transition to one or more alternate manufacturers would likely result in
delays, operational problems and increased costs, and may limit our ability to deliver our products to our customers on time for
such transition period. These risks could damage relationships with our current and prospective customers, cause shortfalls in
expected revenue, and could materially and adversely impact our business, operating results and financial condition.
ity to obtain adequate deliveries or the occurrence of any other circumstance that would
s would impact our ability to ship our products on a timely
terms, or should any of these
m
If we violate the U.S. Foreign Corrupt Practices Act or applicable anti-bribery laws in other countries, or if we fail
to comply with U.S. export controls and government contracting laws, our business could be harmed.
We earn a significant portion of our total revenues from international sales. As a result, we must comply with complex
foreign and U.S. laws and regulations, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other local
laws prohibiting corrupt payments to government officials and others, as well as anti-competition regulations.
The U.S. Foreign Corrupt Practices Act (FCPA), which continues to see increased enforcement in recent years, generally
prohibits U.S. companies and their intermediaries from making corrupt payments to foreign officials for the purpose of
obtaining or keeping business or otherwise obtaining favorablea
record-keeping and internal accounting practices to accurately reflect the transactions of the company. Under the FCPA, U.S.
companies may be held liable for actions taken by agents or local partners or representatives. In addition, regulators may seek to
hold us liable for successor liability FCPA violations committed by companies which we acquire. We are also subject to the
U.K. Bribery Act and may be subject to certain anti-corruption laws of other countries in which we do business.
treatment and requires companies to maintain appropriate
22
In addition to anti-bribery and anti-corruption laws, we are also subject to the export and re-export control laws of the
U.S., including the U.S. Export Administration Regulations (EAR) and the office of Foreign Asset Control (OFAC), as well as
to U.S. government contracting laws, rules and regulations, and may be subjecb
countries in which we do business. If we or our distributors, resellers, agents, or other intermediaries fail to comply with the
FCPA, the EAR, OFAC or U.S. government contracting laws, or the anti-corruption, export or governmental contracting laws
of other countries, governmental authorities in the U.S. or other countries could seek to impose civil and/or criminal penalties,
which could have a material adverse effecff
t on our business, results of operations, financial conditions and cash flows.
t to government contracting laws of other
Violations of these laws and regulations could result in fines and penalties, criminal sanctions, restrictions on our
business conduct and on our ability to offer our products and services in one or more countries. Such violations could also
adversely affecff
and growth prospects.
t our reputation with existing and prospective customers, which could negatively impact our operating results
The failure to recruit and retain qualified personnel and plan for and manage the succession of key executives
could hinder our ability to successfully manage our business, which could have a material adverse effecff
position and operating results.
t on our financial
We operate in businesses where there is intense competition for experienced personnel in all of our global markets and
have, in some instances, experienced attrition of our employees to direct and indirect competitors. We depend on our ability to
tive professionals and to attract and retain talent needed to
identify, recruit, hire, train, develop and retain qualified and effecff
execute our business strategy. Our future success depends in large part upon our ability to attract, train, motivate and retain
highly skilled employees, particularly executives, sales and marketing personnel, software engineers, and technical support
personnel. The complexity of our products, processing functionality, software systems and services require highly trained
professionals. While we presently have a sophisticated, dedicated and experienced team of employees who have a deep
understanding of our business lines, the labor
limited number of people availablea
the highly skilled technical personnel that are integral to our sales, marketing, product development and technical support
teams, the rate at which we can generate sales and develop new products or product enhancements may be limited. This
inabila
ity could have a material and adverse impact on our business, operating results and financial condition.
with the necessary technical skills and understanding. If we are unable to attract and retain
market for these individuals has historically been very competitive due to the
a
In addition, we must maintain and periodically increase the size of our sales force in order to increase our direct sales and
support our indirect sales channels. Because our products are very technical, sales-people require a comparatively long period
of time to become productive, typically three to twelve months. This lag in productivity, as well as the challenge of attracting
qualified candidates, may make it difficult to meet our sales force growth targets. Further, we may not generate sufficient sales
to offset the increased expense resulting from growing our sales force. If we are unablea
to maintain and periodically expand our
sales capabila
ity, our business, operating results and financial condition could be materially and adversely impacted.
Loss of key personnel could adversely impact our business. Our futuret
success depends to a significant degree on the
skills, experience and efforts of Anil Singhal, our President, Chief Executive Officer, and co-founder, and our other key
ive succession planning is also important for our
executive officers and senior managers to work effecff
long-term success. Failure to ensure effect
ive transfers of knowledge and smooth transitions involving key employees could
hinder our strategic planning and execution. The loss of one or more of our key personnel could have a material and adverse
impact on our business, operating results and financial condition. We must, therefore, plan for and manage the succession of
key executives due to retirement, illness or competitive offers elsewhere.
tively as a team. Effect
ff
ff
We assumed certain non-U.S. pension benefit obligations associated with the business acquired in the Comms
Transaction. Future funding obligations related to these liabilities could restrict cash available for our operations,
capital expenditures or other requirements, or require us to borrow additional funds.
As part of the Comms Transaction, we assumed certain unfunded non-U.S. pension obligations related to non-U.S.
employees of the Communications Business. While we intend to comply with any future funding obligations for our non-U.S.
pension benefit plans through the use of cash from operations, there can be no assurance that we will generate enough cash to
do so and also meet our other required or intended cash uses. Our inability to fund these obligations through cash from
operations could require us to seek funding from other sources, including through additional borrowings, which could
materially increase our outstanding debt or debt service requirements.
Our success depends, in part, on our ability to manage and leverage our distribution channels. Disruptions to, or
our failure to effectively develop and manage, these partners and the processes and procedures that support them could
adversely affect our ability to generate revenues from the sale of our products and services. Managing these distribution
23
channels and relationships requires experienced personnel, and lack of sufficient expertise could lead to a decrease in
sales of our products and services, which could cause our operating results to suffer.
ff
Our future success may require us to increase the number and depth of our indirect sales efforts
through our distributors
and channel partners and to leverage those relationships to expand these our distribution channels and to develop new indirect
distribution channels to increase revenue. Our channel partners have no obligation to purchase any products from us. Some of
our distribution and channel partners also distribute and sell competitive products and services and the reduction in sales by
these partners could materially reduce our revenues. In addition, they could internally develop products that compete with our
solutions or partner with our competitors and bundle or resell competitors' solutions, possibly at lower prices. The potential
inabila
unwillingness of our partners to market and sell our products effectively or the loss of existing partnerships could have a
material and adverse impacm t on our business, operating results and financial condition. Our international operations, including
our operations in the United Kingdom, mainland Europe, India, Asia-Pacific and other regions, are generally also subject to the
risk of longer sales cycles through our international distribution channels. Sales to customers outside the United States
accountedd for 39%, 39%,
ity to develop relationships with new partners in new markets, expand and manage our existing partner relationships, the
re nue for the fiscal years ended March 31, 2020, 2019 and 2018, respectively.
dand 41% of our tot lal
ve
The need to develop such relationships can be particularly acute in areas outside of the U.S. Recruiting and retaining
qualified channel partners and training them in the use of our technology and services and ensuring that they comply with our
legal and ethical expectations requires significant time and resources.
Our failure to maintain and increase the number and quality of relationships with channel partners, and any inability to
successfully execute on the partnerships we initiate, could significantly impede our revenue growth prospects in the short and
long term.
Our success depends, in part, on our ability to manage our international research and development operations and
related partnerships. Our international research and development efforts
benefits and involve competitive and other risks.
ff
may achieve delayed or lower than expected
We must continue to enhance our existing products and introduce new products in order to keep up with rapid
technological change. Our international research and development teams play a critical role in these efforts. We must attract,
train, motivate and retain our international research and development team members. To maintain this international employee
research and development talent, we believe we must provide our international engineers with compelling and strategically
significant work, coupled with technical and architectural ownership of their respective development projects. We must develop
the leaders of these international teams, while ensuring their frequent inclusion and participation in corporate strategic and
operational planning. We are likely to recognize the costs associated with these investments earlier than some of the anticipated
benefits, and the returnt
efforts also involve risks, including, knowledge transfer issues related to our technology and resulting exposure to
misappropriation of intellectual
political conditions abroad, and exchange rate and tax compliance issues. The risks related to our research and development
efforts abroad could increase our expenses, impair our development efforts, harm our competitive position and damage our
reputation. If we do not achieve the benefits anticipated from these investments, or if the achievement of these benefits is
delayed, our operating results may be adversely affecff
on these investments may be lower, or may develop more slowly, than we expect. These development
property or information that is proprietary to us, heightened exposure to economic, security and
ted.
t
Necessary licenses for third-party technology may not be available to us on commercially reasonable terms or at
all.
We currently and will in the future license technology from third parties that we use to produce or embed in our products.
While we have generally been able to license required third-party technology to date, third-party licenses required in the futuret
may not be available to us on commercially reasonable terms or at all. Third parties who hold exclusive rights to technology
that we seek to license may include our competitors. If we are unable to obtain any necessary third-party licenses, we would be
required to redesign our product or obtain substitutet
technology, which may not perform as well, be of lower quality or be more
costly. The loss of these licenses or the inabila
development of future products or the enhancement of existing products. We may also choose to pay a premium price for such a
license in certain circumstances where continuity of the licensed product would outweigh the premium cost of the license. The
unavailability of these licenses or the necessity of agreeing to commercially unreasonable terms for such licenses could
t our business, financial condition, operating results and cash flows.
materially adversely affecff
ity to maintain any of them on commercially acceptablea
terms could delay
24
Our success depends on our ability to protect our intellectual property rights.
Our business is heavily dependent on our intellectual
t
property. We rely upon a combination of patent, copyright,
property rights. The reverse engineering, unauthorized copying, or other misappropriation of our intellectual
third parties to benefit from our technology without compensating us. Furthermore, the laws of some
trademark and trade secret laws and registrations and non-disclosure and other contractual and license arrangements to protect
our intellectual
t
property could enablea
foreign jurisdictions do not offer the same protections for our proprietary rights as the laws of the United States, and we may be
subject to unauthorized use of our products in those countries. Legal proceedings to enforce our intellectual
could be burdensome and expensive and could involve a high degree of uncertainty. In addition, legal proceedings may divert
management's attention from growing our business. There can be no assurance that the steps we have taken to protect our
property rights will be adequate to deter misappropriation of proprietary information, or that we will be able to
intellectual
detect unauthorized use by third parties and take appropriate steps to enforce our intellectual
copying or use of our products or proprietary information could result in reduced sales of our products and eventual
operating results.
property rights. The unauthorized
ly harm our
property rights
t
t
t
t
Others may claim that we infringe on their intellectual property rights.
From time to time we have been and may continue to be subject to claims by others that our products infringe on their
t
property rights, patents, copyrights or trademarks. In some cases, we may have agreed to indemnify our customers
intellectual
property rights; therefore,
and partners if our products or technology infringe or misappropriate specified third party intellectual
we could become involved in litigation or claims brought against our customers or partners if our products or technology are the
subject of such allegations. These claims, whether or not valid, could require us to spend significant sums in litigation, pay
damages or royalties, delay product shipments, reengineer our products, rename our products and rebuild name recognition or
property. We may not be able to secure any required licenses on commercially
acquire licenses to such third-party intellectual
reasonable terms or secure them at all. Any of these claims or resulting events could have a material and adverse impact on our
business, operating results and financial condition.
t
t
Uncertainties of regulation of the Internet and data traveling over the Internet could have a material and adverse
impact on our financial condition and results of operations.
We could be materially adversely affected by increased regulation of the Internet and Internet commerce in any country
where we operate, as well as access to or commerce conducted on the Internet. Further, governments may further regulate or
restrict the sales, licensing, distribution, and export or import of certain technologies to certain countries. The adoption of
additional regulation of the Internet and Internet commerce could decrease demand for our products, and, at the same time,
increase the cost of selling our products, which could have a material and adverse effect on our financial condition and results
of operations.
The rapid evolution and increasing enforcement of privacy and security laws and regulations and standards
around the world could require significant company resources, limit certain functionalities of our products, and harm
our business.
We are subject to federal, state, local, and international laws, regulations, directives, and standards relating to the
collection, use, retention, disclosure, security, transfer, and other processing of personally identifiable information. The
regulatory framework for privacy and security issues worldwide is rapidly evolving, and as a result, implementation standards
and enforcement practices are likely to remain uncertain for the foreseeable future.
t We publicly post documentation regarding
our practices concerning the processing, use, and disclosure of data. Any failure, or allegations of failure, by us, our suppliers,
or other parties with whom we do business to comply with this documentation or with other federal, state, local or foreign laws,
regulations, directives, and standards could result in investigations and/or proceedings against us by governmental entities or
others. In many jurisdictions, enforcement actions and consequences for noncompliance are rising. In the United States, these
include enforcement actions in response to rules and regulations promulgated under the authority of federal agencies, state
attorneys general, states' legislation, and consumer protection agencies. In addition, privacy advocates and industryrr groups have
regularly proposed, and may propose in the future, self-regulatory standards with which we must legally comply or that
contractually apply to us. If we fail to follow these security standards, even if no customer information is compromised, we may
incur significant fines or experience a significant increase in costs.
Internationally, virtuall
t
y every jurisdiction in which we operate has established its own data security and privacy legal
framework with which we or our customers must comply. For example, the European Union (EU) has adopted the General Data
Protection Regulation (GDPR) which went into effect on May 25, 2018, and introduced numerous privacy-related obligations
for companies operating in the EU, including greater control for data subjects, increased data portabila
ity for EU consumers, data
25
breach notification requirements, and increased fines. In particular, under the GDPR, fines of up to 20 million euros or up to 4%
of the annual global revenue of the noncompliant company, whichever is greater, could be imposed for violations of certain of
the GDPR’s requirements. The GDPR requirements apply not only to third-party transactions, but also to transfers of
information between us and our subsidiaries, including employee information.
The international data protection landscape is rapidly evolving, resulting in possible significant operational costs for
t
Clauses in our data export agreements as legal bases for transferring personal data outside of the European
internal compliance and risk to our business. For example, we rely upon the EU-U.S. Privacy Shield framework and EU
Standard Contractual
Economic Arena (EEA). Both of these frameworks are subject to ongoing review by governmental bodies and legal challenges
which may result in a ruling that the industry-standard measures we, and other companies, have taken are no longer sufficient.
As a result, in the futuret
data outside of the EEA.
we may need to take additional measures to ensure compliance with respect to our transfers of personal
In addition to the GDPR, the European Commission is considering additional regulations that could affect us and our
customers and other companies by requiring additional regulation of communication services, which may increase our
compliance burden and affecff
t product offerings.
Complying with international data protection laws may cause us to incur additional operational costs or require us to
change our business practices. Despite our efforts, we may not be successful in achieving compliance either due to internal or
external factors such as lack of vendor cooperation. Any actual or perceived non-compliance could result in proceedings against
us by governmental entities, customers, data subjects, or others.
Domestic laws in this area are also complex and developing rapidly. In recent years, there have been a number of well-
publicized data breaches involving the improper dissemination of personal information of individuals. Many states have
adopted legislation that regulates how businesses operate online, including measures relating to privacy, data security and data
breaches. For example, California enacted the California Consumer Privacy Act (CCPA), which took effect on January 1, 2020,
and provides its residents expanded rights to access and to delete their personal information, opt out rights to certain personal
information sharing, and detailed information about how their personal information is used. The CCPA provides for civil
penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation.
The CCPA and its regulations may increase our compliance costs and potential liability.
rr
Because the interpret
ities. If so, we could be required to change our business activities and practices or modifyff our
ation and application of privacy and data protection laws are uncertain, it is possible that these laws
may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the features of
our products and platform capaa bila
products and platform capabi
address privacy and security concerns, even if unfounded, or comply with applicable privacy and data security laws,
regulations, and policies or our contracts governing our processing of personal information, could result in additional cost and
liability to us, damage our reputation, inhibit sales, and adversely affect our business. Furthermore, the costs of compliance
with, and other burdens imposed by, the laws, regulations, and policies that are applicablea
to our marketing and promotion of our products to interested individuals may have an adverse effect on our business.
t on our business. Any inability by us to adequately
lities, which could have an adverse effecff
to the businesses of our customers or
a
We or our suppliers may be impacted by new regulations related to climate change or other environmental issues.
We or our suppliers may become subject to new laws enacted with regards to climate change or other environmental
issues. In the event that new laws are enacted or current laws are modifiedff
could face increased costs in order to comply with these laws. These costs may be incurred across various levels of our supply
chain in order to comply with new environmental regulations, as well as by us in connection with our manufacturing of
products, including costs related to incorporation of substitutet materials and other product re-design costs, as well as costs
associated with product recalls. In addition, we may be unablea
compliant with new regulations, which could cause us to incur increased costs in order to satisfy service obligations to
customers. Additionally, our flow of product may be impacted which could delay the recognition of revenue and have a
materially adverse effecff
to service existing products if certain materials are no longer
in countries in which we or our suppliers operate, we
t on our business.
The current economic and geopolitical environment may impact some specific industries into which we sell and
may lead our customers to delay or forgo technology investments and could have other impacts, any of which could
materially adversely affect our business, financial condition, operating results and cash flows.
Many of our customers are concentrated in certain industries, including financial services, public sector, healthcare, and
the service provider market. Certain industries may be more acutely affect
including public heath crises (including global pandemics such as COVID-19), and changes in U.S. trade policy with China and
ed by economic, geopolitical and other factors,
ff
26
al expenditures
ting all sectors or as a result of conditions affecff
other countries, than other sectors. Our public sector customers are affected by federal, state and local budget decisions. To the
extent that one or more of the sectors in which our customer base operates is adversely impacted, whether as a result of general
conditions affecff
condition and results of operations could be materially and adversely impacted. If companies in our target markets reduce
capita
as downward pressure on the price of our products. There can be no assurance that any decrease in sales resulting from the
COVID-19 outbreak will be offset by increased sales in subsequent periods. Although the magnitude of the impact of the
COVID-19 outbreak on our business and operations remains uncertain, the continued spread of COVID-19 or the occurrence of
other epidemics and the imposition of related public health measures and travel and business restrictions could adversely impact
our business, financial condition, operating results and cash flows.
, we may experience a reduction in sales, longer sales cycles, slower adoption of new technologies as well
ting only those particular sectors, our business, financial
t
International economic, political, legal, compliance and business factors could negatively affect our financial
statements and growth.
We expect to continue to develop our sales and presence outside the U.S.. Our international business (and particularly our
business in high-growth markets) is subject to risks that are customarily encountered in non-U.S. operations, any of which
could negatively affect our business, financial condition and results of operations.
In particular, after significant negotiation between the United Kingdom and the EU, the withdrawal of the United
Kingdom from the EU, commonly referred to as Brexit, took effect on January 31, 2020. There is now a transition period while
the United Kingdom and EU negotiate additional arrangements, including their future trading terms. The United Kingdom has
stated that it wants the transition period to expire, and the futuret
trading terms to be agreed, by December 31, 2020. The
withdrawal could, among other outcomes, disrupt the free movement of goods, services, and people between the United
Kingdom and the EU, undermine bilateral cooperation in key policy areas, significantly disrupt trade between the United
Kingdom and the EU, and lead to a period of considerable uncertainty in relation to global financial and banking markets. In
addition, the withdrawal could lead to legal uncertainty and potentially divergent national laws and regulations as the United
Kingdom determines which EU laws to replace or replicate. If the United Kingdom and the EU are unable to negotiate
acceptablea
future trading terms or if other EU member states pursue withdrawal, barrier-free access between the United
Kingdom and other EU member states or among the EEA overall could be diminished or eliminated. Given the lack of
comparablea
EU will have and how such withdrawal may affecff
precedent, it is unclear what financial, trade, and legal implications the withdrawal of the United Kingdom from the
t us.
The success of our business depends, in part, on the continued growth in the market for and the continued
commercial demand for service delivery, service assurance and network security solutions focused on the performance
monitoring and management of applications and networks.
We derive nearly all of our revenue from the sale of products and services that are designed to allow our customers to
t
and prices for future products to address the market, the optimal distribution strategy and the
assure the delivery of services through management of the performance and network security of applications across IP
networks. We have actively expanded our operations in the past through acquisitions and organic growth and may continue to
expand them in the future in order to gain share in the evolving market in which we operate. Therefore, we must be able to
predict the appropriate features
future changes to the competitive environment. In order for us to be successful, our potential customers must recognize the
value of more sophisticated application management and network security solutions, decide to invest in the management of
their networked applications and, in particular, adopt our management solutions. Any failure of this market to continue to be
viablea
may choose to outsource the operations and management of their networks to managed service providers. Our business may
depend on our ability to continue to develop relationships with these service providers and successfully market our products to
them.
would materially and adversely impact our business, operating results and financial condition. Additionally, businesses
Changes in industry structure and market conditions could lead to charges related to discontinuances of certain of
our products or businesses and asset impairments.
In response to changes in industry and market conditions, we may be required to strategically reallocate managerial,
operational, financial and other resources. Any such efforts may result in charges related to consolidation of excess facilities or
claims from third parties who were resellers or users of discontinued products.
Our growth could suffer if the markets into which we sell our products and services experience cyclicality.
Our growth will depend in part on the growth of the markets which we serve. We serve certain industries that have
historically been cyclical and have experienced periodic downturns that have had a material adverse impact on demand for the
27
products, software and services that we offer. Any of these factors could adversely affect the business, financial condition and
results of operations of the company in any given period.
Uncertain conditions in the global economy and constraints in the global credit market may adversely affect our
revenue and results of operations.
Disruptions in the global economy and constraints in the global credit market may cause some of our customers to
reduce, delay, or cancel spending on capia tal and technology projects, resulting in reduced spending with us. While some
industry sectors such as government and telecommunications may be less susceptible to the effects of an economic slowdown,
our enterprise customers may be adversely affected, especially in financial services and consumer industries. Continued
volatility in, or disruption of financial markets could limit customers' ability to obtain adequate financing to maintain operations
and result in a decrease in sales volume that could have a negative impact on our results of operations. Further, competitors may
respond to economic conditions by lowering their prices, which could put pressure on our pricing. We could also experience
lower than anticipated order levels, cancellations of orders in backlog, defaults on outstanding accounts receivable and extended
payment or delivery terms. Economic weakness, customer financial difficulties and constrained spending on IT initiatives have
result, in challenging and delayed sales cycles and could negatively impact our ability to forecast
resulted, and may in the futuret
future periods. In addition, some of the markets we serve are emerging and the purchase of our products involves material
changes to established purchasing patterns and policies. The purchase of our products is often discretionary and may involve a
significant commitment of capia tal and other resources.
Our stock price has been subject to fluctuations, and will likely continue to be subject to fluctuations, which may
be volatile and due to factors beyond our control.
The market price of our common stock is subject to wide fluctuat
ions in response to various factors, some of which are
beyond our control. In addition to the factors discussed in this "Risk Factors" section and elsewhere in this report, factors that
could cause fluctuations in the market price of our common stock include the following:
t
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
t
or capita
al commitments;
ions in the overall stock market from time to time, including as a result of trends in the
actual or anticipated fluctuations in our operating results;
the financial projections we may provide to the public, any changes in these projections, or our failure to meet these
projections;
failuff
re of securities analysts to initiate or maintain coverage of our company, changes in financial estimates and
publication of other news by any securities analysts who follow our company, or our failure to meet these estimates
or the expectations of investors;
ratings changes by any securities analysts who follow our company;
announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint
t
ventures,
changes in operating performance and stock market valuations of other technology companies generally, or those in
our industry in particular;
price and volume fluctuat
economy as a whole;
changes in accounting standards, policies, guidelines, interpretations, or principles;
actual or anticipated developments in our business or our competitors’ businesses or the competitive landscapea
generally;
developments or disputes concerning our intellectual property or our products and platform capaa bila
proprietary rights;
cybersecurity attacks or incidents;
announced or completed acquisitions of businesses or technologies by us or our competitors;
new laws or regulations or new interpretations of existing laws, or regulations applicablea
changes in our board of directors or management;
announced or completed equity or debt transactions involving our securities;
sales of shares of our common stock by us, our officers, directors, or other stockholders;
lawsuits filed or threatened against us; and
other events or factors, including those resulting from public health crises (including global pandemics such as
COVID-19, war, incidents of terrorism, or responses to these events).
ities, or third-party
to our business;
In addition, the market for technology stocks and the stock markets in general have experienced extreme price and
volume fluctuat
the operating performance of those companies. In the past, stockholders have institutet
ions. Stock prices of many technology companies have fluctuat
ed in a manner unrelated or disproportionate to
d securities class action litigation
t
t
28
following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial
costs, divert resources and the attention of management from our business, and adversely affecff
operations, financial condition, and cash flows. A decline in the value of our common stock, including as a result of one or
more factors set forth above, may result in substantial losses for our stockholders.
t our business, results of
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our headquarters are located in Westford, MA, in approximately 175,000 square feet of space under a lease expiring in
September 2030. In addition, we lease office and/or manufac
i
iMichigahigan; Be krkelleyy, Calilif
fornia; andd Bangalngalore,
India.
di
turi gng space iin llAllen, Texas; San Jose, C lifalifo irnia; Ann
i
bArbor,
IItem 3. Legalgal
e
Proce diedi gngs
ii
From itime to itime, we are subje
ma gnagement, hthe amount of
iwillll not hhave a mate iriall dadverse effecff
subject to lleggall proceedings
i hwith respect to
dings andd lcl iaims iin hthe
yany current llegalgal proce diedi gngs andd lcl iaims, ifif ddete
diordina yry course of bbusiiness. In hthe
i
iopi inion of
rmi dned dadvers lelyy,
lultiimate expense
t on our fifinanciiall co dinditiion, re lsults of operatiions or ca hsh flflows.
iff) fifilledd a Co
iDis itrict Court for hthe Eastern i
iDistrict of Texas assertinging ii f infri gngement
oProbe
b
dproducts, i
lmpl iaint
including
uding hthe G10
l
dand asse irti gng hthat
dand
lPlaiintiffiff’s
iquit blable co dnduct. In Oc btober 2017, a juju yry
infri gngement of hthree patents byby hthe G10 andd Ge
loBladde
i
As
lPl iai
loBl dade
lPlaiintiff)
infringed,
iUni dted States
regardi gng i f i
l iPlaintiffiff’s Com lplaiint
ings, iin lvalidid, not i f i
lalllegedged hthat lleggacyy Tek
bsub isididi yary en iti ities iin hthe
nged, andd unenforceablblea
previouslyy didiscllosedd, iin Ma hrch 2016,
kPacket Intelllligeigence LLC ((Packket Intelllligeigence or
iUnit ded States patents.
dproducts, infringe
infringedd hthese patents. We fifilledd an Answer denyi
intiff was en ititl dled to $$3,500,000 for pre-s iuit ddam gages andd $$2,250,000 for
ktronix Ge
i
denyi gng lPlaiintiffiff’s lallleggatiions
ddue to iine
l
gagaiinst us andd two
of fifive
Ge
ppatents were, am gong othher hthings,
itri lal was h ldheld to ddaddress hthe pa irties’
lcl iaims andd countercllaiims regardi
products, iinvalilididityy of hthese patents, andd ddam gages. On Oc btober 13, 2017, hthe juryjury re dnderedd a ve dirdict fifinding
product
lPlaiintiffiff andd hthat
i di
indicatedd hthat hthe awa d drded ddamagges amounts were iint dendedd to reflflect a
judgmjudgment
ppre- andd post-judgm
iissue, hthe llast ddate b ibei gng June 2022. hThe Court d ideni ded hthe lPl iai
as a matter of llaw, hthe court ente dred fifi
hother dadverse fi di
htherefore,
provide
provide an es itimate for hthe
dand hthe gagg ggregate amount awa d drded byby hthe juju yry
udgment iinterest amounts andd costs andd
post-judgme
post-j
dand hthe Court's aw dard of enhhanc ded ddamagges,
yany
findi gngs. We hhave co lncl d duded hthat hthe i krisk of lloss from hthiis matter iis curre lntlyy
dand "enhhancedd" hthe juju yry
post-judgment iinterest, andd a
dand Geo l dBlade
intiff's motiion for fees.
defini itions, hthe i krisk of lloss iis term ded "reasonably
imilllliion as a res lult of a juju yry fi di
di
runni gng royal
verdict iin hthe amount of $$2.8
dunder GAAP d fi i
royal yty on hthe G10
runni gng royal
i
i
nding iin favor of hthe
post-suit ddamagges. hThe juryjury
i
royal yty. In Septe bmber 2018, hthe Court ente dred
findi gng. hThe judgmjudgment
lalso awardds
expiratiion of hthe patents at
i
llFollowinging daddiditiionall mo itions for jujudgme
dproducts untilil hthe
dgment
dand lalll
lnal judgmjudgment. On June 12, 2019, we filfil ded our Notiice of Appe lal of hthe judgmjudgment
probable, andd
b bl
require us to
i
inei hther remote nor
lrules
nably possiblible". hTherefore, accountinging
yroyalltiies owedd on post- itri lal salles of hthe accusedd G10 andd Ge
loBladde
lplus potentiiall daddiditiionall pre-
dand
dproducts.
grange of pote inti lal lili biabilili yty. We currentlyly es itimate hthat hthe es itimat ded ra gnge of lili babililiityy iis bbetween $$0
Item 4. Mineii
Safetff ytt Disclosures
None.
29
PART II
Itemtt
tt
5. Market forff Regist
rant
e
's Common Equity,tt Related StocSS
kholder MatteMM rs and Issuer Purchases of Eo
quity Stt
ecSS uritiii es
Price Range of Common Stock
Our common stock trades on the Nasdaq Global Select Market, under the symbol NTCT.
Stockholders
At May 11, 2020, we h dhad 96 stockholders of record. We believe that the number of beneficial holders of our common
stock exce deds
14,000
.
Stock Performance Graph
This performance graph shall not be deemed "filed" forff
purposes of Section 18 of the Exchange Act or otherwise subject
to the liabila
the Exchange Act or the Securities Act of 1933, as amended.
ities under that Section, and shall not be deemed to be incorporated by reference into any filing of NetScout under
The Stock Performance Grapha
h below compares the yearly change in the cumulative total stockholder return on
the fivff e-year period from March 31, 2015 through March 31, 2020 with the cumulative total returnt
our common stock during
of
the Nasdaq Composite Index and the Nasdaq Computer & Data Processing Index. The comparison assumes $100 was invested
on March 31, 2015 in our common stock or in the Nasdaq Composite Index and the Nasdaq Computer & Data Processing Index
and assumes reinvestment of dividends, if any.
ff
set fort
d
The stock price performance shown on the grapha
below is not necessarily indicative of futuret
price performance.
Information used in the grapha was obtained from Zacks Investment Research, Inc.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Assumes Initial Investment of $100
$300
$250
$200
$150
$100
$50
$0
3/15
3/16
3/17
3/18
3/19
3/20
NetScout Systems, Inc.
NASDAQ Composite – Total Returns
NASDAQ Computer and Data Processing
NetScout Systems, Inc.
Nasdaq Composite – Total Returns
t
Nasdaq Computer and Data Processing
3/31/2015
3/31/2016
3/31/2017
3/31/2018
3/31/2019
3/31/2020
$
$
$
100.00
100.00
100.00
$
$
$
52.38
100.55
128.31
$
$
$
86.55
123.56
158.29
$
$
$
60.09
149.21
211.57
$
$
$
64.01
165.07
248.63
$
$
$
53.98
166.22
273.16
30
Dividend Policy
In fiscal yyears 2020
dand
2019 we did not declare any cash dividends and do not anticipate declaring cash dividends in the
,
t
In addition, the terms of our credit facff
foreseeable futff ure.
our intention to retain all futuret
our stock buyback program furt
declaration will be at the discretion of our Board of Directors and will depend upon, among other things, our future earnings,
general financial conditions, capital requirements, existing bank covenants and general business conditions.
earnings for reinvestment to fund our expansion and growth, to pay down our debt, and to fund
her described under Item 7 "Liquidity and Capia tal Resources." Any future cash dividend
ility limit our ability to pay cash dividends on our capita
al stock. It is
ff
ff
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer
The following tablea
provides information about purchases we made during the quarter ended March 31, 2020 of equity
securities that are registered by us pursuant to Section 12 of the Exchange Act:
1/1/2020 - 1/31/2020
2/1/2020 - 2/29/2020
3/1/2020 - 3/31/2020
Total
Total Number
of Shares
Purchased (1)
Average Price
Paid per Share
— $
915,114
1,046,161
1,961,275
$
—
28.33
23.26
25.63
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
Maximum Number
of Shares That May
Yet be Purchased
Under the
Program
—
906,100
1,045,466
1,951,566
9,194,997
8,288,897
7,243,431
7,243,431
( )(1) We
h
purchasedd an agg g
ggregate of 9,709 hshares transfe
dd
uring
bliobliggatiions associiatedd wi hith hthe ves iti gng of res itrict ded stockk u init ds during
h
purcha dsed
ddo not redduce hthe ma iximum numbber of hshares hthat m yay bbe
gprogram)).
purchase
h
program ((our
program
ously didiscllosedd 25 milillilion hshare re
i
previously
drred to us from em lpl yoyee is in sati fisfactiion of tax wiithh ldi
hholdi gng
hthe
dunder our
iperi dod. Suchh p
hurchases reflleff ct ded iin hthe tablblea
ously announcedd stockk repurchhase
i
previously
31
Item 6. S66
elSS ecll
ted FinanFF
ciali Data
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in conjunction with our audited consolidated
financial statements and notes thereto and "Management’s Discussion and Analysis of Financial Condition and Results of
Operations" included under Item 7 of this Annual Report on Form 10-K. The consolidated statement of operations data forff
fiscal years ended March 31, 2020, 2019 and 2018 and the consolidated balance sheet data at March 31, 2020 and 2019 are
derived from audited consolidated financial statements included under Item 8 of this Annual Report on Form 10-K. The
consolidated statement of operations data for the fiscal years ended March 31, 2017 and 2016 and the consolidated balance
sheet data at March 31, 2018, 2017 and 2016 have been derived from audited consolidated finaff
do not appear in this Annual Report on Form 10-K. Certain amounts for the twelve months ended March 31, 2018, 2017 and
2016, respectively, have been reclassified to conform to the current period presentation. These reclassifications had no effecff
the reported results of operations. The historical results are not necessarily indicative of the operating results to be expected in
the future.
ncial statements of NetScout that
t on
the
Statement of Operations Data:
Revenue:
Product
Service
Total revenue
Cost of revenue:
Product
Service
Total cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Amortization of acquired intangible assets
Restructuring charges
Impairment of intangible assets
Loss on divestiture of business
Total operating expenses
Income (loss) from operations
Interest and other expense, net
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
Weighted average common shares outstanding used in
computing:
Net income (loss) per share—basic
Net income (loss) per share—diluted
Year Ended March 31,
2020
2019 (1)
2018
2017
2016 (2)
(In thousands, except per share data)
$ 438,341
$ 467,289
$ 520,418
$ 715,404
$ 625,537
453,479
891,820
442,629
909,918
466,369
446,708
986,787
1,162,112
329,882
955,419
122,832
119,360
242,192
649,628
188,294
276,523
99,994
64,505
2,674
—
—
140,938
113,189
254,127
655,791
203,588
291,870
93,572
74,305
18,693
35,871
9,472
158,628
113,277
271,905
714,882
215,076
312,536
109,479
76,640
5,209
—
—
233,275
112,864
346,139
815,973
232,701
328,628
118,438
70,141
4,001
—
—
235,996
92,453
328,449
626,970
208,630
293,335
117,714
32,373
468
—
—
631,990
727,371
718,940
753,909
652,520
17,638
(71,580)
(4,058)
62,064
(25,550)
(15,714)
(21,332)
(14,601)
(9,879)
(6,889)
1,924
4,678
(92,912)
(18,659)
(19,588)
(98,471)
$ (2,754) $ (73,324) $ 79,812
$
$
(0.04) $
(0.93) $
(0.04) $
(0.93) $
0.91
0.90
$
$
$
52,185
18,894
(32,439)
(4,070)
33,291
$ (28,369)
0.36
0.36
$
$
(0.35)
(0.35)
75,162
75,162
78,617
78,617
87,425
88,261
92,226
92,920
81,927
81,927
(1) The fiscal year 2019 amounts and all following years have been impacted by the April 1, 2018 adoption of the new
revenue standard.
32
(2) During the fiscal year ended March 31, 2016, NetScout completed the Comms Transaction. The total equity
consideration was approximately $2.3 billion based on issuing approximately 62.5 million new shares of NetScout
common stock.
Balance Sheet Data:
Cash, cash equivalents and short- and long-term
marketable securities
Working capita
al
Total assets
Debt
Total stockholders’ equity
2020 (1)
2019
March 31,
2018
(In thousands)
2017
2016 (2)
$ 389,071
$ 486,988
$ 447,762
$ 464,705
$ 352,075
$ 260,746
$ 421,286
$ 339,108
$ 394,279
$ 283,422
$ 3,120,503
$ 3,269,994
$ 3,368,608
$ 3,601,513
$3,592,843
$ 450,000
$ 550,000
$ 600,000
$ 300,000
$ 300,000
$ 1,937,919
$ 2,065,433
$ 2,068,782
$ 2,436,250
$2,443,382
(1) Upon adoption of ASU 2016-02, Leases (Topic 842), at the beginning of the firff st quarter of fiscal 2020, NetScout began
including right-of-use assets in total assets, as the guidance requires an entity to recognize lease liabilities and a right-
of-use assets on the balance sheet.
(2) During the fiscal year ended March 31, 2016, NetScout completed the Comms Transaction. The total equity
consideration was approximately $2.3 billion based on issuing approximately 62.5 million new shares of NetScout
common stock.
Item 7. Management's Discussion and Analysis of Financ
ii
ial Conditiii on and Results ott
f Oo
peOO rations
The following information should be read in conjunction with the audited consolidated finaff
ncial information and the
notes thereto included in this Annual Report on Form 10-K. In addition to historical information, the following discussion and
other parts of this Annual Report contain forward-looki
ng statements that involve risks and uncertainties. You should not place
undue reliance on these forward-looking statements. Actual events or results may differ materially dued
and other factors discussed in Item 1A. "Risk Factors" and elsewhere in this Annual Report. These factors may cause our actual
any forward-looki
results to differ materially fromff
Forward-Looking Statements" that appears at the beginning of this Annual Report.
ng statement. See the section titled "Cautionary Statement Concerning
to competitive factors
ff
ff
Overview
We are an industry leader in providing service assurance and security solutions that are used by customers worldwide to
assure their digital business services against disruption. Service providers and enterprises, including local, state and federal
government agencies, rely on our solutions to achieve the visibility necessary to optimize network performance, ensure the
delivery of high-quality, mission-critical appli
cations and services, gain timely insight into the end user experience and protect
the network from attack. With our offerings, customers can quickly, efficiently and effectively identify and resolve issues that
result in downtime, interruptions to services, poor service quality or compromised security, thereby driving compelling returns
on their investments in their network and broader technology initiatives. Some of the more significant technology trends and
catalyst for our business include the evolution of customers digital transformation initiatives, the rapidly evolving security
threat landscape, business intelligence and analytics advancements, and the 5G evolution in both the service provider and
enterprise verticals.
a
Our operating results are influenced by a number of fact
ors, including, but not limited to, the mix and quantity of
ff
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, and our ability to achieve expense reductions and make improvements in a highly competitive
industry.
33
COVID-II
19 Impact
In March 2020, the World Health Organization declared the novel strain of coronavirus (COVID-19) a global pandemic
and recommended containment and mitigation measures worldwide. The pandemic and these containment and mitigation
measures have led to adverse impacts on the U.S. and global economies. Due to the critical naturet
of our products and services,
we are considered critical under State and Federal guidelines. We remain focused on protecting the health and well-being of our
employees and have implemented work from home policies for a vast majoa rity of our employees where possible.
We are closely monitoring the impact of the outbreak of COVID-19 on all aspects of our business, including how it has
impacted and will continue to impact our customers, employees, supply chain, and distribution network. While COVID-19 did
not have a material adverse effecff
t on our reported results for the fourth quarter of our fiscal year 2020, the pandemic did impact
to predict the
the timing of some transactions. There is a great deal of uncertainty in the global economy, and we are unablea
ultimate impact that it may have on our business, future results of operations, financial position or cash flows. The extent to
which our operations may be impacted by the COVID-19 pandemic will depend largely on future developments, which are
highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of
the outbreak and actions by government authorities to contain the outbrea
potential worsening of global economic conditions and the continued disruptions to and volatility in the financial markets
remain unknown.
k or treat its impact. Furthermore, the impacts of a
t
Although there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on our future results, we
believe that our products offer customers a unique solution set that can assist them in dealing with unexpected network, security
and capaa
city challenges during and after the pandemic. Despite high customer interest in our products, the timing of the receipt
of orders is challenging to predict. We believe our current cash reserves leave us well-positioned to manage our business
through this crisis as it continues to unfold. Based on our analysis, we believe our existing balances of cash, cash equivalents
and marketablea
the ordinary course of business for the next twelve months. We are taking actions to reduce costs and increase productivity
throughout our company. This includes limiting discretionary spending and reducing hiring activities. We have temporarily
halted our stock repurchase program, although the repurchase authorization remains effective. In addition, based on covenant
levels at March 31, 2020, we have an incremental $285 million available to us under our $1.0 billion revolving credit facility.
securities and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in
The extent of the impact of the global COVID-19 outbrea
certain developments, including the duration and spread of the outbrea
range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.
We will continue to proactively respond to the situation and may take further actions that alter our business operations as may
be required by governmental authorities, or that we determine are in the best interests of our stakeholders.
k on our operational and financial performance will depend on
k, its impact on our customers and suppliers and the
t
t
Resultstt Overview
Total revenue for the fiisc lal yyear
2019 was
iprima ilrilyy iimpactedd byby an $$18.1
Septe bmber 2018, as wellll as a ddecrease iin
hThese ddecreases were offset byby an iincrease iin se irvice revenue from new maiintenance contracts andd renewalls from a growi
support bbase.
imilllliion ddecrease iin revenue as a res lult of hthe didives ititure of hthe HNT
dproduct revenue from b hboth networkk performance managgement
l
dand DDOS offerings
offerings.
growi gng
dendedd Ma hrch 31, 2020 as comparedd to totall revenue for hthe fifiscall yyear end dded Mar hch 31,
tools b ibusiness iin
Our ggross
profit percentagge iincreas ded byby ap
fi
proximat lelyy one percentagge
ipoint d iduri gng hthe fifiscall yyear end dded Ma hrch 31, 2020
as comparedd iwi hth hthe fifisc lal yyear
i
dendedd Ma hrch 31, 2019.
NNet lloss for hthe fiscal year ended March 31, 2020 was $2.8 million, as compared with net loss for the fiscal year ended
imilllliion iimpaiirment hcha grge of cert iain iintangi
March 31, 2019 of $73.3 million, res lultinging iin a ddecrease iin net lloss of $$70.5
to a $$35.9
ended March 31, 2019, a $$17.6
hcha grges, an $$11.8
business
busine
iincome tax expense.
imilllliion ddecrease iin amortiizatiion of iintangibl
dand a $$9.5
-relat ded expenses,
2019
imilllliion ddecrease iin em lpl yoyee
recordedd iin hthe fifisc lal yyear
dendedd Ma hrch 31,
d
l
.
angiblble assets rellatedd to hthe HNT t
imilllliion. hThe ddecrease iin net lloss was
iprima ilrilyy ddue
ngible assets, a $$16.0
lools b ibusiness
imilllliion ddecrease iin restruc
imilllliion lloss on hthe didives ititure of hthe HNT
recordedd iin hthe fiscal year
i
turi gng
tools
l
d
hThese ddecreases were pa irti lallyly offset byby a $$24.3
imilllliion iincrease iin
At March 31, 2020, we had cash, cash equivalents, and marketable securities (current and non-current) of $389.1 million.
iprim iarilyly ddue
imilllliion
iunits,
stwi d)nd).
i
dendedd Ma hrch 31,
This represents a decrease of $97.9 million compared to the fiscal year ended March 31, 2019. hiThis ddecrease was
to $$175.0
usedd for ca ipita
dand $$11.3
hThese ddecreases were pa irti lallyly offset byby $$225.0
2020.
purchase hshares of our common st kock, $$100.0
h
imilllliion usedd for tax iwithh ldi
, $$11.9
quisi itions of GigGigava ition Incorporatedd (
i i
id d
hholdi gngs iin connec ition iwithh hthe ves iti gng of res itrict ded sto kck
dand East
imilllliion usedd to re
lal expe dinditures
imilllliion usedd for hthe ac
provided byby operatiions dduringing hthe fifisc lal yyear
imilllliion usedd to re ypay llo gng-term ddebbt, $$19.9
iwi dnd Netwo krks, Inc. ((Ea
imilllliion iin ca hsh
(Giggava iti
)on)
t
i
34
Use of Non-GAAP Financ
ii
ial Measures
We supplement the United States 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 total revenue, non-GAAP product revenue, non-GAAP service revenue, non-
GAAP gross profit, non-GAAP income from operations, non-GAAP operating margin, non-GAAP earnings before interest and
other expense, income taxes, depreciation and amortization (EBITDA) from operations, non-GAAP net income, and non-
GAAP net income per share (diluted). Non-GAAP revenue (total, product and service) eliminates the GAAP effecff
acquisitions by adding back revenue related to deferred revenue revaluation, as well as revenue impacted by the amortization of
acquired intangible assets. Non-GAAP gross profit includes the aforementioned revenue adjustments and also removes
expenses related to the amortization of acquired intangible assets, share-based compensat
acquisitions including depreciation costs, compensation for post-combination services and business development and
integration costs and adds back transitional service agreement income. Non-GAAP income from operations includes the
aforementioned adjustmd
and costs related to new accounting standard implementation. Non-GAAP EBITDA from operations includes the
aforementioned items related to non-GAAP income from operations and also removes non-acquisition-related depreciation
expense. Non-GAAP net income includes the foregoing adjustments related to non-GAAP income from operations, net of
related income tax effecff
ts in addition to the provisional one-time impacts of the U.S. Tax Cuts and Jobs Act (TCJA) while
removing transitional service agreement income and changes in contingent consideration. Non-GAAP diluted net income per
share also excludes these expenses as well as the related impact of all these adjustmd
charges, intangible asset impairment charges, loss on divestiture
ents on the provision for income taxes.
ents and also removes restructuring
ion, certain expenses relating to
ts of
m
t
These non-GAAP measures are not in accordance with GAAP, should not be considered an alternative for measures
prepared in accordance with GAAP (revenue, gross profit, operating profit, net income (loss) and diluted net income (loss) 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 substitutet
for results prepared in accordance with GAAP.
Management believes these non-GAAP financial measures enhance the reader's overall understanding of our current
by providing a higher degree of transparency for certain financial
financial performance and our prospects for the futuret
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
with 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.
investors a view of our operating results that may be more easily compared
ff
35
The folff
lowing table reconciles revenue, gross profit, income (loss) from operations, net income (loss) and net income
(loss) per share on a GAAP and non-GAAP basis for the fiscal years ended March 31, 2020, 2019 and 2018:
GAAP revenue
Fiscal Year Ended March 31,
(Dollars in Thousands, Except per Share Data)
2020
2019
2018
$
891,820
$
909,918
$
986,787
Product deferre
ff
d revenue fair value adjustment
Service deferred revenue fair value adjust
d ment
Amortization of acquired intangible assets
Non-GAAP revenue
GAAP gross profit
Product deferred revenue fair value adjust
d ment
Service deferred revenue fair value adjust
Share-based compensation expense
Amortization of acquired intangible assets
d ment
Business development and integration expense
Acquisition related depreciation expense
Transitional service agreement income
Non-GAAP gross profit
GAAP income (loss) from operations
Product deferred revenue fair value adjust
d ment
Service deferred revenue fair value adjust
d ment
Share-based compensation expense
Amortization of acquired intangible assets
Business development and integration expense
New standard implementation expense
Compensation for post-combination services
Restructuring charges
Impairment of intangible assets
Acquisition related depreciation expense
Loss on divestiture
Transitional service agreement income
Non-GAAP income fromff
operations
GAAP net income (loss)
Product deferred revenue fair value adjust
d ment
Service deferred revenue fair value adjust
d ment
Share-based compensation expense
Amortization of acquired intangible assets
Business development and integration expense
New standard implementation expense
Compensation for post-combination services
36
$
$
$
$
$
$
$
$
—
192
—
892,012
649,628
—
192
6,843
24,974
—
31
—
$
$
391
1,199
—
911,508
655,791
391
1,199
7,422
31,238
—
75
2
3,064
9,409
9
999,269
714,882
3,064
9,409
5,983
37,332
244
145
—
681,668
$
696,118
$
771,059
17,638
$
(71,580) $
(4,058)
—
192
50,861
89,479
373
5
578
2,674
—
312
—
1,212
391
1,199
56,328
105,543
874
914
789
18,693
35,871
905
9,472
2,186
3,064
9,409
47,317
113,972
2,689
2,630
1,108
5,209
—
2,057
—
—
163,324
$
161,585
$
183,397
(2,754) $
(73,324) $
79,812
—
192
50,861
89,479
373
5
578
391
1,199
56,328
105,543
874
914
789
3,064
9,409
47,317
113,972
2,689
2,630
1,108
t
Restruct
uring
rr
charges
Impairment of intangible assets
Acquisition-related depreciation expense
Loss on divestiture
Other income
Transitional service agreement income
Change in contingent consideration
Income tax adjust
d ments
Non-GAAP net income
GAAP diluted net income (loss) per share
Per share impact of non-GAAP adjust
d ments identified above
Non-GAAP diluted net income per share
GAAP income (loss) from operations
Previous adjustments to determine non-GAAP income fromff
operations
Non-GAAP income fromff
operations
Depreciation excluding acquisition related
Non-GAAP EBITDA from operations
Critical Accounting Policies
$
$
$
$
2,674
—
312
—
—
—
762
18,693
35,871
905
9,472
—
(45)
1,495
5,209
—
2,057
—
(57)
—
—
(23,415)
(49,877)
(142,546)
119,067
$
109,228
$
124,664
(0.04) $
(0.93) $
2.31
1.38
$
0.90
0.51
1.41
$
$
1.61
1.57
17,638
145,686
163,324
26,313
(71,580) $
(4,058)
233,165
161,585
31,430
187,455
183,397
37,474
$
189,637
$
193,015
$
220,871
We consider accounting policies related to revenue recognition, marketablea
securities, valuation of goodwill, intangible
assets and other acquisition and divestiture accounting items, and share-based compensation to be critical in fully understanding
and evaluating our financial results. We apply significant judgment and create estimates when applying these policies.
Revenue Recognigg tioii n
We exercise judgment and use estimates in connection with determining the amounts of product and service revenues to
be recognized in each accounting period.
We derive revenues primarily fromff
the sale of network management tools and security solutions for service provider and
enterprise customers, which include hardware, software
hardware products with embedded software
We also sell software offerings decoupled fromff
enhanced funct
ionality.
ff
ff
ff
and service offerings. The majoa rity of our product sales consist of
that are essential to providing customers the intended funct
ff
ionality of the solutions.
the underlying hardware and software
ff
solutions to provide customers with
We account for revenue once a legally enforceable contract with a customer has been approved
a
by the parties and the
related promises to transfer products or services have been identified. A contract is defined by us 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 we deem probablea
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 our customers, in an amount that
reflects the consideration we expect to be entitled to in exchange for products and services.
of collection. Customer contracts may include promises to transfer multiple
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
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 fulfi
services, post-contract customer support, stand-ready software-as-a-service (SAAS) and other professional services including
consulting and training. We generally provide software and/or hardware support as part of product sales. Revenue related to the
over the support period. In addition, customers can elect to
initial bundled software and hardware support is recognized ratablya
lled. Our service offerings include installation, integration, extended warranty and maintenance
; and
ff
ff
37
purchase extended support agreements for periods afteff
r 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, our 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 our product and service offerings that may
be delivered at various points in time. We allocate 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. We use a range of amounts to estimate SSP when we sell each of the products and services
separately based on the element’s historical pricing. We also consider our overall pricing objectives and practices across
different sales channels and geographies, and market conditions. Generally, we have establia
a
shed SSP for services based upon an
service elements based on historical standalone sales. In certain instances, we have establia
estimate of profitability and the underlying cost to fulfill those services. Further, for certain service engagements, we consider
quoted prices as part of multi-element arrangements of those engagements as a basis for establia
establia
sold as part of a multiple element transaction. We review sales of the product elements on a quarterly basis and update, when
appropriate, SSP for such elements to ensure that it reflects recent pricing experience. Our products are distributed through our
direct sales force and 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. We record consideration given to a reseller or distributor as a reduction of revenue to the extent we have recorded
revenue from the reseller or distributor. With limited exceptions, our returnt
for a refund.
Returns have been insignificant to date. In addition, we have a history of successfully collecting receivables from our resellers
and distributors.
shed for product elements as the average or median selling price the element was recently sold for, whether sold alone or
policy does not allow product returns
shing SSP. SSP has been
shed SSP for a majori
ty of our
ff
t
Marketablell Securitiii es
We measure the fair value of our marketable securities at the end of each reporting period. Fair value is defined as the
exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly
securities are recorded at fair value and have
transaction between market participants on the measurement date. Marketablea
been classified as Level 1 or 2 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices
(unadjusted) in accessible active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data
points that are observable such as quoted prices, interest rates and yield curves.
Valuationtt
of Goodwill,ll Intangible
tt
Assets and Other
tt
Acquisitiontt
and Divestiture Accountingtt
s
Itemtt
We amortize acquired definite-lived intangible assets over their estimated useful lives. Goodwill and other indefinite-
lived intangible assets are not amortized but subject to annual impairment tests; more frequently if events or circumstances
occur that would indicate a potential decline in their fair value. We perform the assessment annually during the fourth quarter
and on an interim basis if potential impairment indicators arise.
Reporting units are determined based on the components of our operating segments that constitutet
a business for which
financial information is available and for which operating results are regularly reviewed by segment management. Through the
first half of fiscal year 2020, we had two reporting units: (1) Service Assurance and (2) Security. As part of our continued
integration efforts, effective during the third quarter of fiscal year 2020, we reorganized our business units. As a result of this
change, we reduced the number of reporting units from two reporting units to one reporting unit. The former Service Assurance
and Security reporting units were combined as result of organizational changes made to fully integrate the resources and assets
of the Service Assurance and Security business units.
We completed an assessment of any potential impairment for all reporting units immediately prior to and after the
reporting unit change and determined that no impairment existed. As such, no impairment charges were recognized during the
fiscal year ended March 31, 2020.
To test iimpaiirment, we fifirst assess
i di
indicate hthat iit iis more lilik lkelyy hthan not hthat hthe iintangi
lilik lkelyy hthan not hthat hthe f ifair
requi dred. However, ifif we concl dlude
lvalue of hthe iintangibl
hothe
i
i
li
qualita itive factors to ddete
i
angiblble asset iis iim ipai dred. If bbasedd on our
rmine hwhe hther hthe exiistence of events andd icircumstances
lqualiitatiive assessment iit iis more
sting iis
requi dred. During fiscal year 2020, we
rryi gng amount, qua intita itive iimpaiirment testing
i
rwise, quantiitatiive iim ipairment testiingg iis not
ngible asset iis lless hthan iits carryi
38
performed our annual impairment analysis for goodwill as of January 31, 2020. We performed a quantitative analysis and
determined the fair value of the reporting unit's goodwill using establia
shed income and market valuation approaches. Goodwill
was determined to be recoverable as of January 31, 2020. We considered the current and expected future economic and market
conditions surrounding the COVID-19 pandemic to be a triggering event. As such, we performed a quantitative analysis as of
March 31, 2020 and determined the fair value of the reporting unit's goodwill using establia
shed income and market valuation
approaches. Goodwill was estimated to be recoverablea
as of March 31, 2020.
rryi gng
lnuallyly as of Ja
lwouldd, more lilik lkelyy hthan not, redduce hthe f ifair
angiblble assets are test ded for iim ipairment at lleast an
le-liivedd iintangi
icircumstances hch gange hthat
lvalue. To test iimpaiirment, we fifirst assess
indicate hthat iit iis more lilik lkelyy hthan not hthat hthe i dindefi i
Indefi init
d fi
le-liivedd iintangi
event occurs or
rmine hwhe hther hthe exiistence of
assets bbellow iits carryi
events andd icircumstances i di
ngible iis iimpaiiredd. If bbas ded on our
lqualiitatiive assessment we concl dlude hthat iit is more likely than not that the fair value of the indefinite-lived asset is greater than
its carrying amount, quantitative impairment testing is not required. We completed our annual impairment test of the indefinite-
lived intangible asset at January 31, 2020 using the qualitative Step 0 assessment. No impairment indicators were observed as
of January 31, 2020. We considered the current and expected futuret
COVID-19 pandemic and concluded that it was not more likely than not that the trade name was impaired and therefore a
quantitative Step 1 assessment was not performed as of March 31, 2020.
economic and market conditions surrounding the
i
finite li-li dved iintangibl
lqualiitatiive factors to ddete
nuary 31, or on an iint
lvalue of hthe iind fidefi init
ierim bba isis ifif an
angiblble
y
We completed three acquisitions and one divestiture during the three-year period ended March 31, 2020. The acquisition
method of accounting requires an estimate of the fair value of the assets and liabilities acquired as part of these transactions. In
order to estimate the fair value of acquired intangible assets, we use either an income, market or cost method approach.
We had a contingent liability at March 31, 2020 for $$0.7
imilllliion rellatedd to the acquisition of Gigavation in February
2020, for hiwhi hch an escrow account was established to cover damages we may suffer related to any liabilities that we did not
agree to assume or as a result of the breach of representations and warranties of the seller as described in the acquisition
agreement. Except to the extent that valid indemnification claims are made prior to su hch itime, the contingent purchase
r
bFebr
yuary
consideration of $$0.7
imilllliion iwillll bbe paidid to hthe sellller iin
2021
.
We had a contingent liability at March 31, 2020 for $$1.0
imilllliion rellatedd to hthe ac
iqui i isition of Eastwi dind iin
iAprill 2019 for
hiwhi hch an escrow account was established to cover damages we may suffer related to any liabilities that we did not agree to
assume or as a result of the breach of representations and warranties of the seller as described in the acquisition agreement. The
contingent purchase consideration of $1.0 million was paid to the seller in April 2020.
We had a contingent consideration asset related to the divestiture of our handheld network test (HNT) tools business in
earnout payments to us of up to $4.0 million
September 2018. The contingent consideration asset represented potential futuret
over two years that were contingent on the HNT tools business achieving certain milestones. The fair value of the contingent
consideration of $2.3 million was recognized on the divestituret
value of the contingent consideration asset at March 31, 2020 and 2019 was $0 was $$0.8
date and was measured using observablea
imilllliion, respectiively.ly.
(Level 3) inputs. The
We had a contingent liability at March 31, 2018 for $0.5 million related to the acquisition of Efflux
Systems, Inc. (Efflux)
shed to cover damages we may have suffered related to any liabilities that
ff
in July 2017 for which an escrow account was establia
we did not agree to assume or as a result of the breach of representations and warranties of the seller as described in the
acquisition agreement. The $0.5 million was paid to the seller in July 2018.
We had a contingent liability at March 31, 2018 for $4.9 million related to the acquisition of Simena LLC (Simena) in
November 2011, which was based on the ultimate settlement of assets and liabilities acquired as part of the transaction, and the
former owners' futuret
seller in November 2018.
period of employment with us. The contingent purchase consideration of $5.0 million was paid to the
Share-Based Compensationtt
We recognize compensation expense for all share-based payments. Under the fair value recognition provisions, we
recognize share-based compensation net of an estimated forfeituret
expected to vest on a straight-line basis over the requisite service period of the award.
rate and only recognize compensation cost for those shares
We are required to estimate the expected forfeituret
rate and only recognize expense for those shares expected to vest. If
our actual forfeituret
different from what we have recorded in the current period.
rate is materially different from our estimate, the share-based compensation expense could be significantly
Based on historical experience, we assumed an annualized forfeiture rate of 0% for awards granted to our directors, an
annualized forfeiture rate of approximately 2% for awards granted to our senior executives, and an annualized forfeiture rate of
approximately 5% for all remaining employees. We will record additional expense if the actual forfeitures
t
estimated and will record a recovery of prior expense if the actual forfeitures are higher than estimated.
are lower than
39
Comparison of Years Ended March 31, 2020 and 2019
The sections that follow discuss our consolidated statement of operations data for the fiscal years ended March 31, 2020
and March 31, 2019 including results as a percentage of revenue for those periods. For a discussion of (i) our consolidated
statement of operations data for the fiscal year ended March 31, 2018 including results as a percentage of revenue for that
period, as well as (ii) our liquidity and capital resources forff
Ended March 31, 2019 and 2018" and "Liquidity and Capia tal Resources" in Part II, Item 7 of our Annual Report on Form 10-K
for the fiscal year ended March 31, 2019, filed with the SEC on May 28, 2019 (our 2019 Annual Report).
the fiscal year ended March 31, 2018, see "Comparison of Years
Results of Operations
Revenue
Product revenue consists of sales of our hardware products and licensing of our software products. Service revenue
con isists of customer support gagreements, co
yyears
revenue.
ended Ma hrch 31, 2020
d d
dand 2019, n do diirect customer or iindidirect hcha
lnsulting,
ing, tr iainingning andd sta dnd-readydy software as a s
iDuri gng hthe fifiscall
lnnel partner accounted fd forff more hthan 10% of our tot lal
offeri gngs.
i
iervice ff
Fiscal Year Ended March 31,
(Dollars in Thousands)
2020
2019
Change
% of
Revenue
% of
Revenue
$
%
$
$
438,341
4
53,479
891,820
49 % $
467,289
51
442,629
51 % $
(28,948)
49
10,850
100 % $
909,918
100 % $
(18,098)
(6)%
2 %
(2)%
Revenue:
Product
e
Servic
Total revenue
Product. The 6%, or $28.9 million, decrease in product revenue compared with the same period last year was primarily
d, a decreas ie in
tools
l
kwork performance ma gnagement andd DDoS offerings
offerings
rovidder customers, as w lelll as thhe didive istiture of hthe HNT
rprise-rellatedd p droduct revenue for bbothh net
rings from ser ivice p
kwork performance ma gnagement offerings
i
due to llower ente
net
business iin Septembber 2018.
busine
i
Service. The 2%, or $10.9 million, increase in service revenue compared to the same peri diod llast yyear was
iprim iarilyly ddue to
growing
an iincreas ie in revenue from maiintenance contracts ddue to iincreasedd new maiintenance contracts andd renewalls from a growing
support bbase.
Total revenue by geography is as follows:
Fiscal Year Ended March 31,
(Dollars in Thousands)
2020
2019
Change
% of
Revenue
% of
Revenue
$
%
$
545,620
61 % $
553,267
61 % $
(7,647)
(1)%
United States
International:
Europe
Asia
Rest of the world
Subtotal international
154,510
59,939
131,751
346,200
17
7
15
39
148,036
72,355
136,260
356,651
16
8
15
39
6,474
(12,416)
(4,509)
(10,451)
4 %
(17)%
(3)%
(3)%
(2)%
Total revenue
$
891,820
100
$%
909,918
100
$%
(18,098)
United States revenue decreased 1%, or $$7.6
ma gnagement offerings,
rings, as wellll as da decreas de dued
imilllliion, p irim iarilyly ddue to da decrease iin revenue from networkk performance
parti lallyly offset byby an iincreas ie in
tool bs b iusiness,
to hth de diivestiituret
of hthe HNT
i
l
40
offerings. Internatiionall revenue ddecreasedd 3%, or $$10.5
imilllliion, p irim iarilyly ddue to da decrease iin revenue from ne
twork
k
DDoS offerings.
pperformance managgement
offeri gngs.
i
ff
Cost of Revenue and Gross Profit
Cost of product revenue consists primarily of material components, manufacturing personnel expenses, packaging
materials, overhead and amortization of capia talized software, acquired developed technology and core technology. Cost of
service revenue consists primarily of personnel, material, overhead and support costs.
Fiscal Year Ended March 31,
(Dollars in Thousands)
2020
2019
Change
% of
Revenue
% of
Revenue
$
%
Cost of revenue:
Product
Service
$ 122,832
119,360
Total cost of revenue
$ 242,192
14 % $ 140,938
13
113,189
27 % $ 254,127
16 % $ (18,106)
12
6,171
28 % $ (11,935)
Gross profit:
Product $
$ 315,509
35 % $ 326,351
36 % $ (10,842)
Product gross profit
%
2 %
7
70
%
2
%
Service $
$ 334,119
37 % $ 329,440
36 % $
4,679
Service gross profit
%
4 %
7
Total gross profit $
$ 649,628
Total gross profit %
73 %
74
%
$ 655,791
72
%
—
%
$
(6,163)
1
%
(13)%
5 %
(5)%
(3)%
1 %
(1)%
Product. The 13%, or $18.1 million, decrease in cost of product revenue compared to the same period last year was
imilllliion ddecreas ie in thhe am iortiza ition of iintangi
p irimarilyily ddue to $a $7.8
ddue to da decreas ie in p droduct revenue, $a $4.2
projects a dnd a r deductd
proje
ddecreases were par iti lallyly offset byby $a $2.3
percentage increased by two percentage points to 72% during the fisff cal year ended March 31, 2020 as compared to the same
periperi dod iin hthe p irior yyear. hThe 3%, or $$10.8
imilllliion
ddecrease iin produc
rofit, corres
imilllliion, ddecrease in cost of product.
imilllliion ddecreas ie i dn diirect mate iriall costs
imi gng of cert iain
imilllliion ddecreas ie in costs to d ldeliiver m dodell c lalibibra ition
t revenue, partiiallllyy offse bt byy thhe 13%, or $$18.1
loyee-rellatedd expenses associiatedd wiithh thhe iti
imilllliio in increase iin iinvent yory b l
harges. The product gross profit
iion iin hheaddcount, a dnd $a $1.4
imilllliion ddecreas ie in employe
iwi hth hthe 6%, or $$28.9
angiblble assets, $a $7.2
obsolescence charge
dproduc gt gross p fi
imilllliion ddecrease iin
dproducts. hThese
ponds
d
pro
Service. The 5%, or $6.2 million, increase in cost of service revenue was primarily due to a $$7.0
imilllliion iincreas ie in cost of mat
ployee-rellatedd expenses associiatedd wiithh a in increase iin va iriablblea
employe
proje
projects, an $$0.8
iin rent andd o hther facff
offse bt byy a $$2.8
year ended March 31, 2020 compared to the fiscal year ended March 31, 2019. The 1%, or $4.7 million, increase in service
gross profit corre
increase in cost of services.
imilllliion ddecreas ie in contractor fees. Thhe service gross profit percentagge remaiined fd fllafff
i hwith hth 2e %, or $10.9 million, increase in service revenue, partially offset by the 5%, or $6.2 million
imilllliio in increase iin warran yty expense. hThes ie increases were pa irti lallyly
iincentiive compensatiion as wellll as hthe iti
ieri lals usedd to support customers
dunder ser ivice contracts, $a $0.7
t at 74% during the fisff cal
dated expenses a dnd $a $0.5
ililiitiies r lel
sponds
d
imilllliio in increase
imilllliion iincreas ie in
imi gng of certaiin
Gross profitff . Our gross profitff decreased 1%, or $6.2 million, compared to the fiscal year ended March 31, 2019. This
decrease is attributable to the 2%, or $18.1 million, decrease in revenue pa irti lallyly offset byby the $11.9 million, or 5%, decrease in
cost of revenue. The gross margin percent gage iincreased bd y one percentage point to 73% during the fisff cal year ended March 31,
2020 compared to the same period in the prior year.
41
Operating Expenses
Fiscal Year Ended March 31,
(Dollars in Thousands)
2020
2019
Change
% of
Revenue
% of
Revenue
$
%
Research and development
$
188,294
Sales and marketing
General and administrative
Amortization of acquired
intangible assets
t
Restructuring
charges
Impairment of intangible assets
Loss on divestiture of business
276,523
99,994
64,505
2,674
—
—
21
31
11
7
—
—
—
$
203,588
22 % $
(15,294)
291,870
93,572
74,305
18,693
35,871
9,472
32
10
8
2
4
1
(15,347)
6,422
(9,800)
(16,019)
(35,871)
(9,472)
Total operating expenses
$
631,990
70 % $
727,371
79 % $
(95,381)
(8)%
(5)%
7 %
(13)%
(86)%
(100)%
(100)%
(13)%
RResearchh a dnd ddev lelopment. Researchh a dnd dde
lvelopment expenses consiist
iprim iarilyly of personnell expenses, feeff
cons lultants,
products.
product
overheadd a dnd rellatedd expenses associiatedd wiithh thhe ddevellopment of new
h
dproducts a dnd hthe
s forff
henhancement of exi
id
outside
isti gng
i
hThe 8%, or $$15.3
primprim iarilyly ddue to a net $$12.0
iincrease iin va iriablblea
software lilicense expense.
imilllliion, ddecrease iin researchh a dnd dde
imilllliion ddecreas ie in employe
iincentiive compensatiion, $a $2.3
lvelopment expenses comparedd to thhe same pe i driod llast yyear was
loyee-rellatedd expense ddue to a r deductd
imilllliion ddecreas ie i dn depre iciatiion expense, and $d a $0.7
iion iin hheaddcount partiiallllyy offse bt byy an
imilllliio dn decrease iin
Sales and marketkk ing. 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 5%, or $15.3 million, ddecrease iin totall s lales andd markketinging expenses comparedd to thhe same pe i driod llast yyear was
imilllliion ddecreas ie in employe
bre-basedd compensatiion expense par iti lallyly offset byby an iincreas ie in v iari blabl
imilllliio dn decrease iin travell expense, $a $2.3
lrelat ded expenses
$, a $3.3
primprim iarilyly ddue to a net $$4.0
iin hsha
iin ma krke iti gng
$$1.9
imilllliion ddecreas ie in tradde hshows andd o hther events.
loyee-rellatedd expense ddue to a r deductd
iion iin hheaddcount as wellll as da decrease
ie ince intive compensa ition, $a $3.6
imilllliion ddecreas ie in com imi
imilllliio dn decrease
issions expense, andd a
General and administrati
tt
ve. General and administrative expenses consist primarily of personnel expenses for executive,
financial, legal and human resource employees, overhead and other corporate expenditures.
The 7%, or $6.4 million, increase iin ggenerall a dnd dadmi iinistratiive expenses compa dred to hthe same
iperi dod llast yyear was
primprim iarilyly ddue to $a $6.6
ddue to an iincreas ie in v iari blabl
ppartiiallllyy offse bt byy a $$1.7
imilllliion iincreas ie i
lnal ities, andd a net $$1.4
ie ince intive compensa ition offse bt byy a ddecrease iin hsha
ln l geg lal fees a dnd pe
imilllliio in increase iin em lpl yoyee
-relat ded expenses
l
bre-basedd compensatiion. hThes ie increases were
imilllliion ddecreas ie in rent
dand othher fa icilili ities
lrelat ded expenses.
ii
Amortizati
on of acquired intangible assets.tt Amortization of acquired intangible assets consists primarily of amortization
of customer relationships, definite-lived trademark and tradenames, and leasehold interests related to the Comms Transaction,
ONPATH Technologies, Inc., Simena, Psytechnics, Ltd, Network General Corporation, Avvasi Incorporated and Efflux.
The 13%, or $9.8 million, decrease in am iortiza ition of ac
angiblble assets was llargel
rgely dy dued
to da decrease iin
am iortiza ition of hthe iintangi
ddecrease ddue to a r deductd
angiblble assets rellatedd to thhe didivestiituret
iion iin hthe am iortiza ition of iintangi
l
angiblble assets rellatedd to thhe Comms Transac ition.
tool bs b iusines is in Septembber 2018,
iwi hth hthe rem iainingning
iquired id intangi
of hthe HNT
Restructuring. During fiscal years 2020 and 2019, we restructured certain departments to better align functions, drive
productivity and improve efficff
employees who met certain age and service requirements to reduce overall headcount. As a result of these restructuring
programs, we record dded $$2.7
d
as facility-related charges during
imilllliion andnd $18.7 million of restructuring charges related to one-time termination benefits as well
iency. DuriDur ng fiscal year 2019, we also implemented a voluntary separation program (VSP) forff
the fisff cal years ended March 31, 2020 and 2019, respectively.
IImpairment ofof intangibl
ngible assets
angible assets.tt Du iri gng hthe ifirst quarter of fiisca
l
lrelat ded to hthe HNT
certaiin iintangibl
ff
tool bs b iusiness. hThe f ifair v lalue of hthes ie intangibl
ngible assets wa ds determiinedd t bo b le less
l yl year 2019, we performedd a qua intita itive an lalysisysis on
42
hthan hthe car yryiingg v lalue, andd as a res lult, we recogniz
Ma hrch 31, 2019.
ogniz ded an iim ipairment hch garge of $$35.9
imilllliion d iduri gng hthe fifiscal yl year e d dnded
Loss on divestiture of business. During the fiscal year ended March 31, 2019, we recorded a $9.5 million loss on the
divestituret
of the HNT tools business.
Interest and Other Expense, Net
Interest and other expense, net includes interest earned on our cash, cash equivalents and marketable securities, interest
expense and other non-operating gains or losses.
Fiscal Year Ended March 31,
(Dollars in Thousands)
2020
2019
Change
% of
Revenue
% of
Revenue
$
%
Interest and other expense, net
$
(15,714)
(2)% $
(21,332)
(2)% $
5,618
26 %
The 26%, or $5.6 million, ddecrease iin iinterest a dnd
uring
to ddebbt re ypayments on thhe credidit facililiity dy during
imilllliion ddecrease iin othher expense ddue to la lower adjdjustment to hth fe f iaifff
dd
hother expense, net was p irim iarilyly ddue to $a $5.8
fifisc lal yyear 2020, $a $1.3
imilllliion ddecreas ie in
imilllliio dn decrease iin foreignign
r v lalue fof hthe continge
ingent
orded iin fifiscal yl year 2019. hThes de decreases iin expense were partiiallllyy offse bt byy a $$1.1
tool bs b iusines ds diive istiture during
l
during fifisc lal yyear 2020 hwhen comparedd to thhe faiir vallue adjadjustment
lonal se irvices
imilllliion ddecreas ie in tra i insiti
lrelat ded to hthe HNT
tool bs b iusines ds diive istiture
l
dand $a $0.7
imilllliion ddecreas ie i
in interest iincome rec iei dved on
iinterest expens de dued
hange expense, a dnd an $$0.8
exchange
considideratiion rellatedd to thhe HNT
rec d d
gagreement iincome
iinvestments.
Income Tax Expense
The annual effective tax rate forff
fiscal year 2020 was 243.1%, compared to an annual effective tax rate of 21.1% for
to state income taxes and foreign
fiscal year 2019. Generally, the effecff
withholding taxes, partially offset by the tax benefit associated Foreign Derived Intangible Income deductd
ion, foreign tax
credits, research and development tax credits and earnings in jurisdictions subject to tax rates lower than the U.S. statutory
tive tax rate differs from the statutory tax rate dued
t
rate.
The effective tax rate forff
ended March 31, 2019, primarily dued
to treat several of our foreign subsidiaries as U.S. branches forff
the issuance of U.S. regulations impacting our estimate of the Base Erosion Anti-Abuse Tax in the prior fiscal year and a
significant reduction in pre-tax losses as compared to the prior year.
the twelve months ended March 31, 2020 is higher than the effective rate for the twelve months
d tax liabilities related to elections made during the year
federal income tax purposes offset by a discrete benefit related to
shment of net deferre
to the establia
ff
During fiscal year 2019, we completed our analysis and recording of all the tax effects related to the Tax Cuts and Jobs
Act (TCJA), as required under SAB 118, and recorded a benefit of $87 million dued
and a $2 million one-time transition tax.
to the re-measurement of our deferred taxes
Fiscal Year Ended March 31,
(Dollars in Thousands)
2020
2019
Change
% of
Revenue
% of
Revenue
$
%
Income tax expense (benefit)
$
4,678
1 % $
(19,588)
(2)% $
24,266
124 %
43
Contractual Obligations
At March 31, 2020, we had the following contractual
t
obligations:
Payment due by period (Dollars in thousands)
Contractual Obligations
Total
Less than 1
year
1-3 years
3-5 years
More than
5 years
Long-term debt obligations (1)
$
481,779
$
11,361
$
470,418
$
Unconditional purchase obligations (2)
Operating lease obligations (3)
Pension benefit plan
Contingent purchase consideration
35,491
96,137
32,805
1,748
27,230
12,479
409
1,748
8,261
25,190
969
—
— $
—
20,186
1,224
—
—
—
38,282
30,203
—
Total contractual
t
obligations
$
647,960
$
53,227
$
504,838
$
21,410
$
68,485
At March 31, 2020, the total amount of net unrecognized tax benefits for uncertain tax positions and the accrual forff
the
to make a reliabla e estimate when cash settlement, if any, will occur with a tax
related interest wa $s $1.3
authority as the timing of examinations and ultimate resolution of those examinations is uncertain. We have also excluded long-
term deferred revenue of $$104.2
imilllliion as such ah mounts will be recognized as services are provided.
imilllliion. We are unablea
At March 31, 2020, the total accrual of our retirement obligation for our chairman and CEO was $1.2 million. The
payment stream forff
this retirement obligation is based upon the retirement date which is currently not determinable.
(1) Includes estimated future
(2) Represents estimated open purchase orders to purchase inventory as well as commitments forff
interest at an interest rate of 2.49% for our uto standing term loan at March 31, 2020.
products and services
ff
used in the normal course of business.
(3) We lease facilities under operating lease agreements extending throughgh Septe bmber 2030 for a totall of $$96.1
imilllliion.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.
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 availablea
statements indicates that it is probable that a liability has been incurred at the date of the consolidated finaff
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 liabia lity has been incurred, or if the amount of a probablea
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.
prior to issuance of our consolidated financial
loss cannot be reasonably estimated, then, in
ncial statements and
Our Level 3 liabila
d
ities at March 31, 2020 consisted of contingent purchase consideration related to the two acquisitions
the fisff cal year 2020. The contingent purchase consideration related to the two acquisitions represent
that occurred during
amounts deposited into escrow accounts, which were establia
we did not agree to assume or as a result of the breach of representations and warranties of the sellers as described in the
acquisition agreements. The contingent purchase consideration of $0.7 million and $1.0 million related to the Gigavation
Incorporated (Gigavation) and Eastwind Networks, Inc. (Eastwind) acquisitions are included as accrued other in our
consolidated balance sheet at March 31, 2020. Except to the extent that valid indemnification claims are made prior to such
time, the $0.7 million of purchase consideration related to the Gigavation acquisition will be paid to the seller in February 2021.
The contingent purchase consideration related to the Eastwind acquisition was paid to the seller in April 2020.
shed to cover damages we may suffer related to any liabilities that
We had a contingent consideration asset related to the divestiture of our HNT tools business in September 2018. The
o $4.0 million over two years that
contingent consideration asset represented potential futff uret
were contingent on the HNT tools business achieving certain milestones. The fair value of the contingent consideration of $2.3
million was recognized on the divestituret
date and was measured using observablea
consideration asset at March 31, 2020 and 2019 wa $s $0 a dnd $$0.8 mim llion, respectively.
(Level 3) inputs. The contingent
earnout payments to us of up tu
44
We had a contingent liability at March 31, 2018 for $0.5 million related to the acquisition of Efflux in July 2017 for
which an escrow account was established to cover damages we may have suffere
to assume or as a result of the breach of representations and warranties of the seller as described in the acquisition agreement.
The $0.5 million was paid to the seller in July 2018.
d related to any liabilities that we did not agree
ff
We had a contingent liability at March 31, 2018 for $4.9 million related to the acquisition of Simena in November 2011,
which was based on the ultimate settlement of assets and liabilities acquired as part of the transaction, and the former owners'
future period of employment with us. The contingent purchase consideration of $5.0 million was paid to the seller in November
2018.
e
Legal
- From time to time, we are subject to legal proceedings and claims in the ordinary course of business. In the
opinion of management, the amount of ultimate expense with respect to any current legal proceedings and claims, if determined
adversely, will not have a material adverse effect on our financial condition, results of operations or cash flows.
As previously disclosed, in March 2016, Packet Intelligence LLC (Packet Intelligence or Plaintiff) filed a Complaint
against us and two subsidiary entities in the United States District Court for the Eastern District of Texas asserting infringement
of five United States patents. Plaintiff’s Complaint alleged that legacy Tektronix GeoProbe products, including the G10 and
GeoBlade products, infringed these patents. We filed an Answer denying Plaintiff’s allegations and asserting that Plaintiff’s
patents were, among other things, invalid, not infringed, and unenforceable due to inequitablea
trial was held to address the parties’ claims and counterclaims regarding infringement of three patents by the G10 and GeoBlade
products, invalidity of these patents, and damages. On October 13, 2017, the jury rendered a verdict finding in favor of the
Plaintiff and that Plaintiff was entitled to $3,500,000 for pre-suit damages and $2,250,000 for post-suit damages. The jury
indicated that the awarded damages amounts were intended to reflect a running royalty. In September 2018, the Court entered
judgment and "enhanced" the jury verdict in the amount of $2.8 million as a result of a jury finding. The judgment also awards
pre- and post-judgment interest, and a running royalty on the G10 and GeoBlade products until the expiration of the patents at
issue, the last date being June 2022. The Court denied the Plaintiff's motion for fees. Following additional motions for judgment
as a matter of law, the court entered final judgment. On June 12, 2019, we filed our Notice of Appeal of the judgment and all
other adverse findings. We have concluded that the risk of loss from this matter is currently neither remote nor probablea
, and
therefore, under GAAP definitions, the risk of loss is termed "reasonably possible". Therefore, accounting rules require us to
provide an estimate for the range of potential liability. We currently estimate that the estimated range of liability is between $0
and the aggregate amount awarded by the jury and the Court's award of enhanced damages, plus potential additional pre- and
post-judgment interest amounts and costs and any royalties owed on post-trial sales of the accused G10 and GeoBlade products.
conduct. In October 2017, a jury
Warranty and Indemnification
We warrant that our software and hardware products will substantially conform to the documentation accompanying such
products on their original date of shipment. For software, which also includes firmware, the standard warranty commences upon
shipment and generally expires 60 to 90 days thereafter. With regard to hardware, the standard warranty commences upon
shipment and generally expires 60 days to 12 months thereafter. Additionally, this warranty is subject to various exclusions
which include, but are not limited to, non-conformance resulting from modifications made to the software or hardware by a
party other than NetScout; customers’ failure to follow our installation, operation or maintenance instruct
ions; and events
outside of our reasonable control. We also warrant that all support services will be performed in a good and workmanlike
manner. We believe that our product and support service warranties are consistent with commonly accepted industryrr standards.
Warranty cost information is presented and no material warranty costs are accruedr
at the time of sale and recognized ratablya
warranty is deferredr
since service revenue associated with
over the warranty period.
rr
Contracts that we enter into in the ordinary course of business may contain standard indemnification provisions. Pursuant
to these agreements, we may agree to defend third party claims brought against a partner or direct customer claiming
infringement of such third party’s (i) U.S. patent and/or European Union (EU), or other selected countries’ patents, (ii) Berne
convention member country copyright, and/or (iii) U.S., EU, and/or other selected countries’ trademark or intellectual property
rights. Moreover, this indemnity may require us to pay any damages awarded against the partner or direct customer in such type
of lawsuit as well as reimburse the partner or direct customer for reasonable attorney’s fees incurred by them from the lawsuit.
We may also agree from time to time to provide other forms of indemnification to partners or direct customers, such as
indemnification that would obligate us to defendff
customer based on a lawsuit alleging that such third party has suffered personal injury
determined to have been caused by negligently designed or manufactured products.
and pay any damages awarded to a third party against a partner or direct
or tangible property damage legally
n
We have agreed to indemnify our directors and officers and our subsidiaries’ directors and officers if they are made a
party or are threatened to be made a party to any proceeding (other than an action by or in the right of NetScout) by reason of
the fact that the indemnified are agents of NetScout. The indemnity is for any and all expenses and liabilities of any type
45
(including but not limited to, judgments, fines and amounts paid in settlement) reasonably incurred by the directors or officers
in connection with the investigation, defense, settlement or appe
al of such proceeding, provided they acted in good faith.
a
Other Contingent Liabilities
During fiscal year 2020, one of our subsidiaries, located in the United Kingdom (UK), determined that value added tax
a
ied to certain supplies of service to the UK. We filed a blank disclosure with HM Revenue &
(VAT) was not properly appl
Customs (HMRC) notifying HMRC of these application differences, and subsequently filed a voluntary disclosure agreement
(VDA). The VDA covered the period from March 1, 2016 through February 29, 2020. The penalties associated with the
application differences can range from 0%-30% of the underpayment and are based on objective and subjective determinations
to be made by HMRC. At March 31, 2020 we have accruedrr
of
assessment by HMRC. A majority of the difference in our application of the VAT rules relates to services for which the
subsidiary did not collect VAT from its customers and for which customers would have been eligible to reclaim under the UK
VAT regime. Based on these facts, we currently believe that it is probable that we will not be required to settle these amounts
separately with our customers and HMRC, hence we have not recorded a payablea
customers for these amounts. We believe that it is reasonably possible that HMRC will require separate settlement; if that
our current customers and remit that amount to
occurred, we would be required to collect approximately £16 million fromff
HMRC.
the penalties that we believe are probable and estimablea
to HMRC and a receivable fromff
our
Liquidity and Capital Resources
Cash, cash equivalents and marketablea
securities consist of the folff
lowing (in thousands):
Cash and cash equivalents
Short-term marketable securities
Long-term marketable securities
Cash, cash equivalents and marketablea
securities
Cash, cash equivalents and marketable
tt
securitiett s
At March 31,
(Dollars in Thousands)
2020
2019
2018
338,489
$
409,632
$
47,969
2,613
76,344
1,012
369,821
77,941
—
389,071
$
486,988
$
447,762
$
$
At March 31, 2020, cash, cash equivalents and marketable securities (current and non-current) total ded $$389.1
imilllliion.
imilllliion from $487.0 million at March 31, 2019. This decrease was primarily due to $175.0
hiThis represents da decrease of $$97.9
million used to repurchase shares of our common stock, $100.0 million used to repay long-term debt, $19.9 million used forff
capita
million used for the acquisitions of Gigavation and Eastwind. These decreases were partially offset by $225.0 million in cash
provided by operations during the fiscal year ended March 31, 2020.
tax withholdings in connection with the vesting of restricted stock units, and $11.3
, $11.9 million used forff
al expenditures
t
At Ma hrch 31, 2020, cashh, hshort-term and ld l
is in thhe
iUni dted States wer $e $251.7
imilllliion, hiwhille ca hsh h ldheld
outsidde fof hthe U init ded States was ap
i
proximat lely $y $137.4
i
gong-term iinvestment
imilllliion.
Cash and cash equivalents were impacted by the following:
s
Net cash provided by operating activitie
Net cash (used in) provided by investing activities
Net cash used in finff ancing activities
Net cash from operatingii
activtt
itiett s
Fiscal Year Ended March 31,
(Dollars in Thousands)
2020
2019
2018
$
$
$
225,023
$
(4,309) $
(286,870) $
149,838
$
(26,252) $
(79,285) $
222,454
57,128
(220,962)
Fiscii al year 2020 comparem
d to fiscff
al year 2019
Cash provided by operating activities was $225.0 million during the fiscal year ended March 31, 2020, compared to
$149.8 million of cash provided by operating activities during
iincrease wa ds dued
rec iei blvable, $a $23.6
expenses, $a $10.8
imilllliion iincrease fromff
imilllliion iincrease fromff
d fdefe
prepaidid expenses
iin part to $a $70.6
d
imilllliio in increase from a smallller ne lt loss, $a $43.7
drred iincome taxes, $a $12.8
imilllliion fa
imilllliion iincrease fromff
vorabl
bl
ie impact from accounts
accruedd compensatiion andd o hther
dand othher assets, and $d a $10.5
imilllliio in increase from operatinging llease
the fisff cal year ended March 31, 2019. hiThi $s $75.2
imilllliion
46
imilllliion ddecrease fromff
right
right-of-use assets. hThes ie increases were pa irti lallyly offse bt byy a $$35.9
assets, $a $21.8
$$7.7
from hshare-bbas ded compensa ition expense, a dnd $a $3.8
outstanding was 7 d3 d yays at Ma hrch 31, 2020 comparep
ln loss on didive istiture of b ibusiness, $a $7.0
imilllliion ddecreas ie i
imilllliion ddecreas de dued
ngible
to hth ie impaiirment of certaiin iintangibl
imilllliio dn decrease from operatinging lleas le liiabibia lili ities, a
imilllliio dn decrease
drred revenue
imilllliion ddecrease fromff
imilllliion ddecrease fromff
i
d to 88 days at March 31, 2019 and 78 days at March 31, 2018.
ntories. Accounts rec ieiv blable de ays sales
$, a $5.5
iinve
d fdefe
ddepre iciatiion andd amo irtiza ition, $a $13.1
Net cash from investingii
activitiii es
Cash (used in) provided by investing activities included the
following:
Purchase of marketablea
securities
Proceeds from maturity of marketablea
securities
Purchase of fixff ed assets
Purchase of intangible assets
Payments related to the divestiture of business
Acquisition of businesses, net of cash acquired
Increase in deposits
Contingent purchase consideration
Collection of contingent consideration
Capita
alized software
ff
development costs
Fiscal Year Ended March 31,
(Dollars in Thousands)
2020
2019
2018
$
(117,383) $
(229,769) $
144,322
(19,922)
—
—
(11,347)
(31)
—
52
—
230,433
(23,392)
—
(3,293)
—
(97)
—
—
(134)
(114,178)
196,041
(15,913)
(544)
—
(8,334)
(330)
523
—
(137)
$
(4,309) $
(26,252) $
57,128
Cash used in investing activi ities ddecreased bd byy $$21.9
imilllliion during
during hthe fiisff cal yl year e dndedd Ma hrch 31, 2020,
comparedd to $$26.3
imilllliion of ca hsh used id i
hthe fifisc lal yyear e dndedd Ma hrch 31, 2019.
imilllliion to $$4.3
dd
uring
in inves iti gng ac iti ivitiie ds during
NNet cash ih i flnflows relar
ting to the purchase and sales of marketable securities increased $$26.2
imilllliion d iduri gng hthe fifiscal yl year
lrelatinging to hthe amount of iinvestment hs h leldd at eachh respec itive bballance hsheet ddate, from an iinflflow of $$0.7
dendedd Ma hrch 31, 2020
imilllliion d iduri gng fifiscal yl year e d dnded Ma hrch 31, 2019 to an i fl
inflow of $$26.9
ilmillilion during
during fifisc lal yyear e dndedd Ma hrch 31, 2020.
During the twelve months ended March 31, 2020, there was a $n $11.3
imilllliion ca hsh
outflow lrelatedd to thhe ac
fl
iqui isitiions of
Eastwi dind andd Gigigava ition.
divestiture of HNT.
iDuri gng hthe twelve months ended March 31, 2019, there was a $3.3 million cash outflow related to the
Our investments in property at
nd equipment consist primarily of computer equipment, demonstration units, office
equipment and facff
fiscal year 2021.
ility improvements. We plan to continue to invest in capita
al expenditures
t
to support our infrastructure in our
Net cash from financing activtt
itiett s
Cash used in finff ancing activities included the following:
Issuance of common stock under stock plans
$
Payment of contingent consideration
Treasury stock repurchases, including accelerated share
repurchases
Tax withholding on restricted stock units
Proceeds from issuance of long-term debt, net of issuance
costs
Repayment of long-term debt
Fiscal Year Ended March 31,
(Dollars in Thousands)
2020
2019
2018
$
2
—
3
$
(2,851)
(175,000)
(11,872)
—
(100,000)
(14,468)
(11,969)
—
(50,000)
1
(660)
(501,324)
(13,598)
294,619
—
$
(286,870) $
(79,285) $
(220,962)
47
Cash used in financing activities increased $207.6 million to $$286.9
imilllliion during
during hthe fifisc lal yyear
dendedd Ma hrch 31, 2020,
comparedd to $$79.3
imilllliion of ca hsh usedd iin fifinancinging ac iti ivi ities during
duri
the fiscal year ended March 31, 2019.
During the twelve months ended March 31, 2020, we repurchased 7,116,159 shares for $$175.0
imilllliion
dunder the twenty-
five million share repurchase program. During the twelve months ended March 31, 2019, we repurchased 543,251 shares for
$14.5 million under the twenty-five
million share repurchase program.
t
On February 1, 2018, we entered into ASR agreements with two third-party financial instituti
t
ons to repurchase an
five million share repurchase program. We borrowed $300 million under our
aggregate of $300 million of our common stock via accelerated stock repurchase transactions under the twentyt million share
repurchase program and the twentyt
Amended Credit Agreement and made an up-front payment of $300 million pursuant to the ASR and received an initial
delivery of 7,387,862 shares in the aggregate, which is approximately 70 percent of the total number of shares of our common
stock expected to be repurchased under the ASR. As part of this purchase, 970,650 shares for $27.6 million were deducted
under the twenty million share repurchase program and 6,417,212 shares for $182.4 million were deducted under the twentyt
five million share repurchase program. Final settlement of the ASR agreements was completed in August 2018. As a result, we
received an additional 3,679,947 shares of common stock for $96.8 million, which reduced the number of shares availablea
to be
purchased from the twenty-five million share repurchase program during the fiscal year ended March 31, 2019. In total,
11,067,809 shares of our common stock were repurchased under the ASR at an average cost per share of $27.11.
In connection with the delivery of common shares upon vesting of restricted stock units, we have withheld
519,241 shares for $11.9 million, 451,683 shares for $11.9 million and 408,097 shares for $13.6 million related to minimum
statutory
tax withholding requirements on these restricted stock units during the fiscal years ended March 31, 2020, 2019 and
t
2018, respectively. These withholding transactions do not fall under the repurchase program described above, and therefore do
not reduce the amount that is available for repurchase under that program.
During the fiscal years ended March 31, 2020 and 2019, we repaid $100.0 million and $50.0 million of borrowings under
the Amended Credit Agreement, respectively.
Creditdd Facility
On January 16, 2018, we amended and expanded our existing credit agreement (Amended Credit Agreement) with a
syndicate of lenders by and among: NetScout; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral
agent; J.P. Morgan Securities LLC, KeyBanc Capital Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC
Capia tal Markets and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners; Fifth Third Bank, Santander
Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National Association, as co-documentation agents; and the lenders partyt
thereto.
The Amended Credit Agreement provides for a five-year $1.0 billion senior secured revolving credit facility, including a
letter of credit sub-facility of up to $75.0 million. We may elect to use the new credit facility for general corporate purposes or
to finance the repurchase of up to twenty-five million shares of common stock under our common stock repurchase plan. The
commitments under the Amended Credit Agreement will expire on January 16, 2023, and any outstanding loans will be due on
that date. During the fiscal year ended March 31, 2020, we repaid $100.0 million of borrowings under the Amended Credit
Agreement. At March 31, 2020, $450 million was outstanding under the Amended Credit Agreement.
At our election, revolving loans under the Amended Credit Agreement bear interest at either (a) an Alternate Base Rate
per annum equal to the greatest of (1) JPMorgan’s prime rate, (2) 0.50% in excess of the New York Federal Reserve Bank
(NYFRB) rate, or (3) an adjusted one month LIBOR rate plus 1%; or (b) such adjusted LIBOR rate (for the interest period
selected by us), in each case plus an applicablea margin. For the period from the delivery of our financial statements for the
quarter ended December 31, 2019, until we have delivered financial statements for the quarter ended March 31, 2020, the
applicable margin will be 1.50% per annum for LIBOR loans and 0.50% per annum for Alternate Base Rate loans, and
thereafteff
and 2.00% per annum for LIBOR loans if our consolidated leverage ratio is greater than 3.50 to 1.00, down to 0.00% per annum
for Alternate Base Rate loans and 1.00% per annum for LIBOR loans if our consolidated leverage ratio is equal to or less than
1.50 to 1.00.
r the applicable margin will vary depending on our leverage ratio, ranging from 1.00% per annum for Base Rate loans
On July 27, 2017, the U.K. Financial Conduct Authority (FCA) announced that it will no longer require banks to submit
rates for the calculation of LIBOR afteff
determine if (i) adequate and reasonablea means do not exist for ascertaining the LIBOR rate or (ii) the FCA or Government
Authorityt having jurisdiction over the Administrative Agent has made a public statement identifying a specific date after which
the LIBOR rate shall no longer be used for determining interest rates for loans and the Administrative Agent determines that (i)
and (ii) above are unlikely to be temporary then the Administrative Agent and NetScout would agree to transition to an
r 2021. Our Amended Credit Agreement provides for the Administrative Agent to
48
Alternate Base Rate borrowing as described above or amend the Credit Agreement to establia
sh an alternate rate of interest to
LIBOR that gives due consideration to the then prevailing market convention for determining a rate of interest for syndicated
loans in the United States at such time.
Our consolidated leverage ratio is the ratio of our total funded debt compared to our consolidated adjusted EBITDA.
Consolidated adjusted EBITDA includes certain adjustmd
extraordinary, unusual or non-recurring charges, certain restructuring charges, non-cash charges, certain transaction costs and
expenses and certain pro forma adjustmd
the definition of consolidated adjusted EBITDA in the Amended Credit Agreement.
ents in connection with material acquisitions and dispositions, all as set forth in detail in
ents, including, without limitation, adjustmd
ents relating to
Commitment fees will accrue on the daily unused amount of the credit facility. For the period from the delivery of our
financial statements for the quarter ended December 31, 2019 until we have delivered financial statements for the quarter ended
March 31, 2020, the commitment fee will be 0.25% per annum, and thereafter the commitment fee will vary depending on the
our consolidated leverage ratio, ranging from 0.30% per annum if our consolidated leverage ratio is greater than 2.75 to 1.00,
down to 0.15% per annum if our consolidated leverage ratio is equal to or less than 1.50 to 1.00.
Letter of credit participation fees are payablea
to each lender on the amount of such lender’s letter of credit exposure,
during the period from the closing date of the Amended Credit Agreement to but excluding the date which is the later of (i) the
date on which such lender’s commitment terminates or (ii) the date on which such lender ceases to have any letter of credit
exposure, at a rate per annum equal to the applicable margin for LIBOR loans. Additionally, we will pay a fronting fee to each
issuing bank in amounts to be agreed to between us and the applicablea
issuing bank.
Interest on Alternate Base Rate loans is payablea
at the end of each calendar quarter. Interest on LIBOR loans is payable at
the end of each interest rate period or at the end of each three-month interval within an interest rate period if the period is longer
than three months. We may also prepay loans under the Amended Credit Agreement at any time, without penalty, subject to
certain notice requirements.
Debt is recorded at the amount drawn on the revolving credit facility plus interest based on floating rates reflective of
changes in the market which approximates fair value.
The loans and other obligations under the credit facility are (a) guaranteed by each of our wholly owned material
domestic restricted subsidiaries, subject to certain exceptions, and (b) are secured by substantially all of the assets of us and the
subsidiary guarantors, including a pledge of all the capia tal stock of material subsidiaries held directly by us and the subsidiary
guarantors (which pledge, in the case of any foreign subsidiary, is limited to 65% of the voting stock), subject to certain
customary exceptions and limitations. The Amended Credit Agreement generally prohibits any other liens on the assets of
NetScout and its restricted subsidiaries, subject to certain exceptions as described in the Amended Credit Agreement.
The Amended Credit Agreement contains certain covenants applicablea
to us and our restricted subsidiaries, including,
without limitation, limitations on additional indebtedness, liens, various fundamental changes, dividends and distributions,
investments (including acquisitions), transactions with affilff
hedge agreements, payment of junior financing, changes in business and other limitations customary in senior secured credit
facilities. In addition, we are required to maintain certain consolidated leverage and interest coverage ratios. These covenants
and limitations are more fully described in the Amended Credit Agreement. At March 31, 2020, we were in compliance with all
of these covenants.
iates, asset sales, including sale-leaseback transactions, speculative
The Amended Credit Agreement provides that events of default will exist in certain circumstances, including failure to
make payment of principal or interest on the loans when required, failure to perform certain obligations under the Amended
Credit Agreement and related documents, defaults under certain other indebtedness, certain insolvency events, certain events
arising under ERISA, a change of control and certain other events. Upon an event of default, the administrative agent with the
consent of, or at the request of, the holders of more than 50% in principal amount of the loans and commitments may terminate
the commitments and accelerate the maturity of the loans and enforce certain other remedies under the Amended Credit
Agreement and the other loan documents.
In connection with NetScout's Amended Credit Agreement described above, we terminated our previous term loan dated
as of July 14, 2015, by and among NetScout; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral
agent; J.P. Morgan Securities LLC, KeyBanc Capita
Capital Markets and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners; Santander Bank, N.A.,
SunTrust Bank, N.A. and U.S. Bank National Association, as co-documentation agents; and the lenders party thereto.
al Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC
We have capita
alized debt issuance costs totaling $12.2 million at March 31, 2020, which are being amortized over the life
of the revolving credit facility. The unamortized balance was $$4.9
was iincl dludedd as prepaidid expenses
consolidated balance sheet.
dand othher current assets andd a bballance of $$3.2
imilllliion was incin luded as other assets in our
imilllliion as of Ma hrch 31, 2020. hThe b lbalance of $$1.7
imilllliion
49
EExpecxx
tt
tatiions
forfor
iii
iFi
scal
l
Year 2021
As we cannot predidict hthe ddura ition or scope of hthe COVID-19 pa dndemiic
dand iits iimpact on our customers
dand sup lipliers, hthe
gnega itive fifinanciiall iimpact to our re lsults cannot bbe reas
ppote inti lal
managinagi gng hthe b ibusiness to maiint iain ca hsh flflow dand bbelilieve hthat we hhave dadequate lili
lalllow us to meet our an iti icipat ded f
se
ca hsh
di
fundi gng
-for-salle
dand ca ipia tall ex
requirements. We bbelilieve hthat our ca hsh b lbalances, availil blable ddebbt, hshort-term ma krket blable
i
dand futuret
suffi icient to meet our an iti icipat ded
di
ca hsh flflows ggenerat ded byby operatiions
penditures for at lleast hthe next 12 mo hnths.
onablyy es itimatedd, bbut co lduld bbe mate iriall. We are ac itivelyly
iquididityy. We b lbeliieve hthat hthese factors
icuri ities lclas ifisifi ded as a
kiworki gng ca ipita
dneeds for
ivaillablblea
illwill bbe
iwillll
ffi
bl
lal
ddiAdditiionallllyy, a portiion of our ca hsh mayy bbe us ded to ac
iquire or iinvest iin com lplementa yry b ibusinesses or
dproducts or to bobt iain
chnologieogies. From itime to itime, iin hthe
hthe right
nologies. If our
dproducts or te hchnologi
ac
addi iti
lili
lonal
llsell ddi
kseek to
kholders.
couldd res lult iin daddiditiionall didillutiion to our stockh ld
right to use com lplementa yry te h
quisi itions of suchh b ibusinesses,
i i
idi
ymay
quidi yty re
l
equi yty or ddebbt se
iquirements, we
iexi
l
i
diordina yry course of bbusiiness, we evalluate pote inti lal
suffi icient to satisfyisfy our
isti gng sources of lili
icuri ities. hThe salle of ddi
equi yty or ddebbt sec iuritiies
i
idi
quidi yty are iin ffi
addi iti
lonal
Recent Accounting Standards
For information with respect to recent accounting pronouncements on our consolidated financial statements, See Note 2
contained in the "Notes to Consolidated Financial Statements" included in Part IV of this Annual Report on Form 10-K.
50
Item 7A. Quantittt ati
tt
ve and Qualitll ati
tt
ll
ve Disclosure
s About Market
rr
Riskii
Interest Rate Riskii
. We hold our cash, cash equivalents and investments for working capita
al purposes. Some of the
t
e. To minimize this risk, we maintain our portfolio of cash, cash equivalents and
securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal
amount of the investment to fluctuat
investments in a variety of securities, including money market funds and government debt securities. The risk associated with
fluctuating interest rates is limited to our investment portfolio. Due to the short-term nature of these instruments, we believe that
we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest
rates. Declines in interest rates, however, would reduce future interest income. The effect of a hypothetical 10% increase or
decrease in overall interest rates would not have had a material impact on our operating results or the total fair value of the
portfolio.
We are exposed to market risks related to fluctuat
t
ions in interest rates related to our credit facility. At March 31, 2020,
we owed $450 million on this loan with an interest rate of 2.49%. A sensitivity analysis was performed on the outstanding
portion of our debt obligation as of March 31, 2020. Should the current weighted average interest rate increase or decrease by
imilllliion as fo March 31, 2020.
10%, the resulting annual increase or decrease to interest expense would be approximat lelyy $$1.1
Credit Riskii
. Our cash equivalents and marketable securities consist primarily of money market instruments, U.S.
Treasury bills, certificates of deposit, commercial paper, corporate bonds and municipal obligations.
At March 31, 2020 and periodically throughout the year, we have maintained cash balances in various operating accounts
on by evaluating the
in excess of federally insured limits. We limit the amount of credit exposure with any one financial instituti
ons with which we invest.
creditworthiness of the financial instituti
t
t
Foreigni Currency Exchange Riskii
. As a result of our foreign operations, we face exposure to movements in foreign
currency exchange rates, primarily the Euro, British Pound, Canadian Dollar and Indian Rupeeu
primarily from expenses denominated in foreign currencies. We currently engage in foreign currency hedging activities in order
to limit these exposures. We do not use derivative financial instruments for speculative trading purposes.
. The current exposures arise
At March 31, 2020, we had foreign currency forward contracts with notional amounts totaling $1.7 million. The valuation
contract rates in comparim son to current market rates at this date. At March 31, 2019, we had foreign currency
of outstanding foreign currency forward contracts at March 31, 2020 resulted in a liability balance of $49 thousand, reflecting
unfavorablea
forward contracts with notional amounts totaling $4.6 million. The valuation of outstanding foreign currency forward contracts
at March 31, 2019 resulted in a liability balance of $68 thousand, reflecting unfavorable contract rates in comparison to current
market rates at this date and an asset balance of $58 thousand reflecting favorable rates in comparim son to current market rates.
51
Item 8. Finanii
ciali Statett ments and Supplemll
entarytt
Data
Our Consolidated Financial Statements and Schedule and Report of Independent Registered Public Accounting Firm
appear beginning on page F-1 attached to this report.
Item 9. Changes in and Disagreementstt withii Accountantstt on Accountingii
ii
and Financ
ll
ial Disclosure
There have been no changes in or disagreements with accountants on accounting or financial disclosure matters.
Item 9A. Controlsll and Procedures
Evaluation of Disclosure Controlsll and Procedures
As of March 31, 2020, NetScout, under the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, evaluated the effecff
disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Exchange Act. Based upon that
evaluation, our principal executive officer and principal financial officer concluded that, as of March 31, 2020 our disclosure
controls and procedures were effecff
tive in ensuring that material information relating to NetScout, including its consolidated
subsidiaries, required to be disclosed by NetScout in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms, including ensuring that
such material information is accumulated and communicated to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
tiveness of the design and operation of our
Changes in Internal Control over Financial Reporti
e
ng
During the quarter end dded Ma hrch 31, 2020, hthere were no hcha gnges iin our iinte
rnal cont
l
onablyy lilik lkelyy to mate iri lallyly affecff
mate iriallllyy affect ded, or are reas
t, our iinte
rnal cont
l
lrol over fifina
bl
ing.
inci lal reporting.
lrol over fifina
inci lal reportinging hthat hhave
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establia
shing and maintaining adequate internal control over financial reporting as such
term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting was designed to provide
reasonable assurance regarding reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate. Our management assessed the effectiveness of our internal control over financial
reporting as of March 31, 2020. In making this assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework in 2013. Based on
our assessment, we concluded that our internal control over financial reporting was effective as of March 31, 2020.
The effectiveness of our internal control over financial reporting as of March 31, 2020 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Item 9B. Other
tt
Information
Not applicable.
52
Itemtt
10. Directors,s Executivtt e Offiff cers and Corporate Governance
PART III
The information required by this Item 10 will be included under the captia
ons "Directors and Executive Officers,"
"Proposal 1 Election of Directors," "Delinquent Section 16(a) Reports," "Corporate Governance -- Code of Ethics," "The Board
of Directors and its Committees" and "Corporate Governance" in our definitive Proxy Statement with respect to our 2020
Annual Meeting of Stockholders to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this
Annual Report and is incorporated herein by reference.
Item 11. Executive Compensm
ation
The information required by this Item 11 will be included under the captia
on "Compensation and Other Information
Concerning Directors and Executive Officers" in our definitive Proxy Statement with respect to our 2020 Annual Meeting of
Stockholders to be filed with the SEC not later than 120 days aftff er the end of the fiscal year covered by this Annual Report and
is incorporated herein by reference.
Item 12. Security Ownershipii of Certainii Beneficialii Owners and Management and Relatell
d Stockholder Mattett rs
The information required by this Item 12 will be included under the captia
ons "Security Ownership of Certain Beneficial
Owners and Management" and "Compensation and Other Information Concerning Directors and Executive Officers -- Equity
Compensation Plan Information" in our definitive Proxy Statement with respect to our 2020 Annual Meeting of Stockholders to
be filed with the SEC not later than 120 days after the end of the fiscal year covered by this Annual Report and is incorporated
herein by reference.
Item 13. Certainii Relationships and Related Transactions, and Direct
ortt
ii
Independen
ee
ce
The information required by this Item 13 will be included, as applicablea
, under the capta ions "Corporate Governance --
Director Independence," "Compensation and Other Information Concerning Directors and Executive Officers -- Employment
and Other Agreements" and "Transactions with Related Persons" in our definitive Proxy Statement with respect to our 2020
Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the end of the fiscal year covered by this
Annual Report and is incorporated herein by reference.
Item 14. Principal
ii
Accountingtt
Fees and Services
The information required by this Item 14 will be included under the captia
ons "Auditors Fees and Services" and "Auditors
Fees and Services -- Policy on Audit Committee Pre-approval
Statement with respect to our 2020 Annual Meeting of Stockholders to be filed with the SEC not later than 120 days after the
end of the fiscal year covered by this Annual Report and is incorporated herein by reference.
of Audit and Non-Audit Services" in our definitive Proxy
a
53
Itemtt
15. Exhibits,
ii Finanii
ciali Statett ment Schedulesll
PART IV
(a)
1.
Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at March 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended March 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended March 31, 2020, 2019
and 2018
Consolidated Statements of Stockholders’ Equity for the Years Ended March 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended March 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
2.
Financial Statement Schedule.
Valuation and Qualifyiff ng Accounts for the Years Ended March 31, 2020, 2019 and 2018
No other financial statement schedules have been included because they are either not applicable or the
information is in the consolidated financial statements.
3.
Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this
report.
(b)
(c)
We hereby file as part of this Annual Report on Form 10-K the exhibits listed in Item 15(a)(3) above.
We hereby file as part of this Annual Report on Form 10-K the financial statement schedule listed in
Item 15(a)(2) above.
F-2
F-5
F-6
F-7
F-8
F-9
F-10
S-1
54
3.1, 4.1
3.2, 4.2
4.3
4.4
10.1*
10.2
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
NetScout Systems, Inc.
Index to Exhibits
Composite conformed copy of Third Amended and Restated Certificate of Incorporation of NetScout (as
amended) (filed as Exhibit 3.2 to NetScout’s current report on Form 8-K, SEC File No. 000-26251, filed on
September 21, 2016, and incorporated herein by reference).
Amended and Restated By-laws of NetScout (filed as Exhibit 3.1 to NetScout’s current Report on Form 8-
K, SEC File No. 000-26251, filed on May 11, 2020 and incorporated herein by reference).
Specimen Certificate for shares of NetScout’s Common Stock (filed as Exhibit 4.3 to NetScout’s Annual
Report on Form 10-K for the fiscal year ended March 31, 2001, SEC File No. 000-26251, filed on June 29,
2001, and incorporated herein by reference).
Description of Common Stock (filed herewith).
Form of Amended and Restated Indemnification Agreement between NetScout and each director and
executive officer filed as Exhibit 10.1 to NetScout's Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2013, SEC File No. 000-26251, filed January 28, 2014, and incorporated
herein by reference).
J. Gutierrez and John A. Cataldo, Trustees of Nashoba Westford Realty Trust, u/d/t
Lease between Arturot
dated April 27, 2000 and recorded with the Middlesex North Registry of Deeds in Book 10813, Page 38
and NetScout for Westford Technology Park West, as amended (filed as Exhibit 10.26 to NetScout’s
Annual Report on Form 10-K for the fiscal year ended March 31, 2001, SEC File No. 000-26251, filed on
June 29, 2001, and incorporated herein by reference).
Agreement Relating to Employment, dated January 3, 2007, by and between NetScout and Anil K. Singhal
(filed as Exhibit 10.2 to NetScout’s Current
January 5, 2007 and incorporated herein by reference).
Report on Form 8-K, SEC File No. 000-26251, filed on
r
Amendment No. 1, dated February 2, 2007, to Agreement Relating to Employment by and between the
Company and Anil K. Singhal (filed as exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 2006, SEC File No. 000-26251, filed February 5, 2007 and
incorporated herein by reference).
Amendment No. 2, dated December 22, 2008, to Agreement Relating to Employment by and between the
Company and Anil K. Singhal (filed as exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the
quarterly period ended December 31, 2008, SEC File No. 000-26251, filed February 6, 2009 and
incorporated herein by reference).
Amendment No. 3, dated May 28, 2012, to Agreement Relating to Employment, by and between the
Company and Anil K. Singhal (filed as Exhibit 10.3 to NetScout’s Current Report on Form 8-K, SEC File
No. 000-26251, filed on June 1, 2012 and incorporated herein by reference).
NetScout Systems, Inc. 2007 Equity Incentive Plan, as amended (filed as Appendix A to the Registrant’s
Definitive Proxy Statement on Schedule 14A, SEC File No. 000-26251, filed with the Commission on July
28, 2015 and incorporated herein by reference)
NetScout Form of Restricted Stock Unit Agreement with respect to the NetScout 2007 Equity Incentive
Plan (filed as Exhibit 99.2 to NetScout’s Registration Statement on Form S-8, SEC File No. 333-148364,
filed on December 27, 2007 and incorporated herein by reference).
Form of Amended and Restated Severance Agreement for Named Executive Offiff cers (other than the CEO
and CFO) (filed as Exhibit 10.1 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed
on June 1, 2012 and incorporated herein by reference).
10.10*
Amended and Restated Severance Agreement, dated May 28, 2012, by and between the Company and Jean
Bua (filed as Exhibit 10.2 to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on
June 1, 2012 and incorporated herein by reference).
55
10.11
10.12*
10.13*
10.14
10.15*
21
23
31.1
31.2
32.1†
32.2†
Third Amendment Agreement, dated August 10, 2010, to that certain Lease, dated August 17, 2000, as
amended, between the Company and Westford West I Limited Partnership, as successor to Arturot
Gutierrez and John A. Cataldo, Trustees of Nashoba Westford Realty Trust, u/d/t dated April 27, 2000
(filed as Exhibit 10.1 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2010, SEC File No. 000-26251, filed November 9, 2010 and incorporated herein by
reference).
J.
NetScout Systems, Inc. Amended and Restated 2011 Employee Stock Purchase Plan (filed as Exhibit 10.1
to NetScout’s Current Report on Form 8-K, SEC File No. 000-26251, filed on September 13, 2018 and
incorporated herein by reference).
Form of Amendment to Amended and Restated Severance Agreement for Executive Offiff cers (filed as
Exhibit 10.9 to NetScout’s Quarterly Report on Form 10-Q for the quarterly period ended December 31,
2014, SEC File No. 000-26251, filed on January 27, 2015 and incorporated herein by reference).
Amendment and Restatement Agreement dated as of January 16, 2018, to the Credit Agreement, dated as
of July 14, 2015, by and among NetScout Systems, Inc.; certain subsidiaries of NetScout Systems, Inc. as
loan parties; the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative
agent attaching the Amended and Restated Credit Agreement, dated as of January 16, 2018, by and among
NetScout Systems, Inc.; JPMorgan Chase Bank, N.A., as administrative agent and collateral agent;
JPMorgan Chase Bank, N.A., Wells Fargo Securities, LLC, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, RBC Capia tal Markets and KeyBanc Capital Markets Inc., as joint lead arrangers and joint
bookrunners; SunTrust Bank, N.A., Santander Bank, N.A., U.S. Bank National Association and Fifth Third
Bank, as co-documentation agents; and the lenders party thereto (filed as Exhibit 10.5 to NetScout’s
current report on Form 8-K, SEC File No. 000-26251, filed with the SEC on January 18, 2018 and
incorporated by reference herein.
Summary of Non-Employee Director Compensation (filed as Exhibit 10.1 to NetScout's Quarterly Report
on Form 10Q for the quarterly period ended September 30, 2018, SEC file No. 000-26251, filed on
November 8, 2018 and incorporated herein by reference.
Subsidiaries of NetScout (filed herewith).
Consent of PricewaterhouseCoopers LLP (filed herewith).
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
Certification Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 (furnished herewith).
Certification Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 (furnished herewith).
101.INS**
XBRL Instance Document.
101.SCH**
XBRL Taxonomy Extension Schema Document.
101.CAL**
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF**
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB**
XBRL Taxonomy Extension Labea
l Linkbase Document.
101.PRE**
XBRL Taxonomy Extension Presentation Linkbase Document.
104
*
**
†
The cover page from the Company's Annual Report on Form 10-K for the year ended March 31, 2020
formatted in Inline XBRL
Indicates a management contract or compensatory plan or arrangement.
XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration
statement or prospectust
for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not
filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to
liability under these sections.
Exhibit has been furnished, is not deemed filed and is not to be incorporated by reference into any of the
Company's filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, irrespective of any general incorporation language contained in any such filing
56
Item 16. Form 10-K Summary
Not provided.
57
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has dulyd
caused
this report to be signed on its behalf by the undersigned, thereunto dulyd
authorized.
SIGNATURES
NETSCOUT SYSTEMS, INC.
By:
/S/ ANILAA
K. SINGHAL
Anil K. Singhal
President, Chief Executive Officer,
and Chairman
Date: May 20, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
ities and on the dates indicated.
persons on behalf of the registrant and in the capac
a
Signature
g
Title(s)( )
Date
/S/ ANIL K. SINGHAL
Anil K. Singhal
President, Chief Executive Officer,
and Chairman (Principal
Executive Officer)
/S/
JEANAA BUA
Jean Bua
Executive Vice President and Chief Financial
Officer (Principal Financial
Officer) (Principal Accounting
Officer)
May 20, 2020
May 20, 2020
/S/ MICHAEL SZABADOS
Chief Operating Offiff cer and Vice Chairman
May 20, 2020
Michael Szabados
/S/ ROBERT E. DONAHUE
Director
Robert E. Donahue
/S/
JOHN R. EGAN
John R. Egan
Director
/S/ ALFRED GRASSO
Director
Alfred Grasso
/S/
JOSEPH G. HADZIMA, JR.
Director
Joseph G. Hadzima, Jr.
/S/ CHRISTOPHER PERRETTA
Director
Christopher Perretta
/S/ SUSAN L. SPRADLEY
Director
Susan L. Spradley
/S/ VIVIAN VITALE
Director
Vivian Vitale
58
May 20, 2020
May 20, 2020
May 20, 2020
May 20, 2020
May 20, 2020
May 20, 2020
May 20, 2020
NetScout Systems, Inc.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at March 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended March 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended March 31, 2020, 2019 and 2018
Consolidated Statements of Stockholders’ Equity for the Years Ended March 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows for the Years Ended March 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
F-2
F-5
F-6
F-7
F-8
F-9
F-10
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of NetScout Systems, Inc.:
ii
Opinion
s on the Finanii
ciali Statett ments and Intertt nal
rr
Control over Financ
ii
ee
ial Reporti
ngii
We have audited the accompanying consolidated balance sheets of NetScout Systems, Inc. and its subsidiaries (the “Company”)
as of March 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income (loss),
stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2020, including the related notes
and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated
financial statements”). We also have audited the Company's internal control over financial reporting as of March 31, 2020,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of March 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three
years in the period ended March 31, 2020 in conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of March 31, 2020 based on criteria establia
COSO.
shed in Internal Control - Integrated Framework (2013) issued by the
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for
leases in fiscal year 2020 and the manner in which it accounts for revenues from contracts with customers in fiscal year 2019.
Basis for Opinions
ii
The Company's management is responsible for these consolidated financial statements, for maintaining effecff
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included
in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to
express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial
reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
tive internal
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
ive internal control over financial reporting was maintained in all material
whether due to error or fraud, and whether effect
respects.
ff
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definitiontt
and Limi
taii
ii
tions of Internal
tt
tt
Control
ii
over Financ
ial Reportingii
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
rr
F-2
dispositions of the assets of the company; (ii) provide reasonablea
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effecff
of the company are being made only in accordance with authorizations of management and directors of the
assurance that transactions are recorded as necessary to permit
t on the financial statements.
t
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effecff
ct to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
tiveness to future periods are subjeu
Criticatt
l Auditdd MattMM ers
tt
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or
disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate
opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue from Contractstt with Customers - Identifii cation of Distinct Performance
r
i
Obligati
ons
As described in Note 3 to the consolidated financial statements, 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. 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. During the year ended
March 31, 2020, the Company recognized revenue from contracts with customers of $891.8 million.
The principal considerations for our determination that performing procedures relating to revenue from contracts with
customers, specifically the identification of distinct performance obligations, is a critical audit matter are there was significant
judgment by management in determining whether the products and services are considered distinct performance obligations that
should be accounted for separately or as one combined performance obligation. This in turn led to a high degree of auditor
judgment, subjectivity and effort
obligations.
in performing procedures and evaluating management’s identification of distinct performance
ff
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effecff
revenue recognition process, including controls over the identification of distinct performance obligations. These procedures
also included, among others, testing management’s process for identifying distinct performance obligations and evaluating the
revenue recognition impact of contractual
terms and conditions by examining customer contracts on a test basis.
tiveness of controls relating to the
t
Goodwill Impairment
r
Assessment
As described in Note 9 to the consolidated financial statements, the Company’s consolidated goodwill balance was $1.7 billion
as of March 31, 2020. Management assesses goodwill for impairment at the reporting unit level at least annually, as of January
31, or on an interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of
the Company’s reporting unit below its carrying value. Management determined the fair value of the reporting unit by preparing
a discounted cash flow analysis using forward looking projections of the reporting unit’s future operating results and by
comparing the value of the reporting unit to the implim ed market value of selected peers. The assumptim ons used in the discounted
cash flow analysis include: projected revenues, selling margins, and other operating expenditures,
which is essentially equal to the "market participant" weighted-average cost of capia tal (WACC).
as well as a discount rate,
t
The principal considerations for our determination that performing procedures relating to the goodwill
impairment assessment is a critical audit matter are there was significant judgment by management when developing the fair
value measurement of the reporting unit, which in turn led to a high degree of auditor judgment, subjectivity, and effort in
performing procedures and evaluating evidence related to management’s assumptim ons, specifically the assumptim ons related to
projected revenues and other operating expenditures.
specialized skills and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
In addition, the audit effort involved the use of professionals with
t
F-3
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall
opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to
management’s goodwill impairment assessment, including controls over the determination of the fair value measurement of the
Company’s reporting unit. These procedures also included, among others (i) testing management’s process for developing the
fair value measurement of the reporting unit and evaluating the appropriateness of the discounted cash flow analysis, (ii)
evaluating the assumptim ons used by management in developing the fair value measurement, including projected revenues and
other operating expenditures,
develop their estimates. Evaluating management’s assumptim ons related to projected revenues and other operating expenditures
involved evaluating whether the assumptions used were reasonable considering the current and historical performance of the
business and whether these assumptions were consistent with evidence obtained in other areas of the audit as well as external
market and industry data. Professionals with specialized skills and knowledge were used to assist in evaluating the
appropriateness of management’s discounted cash flow analysis.
and (iii) testing the completeness and accuracy of the underlying data used by management to
t
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
May 20, 2020
We have served as the Company’s auditor since 1993.
F-4
NetScout Systems, Inc.
Consolidated Balance Sheets
(In thousands, except share and per share data)
Assets
Current assets:
Cash and cash eqqquivalents
Marketable securities
Accounts receivable and unbilled costs, net of allowance for doubtful accounts of $1,350 and
$1,583 at March 31, 2020 and 2019, respectively
Inventories and deferred costs
Prepppaid income taxes
Prepaid expenses and other current assets
Total current assets
Fixed assets,,, net
Oppperatinggg lease riggght-of-use assets
Goodwill
Intangggible assets,,, net
Deferred income taxes
Longgg-term marketable securities
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payablea
Accrued compppensation
Accrued other
Income taxes pppayyyable
Deferred revenue and customer deppposits
Current pppportion of opppperatingggg lease liabila
ities
liabilities
Total current
r
Other longgg-term liabilities
Deferred tax liabilityyy
Accrued longgg-term retirement benefits
Longgg-term deferred revenue and customer deppposits
Oppperatinggg lease liabia lities,,, net of current ppportion
Longggg-term debt
Total liabilities
Commitments and continggggencies ((((Note 19))))
Stockholders’ eqqquityyy:
Preferred stock, $0.001 par value: 5,000,000 shares authorized; no shares issued or
outstanding at March 31, 2020 and 2019
Common stock, $0.001 par value: 300,000,000 shares authorized; 122,006,077 and
119,760,132 shares issued and 72,220,906 and 77,610,361 shares outstanding at March 31,
2020 and 2019, respectively
Additional pppaid-in capppa ital
Accumulated other comppprehensive income (((loss)))
Treasury stock at cost, 49,785,171 and 42,149,771 shares at March 31, 2020 and 2019,
respectively
Retained earninggggs
Total stockholders’ eqqqquityyyy
Total liabilities and stockholders’ eqqquityyy
March 31,
2020
March 31,
2019
$
338,489
47,969
$
409,632
76,344
$
$
213,514
22,227
13,505
24,039
659,743
57,715
68,583
1,725,680
582,179
6,220
2,613
17,770
3,120,503
20,004
75,632
21,840
903
270,281
10,337
398,997
10,039
114,394
34,256
104,240
70,658
450,000
1,182,584
$
$
235,318
26,270
18,000
35,658
801,222
58,951
—
1,715,485
669,118
7,218
1,012
16,988
3,269,994
24,582
58,501
23,027
1,318
272,508
—
379,936
19,493
124,229
36,284
94,619
—
550,000
1,204,561
—
—
122
2,891,553
(3,160)
120
2,828,922
(2,639)
(1,305,935)
355,339
1,937,919
3,120,503
$
(1,119,063)
358,093
2,065,433
3,269,994
$
The accompanying notes are an integral part of these consolidated financial statements.
F-5
NetScout Systems, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Revenue:
Product
Service
Total revenue
Cost of revenue:
Product
Service
Total cost of revenue
Gross profit
Operating expenses:
Research and development
Sales and marketing
General and administrative
Amortization of acquired intangible assets
Restructuring charges
Impairment of intangible assets
Loss on divestiture of business
Total operating expenses
Income (loss) from operations
Interest and other income (expense), net:
Interest income
Interest expense
Other income (expense), net
Total interest and other expense, net
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
Weighted average common shares outstanding used in computing:
Net income (loss) per share—basic
Net income (loss) per share—diluted
Ended March 31,
2020
2019
2018
$
438,341
$
467,289
$
453,479
891,820
122,832
119,360
242,192
649,628
188,294
276,523
99,994
64,505
2,674
—
—
631,990
17,638
4,528
(20,597)
355
(15,714)
1,924
442,629
909,918
140,938
113,189
254,127
655,791
203,588
291,870
93,572
74,305
18,693
35,871
9,472
727,371
(71,580)
5,245
(26,143)
(434)
(21,332)
(92,912)
4,678
(2,754) $
(0.04) $
(0.04) $
(19,588)
(73,324) $
(0.93) $
(0.93) $
$
$
$
75,162
75,162
78,617
78,617
520,418
466,369
986,787
158,628
113,277
271,905
714,882
215,076
312,536
109,479
76,640
5,209
—
—
718,940
(4,058)
1,808
(12,633)
(3,776)
(14,601)
(18,659)
(98,471)
79,812
0.91
0.90
87,425
88,261
The accompanying notes are an integral part of these consolidated financial statements.
F-6
NetScout Systems, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Net income (loss)
Other comprehensive income (loss):
Cumulative translation adjustments
Recognition of actuarial net gain (loss) from pension and other post-
retirement plans, net of taxes (benefit) of $590, ($976), and $435
Changes in market value of investments:
Changes in unrealized gains (losses), net of taxes of $39, $19, and $15
Total net change in market value of investments
Changes in market value of derivatives:
Changes in market value of derivatives, net of (benefits) tax of
($25), ($172), and $267
Reclassification adjustment for net gains (losses) included in net
income (loss), net of taxes (benefit) of $7, $138, and ($219)
Total net change in market value of derivatives
Other comprehensive income (loss)
Total comprehensive income (loss)
Year Ended March 31,
2020
2019
2018
$
(2,754) $
(73,324) $
79,812
(1,644)
(3,229)
1,054
(2,278)
126
126
(78)
21
(57)
(521)
60
60
(524)
437
(87)
(5,534)
$
(3,275) $
(78,858) $
4,889
1,353
(6)
(6)
812
(681)
131
6,367
86,179
The accompanying notes are an integral part of these consolidated financial statements.
F-7
NetScout Systems, Inc.
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
Common stock
Voting
Shares
Par
Value
Additional
Paid In
Capital
Balance, March 31, 2017
115,917,431
$ 116
$2,693,846
Treasury stock
Accumulated
Other
Comprehensive
Income (Loss)
$
Shares
(3,472) 23,876,143
Stated
Value
Retained
Earnings
$ (570,921) $ 316,681
79,812
Net income
Unrealized net investment losses
Unrealized net gains on derivative
financial instruments
Cumulative translation adjustments
Recognition of actuarial net gains
from pension and other post-
retirement plan
Issuance of common stock pursuant
to vestinggg of restricted stock units
Stock-based compensation expense
for restricted stock units granted to
employees
p yp yp y
Issuance of common stock under
emppployyyee stock pppurchase ppplan
Repurchase of treasury stock
Balance, March 31, 2018
Net loss
Unrealized net investment gains
Unrealized net losses on derivative
financial instruments
Cumulative translation adjustments
Recognition of actuarial net losses
from pension and other post-
retirement plan
Issuance of common stock pursuant
to vesting of restricted stock units
Stock-based compensation expense
for restricted stock units granted to
employees
p yp yp y
Issuance of common stock under
emppployyyee stock pppurchase ppplan
Repurchase of treasury stock
Cumulative effect of adoption of
ASU 2014-09
Net loss
Unrealized net investment gains
Unrealized net losses on derivative
financial instruments
Cumulative translation adjustments
Recognition of actuarial net gains
from pension and other post-
retirement plan
Issuance of common stock pursuant
to vesting of restricted stock units
Stock-based compensation expense
for restricted stock units granted to
employees
p yp yp y
Issuance of common stock under
emppployyyee stock pppurchase ppplan
Repurchase of treasury stock
Balance, March 31, 2020
1,216,535
1
610,947
117,744,913
117
43,425
17,849
(90,000)
2,665,120
(6)
131
4,889
1,353
2,895
60
(87)
(3,229)
(2,278)
13,598,747
37,474,890
(424,922)
(995,843)
396,493
(73,324)
1,438,219
3
577,000
51,945
15,074
96,783
4,674,881
(123,220)
126
(57)
(1,644)
1,054
1,651,284
2
594,661
48,404
14,227
7,635,400
(186,872)
Balance, March 31, 2019
119,760,132
120
2,828,922
(2,639) 42,149,771
(1,119,063)
34,924
358,093
(2,754)
Total
Stockholders'
Equity
2,436,250
79,812
(6)
$
131
4,889
1,353
1
43,425
17,849
(514,922)
2,068,782
(73,324)
60
(87)
(3,229)
(2,278)
3
51,945
15,074
(26,437)
34,924
2,065,433
(2,754)
126
(57)
(1,644)
1,054
2
48,404
14,227
(186,872)
122,006,077
$ 122
$2,891,553
$
(3,160) 49,785,171
$(1,305,935) $ 355,339
$
1,937,919
The accompanying notes are an integral part of these consolidated financial statements.
F-8
NetScout Systems, Inc.
Consolidated Statements of Cash Flows
(In thousands)
2020
Year Ended March 31,
2019
2018
$
(2,754) $
(73,324) $
79,812
Cash flows from operating activities:
Net income (((loss)))
Adjustments to reconcile net income (loss) to cash provided by operating activities, net
of the effects of acqqquisitions:
Depppreciation and amortization
Oppperatinggg lease riggght-of-use assets
Loss on divestiture of business
Loss on disppposal of fixed assets
Deal related compppensation expppense and accretion charggges
Share-based compppensation expppense associated with eqqquityyy awards
Net changgge in fair
Accretion of contingggent consideration
Impppairment charggge
Deferred income taxes
Other (((gggains))) losses
Changgges in assets and liabilities
value of contingggent and contractual liabilities
ff
Accounts receivable and unbilled costs
Due from related pppartyyy
Inventories
Prepppaid expppenses and other assets
Accounts pppayyyable
Accrued compppensation and other expppenses
Oppperatinggg lease liabilities
Due to related pppartyyy
Income taxes pppayyyable
Deferred revenue
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of marketable securities
Proceeds from maturityyy of marketable securities
Purchase of fixed assets
Purchase of intangggible assets
Payyyments related to the divestiture of business
Acqqquisition of businesses,,, net of cash acqqquired
Increase in deppposits
Contingggent pppurchase consideration
Collection of contingggent consideration
Cappppa italized software developpppment costs
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Issuance of common stock under stock ppplans
Payyyment of contingggent consideration
Treasuryyyrr stock repppurchases,,, includinggg accelerated share repppurchases
Tax withholdinggg on restricted stock units
Proceeds from issuance of longgg-term debt,,, net of issuance costs
Reppppayyyyment of longggg-term debt
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents and restricted cash, beginning of year
Cash and cash equivalents and restricted cash, end of year
Supplemental disclosures of cash flow information:
Cash pppaid for interest
Cash pppaid for income taxes
Non-cash transactions:
to fixed assets
Transfers of inventoryyyrr
Additions to pppropppertyyy,,, ppplant and eqqquipppment included in accounts pppayyyable
Issuance of common stock under emppployyyee stock pppurchase ppplans
Contingggent consideration related to acqqquisition,,, included in accrued other
Tenant imppprovement allowance
Initial fair value of contingent consideration received as partial consideration for
divestiture of business
$
$
$
$
$
$
$
$
$
116,104
10,504
—
16
—
50,861
798
(36)
—
(9,821)
(152)
21,472
—
1,501
13,839
(4,288)
32,812
(13,077)
—
(919)
8,163
225,023
(117,383)
144,322
(19,922)
—
—
(11,347)
(31)
—
52
—
(4,309)
2
—
(175,000)
(11,872)
—
(100,000)
(286,870)
(3,427)
(69,583)
409,820
340,237
17,644
13,061
$
$
$
2,290
255
14,227
1,800
$
$
$
$
— $
137,878
—
7,660
260
102
56,328
1,614
(119)
35,871
(33,442)
(152)
(22,180)
172
5,321
3,034
(3,876)
19,964
—
234
(639)
15,132
149,838
(229,769)
230,433
(23,392)
—
(3,293)
—
(97)
—
—
(134)
(26,252)
3
(2,851)
(14,468)
(11,969)
—
(50,000)
(79,285)
(5,212)
39,089
370,731
409,820
23,281
13,381
$
$
$
2,152
455
15,074
$
$
$
— $
$
10,171
— $
2,257
$
153,503
—
—
481
153
47,317
—
—
—
(127,784)
18
84,952
443
1,006
20,147
(8,929)
(17,718)
—
(75)
(2,734)
(8,138)
222,454
(114,178)
196,041
(15,913)
(544)
—
(8,334)
(330)
523
—
(137)
57,128
1
(660)
(501,324)
(13,598)
294,619
—
(220,962)
6,385
65,005
305,726
370,731
9,604
18,216
5,556
1,379
17,849
523
2,104
—
The accompanying notes are an integral part of these consolidated financial statements.
F-9
NetScout Systems, Inc.
Notes to Consolidated Financial Statements
NOTE 1 – NATURE OF BUSINESS
NetScout Systems, Inc., or NetScout or the Company, has been a technology innovator for three-plus decades since its
ve Service Intelligence (ASI) technology, help customers
founding in 1984. The Company's solutions, based on patented Adaptia
identify network and application performance issues, defend their networks from denial of service (DDoS) attacks, and rapidly
find and isolate advanced network threats. As a result, customers can quickly resolve issues that cause business disruptions,
downtime, poor service quality or compromised security, thereby driving compelling returns
on their investments in their
network and broader information technology (IT) initiatives. The Company reports revenue and income in one reportable
segment.
t
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of NetScout and its wholly owned subsidi
u
aries. Inter-company
transactions and balances have been eliminated in consolidation.
Certain amounts for the twelve months ended March 31, 2018 have been reclassified to conform to the current period
presentation. These reclassifications had no effecff
t on the reported results of operations.
Segment Reporting
The Company's operating segments are determined based on the units that constitute a business for which financial
information is availablea
(CODM). The Company reports revenue and income in one reportablea
and for which operating results are regularly reviewed by the Chief Operating Decision Maker
segment.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabia lities and disclosures of
contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates in these financial statements include those involving revenue
recognition, valuation of goodwill and acquired assets and liabilities, valuation of the pension obligation, valuation of
contingent consideration and share-based compensation. These items are continuously monitored and analyzed by management
for changes in facts and circumstances and material changes in these estimates could occur in the future.
t
The Company considered the impact of the COVID-19 pandemic on the use of estimates and assumptions used for
financial reporting and determined that there was no adverse material impact to its results of operations for the fourth quarter of
fiscal year 2020. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business,
research and
results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing,
development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a
result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as
well as the economic impact on local, regional, national and international customers and markets. The Company has made
estimates within our financial statements and there may be changes to those estimates in future periods. Actual results may
differ from these estimates.
t
COVID-19 Risks and Uncertainties
The Company is closely monitoring the impact of COVID-19 on all aspects of its business. COVID-19 was declared a
global pandemic by the World Health Organization on March 11, 2020 and the President of the United States declared the
COVID-19 outbreak a national emergency. While the COVID-19 pandemic has not had a material adverse impacm t on the
Company’s operations to date, the future impacts of the pandemic and any resulting economic impact are largely unknown and
rapidly evolving. It is possible that the COVID-19 pandemic, the measures taken by the governments of countries affected and
the resulting economic impact may materially and adversely affecff
financial position as well as its customers.
t the Company’s results of operations, cash flows and
Under Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements—Going Concern (Subtopic
205-40), or ASC 205-40, the Company has the responsibility to evaluate whether conditions and/or events raise substantial
F-10
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
financial obligations as they become due within one year after the date that the financial
doubt about its ability to meet its futuret
statements are issued. The Company is taking precautionary actions to reduce costs and spending across the organization. This
includes limiting discretionary spending and reducing hiring activities. The Company has temporarily halted the stock
repurchase program, although the repurchase authorization remains effective. In addition, based on covenant levels at March
31, 2020, the Company has an incremental $285 million available under the $1.0 billion revolving credit facility. The Company
expects net cash provided by operations combined with cash, cash equivalents, and marketable securities and borrowing
availability under the revolving credit facility to provide sufficient liquidity to fund current obligations, capital spending, debt
service requirements and working capia tal requirements over at least the next twelve months.
Cash and Cash Equivalents and Marketable Securities
Under current authoritative guidance, NetScout has classified its investments as "availablea
-for-sale" which are carried at
fair value based on quoted market prices and associated unrealized gains or losses are recorded as a separate component of
stockholders’ equity until realized. NetScout 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.
At March 31, 2020 and periodically throughout the year, NetScout has maintained cash balances in various operating
accounts in excess of federally insured limits. NetScout limits the amount of credit exposure by investing only with credit
worthy institutions which the Company believes are those instituti
ons with an investment grade rating for deposits.
t
Revenue Recognition
The Company accounts for revenue in accordance with ASU No. 2014-09, Revenue from Contracts with Customers
(Topic 606), which was adopted on April 1, 2018 using the modified retrospective transition method. For further discussion of
the Company's accounting policies related to revenue see Note 3, "Revenue Recognition."
Commission Expense
Sales commissions are recorded as an asset when the initial contract's duration is longer than 12 months and amortized to
expense ratably over the remaining performance periods of the related contracts.
Uncollected Deferred Revenue
Because of NetScout's revenue recognition policies, there are circumstances for which the Company does not recognize
has not been collected. While the
revenue relating to sales transactions that have been billed, but the related account receivablea
receivable represents an enforceablea
deferred revenue or the related account receivablea
transactions because control of the underlying deliverablea
receivable and deferred revenue was $11.1 million and $23.3 million at March 31, 2020 and 2019, respectively.
and no amounts appear in the consolidated balance sheets for such
obligation, for balance sheet presentation purposes, the Company has not recognized the
has not transferred. The aggregate amount of unrecognized accounts
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of
investments, trade accounts receivablea
placed with financial instituti
and accounts payablea
ons with high credit standings.
t
. NetScout's cash, cash equivalents, and marketablea
securities are
At Ma hrch 31, 2020
dand
2019 the Company had no direct customers or indirect channel partners which accounted for
,
more than 10% of the accounts receivablea
balance.
During the fiscal years
dendedd Ma hrch 31, 2020, 2019
ppartners account ded for more hthan 10% of tot lal
rev nue.
e
dand 2018 respec iti
lvelyy, no didirect customers or i di
indirect hchannell
Historically, the Company has not experienced any significant failure of its customers 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.
F-11
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Trade Receivable Valuations
Accounts receivablea
are stated at their net realizable value. The allowance against gross trade receivables reflects the best
estimate of probable losses inherent in the receivablea
allowances for known troubled accounts and other currently available information.
s portfolio determined on the basis of historical experience, specificff
Inventories
Inventories are stated at the lower of actual cost or net realizable value. Cost is determined by using the first-in, first-out
(FIFO) method.
Fixed Assets
Fixed assets are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or anticipated useful life of the
improvement. Gains and losses upon asset disposal are recognized in the year of disposition. Expenditures
for replacements and
alized, while expenditures for maintenance and repairs are charged against earnings as incurred.
building improvements are capita
t
Leases
Effective April 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), which requires leases to be recognized
on the balance sheet. Leases with an original term of 12 months or less are not recognized on the Company’s balance sheet, and
the lease expense related to those short-term leases is recognized over the lease term. The Company does not account for lease
and non-lease (e.g. common area maintenance) components of contracts separately for any underlying asset class. For fiscal
years ending prior to this date, the Company followed the guidance for leases under Topic 840, Leases. See Recently Issued
Accounting Pronouncements below and Footnote 18, Leases, for further details.
The Company has operating leases for administrative, research and development, sales and marketing and manufacturing
facilities and equipment under various non-cancelable lease agreements. Lease commencement occurs on the date the Company
takes possession or control of the property or equipment. The Company’s lease terms may include options to extend or
terminate the lease where it is reasonably certain that the Company will exercise those options. The Company considers several
economic factors when making this determination, including but not limited to, the significance of leasehold improvements
incurred in the office space, the difficulty in replacing the asset, underlying contractual obligations, or specific characteristics
unique to a particular lease. The Company’s lease agreements do not contain any material residual value guarantees or material
restrictive covenants.
Valuation of Goodwill, Intangible Assets and Other Acquisition and Divestiture Accounting Items
The Company amortizes acquired definite-lived intangible assets over their estimated useful lives. Goodwill and other
indefinite-lived intangible assets are not amortized but subject to annual impairment tests; more frequently if events or
circumstances occur that would indicate a potential decline in their fair value. The Company performs the assessment annually
during the fourth quarter and on an interim basis if potential impairment indicators arise.
Reporting units are determined based on the components of a Company's operating segments that constitutet
which financial information is available and for which operating results are regularly reviewed by segment management.
Through the first half of fiscal year 2020, the Company had two reporting units: (1) Service Assurance and (2) Security. As part
of its continued integration efforts, effective during the third quarter of fiscal year 2020, the Company reorganized its business
units. As a result of this change, the Company reduced the number of reporting units from two reporting units to one reporting
unit. The former Service Assurance and Security reporting units were combined as result of organizational changes made to
fully integrate the resources and assets of the Service Assurance and Security business units.
a business for
To test impairment, the Company first assesses qualitative factors to determine whether the existence of events and
circumstances indicate that it is more likely than not that the intangible asset is impaired. If based on the Company's qualitative
assessment it is more likely than not that the fair value of the intangible asset is less than its carrying amount, quantitative
impairment testing is required. However, if the Company concludes otherwise, quantitative impairment testing is not required.
During fiscal year 2020, the Company performed its annual impairment analysis for goodwill as of January 31, 2020. The
Company performed a quantitative analysis and determined the fair value of the reporting unit's goodwill using establia
shed
income and market valuation approaches. Goodwill was estimated to be recoverable as of January 31, 2020. The Company
considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic to be a
F-12
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
triggering event. As such, the Company performed a quantitative analysis as of March 31, 2020 and determined the fair value of
the reporting unit's goodwill using establia
recoverablea
shed income and market valuation approaches. Goodwill was determined to be
as of March 31, 2020.
Indefinite-lived intangible assets are tested for impairment at least annually, or on an interim basis if an event occurs or
circumstances change that would, more likely than not, reduce the fair value of the indefinite-lived intangible assets below its
carrying value. To test impairment, the Company first assesses qualitative factors to determine whether the existence of events
and circumstances indicate that it is more likely than not that the indefinite-lived intangible is impaired. If based on the
Company's qualitative assessment, the Company concludes that it is more likely than not that the fair value of the indefinite-
lived asset is greater than its carrying amount, quantitative impairment testing is not required. The Company completed its
annual impairment test of the indefinite-lived intangible asset at January 31, 2020 using the qualitative Step 0 assessment. No
impairment indicators were observed as of January 31, 2020. The Company considered the current and expected future
economic and market conditions surrounding the COVID-19 pandemic and concluded that it was not more likely than not that
the trade name was impaired and therefore a quantitative Step 1 assessment was not performed as of March 31, 2020.
The Company completed three acquisitions and one divestiture during the three-year period ended March 31, 2020. The
acquisition method of accounting requires an estimate of the fair value of the assets and liabilities acquired as part of these
transactions. In order to estimate the fair value of acquired intangible assets, the Company uses either an income, market or cost
method approach.
The Company's Level 3 liabilities at March 31, 2020 consisted of contingent purchase consideration related to the two
acquisitions that occurred during the fiscal year 2020. The contingent purchase consideration related to the two acquisitions
represent amounts deposited into escrow accounts, which were establia
liabilities that NetScout did not agree to assume or as a result of the breach of representations and warranties of the sellers as
described in the acquisition agreements. The contingent purchase consideration of $0.7 million and $1.0 million related to the
Gigavation Incorporated (Gigavation) and Eastwind Networks, Inc. (Eastwind) acquisitions are included as accrued other in the
Company's consolidated balance sheet at March 31, 2020. Except to the extent that valid indemnification claims are made prior
to such time, the $0.7 million of purchase consideration related to the Gigavation acquisition will be paid to the seller in
February 2021. The contingent purchase consideration related to the Eastwind acquisition was paid to the seller in April 2020.
shed to cover damages NetScout may suffer related to any
The Company had a contingent consideration asset related to the divestiture of its handheld network test (HNT) tools
business in September 2018. The contingent consideration asset represented potential future earnout payments to the Company
of up to $4.0 million over two years that were contingent on the HNT tools business achieving certain milestones. The fair
value of the contingent consideration of $2.3 million was recognized on the divestituret
unobservablea
million, respectively.
(Level 3) inputs. The value of the contingent consideration asset at March 31, 2020 and 2019 was $0 and $0.8
date and was measured using
The Company had a contingent liability at March 31, 2018 for $0.5 million related to the acquisition of Efflux
ff
in July
2017 for which an escrow account was established to cover damages NetScout may have suffered related to any liabilities that
NetScout did not agree to assume or as a result of the breach of representations and warranties of the seller as described in the
acquisition agreement. The $0.5 million was paid to the seller in July 2018.
The Company had a contingent liability at March 31, 2018 for $4.9 million related to the acquisition of Simena LLC in
November 2011, which was based on the ultimate settlement of assets and liabilities acquired as part of the transaction, and the
former owners' futuret
period of employment with NetScout. The contingent purchase consideration of $5.0 million was paid to
the seller in November 2018.
Capitalized Software Development Costs
Costs incurred in the research and development of the Company’s products are expensed as incurred, except for certain
software development costs. Costs associated with the development of computer software are expensed prior to the
establishment of technological feasibility and capita
for first
r until the related software products are availablea
alized thereafteff
customer shipment. Such costs are amortized using the straight-line method over the estimated economic life of the product,
which generally does not exceed three years. Capita
recoverabila
technologies. Unamortized capia talized software development costs that are determined to be in excess of the net realizablea
value of the software products would be expensed in the period in which such a determination is made.
ity in the event of changes to the anticipated future revenue for the software products or changes in product
alized software development costs are periodically assessed for
F-13
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Typically for accounting purposes, these R&D investments have not been capia talized because of the development
methodology employed. The developments are added individually to the core code over a shorter period of time but marketed
as a release once all portions are complete.
Amortization included as cost of product revenue was $$0.5
ended March 31, 2020, 2019, and 2018, respectively. The Company capita
costs in the fiscal years ended March 31, 2020 and 2019.
imilllliion, $$1.1
imillllion,
ion and $1.0 million for the fiscal years
aliz ded $$0 andan $0.1 million in softwff
are development
Derivative Financial Instruments
Under authoritative guidance for derivative instruments and hedging activities, all hedging activities must be documented
tive in offsetting changes to future cash flows in order
at the inception of the hedge and must meet the definition of highly effecff
for the derivative to qualify for hedge accounting. Under the guidance, if an instrument qualifies for hedge accounting, the
changes in the fair value each period for open contracts, measured at the end of the period, are recorded to other comprehensive
income. Otherwise, changes in the fair value are recorded in earnings each period. Management must perform initial and
ongoing tests in order to qualify for hedge accounting. In accordance with the guidance, the Company accounts for its
instruments under hedge accounting. The effecff
tiveness and a measurement of ineffectiveness of qualifying hedge contracts are
assessed by the Company quarterly. The Company records the fair value of its derivatives in prepaid expenses and other current
assets and accruedrr
changes in the fair value of qualifying hedges are recorded in other comprehensive income (loss) until the forecasted transaction
occurs, with any ineffective portion classified directly to the Company’s consolidated statement of operations based on the
expense categories of the items being hedged. When forecasted transactions occur, unrealized gains or losses associated with
the effective portion of the hedge are reclassified to the respective expense categories in the Company’s consolidated statement
of operations. Gains or losses related to hedging activity are included as operating activities in the Company’s consolidated
statement of cash flows. If the underlying forecasted transactions do not occur, or it becomes probable that they will not occur,
the gain or loss on the related cash flow hedge is recognized immediately in earnings.
other in the Company's consolidated balance sheet. The effecff
tive portion of gains or losses resulting from
Contingencies
NetScout accounts for claims and contingencies in accordance with authoritative guidance that requires an estimated loss
to be recorded from a claim or loss contingency when information availablea
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 NetScout determines 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, Netscout discloses the amount or range of estimated loss if the amount or
range of estimated loss is material. Accounting for claims and contingencies requires NetScout to use its judgment. NetScout
consults with legal counsel on those issues related to litigation and seeks input from other experts and advisors with respect to
matters in the ordinary course of business.
prior to issuance of its consolidated financial
Contingent assets and liabilities include contingent consideration in connection with the Company’s acquisitions and
Contingent consideration represents earnout payments in connection with the Company’s acquisitions and
divestitures.
t
divestitures
and is recognized at fair value on the acquisition date and remeasured each reporting period with subsequent
t
adjustments recognized in the consolidated statements of income. The Company discounts the contingent purchase
consideration to present value using a risk adjusted interest rate at each reporting period. Contingent consideration is valued
using significant inputs that are not observable in the market which are defineff
measurement accounting. The Company believes its estimates and assumptions are reasonable, however, there is significff ant
judgment involved.
d as Level 3 inputs pursuant to fair value
Changes in the fair value of contingent assets and liabilities may result from changes in discount periods. The Company
reflects changes in fair value due to probabila
are reflected in both cash flows from operating and financing activities and the changes in fair value are reflected in cash flows
from operating activities in the consolidated statements of cash flows.
ity changes in earnings in the consolidated statements of income. Earnout payments
Share-Based Compensation
NetScout recognizes compensation expense for all share-based payments granted. Under the fair value recognition
provisions, share-based compensation is calculated net of an estimated forfeituret
for those shares expected to vest on a straight-line basis over the expected requisite service period of the award.
rate and compensation cost is only recognized
F-14
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Foreign Currency
NetScout accounts for its reporting of foreign operations in accordance with guidance which establia
shes guidelines for the
determination of the functional currency of foreign subsidiaries. In accordance with the guidance, NetScout has determined its
functional currency for those foreign subsidiaries that are an extension of NetScout's U.S. operations to be the U.S. Dollar.
Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than U.S. dollars
are translated into U.S. dollars using the period-end exchange rate, and income and expense items are translated using the
average exchange rate during the period. Cumulative translation adjustments are reflected as a separate component of
stockholders' equity.
NetScout will experience currency exchange risk with respect to foreign currency denominated expenses. In order to
partially offset the risks associated with the effecff
shed a program
that utilizes foreign currency forward contracts. Under this program, increases or decreases in foreign currency exposures are
partially offset by gains or losses on forward contracts, to mitigate the impact of foreign currency transaction gains or losses.
The Company does not use forward contracts to engage in currency speculation. All outstanding foreign currency forward
contracts are recorded at fair value at the end of each fiscal period.
ts of certain foreign currency exposures, NetScout has establia
The Company had foreign currency losses of $$0.7
imilllliion, $$2.0
imilllliion and $4.1 million for the fiscal years ended
March 31, 2020, 2019 and 2018, respectively. These amounts are included in other expense, net.
Advertising Expense
NetScout recognizes advertising expense as incurred. Advertising expense was $8.3 million, $9.4 million and $6.5
million for the fiscal years ended March 31, 2020, 2019 and 2018, respectively.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive
income (loss) typically consists of unrealized gains and losses on marketablea
contracts, actuarial gains and losses, and foreign currency translation adjustments.
securities, unrealized gain (loss) on hedge
Income Taxes
NetScout accounts for its income taxes under the asset and liability method. Under the asset and liability method,
to differences
deferred tax assets and liabilities are recognized based on anticipated futuret
between financial statement carrying amounts of assets and liabilities and their respective tax basis, as well as the effect of any
net operating loss and tax credit carryforwards. Income tax expense is comprised of the current tax liability or benefit and the
change in deferred tax assets and liabilities. NetScout evaluates the recoverability of deferred tax assets by considering all
positive and negative evidence relating to future profitability. NetScout weighs objective and verifiablea
in this analysis. In situations where NetScout concludes that it does not have sufficient objective and verifiable evidence to
support the realizabila
ity of the deferred tax asset, NetScout creates a valuation allowance against it.
tax consequences attributablea
evidence more heavily
Recent Accounting Standards
In March 2020, the FASB issued ASU 2020-04, Refereff
nce Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting. The amendments provide optional guidance for a limited time to ease the
potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for
applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain
criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference
rate expected to be discontinued due to reference rate reform. These amendments are effect
ive immediately and may be applied
prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31,
2022. The adoption will not have a material impact on the Company's financial position, results of operations, and disclosures.
ff
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method
and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321,
Topic 323, and Topic 815. This guidance addresses accounting for the transition into and out of the equity method and provides
clarification of the interaction of rules for equity securities, the equity method of accounting, and forward contracts and
tive for fiscal years and interim periods within those fiscal
purchase options on certain types of securities. This standard is effecff
years beginning after December 15, 2020. Early adoption is permitted. ASU 2020-01 is effective for NetScout beginning April
F-15
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
1, 2021. The Company is currently assessing the effect that ASU 2020-01 will have on its financial position, results of
operations, and disclosures.
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 afteff
r 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 employe
postretirement plans. This guidance is effective for fiscal years ending afteff
NetScout beginning April 1, 2020. Early adoption is permitted. This guidance will have no impact on the Company's
consolidated financials statements upon adoption other than with respect to the updated disclosure requirements.
rs that sponsor defined benefit pension or other
r December 15, 2020. ASU 2018-14 is effective for
m
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
does not believe the adoption of ASU 2018-13 will have a material impact 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 component
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 effect
ive April 1, 2019. The adoption has had
an immaterial impact on the Company's consolidated financial statements.
s and align the recognition and presentation of the effects of the hedging
m
ff
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, ASU 2019-11 and ASU 2020-02 (collectively, Topic 326). Topic 326 requires measurement and
recognition of expected credit losses for financial assets held. Topic 326 replaces the existing incurred loss impairment model
with an expected loss methodology, which will result in more timely recognition of credit losses. Topic 326 is effecff
tive for NetScout beginning
annual periods beginning after December 15, 2019, and interim periods therein. Topic 326 is effecff
April 1, 2020, and earlier adoption is permitted. The Company does not believe the adoption of Topic 326 will have a material
impact on its financial position, results of operations, and disclosures.
tive for
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) Section A - Leases: Amendments to the FASB
ff
ion Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted
Accounting Standards Codification (ASU 2016-02) and issued subsequent amendments to initial guidance in July 2018 within
ASU 2018-10, Codificat
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 18,
"Leases" for further details.
NOTE 3 - REVENUE RECOGNITION
Revenue from Contracts with Customers
In May 2014, the FASB issued Topic 606, which requires an entity to recognize the amount of revenue to which it
expects to be entitled for the transfer of promised goods or services to customers. Topic 606 replaced most existing revenue
recognition guidance under GAAP. The new standard introduces a five-step process to be followed in determining the amount
F-16
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
and timing of revenue recognition. It also provides guidance on accounting for costs incurred to obtain or fulfill contracts with
customers and establia
shes disclosure requirements which are more extensive than those required under prior GAAP.
Topic 606 became effective for the Company on April 1, 2018. The Company elected to use the modified retrospective
transition approach. Therefore, the comparative financial information has not been restated and continues to be reported under
the accounting standards in effecff
t for those periods.
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 majoa rity 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 enforceablea
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 enforceablea
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
warrantyt 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
incurred in connection with providing consulting services are included in services revenue, with the offsetting
expenditures
expense recorded in cost of service revenue. Training services include on-site and classroom training. Training revenues are
recognized upon delivery of the training.
u
u
t
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
ty of its service elements based on historical standalone sales. In certain instances,
Company has establia
the Company has establia
ity 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 establia
shed 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
shed SSP for services based upon an estimate of profitabila
shing SSP. SSP has been establia
shed SSP for a majori
a
F-17
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
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
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 customer as a reduction of revenue to the extent they have recorded revenue from the
customer. 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.
t
During the fiscal year ended March 31, 2020, the Company recognized revenue of $$271.7
imilllliion
lrel ta ed 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 ratablya
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.
over the contract term as a stand-ready obligation. For consulting and training services, the
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,
refunds or warranties at March 31, 2020.
t
At March 31, 2020, the Company had total deferred revenue of $374.5 million, which represents the aggregate total
contract price allocated to undelivered performance obligations. The Company expects to recognize $270.3 million, or 72%, of
this revenue during the next 12 months, and expects to recognize the remaining $104.2 million, or 28%, of this revenue
thereafter.
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 variablea
recognized during the twelve months ended March 31, 2020.
consideration or performance obligations satisfied in a prior period
Contract Balances
The Company may receive payments from customers based on a billing schedule as establia
shed 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 ratablya
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.
F-18
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
At Ma hrch 31, 2020, thhe cons lioliddat ded bballance hsheet iincl dludedd $$7.2
lated to salles commiissiions to bbe
d
pe i driods.
bA b lalance of $$3.9
imilllliion wa is incl dludedd as o hther asset
expensed id in futff uret
fof $$3.3
onsoliddat ded bballance hsheet at Ma hrch 31, 2020. At Ma hrch 31,
2019, thhe cons lioliddat ded bballance sheet included $6.4 million in assets related to sales commissions to be expensed in futff uret
periods. A balance of $3.8 million was included in prepaid expenses and other current assets, and a balance of $2.6 million was
included in other assets in the Company's consolidated balance sheet at March 31, 2019.
hother current assets, and bd a b lalance
imilllliion wa is incl dluded id in pre
is in thhe Com ypany's c
li
imilllliion iin assets rel
ipaidd expenses a dnd
During the twelve months ended March 31, 2020 and 2019, the Company recog iniz ded $$6.5
imilllliion 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 4 – CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents co insistedd of U.S ggovernment andd m iuni ici
lpal bliobliggatiions, commerciiall paper, moneyne market
instruments and cash maintained with various financial instituti
t
ons at March 31, 2020 and 2019.
Cash, Cash Equivalents and Restricted Cash
The following tablea
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):
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
March 31, 2020
March 31, 2019 March 31, 2018 March 31, 2017
$
$
338,489
1,748
340,237
$
$
409,632
188
409,820
$
$
369,821
910
370,731
$
$
304,880
846
305,726
The Company's restricted cash includes cash balances which are legally or contractual
t
ly 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.
Marketable Securities
The following is a summary of marketablea
securities held by NetScout at March 31, 2020 classified as short-term and
long-term (in thousands):
Type of security:
U.S. government and municipal obligations
Commercial paper
Corporate bonds
Total short-term marketablea
securities
U.S. government and municipal obligations
Total long-term marketable securities
Total marketable securities
Amortized
Cost
Unrealized
Gains
Fair
Value
$
$
28,621
14,644
4,587
47,852
2,562
2,562
$
107
—
10
117
51
51
28,728
14,644
4,597
47,969
2,613
2,613
$
50,414
$
168
$
50,582
F-19
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The folff
lowing is a summary of marketablea
securities held by NetScout at March 31, 2019, classified as short-term and
long-term (in thousands):
Type of security:
Amortized
Cost
Unrealized
Gains
Fair
Value
U.S. government and municipal obligations
$
27,610
$
Commercial paper
Total short-term marketablea
securities
Corporate bonds
Total long-term marketable securities
Total marketable securities
48,722
76,332
1,007
1,007
$
12
—
12
5
5
27,622
48,722
76,344
1,012
1,012
$
77,339
$
17
$
77,356
Contractual maturit
t
follows (in thousands):
ies of the Company’s marketable securities held at March 31, 2020 and March 31, 2019 were as
Available-for-sale securities:
Due in 1 year or less
Due after 1 year through 5 years
NOTE 5 – FAIR VALUE MEASUREMENTS
March 31,
2020
March 31,
2019
$
$
47,969
2,613
50,582
$
$
76,344
1,012
77,356
The fair value hierarchy has three levels based on the reliabila
to fair values determined based on quoted prices in active markets forff
using significant other observablea
following tablea
hierarchy at March 31, 2020 and 2019 (in thousands):
inputs, and Level 3 includes fair
ff
ity of the inputs used to determine fair value. Level 1 refers
identical assets. Level 2 refers to fair values estimated
values estimated using significant unobservable inputs. The
s present the Company's financial assets and liabilities measured on a recurring basis using the fair value
Fair Value Measurements at
March 31, 2020
Level 1
Level 2
Level 3
Total
ASSETS:
Cash and cash equivalents
$
338,489
$
U.S. government and municipal obligations
Commercial paper
Corporate bonds
31,341
—
4,597
— $
—
14,644
—
— $
338,489
—
—
—
31,341
14,644
4,597
LIABILITIES:
Contingent purchase consideration
Derivative financial instruments
374,427
$
14,644
$
— $
389,071
— $
—
— $
— $
(49)
(49) $
(1,748) $
—
(1,748) $
(1,748)
(49)
(1,797)
$
$
$
F-20
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Fair Value Measurements at
March 31, 2019
Level 1
Level 2
Level 3
Total
ASSETS:
Cash and cash equivalents
$
409,632
$
— $
— $
409,632
U.S. government and municipal obligations
Commercial paper
Corporate bonds
Derivative financial instruments
Contingent consideration
LIABILITIES:
Derivative financial instruments
10,732
—
1,012
—
—
16,890
48,722
—
58
—
421,376
$
65,670
$
—
—
—
—
762
762
27,622
48,722
1,012
58
762
$
487,808
— $
— $
(68) $
(68) $
— $
— $
(68)
(68)
$
$
$
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of
unobservable inputs when determining fair value. On a recurring basis, the Company measures certain finaff
liabilities at fair value, including marketablea
securities and derivative financial instruments.
ncial assets and
The Company's Level 1 investments are classified as such because they are valued using quoted market prices or
alternative pricing sources with reasonable levels of price transparency.
The Company's Level 2 investments are classified as such because fair value is calculated using market observable data
d to the
for similar but not identical instruments, or a discounted cash flowff
underlying interest yield curve. The Company classifies municipal obligations as Level 2 because the fair values are determined
using quoted prices from markets the Company considers to be inactive. Commercial paper is classified as Level 2 because the
Company uses market information from similar but not identical instruments and discounted cash flow models based on interest
rate yield curves to determine fair value. The Company's derivative financial instruments consist of forward foreign exchange
contracts and are classified as Level 2 because the faiff
observable inputs, including spot prices for foreign currencies and credit derivatives, as well as an interest rate factor.
r values of these derivatives are determined using models based on market
model using the contractual interest rate as comparem
d
The Company's Level 3 liabila
ities at March 31, 2020 consisted of contingent purchase consideration related to the two
the fisff cal year 2020. The contingent purchase consideration related to the two acquisitions
acquisitions that occurred during
represent amounts deposited into escrow accounts, which were establia
liabilities that NetScout did not agree to assume or as a result of the breach of representations and warranties of the sellers as
described in the acquisition agreements. The contingent purchase consideration of $0.7 million and $1.0 million related to the
Gigavation and Eastwind acquisitions are included as accrued other in the Company's consolidated balance sheet at March 31,
2020. Except to the extent that valid indemnification claims are made prior to such time, the $0.7 million of purchase
consideration related to the Gigavation acquisition will be paid to the seller in February 2021. The contingent purchase
consideration related to the Eastwind acquisition was paid to the seller in April 2020.
shed to cover damages NetScout may suffer related to any
The Company's Level 3 assets at March 31, 2019 consisted of contingent consideration related to the divestiture of the
Company's handheld network test (HNT) tools business in September 2018. The contingent consideration represented potential
future earnout payments to the Company of up to $4.0 million over two years that were contingent on the HNT tools business
achieving certain milestones. The fair value of the contingent consideration of $2.3 million was recognized on the divestituret
date and was measured using unobservable (Level 3) inputs. The Company recordedd a $$0.8
the fair value of the contingent consideration, which is included in other expense, net within the Company's consolidated
statement of operations for the years ended March 31, 2020 and 2019, respectively. The $$0.8
consideration was included in other assets within the Company’s consolidated balance sheet at March 31, 2019.
imilllliion andan a $1.6 million change in
co ingent
imilllliion of
nt
F-21
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The folff
lowing table sets forth a reconciliation of changes in the fair value of the Company’s Level 3 finaff
ncial liabilities
for the year ended March 31, 2020 (in thousands):
Balance at March 31, 2019
Additions to Level 3
Change in fair value of contingent consideration
Payments received
Balance at March 31, 2020
Contingent
Purchase
Consideration
Contingent
Consideration
$
$
— $
(1,800)
—
52
(1,748) $
762
—
(762)
—
—
Accretion income related to the contingent consideration received as partial consideration for the divestiture of the HNT
the fiscal year ended March 31, 2020 was $$36 hthousandnd and was included within interest income.
tools business forff
The following tablea
sets forth a reconciliation of changes in the fair value of the Company’s Level 3 finaff
ncial liabilities
for the year ended March 31, 2019 (in thousands):
Balance at March 31, 2018
Contingent consideration pursuant to divestiture of the HNT tools business
Change in fair value of contingent consideration
Payments made
Balance at March 31, 2019
Contingent
Purchase
Consideration
Contingent
Consideration
$
$
(5,464) $
—
(102)
5,566
— $
—
2,257
(1,495)
—
762
Deal related compensation expense and accretion charges related to the contingent purchase consideration for the fisff cal
year ended March 31, 2019 were $102 thousand and were included within research and development expense. Accretion
income related to the contingent consideration received as partial consideration for the divestiture of the HNT tools business for
the fiscal year ended March 31, 2019 was $119 thousand and was included within interest income.
NOTE 6 – INVENTORIES
Inventories are stated at the lower of actual cost or net realizabla e value. Cost is determined by using the FIFO method.
Inventories consisted of the folff
lowing (in thousands):
Raw materials
Work in process
Finished goods
Deferred costs
March 31,
2020
2019
$
$
15,311
819
5,376
721
22,227
$
$
14,432
1,181
7,738
2,919
26,270
F-22
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 7 – FIXED ASSETS
Fixed assets consisted of the following (in thousands):
t
and fixt
ures
ff
Furnituret
Computer equipment and internal use software
Demonstration and spare part units
Leasehold improvements (1)
Less – accumulated depreciation
Estimated Useful
Life in Years
March 31,
2020
2019
3-7 $
3-5
2-5
up to 12
$
9,561
170,518
51,910
19,626
251,615
(193,900)
57,715
$
$
9,373
158,797
17,928
46,662
232,760
(173,809)
58,951
(1) Leasehold improvements are depreciated over the shorter of the lease term or anticipated useful life of the improvement.
Depreciation expense was $$23.4
imilllliion, $$27.4
imilllliion
dand $$34.7
imilllliion for hthe fifiscal yl years
dendedd Ma hrch 31, 2020, 2019
dand 2018, respec iti
lvelyy.
NOTE 8 – ACQUISITIONS & DIVESTITURES
Gigavat
iontt
i
Acquisit
iontt
ii
On February 5, 2020 (the Gigavation Closing Date), the Company acquired 100% of the common stock of Gigavation
Incorporated, a cybersecurity company for $8.0 million. Gigavation’s solutions provide security to device communication
protocols, end point protection and security analytics. The Gigavation technology and engineering talent have been integrated
into our service assurance products in order to support the ongoing enhancement of that products portfolio.
hThe Com ypany hhas c
omplet ded hthe purchhase acc
l
ounti gng
i
lrelat ded to hthe GigaGigavatiion ac
iqui i isition as of Ma hrch 31, 2020.
Goodwill and intangible assets recorded as part of the acquisition are not deductible for tax purposes. The Company determined
Gigavation's results of operations are not material. As such, the pro forma information is not required for fiscal year 2020.
The following tablea
summarizes the allocation of the purchase price (in thousands):
Initial cash payment
Estimated fair value of contingent purchase consideration
Estimated purchase price
$
$
7,200
800
8,000
The following tabla e refleff cts the estimated faiff
r value of assets acquired and liabia lities assumed (in thousands):
sh
Accounts receivable
Prepaid and other current assets
Intangible assets
Deferred tax liability
Accounts payablea
Accrued other liabia lities
Goodwill
$
7
209
5
4,760
(693)
(50)
(54)
$
3,816
F-23
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Of the total consideration, $0.8 million was deposited into an escrow account. The escrow account was establia
shed to
cover damages NetScout may suffer related to any liabilities that NetScout did not agree to assume or as a result of the breach
of representations and warranties of the seller as described in the acquisition agreement. Generally, indemnification claims that
Gigavation would be liable for are limited to the total amount of the escrow account, which shall be the sole source for the
satisfaction of any damages to the Company for such claims, but such limitation does not apply with respect to the seller's
breach of certain fundam
shareholders may be liablea
$0.1 million was withdrawn from the escrow account to satisfy an indemnification claim. Except to the extent that valid
indemnification claims are made prior to such time, hthe rem iai ini gng $$0.7
ental representations or related to other specified indemnity items, forff which certain of Gigavation's
for additional amounts in excess of the escrow amount. During the year ended March 31, 2020,
imilllliion iwillll beb paid to the seller in February 2021.
ff
In connection with the Gigavation acquisition, certain former employees of Gigavation received restricted stock units.
The restricted stock units issued are considered new share-based payment awards granted by NetScout to the former employees
of Gigavation. NetScout accounted forff
ion net of an estimated forfei
share-based compensat
to vest on a straight-line basis over the requisite service period of the award.
these new awards separately from the business combination. The Company recognized
ture rate and only recognized compensation cost for those shares expected
m
ff
The fair value of the intangible asset was based on a valuation using an income approach. The underlying assumptim ons
include the estimated cash flows
ff
contributory assets, if any. This fair
r value measurements.
represents Level 3 faiff
ff
to be generated by the technology purchased as part of the acquisition less any returns
value measurement was based on significant inputs not observablea
t
in the market and thus
on
The following tablea
reflects the fair value of the acquired identifiable intangible asset and related estimated useful life (in
thousands):
Developed technology
Fair Value
Useful Life (Years)
$4,760
10
The weighted average useful life of the developed technology acquired from Gigavation is 10 years.
Eastwind Acquisit
iontt
ii
On April 3, 2019 (the Eastwind Closing Date), the Company completed the acquisition of certain assets and liabilities of
Eastwind for $5.2 million. Eastwind's breach analytics cloud analyzes data to identify malicious activity, insider threats and
data leakage.
The Company completed the purchase accounting related to the Eastwind acquisition as of June 30, 2019. Goodwill and
ible forff
intangible assets recorded as part of the acquisition are deductd
of operations are not material. As such, the pro forma information is not required for fiscal year 2020.
tax purposes. The Company determined Eastwind's results
Initial cash payment
Estimated fair value of contingent purchase consideration
Estimated purchase price
$
$
4,154
1,000
5,154
The following tabla e refleff cts the estimated faiff
r value of assets acquired and liabia lities assumed (in thousands):
Property, plant and equipment
Intangible assets
Accrued other liabia lities
Goodwill
$
$
17
4,230
(96)
1,003
F-24
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Of the total consideration, $1.0 million was deposited into an escrow account. The escrow account was establia
shed to
cover damages NetScout may suffer related to any liabilities that NetScout did not agree to assume or as a result of the breach
of representations and warranties of the seller as described in the acquisition agreement. Generally, indemnification claims that
Eastwind would be liable for are limited to the total amount of the escrow account, which shall be the sole source for the
satisfaction of any damages to the Company for such claims, but such limitation does not apply with respect to the seller's
breach of certain fundam
ental representations or related to other specified indemnity items, forff which certain of Eastwind's
shareholders may be liablea
$1.0 million was p iaid to the seller in April 2020.
for additional amounts in excess of the escrow amount. The contingent purchase consideration of
ff
In connection with the Eastwind acquisition, certain former employees of Eastwind received cash retention payments
totaling $0.3 million on the Eastwind Closing Date. Because these employees were not required to provide future services to the
Company, the cash retention payments were accounted for as part of the purchase price. These former Eastwind employees will
also receive cash retention payments subject to such employee's continued employment with the Company through the next
regularly scheduled payroll dates following each of the firff st and second anniversaries of the Eastwind Closing Date. The cash
retention payment liability related to these future cash retention payments were accounted forff
separately from the business
combination as the cash retention payment is automatically forfeited upon termination of employment. The Company will
record the liability over the period it is earned as compensat
ion expense for post-combination services.
m
The fair value of intangible asset was based on a valuation using a cost method approach. The underlying assumptim ons
include estimates of cost to replace or reproduce the asset, less adjustmd
obsolescence, if relevant. This fair
represents Level 3 faiff
r value measurements.
ff
value measurement was based on significant inputs not observablea
in the market and thus
ents forff
physical deterioration and functional
The following tablea
reflects the fair value of the acquired identifiable intangible asset and related estimated useful life (in
thousands):
Developed technology
Fair Value
Useful Life (Years)
$4,230
10
The average useful life of the developed technology acquired fromff
Eastwind is 10 years.
HNT Tools Bll
ii
usines
s Divestitutt
re
On September 14, 2018 (the HNT Divestiture Date), the Company divested its HNT tools business forff
cash proceeds of
$1.3 million and potential future earnout payments of up to $4.0 million over two years that are contingent on the HNT tools
business achieving certain milestones. The fair value of the contingent consideration in the amount of $2.3 million was
recognized on the HNT Divestiture Date and was measured using unobservable (Level 3) inputs. The contingent consideration
is presented as a non-cash investing activity on the consolidated statement of cash flows. The Company transferred $4.6
million of consideration along with net liabila
al adjustment during the
year ended March 31, 2019. The Company recorded a loss on the divestiture for the year ended March 31, 2019 totaling $9.5
million, which included $1.3 million of transaction costs and $0.5 million of incentive compensation payable to the HNT tools
business employees negotiated as part of the sale. In connection with the divestiture, the Company has entered into a
transitional services agreement with the buyer to provide certain services for a period of up to eighteen months. Income
associated with the transitional services agreement for the fisff cal years ended March 31, 2020 and 2019 was $$1.2
imilllliion
dand iis iincl dludedd wiithihin othher expense, ne it in thhe Com ypany's c
$$2.2
dand
onsoliddat ded statement of operatiions.
ities of the HNT tools business related to a working capita
imilllliion, respec iti
lvelyy,
li
The Company determined that the sale of the HNT tools business did not represent a strategic shift and will not have a
t on its consolidated results of operations, financial position or cash flows. Accordingly, the Company has not
effecff
majora
presented the sale as a discontinued operation in the consolidated financial statements.
Efflux
On July 12, 2017 (the Efflux Closing Date), the Company completed the acquisition of Efflux
for $8.6 million. Efflux's
ff
technology detects, analyzes and correlates threat activity within enterprise networks. The Efflux
technology and engineering
talent have been integrated into our security products in order to support the ongoing enhancement of that products portfolio.
ff
F-25
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Goodwill of $6.1 million was recognized forff
the excess purchase price over the fair value of the net assets acquired.
Goodwill and intangible assets recorded as part of the acquisition are not deductible forff
tax purposes.
NOTE 9 – GOODWILL & INTANGIBLE ASSETS
Goodwill
The Company assesses goodwill for impairment at the reporting unit level at least annually, as of January 31, or on an
interim basis if an event occurs or circumstances change that would, more likely than not, reduce the fair value of the reporting
unit below its carrying value.
Reporting units are determined based on the components of a Company's operating segments that constitute a business forff
ff
which financial information is available and for which operating results are regularly reviewed by segment management.
Through the firff st half of fisca
l year 2020, the Company had two reporting units: (1) Service Assurance and (2) Security. As part
of its continued integration efforts,
ff
units. As a result of this change, the Company reduced the number of reporting units fromff
unit. The former Service Assurance and Security reporting units were combined as result of organizational changes made to
fully integrate the resources and assets of the Service Assurance and Security business units.
l year 2020, the Company reorganized its business
two reporting units to one reporting
effective during the third quarter of fisca
ff
At March 31, 2020 and 2019, the carrying amount of goodwililll was $$1.7 bilbillilion.
In fiscal years 2020 and 2019, the Company's quantitative impairment tests indicated that goodwill was not impaired. The
economic and market conditions surrounding the COVID-19 pandemic to
Company considered the current and expected future
be a triggering event. As such, the Company performed a quantitative analysis as of March 31, 2020. The quantitative
impairment test indicated goodwill was not impaired as of March 31, 2020.
ff
The Company determined the fair value of its reporting unit by preparing a discounted cash flowff
analysis using forward
looking projections of the reporting unit's futuret
implied market value of selected peers. The assumptim ons used in the discounted cash flowff
selling margins, and other operating expenditures.
t
to the "market participant" weighted-average cost of capita
carrying value.
analysis include: projected revenues,
The discount rate used is a cost of equity method, which is essentially equal
al (WACC). The goodwill fair value substantially exceeded the
operating results and by comparing the value of the reporting unit to the
The change in the carrying amount of goodwill for the fiscal year ended March 31, 2020 is due to the acquisitions of
Eastwind a dnd GigaGigavatiion and id impact of foreff
currencies other than the U.S. Dollar.
ign currency translation adjustments related to asset balances that are recorded in
The changes in the carrying amount of goodwill forff
thousands):
Balance at March 31, 2018
Divestiture of the HNT tools business
Foreign currency translation impact
Balance at March 31, 2019
Goodwill attributed to the Eastwind acquisition
Goodwill attributed to the Gigavation acquisition
Foreign currency translation impact
Balance at March 31, 2020
Intangible Assets
the fisff cal years ended March 31, 2020 and 2019 are as follow
ff
s (in
$
$
$
1,712,764
(4,414)
7,135
1,715,485
1,003
3,816
5,376
1,725,680
The net carrying amounts of intangible assets were $$582.2
imilllliion
dand $$669.1
imilllliion at March 31, 2020 and 2019,
respectively. Intangible assets acquired in a business combination are recorded under the acquisition method of accounting at
their estimated fair values at the date of acquisition. The Company amortizes intangible assets over their estimated useful lives,
except for the acquired trade name which resulted fromff
the Network General acquisition, which has an indefinite life and thus is
not amortized. The carrying value of the indefinite lived trade name is evaluated forff
frequently if events or changes in circumstances indicate that the asset might be impaired.
potential impairment annually or more
F-26
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
During fiscal year 2019, the Company performed a quantitative analysis on certain intangible assets related to the HNT
tools business, which has since been divested. The faiff
calculated considering a range of potential transaction prices which the Company considers to be a Level 3 measurement. The
fair value of these intangible assets was determined to be less than the carrying value, and as a result, the Company recognized
an impairment charge of $35.9 million in the twelve months ended March 31, 2019. The impairment charge was recorded
within a separate operating expense line item in the Company's consolidated statements of operations during the twelve months
ended March 31, 2019.
r value for the intangible assets related to the HNT tools business was
During fiscal year 2019, the Company completed the divestituret
value of the Company's intangible assets was reduced by $10.2 million.
of the HNT tools business. As a result, the net carrying
In fiscal year 2020 and 2019, the Company's annual impairment tests indicated that the acquired trade name was not
ff
h quarter of fiscal year 2019, the Company completed its annual impairment test of the indefinite lived
impaired. In the fourt
intangible at January 31, 2020 using the qualitative Step 0 assessment. No impairment indicators were observed at January 31,
2020. The Company considered the current and expected future
pandemic and concluded that it was not more likely than not that the trade name was impaired and therefore a quantitative Step
1 assessment was not performed as of March 31, 2020.
economic and market conditions surrounding the COVID-19
ff
Intangible assets include the indefinite lived trade name with a carrying value of $18.6 million and the folff
lowing
amortizablea
intangible assets at March 31, 2020 (in thousands):
Developed technology
Customer relationships
Distributor relationships and technology licenses
Definite-lived trademark and trade name
Core technology
Net beneficial leases
Non-compete agreements
Leasehold interest
Backlog
Capita
alized software
Other
Cost
Accumulated
Amortization
$
249,675
$
(191,876) $
767,366
(275,361)
6,785
39,059
7,192
336
292
500
16,223
3,317
1,208
(6,321)
(26,246)
(7,074)
(336)
(292)
(500)
(16,223)
(3,202)
(943)
Net
57,799
492,005
464
12,813
118
—
—
—
—
115
265
$
1,091,953
$
(528,374) $
563,579
Intangible assets include the indefinite lived trade name with a carrying value of $18.6 million and the folff
lowing
amortizablea
intangible assets at March 31, 2019 (in thousands):
Developed technology
Customer relationships
Distributor relationships and technology licenses
Definite-lived trademark and trade name
Core technology
Net beneficial leases
Non-compete agreements
Leasehold interest
Backlog
Capita
Other
alized software
Cost
242,259
772,969
6,882
39,304
7,192
336
292
500
16,397
3,317
1,208
1,090,656
$
$
$
$
Accumulated
Amortization
(168,289) $
(218,043)
(5,237)
(20,586)
(6,845)
(336)
(292)
(500)
(16,397)
(2,690)
(923)
(440,138) $
Net
73,970
554,926
1,645
18,718
347
—
—
—
—
627
285
650,518
F-27
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Amortization included as product revenue consists of amortization of backlog. Amortization included as cost of product
revenue consists of amortization of developed technology, distributor relationships and technology licenses, core technology
and software. Amortization included as operating expense consists of all other intangible assets. The following tablea
summary of amortization expense during the fisff cal years ended March 31, 2020, 2019, and 2018 (in thousands).
provides a
Amortization of intangible assets included as:
Product revenue
Cost of product revenue
Operating expense
Years Ended March 31,
2020
2019
2018
$
— $
— $
26,664
64,525
34,039
74,325
9
40,286
76,661
$
91,189
$
108,364
$
116,956
The following is the expected futuret
amortization expense at March 31, 2020 for the fisff cal years ended March 31 (in
thousands):
2021
2022
2023
2024
2025
Thereafter
Total
$
$
80,028
69,657
61,976
53,910
47,665
250,343
563,579
The weighted average amortization period of developed technology and core technology
hnology iis 11.2 yyears.r The weighted
average amortization period for customer and distributor relationships is 15.9 years. The weighted average amortization period
for trademarks and trade names is 8.6 years. The weighted average amortization period for capita
The weighted average amortization period for all amortizing intangible assets is 14.6 years.
alized software is 3.0 years.
NOTE 10 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
NetScout operates internationally and, in the normal course of business, is exposed to fluff ctuat
ions in foreign currency
exchange rates. The exposures result from costs that are denominated in currencies other than the U.S. Dollar, primarily the
Euro, British Pound, Canadian Dollar, and Indian Rupeeu
up to twelve months, within specified
forecasted cash flows
guidelines through the use of forward contracts. The Company enters into forei
gn currency exchange contracts to hedge cash
flow exposures from costs that are denominated in currencies other than the U.S. Dollar. These hedges are designated as cash
flow hedges at inception.
. The Company manages its foreign cash flow risk by hedging
for operating expenses denominated in foreff
ign currencies forff
ff
ff
t
All of the Company’s derivative instruments are utilized forff
risk management purposes, and the Company does not use
derivatives forff
impact earnings on or before maturity.
speculative trading purposes. These contracts will mature over the next twelve months and are expected to
The notional amounts and fair values of derivative instruments in the consolidated balance sheets at March 31, 2020 and
2019 were as follows (in thousands):
Notional Amounts (a)
Prepaid Expenses and Other
Current Assets
Accrued Other
March 31,
2020
March 31,
2019
March 31,
2020
March 31,
2019
March 31,
2020
March 31,
2019
Derivatives Designated as Hedging
rr
Instrume
Forward contracts
nts:
$
1,722
$
4,550
$
— $
58
$
49
$
68
F-28
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
(a) Notional amounts represent the gross contract/not
tt
ional amount of the derivatives outstanding.
The following tablea
provides the effecff
t foreff
ign exchange forward contracts had on other comprehensive income (loss),
(OCI) and results of operations at March 31, 2020 and 2019 (in thousands):
Forward contracts
Recognized
in OCI on Derivative
(a)
March 31,
March 31,
Gain (Loss) Reclassified from
Accumulated OCI into Income
(b)
March 31,
March 31,
2020
2019
Location
2020
2019
$
$
(103) $
(696) Research and development
Sales and marketing
(103) $
(696)
$
$
(19) $
47
28
$
164
411
575
(a) The amount represents the change in fair value of derivative contracts dued
(b) The amount represents reclassification from other comprehensive income to earnings that occurs when the hedged item
to changes in spot rates.
affects earnings.
NOTE 11 – RESTRUCTURING CHARGES
During the fourth quarter of fisca
ff
l year 2017, the Company restructured certain departments to better align funct
ff
ions
subsequent to the Comms Transaction. Communication of the plan to the impacted employees was substantially completed on
ion, during the fiscal year ended March 31, 2017, the Company recorded a
March 31, 2017. As a result of the workforce reductd
restructuring charge totaling $1.9 million related to one-time termination benefits and $0.4 million in facff
charges. All of the workforce reduction was completed during the second quarter of fisca
Company recorded an additional charge for one-time termination benefits and facility-related costs of $0.9 million during the
fiscal year ended March 31, 2018. The one-time termination benefits and facilities-related costs related to this plan were paid in
full during the fisff cal year ended March 31, 2018.
l year 2018 and as a result the
ility related
ff
ions. As
During the fiscal year ended March 31, 2018, the Company restructured certain departments to better align funct
a result of the workforce reduction, during the fisff cal year ended March 31, 2018, the Company recorded a restructuring charge
the employees that were notified during the period. Additional
totaling $5.1 million related to one-time termination benefits forff
one-time termination benefit charges and facility-related costs of $1.7 million were recorded during the fiscal year ended
March 31, 2019. The one-time termination benefits and facility-related costs related to this plan were paid in fulff
fiscal year ended March 31, 2019.
ng the
l durid
ff
During the fiscal year ended March 31, 2019, the Company implemented a voluntary separation program (VSP) for
employees who met certain requirements to reduce overall headcount. As a result of the related workforce reduction, the
Company recorded restructuring
voluntarily terminated their employment with the Company during the period. Additional one-time termination benefit charges
of $0.1 million were recorded in the fiscal year ended March 31, 2020. The one-time termination benefits were paid in full
the end of the firff st quarter of the fisff cal year ended March 31, 2020.
charges totaling $17.2 million related to one-time termination benefits for employe
es who
by
m
ff
t
During the fiscal year ended March 31, 2020, the Company approved two restructuring plans. During the second quarter
ions. As a result of
of the fiscal year ended March 31, 2020, the Company restructured certain departments to better align funct
the workforce reduction, the Company recorded a restructuring charge totaling $0.5 million during the year ended March 31,
2020. The one-time termination benefits are expected to be paid in fulff
ng the first three months of the fiscal year ending
March 31, 2021. During the fourt
departments to better align functions. As a result of the workforce reduction, the Company recorded a restructuring charge
totaling $2.1 million during
full by the second quarter of the fiscal year ending March 31, 2021.
al year ended March 31, 2020. The one-time termination benefits are expected to be paid in
h quarter of the fisff cal year ended March 31, 2020, the Company restructured certain
the fiscff
l durid
d
ff
ff
F-29
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The folff
lowing table provides a summary of the activity related to the restructuring plans and the related restructuring
t
liability (in thousands):
Balance at March 31, 2017
Restructuring charges to
operations
Cash payments
Other adjustments
Balance at March 31, 2018
Restructuring charges to
operations
Cash payments
Other adjustments
Balance at March 31, 2019
Restructuring charges to
operations
Cash payments
Other adjustments
Q4 FY2017 Plan
FY2018 Plan
VSP
Q2 FY20
Plan
Q4 FY20
Plan
Employee
-Related
Facilities
Related
Employee
-Related
Facilities
Related
Employee
-Related
Employee
-Related
Employee
-Related
Total
$
1,550
$
405
$
— $
— $
— $
— $
— $ 1,955
729
(1,867)
(412)
208
(374)
(239)
5,085
(1,331)
(58)
—
—
—
—
—
—
—
—
—
—
—
—
6,022
(3,572)
(709)
$
— $
— $
3,696
$
— $
— $
— $
— $ 3,696
—
—
—
—
—
—
1,017
(4,240)
(473)
643
(458)
(185)
17,248
(17,329)
81
—
—
—
— 18,908
— (22,027)
(577)
—
$
— $
— $
— $
— $
— $
— $
— $
—
123
(123)
—
465
(434)
(28)
2,069
2,657
(339)
(13)
(896)
(41)
Balance at March 31, 2020
$
— $
— $
— $
— $
— $
3
$
1,717
$ 1,720
NOTE 12 – LONG-TERM DEBT
On January 16, 2018, the Company amended and expanded its existing credit agreement (Amended Credit Agreement)
with a syndicate of lenders by and among: the Company; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and
collateral agent; J.P. Morgan Securities LLC, KeyBanc Capita
RBC Capital Markets and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners; Fifthff Third Bank,
Santander Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National Association, as co-documentation agents; and the lenders
party thereto.
al Markets, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
The Amended Credit Agreement provides for a fivff e-year, $1.0 billion senior secured revolving credit facility, including a
o $75.0 million. The Company may elect to use the new credit facility forff
letter of credit sub-facility of up tu
purposes or to finance the repurchase of up to twenty-five
common stock repurchase plan. The commitments under the Amended Credit Agreement will expire on January 16, 2023, and
any outstanding loans will be due on that date. During the fiscal year ended March 31, 2020, the Company repaid $100.0
million of borrowings under the Amended Credit Agreement. At March 31, 2020, $450 million was outstanding under the
Amended Credit Agreement.
million shares of the Company's common stock under the Company's
general corporate
t
At the Company's election, revolving loans under the Amended Credit Agreement bear interest at either (a) an Alternate
Base Rate per annum equal to the greatest of (1) JPMorgan's prime rate, (2) 0.50% in excess of the New York Federal Reserve
Bank (NYFRB) rate, or (3) an adjusted one month LIBOR rate plus 1%; or (b) such adjusted LIBOR rate (for the interest period
selected by the Company), in each case plus an applicablea margin. For the period from the delivery of the Company's financial
statements forff
March 31, 2020, the appli
Rate loans, and thereafter the appli
epending on the Company's leverage ratio, ranging from 1.00% per
annum for Base Rate loans and 2.00% per annum for LIBOR loans if the Company's consolidated leverage ratio is greater than
3.50 to 1.00, down to 0.00% per annum for Alternate Base Rate loans and 1.00% per annum for LIBOR loans if the Company's
consolidated leverage ratio is equal to or less than 1.50 to 1.00.
the quarter ended December 31, 2019, until the Company has delivered financial statements for the quarter ended
cablea margin will be 1.50% per annum for LIBOR loans and 0.50% per annum for Alternate Base
cablea margin will vary drr
a
a
On July 27, 2017, the U.K. Financial Conduct Authority (
t
t FCA) announced that it will no longer require banks to submi
u
rates for the calculation of LIBOR after 2021. The Company's Amended Credit Agreement provides for the Administrative
F-30
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Agent to determine if (i) adequate and reasonablea means do not exist for ascertaining the LIBOR rate or (ii) the FCA or
Government Authority having jurisdiction over the Administrative Agent has made a public statement identifying a specificff
date afteff
r which the LIBOR rate shall no longer be used for determining interest rates for loans and the Administrative Agent
determines that (i) and (ii) above are unlikely to be temporary then the Administrative Agent and the Company would agree to
sh an alternate rate
transition to an Alternate Base Rate borrowing as described above or amend the Credit Agreement to establia
of interest to LIBOR that gives due consideration to the then prevailing market convention for determining a rate of interest for
syndicated loans in the United States at such time.
The Company's consolidated leverage ratio is the ratio of its total funded debt compared to its consolidated adjusted
ents relating to
EBITDA. Consolidated adjusted EBITDA includes certain adjustmd
extraordinary, unusual or non-recurring charges, certain restructuring charges, non-cash charges, certain transaction costs and
expenses and certain pro forma adjustmd
the definition of consolidated adjusted EBITDA in the Amended Credit Agreement.
ents in connection with material acquisitions and dispositions, all as set forth in detail in
ents, including, without limitation, adjustmd
Commitment fees will accrue on the daily unused amount of the credit facility. For the period from the delivery of the
Company's financial statements for the quarter ended December 31, 2019 until the Company has delivered financial statements
for the quarter ended March 31, 2020, the commitment fee will be 0.25% per annum, and thereafter the commitment fee will
vary depending on the Company's consolidated leverage ratio, ranging from 0.30% per annum if the Company's consolidated
leverage ratio is greater than 2.75 to 1.00, down to 0.15% per annum if the Company's consolidated leverage ratio is equal to or
less than 1.50 to 1.00.
Letter of credit participation fees are payablea
to each lender on the amount of such lender’s letter of credit exposure,
during the period from the closing date of the Amended Credit Agreement to but excluding the date which is the later of (i) the
date on which such lender’s commitment terminates or (ii) the date on which such lender ceases to have any letter of credit
exposure, at a rate per annum equal to the applicable margin for LIBOR loans. Additionally, the Company will pay a fronting
fee to each issuing bank in amounts to be agreed to between the Company and the applicablea
issuing bank.
Interest on Alternate Base Rate loans is payablea
at the end of each calendar quarter. Interest on LIBOR loans is payable at
the end of each interest rate period or at the end of each three-month interval within an interest rate period if the period is longer
than three months. The Company may also prepay loans under the Amended Credit Agreement at any time, without penalty,
subject to certain notice requirements.
Debt is recorded at the amount drawn on the revolving credit facility plus interest based on floating rates reflective of
changes in the market which approximates fair value.
The loans and other obligations under the credit facility are (a) guaranteed by each of the Company's wholly owned
material domestic restricted subsidiaries, subject to certain exceptions, and (b) are secured by substantially all of the assets of
the Company and the subsidiary guarantors, including a pledge of all the capia tal stock of material subsidiaries held directly by
the Company and the subsidiary guarantors (which pledge, in the case of any foreign subsidia
stock), subjeu
liens on the assets of the Company and its restricted subsidiaries, subject to certain exceptions as described in the Amended
Credit Agreement.
ct to certain customary exceptions and limitations. The Amended Credit Agreement generally prohibits any other
ry, is limited to 65% of the voting
u
The Amended Credit Agreement contains certain covenants applicablea
to the Company and its restricted subsidiaries,
including, without limitation, limitations on additional indebtedness, liens, various fundamental changes, dividends and
distributions, investments (including acquisitions), transactions with affili
speculative hedge agreements, payment of junior financing, changes in business and other limitations customary in senior
secured credit facilities. In addition, the Company is required to maintain certain consolidated leverage and interest coverage
ratios. These covenants and limitations are more fully described in the Amended Credit Agreement. At March 31, 2020, the
Company was in compliance with all of these covenants.
ates, asset sales, including sale-leaseback transactions,
ff
The Amended Credit Agreement provides that events of default will exist in certain circumstances, including failure to
make payment of principal or interest on the loans when required, failure to perform certain obligations under the Amended
Credit Agreement and related documents, defaults under certain other indebtedness, certain insolvency events, certain events
arising under ERISA, a change of control and certain other events. Upon an event of default, the administrative agent with the
consent of, or at the request of, the holders of more than 50% in principal amount of the loans and commitments may terminate
the commitments and accelerate the maturity of the loans and enforce certain other remedies under the Amended Credit
Agreement and the other loan documents.
F-31
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
In connection with the Company's Amended Credit Agreement described above, the Company terminated its previous
term loan dated as of July 14, 2015, by and among the Company; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative
agent and collateral agent; J.P. Morgan Securities LLC, KeyBanc Capita
Incorporated, RBC Capital Markets and Wells Fargo Securities, LLC, as joint lead arrangers and joint bookrunners; Santander
Bank, N.A., SunTrust Bank, N.A. and U.S. Bank National Association, as co-documentation agents; and the lenders party
thereto.
al Markets, Merrill Lynch, Pierce, Fenner & Smith
The Company has capita
over the life of the revolving credit facff
$1.7 million was included as prepaid expenses and other current assets and a balance of $3.2 million was included as other
assets in the Company's consolidated balance sheet.
alized debt issuance costs totaling $12.2 million at March 31, 2020, which are being amortized
ility. The unamortized balance was $4.9 million as of March 31, 2020. The balance of
NOTE 13 – NET INCOME (LOSS) PER SHARE
Calculations of the basic and diluted net income (loss) per share and potential common shares are as follows (in
thousands, except for per share data):
Numerator:
Net income (loss)
Denominator:
Year Ended March 31,
2020
2019
2018
$
(2,754) $
(73,324) $
79,812
Denominator for basic net income (loss) per share - weighted average
common shares outstanding
75,162
78,617
87,425
Dilutive common equivalent shares:
Weighted average restricted stock units
—
—
836
Denominator for diluted net income (loss) per share - weighted average
shares outstanding
75,162
78,617
88,261
Net income (loss) per share:
Basic net income (loss) per share
Diluted net income (loss) per share
$
$
(0.04) $
(0.04) $
(0.93) $
(0.93) $
0.91
0.90
The following tabla e sets forth
ff
restricted stock units excluded from the calculation of diluted net income per share, since
their inclusion would be antidilutive (in thousands):
Restricted stock units
Year Ended March 31,
2020
2019
2018
675
706
1,450
Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average number of shares
outstanding during the period. Unvested restricted shares, although legally issued and outstanding, are not considered
outstanding for purposes of calculating basic earnings per share. Diluted net income (loss) per share is calculated by dividing
net income (loss) by the weighted average number of shares outstanding plus the dilutive effecff
shares and restricted stock units using the treasury stock method. The calculation of the dilutive effecff
awards under the treasury stock method includes consideration of proceeds from the assumed exercise of unrecognized
compensation expense. As the Company incurred a net loss in the fiscal years ended March 31, 2020 and 2019, all outstanding
restricted stock units have an anti-dilutive effect and are therefore excluded from the computation of diluted weighted average
share outstanding.
t, if any, of outstanding restricted
t of outstanding equity
For the fiscal year ended March 31, 2018, the delivery of 7.4 million shares under the Company's accelerated share
repurchase (ASR) agreements reduced its outstanding shares used to determine its weighted average common shares
outstanding for purposes of calculating basic and diluted earnings per share. See Note 14 for additional information. The
Company evaluated the ASR agreements forff
settlement and determined the additional shares to be received would be anti-dilutive, and therefore they were not included in
the Company's calculation of diluted earnings per share for the fisff cal year ended March 31, 2018.
potential dilutive effects of any shares remaining to be received or owed upon
F-32
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
NOTE 14 – TREASURY STOCK
On May 19, 2015, the Company’s Board of Directors approved a share repurchase program, conditional upon the
completion of the Comms Transaction. This program enabled the Company to repurchase up to 20 million shares of its common
tive on July 14, 2015 upon the completion of the Comms Transaction and replaced the Company's
stock. This plan became effecff
previously existing open market stock repurchase program. The Company was not obligated to acquire any specific amount of
common stock within any particular timeframe under this program. The Company repurchased 6,773,438 shares for $227.6
million in the open market under this stock repurchase plan during the fiscal year ended March 31, 2018. At March 31, 2018,
there were no shares of common stock that remained available to be purchased under this plan.
On October 24, 2017, the Company’s Board of Directors approved a new share repurchase program that enables the
Company to repurchase up to twenty-five million shares of its common stock. This new program became effecff
tive once the
Company’s previously disclosed twenty million share repurchase program was completed. The Company is not obligated to
acquire any specific amount of common stock within any particular timeframe as a result of its new share repurchase program.
On February 1, 2018, the Company entered into ASR agreements with two third-party financial instituti
t
ons (the Dealers)
to repurchase an aggregate of $300 million of the Company's common stock via accelerated stock repurchase transactions under
the Company’s twenty million share repurchase program and the twenty-five million share repurchase program. The Company
borrowed $300 million against its Amended Credit Facility in order to finance the payment of the initial purchase price to each
of the Dealers. Under the terms of the ASR, the Company made a $150 million payment to each of the Dealers on February 2,
2018, and received an initial delivery of 3,693,931 shares from each of the Dealers, or 7,387,862 shares in the aggregate, which
is approximately 70 percent of the total number of shares of the Company's common stock expected to be repurchased under the
ASR. As part of this purchase, 970,650 shares for $27.6 million were deducted under the twenty million share repurchase
program and 6,417,212 shares for $182.4 million were deducted from the twenty-five
million share repurchase program during
the fiscal year ended March 31, 2018. Final settlement of the ASR agreements was completed in August 2018. As a result, the
Company received an additional 3,679,947 shares of its common stock for $96.8 million, which reduced the number of shares
million share repurchase program during the fiscal year ended March 31, 2019.
available to be purchased from the twenty-five
In total, 11,067,809 shares of the Company's common stock were repurchased under the ASR at an average cost per share of
$27.11.
t
t
The Company repurchased an additional 7,116,159 shares for $175.0 million, and 543,251 shares for $14.5 million under
t
the twenty-five
March 31, 2020, 7,243,431 shares of common stock remained available to be purchased under the current repurchase program.
million share repurchase program during the fiscal years ended March 31, 2020 and 2019, respectively. At
In connection with the vesting and release of the restriction on previously vested shares of restricted stock, the Company
repurchased 519,241 shares for $11.9 million, 451,683 shares for $11.9 million and 408,097 shares for $13.6 million related to
minimum statutory tax withholding requirements on these restricted stock units during the fiscal years ended March 31, 2020,
2019 and 2018, respectively. These repurchase transactions do not fall under the repurchase program described above, and
therefore do not reduce the amount that is available for repurchase under those programs.
NOTE 15 – STOCK PLANS
2011 Employee Stock Purchase Plan
On September 7, 2011, the Company’s stockholders approved the 2011 Employee Stock Purchase Plan (the ESPP), under
which 2,500,000 shares of the Company’s common stock have been reserved for issuance. On November 8, 2018, the Company
increased the number of shares available under the ESPP by an additional 3,000,000 shares. The Company implemented the
ESPP on March 1, 2012. Eligible employees may purchase shares of the Company’s common stock through regular payroll
deductions of up to 20% of their eligible compensation. Under the terms of the offering under the ESPP, the number of shares
of the Company’s common stock which a participant could purchase during any purchase period is limited to 2,000. In addition,
the fair market value of shares purchased by an individual participant in the plan may not exceed $25,000 if the contribution
period is within any calendar year. However, if contribution periods overlap calendar years, an individual participant is eligible
to utilize the unused portion of the $25,000 limit from the subsequent purchase in the current purchase up to $50,000. 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 market value on the last day of such offering period. The offering periods run from March 1 through August 31 and from
September 1 through the last day of February of each year. During the fiscal year ended March 31, 2020, employees purchased
594,661 shares under the ESPP with a weighted average purchase price per share of $23.92. At March 31, 2020, 2,313,482
shares were availablea
for future issuance under the ESPP.
F-33
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
2019 Equity Incentive Plan
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
ciation rights, restricted stock awards, restricted stock unit awards, and other stock awards, collectively referred to as
a
stock appre
"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 faiff
r 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 forff
available forff
issuance under the 2019 Plan, which consisted of 5,500,000 new shares plus 1,294,651 shares that remained
grant under the Amended 2007 Plan as of September 12, 2019, the effective date of the 2019 Plan.
stock options,
t
The aggregate number of shares availablea
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 March 31,
2020, an aggregate of 4,274,473 shares of unvested equity awards were outstanding under the 2019 Plan.
The 2019 Plan is administered by the Compensation Committee of the Board of Directors. The Compensation Committee
operates under guidelines establia
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.
shed by the Board of Directors. The Compensation Committee has the authority to select the
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).
Based on historical experience, the Company assumed an annualized forfei
awards granted to its
independent directors, approximately 2% for awards granted to its senior executives, and approximately 5% granted to all
remaining employees during
the fiscal years ended March 31, 2020, 2019 and 2018.
ture rate of 0% forff
d
ff
The following is a summary of share-based compensation expense including restricted stock units and employe
r values within the
purchases made under the Company's employee stock purchase plan (ESPP) based on estimated faiff
applicable cost and expense lines identified below (in thousands):
m
e stock
Cost of product revenue
Cost of service revenue
Research and development
Sales and marketing
General and administrative
Year Ended March 31,
2020
2019
2018
$
1,069
$
1,463
$
5,774
15,511
17,085
11,422
5,959
17,321
18,923
12,662
$
50,861
$
56,328
$
1,159
4,824
14,711
15,213
11,410
47,317
F-34
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Transactions under the Amended 2007 and 2019 Plan during the fiscal years ended March 31, 2020, 2019 and 2018 are
summarized in the tabla e below.
Outstanding – March 31, 2017
Granted
Vested
Canceled
Outstanding – March 31, 2018
Granted
Vested
Canceled
Outstanding – March 31, 2019
Granted
Vested
Canceled
Outstanding – March 31, 2020
Restricted Stock Units
Number of
Awards
3,610,301
$
1,962,590
(1,216,585)
(277,526)
4,078,780
$
2,178,339
(1,438,219)
(608,245)
4,210,655
$
2,062,110
(1,651,284)
(347,008)
4,274,473
$
Weighted
Average
Fair Value
30.24
34.01
31.09
31.70
31.77
30.10
32.49
30.52
30.84
26.32
31.03
29.74
28.68
At March 31, 2020, there were 6,967,333 shares of common stock available forff
grant under the 2019 Plan.
The Company does not currently expect to repurchase shares fromff
any source to satisfy its obligations under the 2019
Plan.
The aggregate intrinsic value of stock options exercised and the faiff
r value of restricted stock units vested at March 31,
2020, 2019 and 2018 were as foll
ff
ows (in thousands):
Total fair value of restricted stock unit awards vested
$
37,783
$
38,070
$
40,539
At March 31, 2020, the total unrecognized compensation cost related to restricted stock unit awards was $93.6 million,
which is expected to be amortized over a weighted-average period of 1.4 years.
Year Ended March 31,
2020
2019
2018
NOTE 16 – PENSION BENEFIT PLANS
401(k) Plan
The Company has a defined contribution program for certain employees that is qualified under Section 401(k) of the
Internal Revenue Code of 1986, as amended. The Company matches 50% of the employee’s contribution up to 6% of the
employee’s salary. NetScout contributions vest at a rate of 25% per year of service. NetScout made matching contributions of
$6.7 million, $6.6 million and $8.0 million to the plan for the fisff cal years ended March 31, 2020, 2019 and 2018, respectively.
Defined Benefit Pension Plan
Certain of the Company's non-U.S. employees participate in certain noncontributory defined benefit pension plans. None
of the Company's employees in the U.S. participate in any noncontributory defined benefit pension plans. In general, these
plans are funded based on considerations relating to legal requirements, underlying asset returns,
the plan’s funded status,
anticipated deductibility of the contribution, local practices, market conditions, interest rates and other factors.
t
t
the
F-35
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The components of the change in benefit obligation of the pension plan is as follows (in thousands):
Benefit obligation, at beginning of year
Service cost
Interest cost
Benefits paid and other
Actuarial loss (gain)
Foreign exchange rate impact
Benefit obligation, at end of year
March 31,
2020
34,895
341
603
(359)
(1,644)
(1,031)
32,805
$
$
$
March 31,
2019
33,464
304
704
(302)
3,254
(2,529)
34,895
$
The reconciliation of the beginning and ending balances of the fair value of the assets of the pension plan is as follow
ff
s (in
thousands):
Fair value of plan assets, at beginning of year
Employer direct benefit payments
Benefits paid and other
Fair value of plan assets, at end of year
March 31,
2020
March 31,
2019
$
$
— $
359
(359)
— $
—
302
(302)
—
The folff
lowing sets forff
th the components of the Company's net periodic pension cost of the noncontributory defined
benefit pension plans for the fiscal years ended March 31, 2020, 2019, and 2018 (in thousands):
Service cost
Interest cost
Net periodic pension cost
Ended March 31,
2020
2019
2018
$
$
341
603
944
$
$
304
704
1,008
$
$
407
718
1,125
Weighted average assumptions used to determine net periodic pension cost at date of measurement:
Discount rate
Rate of compensation increase
March 31,
2020
March 31,
2019
March 31,
2018
1.90 %
3.00 %
1.80 %
3.00 %
2.30 %
2.25 %
As of March 31, 2020, unrecognized actuat
rial gain of $1.6 million ($1.1 million, net of tax) which have not yet been
recognized in net periodic pension cost are included in accumulated other comprehensive income (loss). The unrecognized
actuarial gains and losses are calculated as the difference between the actuari
the value of the plan assets less accrued pension costs. None of this amount is expected to be recognized in net periodic pension
costs during the fisff cal year ending March 31, 2021. No plan assets are expected to be returned to the Company during the fisff cal
year ending March 31, 2021.
ally determined projected benefit obligation and
t
F-36
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Expected Contributions
During the fiscal year ended March 31, 2020, the Company contributed $359 thousand to its defineff
service, as appropri
a
d benefit pension plan.
ate, expected to be paid by the plan
The following sets forth
ff
in the periods indicated (in thousands):
benefit payments, which reflect expected futuret
2021
2022
2023
2024
2025
2026 - 2031
$
$
$
$
$
$
409
454
515
562
662
4,741
NOTE 17 – INCOME TAXES
Income (loss) before income tax expense (benefit) consisted of the following (in thousands):
c
Domesti
Foreign
Year Ended March 31,
2020
2019
2018
$
$
(1,502) $
(107,088) $
(35,032)
3,426
14,176
16,373
1,924
$
(92,912) $
(18,659)
The components of the income tax expense (benefit) are as follows (in thousands):
Current income tax expense:
Federal
State
Foreign
Deferred income tax benefit:
Federal
State
Foreign
Year Ended March 31,
2020
2019
2018
$
2,817
$
3,902
$
1,850
9,712
14,379
(5,287)
(2,897)
(1,517)
(9,701)
(136)
10,618
14,384
(25,347)
(3,845)
(4,780)
(33,972)
14,191
1,925
12,249
28,365
(113,122)
(10,037)
(3,677)
(126,836)
$
4,678
$
(19,588) $
(98,471)
F-37
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The income tax expense (benefit) computed using the fedff
eral statutory income tax rate differs from NetScout's effective
tax rate primarily dued
to the following:
Statutory U.S. federal tax rate
State taxes, net of federal tax effect
Research and development tax credits
Effect of foreign operations
Meals and entertainment
Domestic production activities deductd
ion
Change in valuation allowance
Internal restructuring charges
Stock compensation
Divestiture
GILTI/FDII
BEAT
2017 Tax Act (transition tax and re-measurement of deferreds)
Foreign withholding
Provision to returnt
Other permanent differences
Year Ended March 31,
2020
2019
2018
21.0 %
21.0 %
31.6 %
(47.8)
(245.9)
(66.9)
43.7
—
250.0
196.5
172.1
—
(174.3)
—
—
220.6
(152.8)
26.9
3.4
7.1
(0.1)
(1.0)
—
2.2
—
(2.6)
(1.0)
2.9
(7.0)
0.4
(3.1)
(1.0)
(0.1)
6.9
39.5
14.0
(6.7)
13.8
(0.2)
—
(2.5)
—
—
—
454.1
(21.0)
0.8
(2.6)
243.1 %
21.1 %
527.7 %
The components of net deferred tax assets and liabia lities are as follows (in thousands):
Deferred tax assets:
Accrued expenses
Deferred revenue
Reserves
Pension and other retiree benefits
Net operating loss carryforwards
Tax credit carryforwards
Share-based compensation
Operating lease liabia lity
Other
Total gross deferred tax assets
Valuation allowance
Net deferre
ff
d tax assets
Deferred tax liabilities:
Intangible assets
Other deferred liabilities
Operating lease right-of-use asset
Depreciation
Total deferred tax liabila
ity
F-38
Year Ended March 31,
2020
2019
$
5,060
$
14,420
3,216
5,078
12,443
14,138
4,534
18,213
20
77,122
(5,641)
71,481
4,359
11,278
5,463
5,960
14,992
9,043
5,505
—
166
56,766
(835)
55,931
(146,950)
(8,061)
(15,152)
(9,492)
(164,199)
(1,609)
—
(7,134)
$
(108,174) $
(117,011)
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
ff
Deferred tax assets and liabia lities are recognized based on the anticipated future
tax consequences, attributable to
differences between financial statement carrying amounts of assets and liabia lities and their respective tax bases. Deferre
assets and liabilities are measured using enacted tax rates in effecff
The Company evaluates the recoverability of deferred tax assets by considering all positive and negative evidence relating to
future profitability. The Company weighs objective and verifiable evidence more heavily in this analysis. In situations where
the Company concludes that it does not have sufficient objective and verifiablea
it creates a valuation allowance against it. As a res lult, thhe Com ypany establiblia
Ma hrch 31, 2019 andd $$5.6
lalllowance as of Ma hrch 31, 2020, as compa dred to Ma hrch 31, 2019, iis
tax credidits thhat thhe Compa yny b lbeliieves are not more lilikkelyly hthan not to bbe realilizedd. If iit iis llate dr determiinedd thhe Compa yny iis blable to
use lalll or a
requi dred to recogniz
i
portion of hthe d fdefe
drred tax assets for hiwhichh a v lalua ition lalllowanc he has bbeen establiblia
ff
imilllliion as of Ma hrch 31, 2020, represe inti gng an iincrease of $$4.8
i
ognize thhes de deferre
finefit rec dorded id in thhe pe i driod such dh deter
imilllliion. hThe iincrease iin hthe v lalua ition
hshedd a v lalua ition lalllowance of $$0.8
evidence to support the realizabila
h dshed, hthen thhe Compa yny may by be
nces are expected to reverse.
the year in which the differe
iprim iarilyly rellatedd t do deferre
dd tax assets hthrough
ity of the asset
rough a tax bbe
imilllliion as of
dd tax assets
iminatiion iis
lrelat ded to f
foreiggn
i
dmade.
d tax
t forff
ff
ff
ff
At March 31, 2020, the Company had U.S. federal net operating loss carry forwards of approximately $19 million, state
net operating loss carryforwards of approximately $34 million and tax credit carryforwards of approximately $12 million. The
net operating loss and credit carryforwards will expire at various dates beginning in 2021. The Company also had foreign net
operating loss carryforwards of approximately $45 million at March 31, 2020 and tax credit carryforwards of approximately
$4 million. The majority of forei
gn net operating losses have no expiration dates. Utilization of the U.S. net operating losses
and credits are subject to an annual limitation due to the ownership change limitations provided by the Internal Revenue Code
of 1986, as amended, and similar state tax provisions.
ff
The Company files U.S. federal tax returns and files returns in various state, local and foreign jurisdictions. With respect
tax
to the U.S. federal and primary state jurisdictions, the Company is no longer subject to examinations by tax authorities forff
years before 2015, although carryforward attributes that were generated prior to 2015 may still be adjusted upon examination if
they either have been or will be used in a futff uret
during the year, and some of those inquiries may include an audit of the tax returnt
business, NetScout and its subsidiaries are examined by various taxing authorities, including the IRS in the United States.
period. The Company also receives inquiries from various tax jurisdictions
previously filed. In the normal course of
A reconciliation of the beginning and ending amount of unrecognized tax benefits forff
the fiscal years ended March 31,
2020, 2019 and 2018 is as follows (in thousands):
Balance at April 1,
Additions based on tax positions related to the current year
Release of tax positions of prior years
Decrease relating to settlements with taxing authorities
Balance at March 31,
Year Ended March 31,
2020
2019
2018
1,314
$
2,215
$
2,926
49
(212)
—
28
(194)
(735)
126
(481)
(356)
1,151
$
1,314
$
2,215
$
$
The Company is unable to make a reliabla e estimate when cash settlement, if any, will occur with a tax authority as the
timing of examinations and ultimate resolution of those examinations is uncertain. All of the unrecognized tax benefits would
affect the effective tax rate if recognized.
The Company includes interest and penalties accrued in the consolidated financial statements as a component of the tax
provision.
During fiscal year 2019, we completed our analysis and recording of all the tax effects related to the Tax Cuts and Jobs
Act (TCJA), as required under SAB 118, and recorded a benefit of $87.0 million dued
taxes and a $2.0 million one-time transition tax.
to the re-measurement of our deferred
The Company is subject to a territorial tax system under the TCJA, in which we are required to provide for tax on Global
Intangible Low-Taxed Income (GILTI) earned by certain forei
policy to provide for tax expense related to GILTI in the year the tax is incurred as a period expense.
gn subsidiaries. The Company has establia
ff
shed an accounting
As a result of the TJCA, the Company expects that foreign earnings can be repatriated tax efficiently. Specifically,
foreign earnings will not be indefinitely reinvested where the Company can repatriate those earnings in a tax efficient manner
acceptablea
certain previously taxed historical earnings during the current fiscal year in a tax efficient manner. The Company continues to
and operational requirements. The Company repatriated
to management and which comply with local statutory
t
F-39
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
assert that any remainder of historical book over tax basis differences will be permanently reinvested. It is not practicablea
estimate the amount of unrecognized deferred U.S. taxes on these differences.
to
NOTE 18 – LEASES
In February 2016, the FASB issued ASC 842 to increase transparency and comparabila
ity 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 on April 1, 2019 using the modified retrospective method and as a result did not adjust
comparative periods or modify disclosures in those comparam
tive periods.
d
The new guidance provides a number of optional practical expedients in transition. The Company elected the package of
practical expedients, which does not require the reassessment of prior conclusions about lease identification, lease classification
and initial direct costs. Further, the Company elected the practical expedients to combine lease and non-lease components, and
to not recognize right-of-use (ROU) assets and lease liabia lities for short-term leases. Leases with an initial term of 12 months or
less are classified as short-term leases. The Company did not elect the hindsight practical expedient to determine the lease term
for existing leases.
The adoption of ASC 842 on April 1, 2019 resulted in the recognition of operating lease ROU assets of approximately
$68.2 million, operating lease liabia lities of approximately $83.2 million and the elimination of deferred rent of approximately
$15.0 million. Operating leases are included in operating lease ROU assets and lease liabia lities on the Company’s balance
sheets. The adoption of ASC 842 did not have a material impact on the Company’s consolidated statement of operations,
consolidated statement of stockholders' equity, consolidated statement of comprehensive income (loss) or consolidated
statement of cash flows. The new standard had no material impact on liquidity and had no impact on the Company’s debt-
covenant compliance under its current debt agreements.
The Company determines if an arrangement is a lease at inception. ROU assets represent the Company’s right to use an
tion of the lease term. Lease liabilities represent the Company’s contractual
underlying asset for the durad
lease payments over the lease term. ROU assets are recorded and recognized at commencement for the lease liability amount,
plus initial direct costs incurred less lease incentives received. Lease liabilities are recorded at the present value of future lease
payments over the lease term at commencement. The discount rate used is generally the Company’s estimated incremental
borrowing rate unless the lessor’s implicit rate is readily determinable. Incremental borrowing rates are calculated periodically
to estimate the rate the Company would pay to borrow the funds necessary to obtain an asset of similar value over a similar
term. Lease expenses relating to operating leases are recognized on a straight-line basis over the lease term.
obligation to make
t
The Company has operating leases for administrative, research and development, sales and marketing and manufacturing
facilities and equipment under various non-cancelable lease agreements. The Company’s leases have remaining lease terms
ranging from 1 year to 11 years. The Company’s lease terms may include options to extend or terminate the lease where it is
reasonably certain that the Company will exercise those options. The Company considers several economic facff
making this determination, including but not limited to, the significance of leasehold improvements incurred in the office space,
the difficulty in replacing the asset, underlying contractual obligations, or specific characteristics unique to a particular lease.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
tors when
Most of the Company’s lease agreements contain variablea
payments, primarily forff
common area maintenance (CAM),
which are expensed as incurred and not included in the measurement of the ROU assets and lease liabia lities.
The components of operating lease cost for the fiscal year ended March 31, 2020 were as follows (in thousands):
Lease cost under long-term operating leases
Lease cost under short-term operating leases
Variablea
lease cost under short-term and long-term operating leases
Total operating lease cost
$
$
13,318
4,172
4,259
21,749
F-40
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
The table below presents supplemental cash flowff
information related to leases during the fisff cal year ended March 31,
2020 (in thousands):
Right-of-use assets obtained in exchange for new operating lease liabila
ities
$
11,127
Weighted average remaining lease term in years and weighted average discount rate are as follows:
Weighted average remaining lease term in years - operating leases
Weighted average discount rate - operating leases
Future minimum payments under non-cancellable leases at March 31, 2020 are as foll
ff
ows (in thousands):
ar Ending March 31,
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less imputed interest
Present value of lease liabila
ities
8.59
4.1 %
12,479
13,626
11,564
10,167
10,019
38,282
96,137
(15,142)
80,995
$
$
$
As previously disclosed in the Company’s fiscal year Form 10-K and under the previous lease accounting standard, ASC
840, Leases, the following tabla e summarizes the future non-cancelablea minimum lease commitments (including office space,
copiers, and automobiles) at March 31, 2019 (in thousands):
Year Ending March 31,
2020
2021
2022
2023
2024
Remaining years
Total minimum lease payments
NOTE 19 – COMMITMENTS AND CONTINGENCIES
Acquisition- and Divestiture-Related
$
$
16,102
11,059
9,804
8,807
8,500
43,997
98,269
The Company's Level 3 liabila
ities at March 31, 2020 consisted of contingent purchase consideration related to the two
the fisff cal year 2020. The contingent purchase consideration related to the two acquisitions
acquisitions that occurred during
represent amounts deposited into escrow accounts, which were establia
liabilities that NetScout did not agree to assume or as a result of the breach of representations and warranties of the sellers as
described in the acquisition agreements. The contingent purchase consideration of $0.7 million and $1.0 million related to the
shed to cover damages NetScout may suffer related to any
d
F-41
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Gigavation and Eastwind acquisitions are included as accrued other in the Company's consolidated balance sheet at March 31,
2020. Except to the extent that valid indemnification claims are made prior to such time, the $0.7 million of purchase
consideration related to the Gigavation acquisition will be paid to the seller in February 2021. The contingent purchase
consideration related to the Eastwind acquisition was paid to the seller in April 2020.
The Company had a contingent consideration asset related to the divestiture of its HNT tools business in September 2018.
The contingent consideration asset represented potential futuret
two years that were contingent on the HNT tools business achieving certain milestones. The fair value of the contingent
consideration of $2.3 million was recognized on the acquisition date and was measured using unobservablea
The contingent consideration asset at March 31, 2020 and 2019 was $0 and $0.8 million, respectively.
earnout payments to the Company of up to $4.0 million over
(Level 3) inputs.
The Company had a contingent liability at March 31, 2018 for $0.5 million related to the acquisition of Efflux
ff
in July
2017 for which an escrow account was established to cover damages NetScout may have suffered related to any liabilities that
NetScout did not agree to assume or as a result of the breach of representations and warranties of the seller as described in the
acquisition agreement. The $0.5 million was paid to the sellers in July 2018.
The Company had a contingent liability at March 31, 2018 for $4.9 million related to the acquisition of Simena LLC in
November 2011, which was based on the ultimate settlement of assets and liabilities acquired as part of the transaction, and the
former owners' futuret
period of employment with NetScout. The contingent purchase consideration of $5.0 million was paid to
the seller in November 2018.
Leggal
From itime to itime, NetScout iis subjec
subject to llegalgal proce diedi gngs
dand lcl iaims iin hthe
diordi
ynary course of b ibusiness. In hthe
iopi inion
of ma gnagement, hthe amount of
dadversely,ly,
illwill not hhave a mate iri lal dadverse effect on hthe Com ypany’s fifina
inci lal
condi ition, res lults of operatiions or ca hsh flflows.
di
lultiimate expense
i hwith respect to
yany current llegalgal proce diedi gngs andd lcl iaims, ifif ddete
rmi dned
i
As
previouslyy didiscllosedd, iin Ma hrch 2016,
i
l
kPacket Intelllligeigence LLC ((Packket Intelllligeigence or
lPlaiintiff)
iff) fifilledd a Co
lmpl iaint
equitablblea
i
dconduct. In
iDistrict Court for hthe Eastern iDistriict of Texas assertinging
ktronix Ge
i
lalllegedged hthat lleggacyy Tek
infringedd hthese patents. NetScout fifilledd an Answer denyi
denyi gng lPlaiintiffiff’s lallleggatiions
dproducts, i
uding
l
including
dand asse irti gng
oProbe
b
i
lcl iaims andd countercllaiims regardi
dproducts, iinvalilididityy of hthese patents, andd ddam gages. On Oc btober 13, 2017, hthe juryjury re dnderedd a ve dirdict
infri gngement of hthree patents byby
intiff was enti l ditled to $$3,500,000 for pre-s iuit ddam gages andd $$2,250,000 for
b i
lPl iai
lPl iai
loBl dade
fringedd,
subsididia yry entiitiies iin hthe
intiff’s patents were, am gong
hother hithi gngs, iinvalilidd, not iinfringe
iUni dted States
l iPlaintiffiff’s Com lplaiint
iUnitedd States patents.
dproducts, infringe
dand unenforce blable ddue to iin
regardi gng i f i
gagaiinst NetScout andd two
iinf ifri gngement of fifive
hthe G10 andd Ge
hthat
Oc btober 2017, a juju yry itri lal was h ldheld to ddaddress hthe pa irties’
hthe G10 andd Ge
loBl dade
findi gng iin favor of hthe lPlaiintiffiff andd hthat
fi di
ddam gages. hThe juryjury iindidicat ded hthat hthe aw dardedd ddam gages amounts were iintenddedd to reflflect a
dconductedd a bbe hnch triiall on hwhethher hthese patents were unenforceablblea
Septe bmber 2018, hthe Court ente dred jujudgme
findi gng. hThe judgmjudgment
fi di
iuntill hthe ex ipira ition of hthe patents at iissue, hthe llast ddate b ibei gng June 2022. hThe Court d ideni ded hthe l iPlaintiffiff's
llFoll
filfil ded iits Notiice of Appe lal of hthe judgmjudgment
matter iis currentlyly neiithher remote nor
lrules
possiblble". hTherefore, acco
possi
curre lntlyy es itimates hthat hthe es itimatedd
Court's awardd of
henhancedd ddam gages,
royal ities owedd on post-t iriall salles of hthe accus ded G10
royal
dand lalll
bprobablblea
,
require NetScout to
i
grange of lili biabilili yty iis bbetween $$0
addi iti
lplus pote inti lal ddi
hother hithi gngs, iine
dgment andd "e hnhanc ded" hthe juryjury ve dirdict iin hthe amount of $$2.8
lonal motiions for judgmjudgment as a matter of llaw, hthe court enteredd fifinall jujudgme
dunder GAAP ddefi i
provide an es itimate for hthe
id
lonal pre- andd post-j
dproducts.
dand post jujudgemdgement iinterest, andd a
royal yty on hthe G10
hother dadverse fi di
lalso awardds pre-
ddue to, am gong
dand Geo l dBlade
dand htherefore,
runni gng royal
post-judgme
runni gng royal
iowi gng ddi
iunti gng
addi iti
i
i
findi gngs. NNetScout hhas co lncl d duded hthat hthe iriskk of lloss from hithis
dgment. On June 12, 2019, NetScout
fini itions, hthe iriskk of lloss iis termedd "reas
onablyy
bl
grange of pote inti lal lili biabilili yty. NetScout
dand hthe
dand hthe gagg ggregate amount awa d drded byby hthe juju yry
udgment iinterest amounts andd costs
dand anyy
post-suit
i
lalso
royal yty. hThe Court
iquit blable co dnduct. In
imilllliion as a re lsult of a juju yry
dproducts
dand Geo l dBlade
imotion for fees.
Unconditional Purchase Obligations
At March 31, 2020, the Company had unconditional purchase obligations of $$35.5
imilllliion, hiwhi hch represent estimated
open purchase orders to purchase inventory as well as commitments for products and services used in the normal course of
business.
F-42
NetScout Systems, Inc.
Notes to Consolidated Financial Statements—(Continued)
Othe Cr Con iti gngent
iLi
iabili iities
a
a
During fiscal year 2020, one of the Company’s subsidiaries, located in the United Kingdom (UK), determined that value
ied to certain supplies of service to the UK. The Company filed a blank disclosure with
added tax (VAT) was not properly appl
HM Revenue & Customs (HMRC) notifying HMRC of these application differences, and subsequently filed a voluntary
disclosure agreement (VDA). The VDA covered the period of March 1, 2016 through February 29, 2020. The penalties
associated with the appli
cation differences can range from 0%-30% of the underpayment and are based on objective and
subjective determinations to be made by HMRC. At March 31, 2020 the Company has accrued the penalties that it believes are
probable and estimablea
of assessment by HMRC. A majority of the difference in the Company's application of the VAT rules
relates to services forff which the subsidiary did not collect VAT from its customers and for which customers would have been
eligible to reclaim under the UK VAT regime. Based on these facts the Company currently believes that it is probable that it
will not be required to settle these amounts separately with its customers and HMRC, hence the Company has not recorded a
payablea
that HMRC will require separate settlement; if that occurred, the Company would be required to collect approxim
million from its current customers and remit that amount to HMRC.
its customers for these amounts. The Company believes that it is reasonably possible
to HMRC and a receivable fromff
ately £16
a
NOTE 20 – SEGMENT AND GEOGRAPHIC INFORMATION
The Company manages its business in the following geographic
a
areas: United States, Europe, Asia and the rest of the
world. The Company’s policies mandate compliance with economic sanctions and export controls.
Total revenue by geography is as follows (in thousands):
s
United State
Europe
Asia
Rest of the world
Year Ended March 31,
2020
2019
2018
$
545,620
$
553,267
$
154,510
59,939
131,751
148,036
72,355
136,260
$
891,820
$
909,918
$
581,853
174,445
88,917
141,572
986,787
The United States revenue includes sales to resellers in the United States. These resellers fulfill customer orders and may
subsequently ship the Company’s products to international locations. Further, the Company determines the geography of its
sales after considering where the contract originated. A majority of revenue attributable to locations outside of the United States
is a result of export sales. Substantially all of the Company’s identifiable assets are located in the United States.
F-43
NOTE 21 – QUARTERLY RESULTS OF OPERATRR IONS – UNAUDITED
The following tabla e sets forth
ff
certain unaudited quarterly results of operations of NetScout for the fisff cal years ended
March 31, 2020 and 2019. In the opinion of management, this information has been prepared on the same basis as the audited
consolidated financial statements and all necessary adjustments, consisting only of normal recurring adjustmd
included in the amounts stated below to present fairly the quarterly information when read in conjunction with the audited
consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The quarterly
operating results are not necessarily indicative of futuret
results of operations.
ents, have been
Three Months Ended
(in thousands, except per share data)
March 31,
2020
Dec. 31,
2019
Sept. 30,
2019
June 30,
2019
March 31,
2019
Dec. 31,
2018
Sept. 30,
2018
June 30,
2018
Revenue
Gross profit
$ 229,351
$ 260,024
$ 216,421
$ 186,024
$ 235,002
$ 246,008
$ 223,797
$ 205,111
$ 166,619
$ 194,439
$ 157,289
$ 131,281
$ 176,466
$ 176,424
$ 159,817
$ 143,084
Net income (loss)
Diluted net income (loss)
per share
$
$
7,336
$ 36,725
$ (17,472) $ (29,343) $ 19,211
$ (3,603) $ (26,428) $ (62,504)
0.10
$
0.49
$
(0.23) $
(0.38) $
0.24
$
(0.05) $
(0.34) $
(0.78)
F-44
NetScout Systems, Inc.
Schedule II—Valuation and Qualifying Accounts
(in thousands)
Year ended March 31, 2018
Allowance forff
doubtful accounts
Deferred tax asset valuation allowance
Year ended March 31, 2019
Allowance for doubtful accounts
Deferred tax asset valuation allowance
Year ended March 31, 2020
Allowance forff
doubtful accounts
ff
Deferre
d tax asset valuation allowance
at
Beginning
of Year
Additions
Resulting in
Charges to
Operations
Charges to
Other
Accounts
Deductions
Due to Write-
Offs
Balance at
End of Year
$
$
$
$
$
$
2,066
3,374
1,991
3,108
1,583
835
$
$
$
$
$
$
695
$
— $
826
905
1,450
4,806
$
$
$
$
(346)
—
(464)
—
(1,202)
—
$
$
$
$
$
$
(424) $
(266) $
(770) $
(3,178) $
(481) $
— $
1,991
3,108
1,583
835
1,350
5,641
S-1
CORPORATE INFORMATION
BOARD OF DIRECTORS
ANIL K. SINGHAL
Chairman of the Board,
Co-Founder, President and Chief Executive Officer
NETSCOUT SYSTEMS, INC.
MICHAEL SZABADOS
Vice Chairman of the Board
and Chief Operating Officer
NETSCOUT SYSTEMS, INC.
ROBERT E. DONAHUE
President and Chief Executive Officer (Retired)
Authorize.net Holdings, Inc.
JOHN R. EGAN
Managing Partner
Egan-Managed Capital, L.P.
ALFRED GRASSO
President and Chief Executive Officer (Retired)
The Mitre Corporation
JOSEPH G. HADZIMA, JR.
Managing Director
Main Street Partners, LLC
CHRISTOPHER PERRETTA
Chief Information and Operations Officer (Retired)
MUFG Americas Holding Corporation
SUSAN L. SPRADLEY
Chief Executive Officer
Motion Intelligence, Inc.
VIVIAN VITALE
Principal
Vivian Vitale Consulting, LLC
EXECUTIVE OFFICERS
ANIL K. SINGHAL
Chairman of the Board,
Co-Founder, President and Chief Executive Officer
MICHAEL SZABADOS
Vice Chairman of the Board
and Chief Operating Officer
JEAN BUA
Executive Vice President,
Chief Financial Officer and Treasurer
JOHN W. DOWNING
Executive Vice President,
Worldwide Sales Operations
CORPORATE HEADQUARTERS
310 Littleton Road
Westford, MA 01886
Telephone: (978) 614-4000
Fax: (978) 614-4004
Web: www.netscout.com
FORM 10-K
Stockholders may obtain copies of the exhibits to the Company’s
Annual Report on Form 10-K as filed with the Securities and Exchange
Commission at the SEC’s website, www.sec.gov, or by contacting
NETSCOUT Investor Relations or by visiting the investor relations section
of the Company’s website, www.netscout.com.
INVESTOR RELATIONS
NETSCOUT SYSTEMS, INC.
310 Littleton Road
Westford, MA 01886 USA
Telephone: (978) 614-4000
Email: ir@netscout.com
ANNUAL MEETING
The Annual Meeting of Stockholders of the Company will be held on
Thursday, September 10, 2020 at 10:00 a.m. ET.
LEGAL COUNSEL
Cooley LLP
Boston, MA
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
PricewaterhouseCoopers LLP
Boston, MA
TRANSFER AGENT
Computershare
P.O. Box 505000
Louisville, KY 40233-5000
Stockholder Inquiries:
Telephone: (877) 239-1247
TDD for hearing impaired: (800) 490-1493
International Shareowners: (201) 680-6578
TDD International Shareowners: (781) 575-4592
www.computershare.com/investor
COMMON STOCK
Common Stock of NETSCOUT SYSTEMS, INC. is traded on the
NASDAQ Global Select Market under the symbol “NTCT”
310 Littleton Road
Westford, MA 01886
P: (978) 614-4000
F: (978) 614-4004
www.netscout.com