Netscout Scouts Out Mobile Network Connections

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The battle for eyeballs, once played out on TV screens by the Big 3 networks, has shifted to smaller, more mobile devices.

Among others, the players areAT&T ( T ),Verizon ( VZ ) andSprint Nextel ( S ), committing millions to infrastructure improvements and huge sums for TV ads to talk up their reliability and the other guy's spotty reception.

Events known as "service delivery problems" turn off customers and ruin revenue projections.

A beneficiary of this wireless warfare isNetScout Systems ( NTCT ).

The Westford, Mass.-based company supplies network performance monitoring equipment and software for service carriers and other businesses that have always-on, high-volume, high-speed networks.

"As the industry moves toward more services and mobile delivery with iPads, carriers need faster and more quality delivery," said Jean Bua, NetScout's chief financial officer.

"We analyze these networks, and on one end of service provide diagnostic information about the network all the way to a more sophisticated product, providing carriers with real-time and predicative analytics, and proactive troubleshooting," she said.

Local Analysis

NetScout can localize its analysis to inform clients of consumer experiences trying to log on to a network in Manhattan, for example.

NetScout says it's the only company delivering end-to-end service for USDM, or unified service delivery management. USDM combines VoIP (voice over Internet protocol), video conferencing, telepresence, instant messaging, email and security.

NetScout serves two customer bases, the media service provider and the broader business enterprise market.

The company serves 148 service providers in 46 countries, according to Steve Shalita, vice president of marketing.

Shalita said many operators don't allow NetScout to reveal their names, but "every major mobile operator uses our technology, including Bell Canada and Leap Cricket."

NetScout's enterprise clientele includes 90% of the Fortune 100, Shalita said.

"These are companies highly invested in information technology, thus the importance of service availability, performance and user experience."

Competitors includeHewlett Packard ( HPQ ),IBM (IBM) andCA Technologies (CA). "It's a highly competitive, and fragmented market in which we compete. Customers would have to buy products from multiple companies to achieve what we do," said Shalita.

In its most recent first quarter ended in June, NetScout's earnings rose 46% from the year-ago quarter to 19 cents a share, while revenue increased 21% over the same period to $76.4 million.

Investors responded enthusiastically. On July 19, when first-quarter results were announced, the stock popped nearly 9%.

Analysts tracked by Thomson Reuters expect this quarter's EPS to come in at 26 cents, an 8% increase from a year ago. For the full fiscal 2013, they're looking for $1.26, a 15% increase.

Bua pegged NetScout's success to a core, long-term focus on information technology spanning 25 years, and a stable workforce of long-time employees.

"Our employees are driven by a culture of innovation," she explained, "and the growth opportunity we see in the marketplace, along with a feeling of satisfaction in knowing you're helping customers be better than they were before our product was put in. Plus, our company has never had a layoff, and prides itself in having a stable workforce."

The company is willing to acquire technology and expertise it doesn't have in-house. In July, NetScout acquired the intelligent Customer Service Assurance (iCSA) product line from privately-held Accanto Systems for an undisclosed sum.

In November 2011, the company bought privately held Simena, a Sterling, Va.-based provider of Internet protocol (IP) monitoring and switching technology.

"NetScout has a very good platform for where its management is going, which is in distinguishing itself from its competitors by the depth of its analytics," said Zeus Kerravala, principal analyst at ZK Research. Kerravala said NetScout is well positioned for the future of real-time network monitoring.

"Legacy tools for network monitoring don't really work in a real-time environment," Kerravala explained.

Predictive Capability

It's a shift from an environment in which IT reacts to problems to one where IT has predictive capability to anticipate them. In fact, "73% of problems in IT are reported by the user, instead of IT staff," Kerravala said.

"These guys have a leadership role in their industry," said Wunderlich Securities analyst Matt Robison. "A lot of businesses transformed to VoIP and combined with data and the wave of demand associated with that, and also (were) driven by smartphone platforms; operators need to make sure networks are running at full capability."

NetScout's strong quarter earned only a neutral rating from Wedbush. The latter is concerned about the "slowing IT spending environment," including "pockets of weakness in the international markets and in parts of financial services and is seeing increased budget scrutiny in the federal vertical which poses some risk as we head into the fiscal year-end quarter for federal."

The squeeze on federal spending is underlined by the threat of sequestration, or automatic cuts in defense and other federal spending, on Jan.1, absent an intervening budget deal in Congress.

Even so, Wedbush said NetScout's FY13 guidance of $340 million-$355 million in revenue and $1.21-1.30 EPS was attainable, with recent acquisitions offsetting concerns about federal spending.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: HPQ , NTCT , S , T , VZ

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