NetScout Systems, Inc. Aktie

Thank you for standing by, and welcome to the NetScout's Fourth Quarter and Full Fiscal Year 2026 Financial Results Conference Call.[Operator Instructions] As a reminder, this call is being recorded.[Operator Instructions] I would now like to turn the call over to Scott Dressel, NetScout's VP of Corporate Finance. Scott, please go ahead.

Thank you, operator, and good morning, everyone. Welcome to NetScout's Fourth Quarter and Full Fiscal Year 2026 Conference Call for the period ended March 31, 2026. Joining me today are Anil Singhal, NetScout's President and Chief Executive Officer, Anthony Piazza, NetScout's Executive Vice President and Chief Financial Officer. Please note that a slide presentation accompanies our prepared remarks. You can advance the slides in the webcast viewer to follow our commentary. Both the slides and the prepared remarks can be accessed in multiple areas within our Investor Relations section of our website at www.netscout.com, including the IR landing page and the Quarterly Results page.

As discussed in detail on Slide #3, today's conference call will include certain forward-looking statements about NetScout's views on expected results of future performance and business strategy.

These statements speak only as of today's date and involve risks, uncertainties and assumptions that may cause actual results to differ materially, including, but not limited to, those described in the company's filings with the Securities and Exchange Commission that can be found in our annual report on Form 10-K and quarterly reports on Form 10-Q.

As discussed in detail on Slide #4, today's conference call will also include discussion of certain non-GAAP financial measures that the company believes to be useful for investors. While the slide presentation includes both GAAP and non-GAAP results other than revenue and balance sheet information, which are presented in accordance with GAAP, we will focus our discussion on non-GAAP financial information. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliation of all non-GAAP metrics to the nearest GAAP measures are provided in the appendix of the slide presentation in today's financial results press release and on our website. I will now turn the call over to Anil for his prepared remarks. Anil?

Thank you, Scott, and good morning, everyone. We appreciate you joining us today. NetScout delivered strong fiscal year 2026 top and bottom line results, driven by growth across both our Cybersecurity and Service Assurance offerings. Our performance in the fiscal year helped us achieve the key strategic objectives we laid out a year ago, including accelerating product innovation, driving annual revenue growth and expanding margins.

We also strengthened our innovation engine through the introduction of differentiated capability across the portfolio, including AI-ready smart data, expanded observability, enhanced edge visibility and adaptive threat protection. We accomplished this in what continues to be a dynamic operating environment, underscoring the strength of our strategy and the consistency of our execution. These results have further reinforced our financial foundation and position NetScout to drive continued innovation, revenue growth and margin improvement in fiscal year 2027. At the same time, we believe market trends across AI, observability and network security are expanding our opportunity set and creating additional revenue for long-term value creation. With that context, let me turn to Slide #6 for a brief review of our fourth quarter and full fiscal year 2026 financial performance for the period ended March 31, 2026.

For the fourth quarter, total revenue was approximately $203 million compared with $205 million for the same period last fiscal year, which was in line with our expectations given the shift in customer order timing to the prior quarter as we discussed on our Q3 earnings call. Diluted earnings per share was $0.52, consistent with the same period last fiscal year. For the full fiscal year, which is more representative of the business and the underlying market trends, revenue increased by 4.5% to approximately $860 million, driven by growth in both our Cybersecurity and Service Assurance offerings. We expanded both our gross and operating margins year-over-year and delivered nearly 12% growth in diluted earnings per share at $2.48, exceeding the high end of our guidance range.

Now let's turn to Slide #7 for some perspective on our business and some market insights. Starting with a review of our service assurance offerings. The revenue for the full fiscal year increased approximately 3% year-over-year, driven by growth in the enterprise customer vertical with strong contributions from both federal and nonfederal government-related spending. Our Enterprise customers continue to rely on our Service Assurance solutions to advance their digital transformation initiatives. In turn, we are investing in innovation, particularly with respect to observability and AI and to help our customers drive greater efficiency, reduce risk and accelerate troubleshooting and lower costs. An example of this innovation during the year is our Omnis Sensor and Omnis streamer, which work together as an integrated AIOps solution that transforms high-fidelity network packet data into actionable intelligence.

Also, our sensor and streamer products include Agentic AI interfaces that enable efficient and cost-effective integration with multi-vendor AI solutions, which facilitate automation and reduces total cost of ownership for our customers. Among our Carrier Service Provider customers, we continue to see measured 5G investment as they balance build-outs with monetization, and we expect this to continue into our fiscal year 2027. At the same time, emerging opportunities such as fixed wireless access, 5G network slicing and AIOps initiative have the potential to drive revenue and cost efficiency for a Communication Service Provider.

We believe NETScout is well positioned to support this transition. Our 5G observability solution provides end-to-end visibility for 5G stand-alone slices to support high-performance services such as immersive gaming and large-scale sporting events as well as mission-critical application and services.

Moving to our Cybersecurity offerings. Revenue for the full fiscal year increased approximately 8%, with growth across both our Enterprise and Service Provider verticals. Cybersecurity continues to grow faster than the company average and is an increasingly important driver of our long-term revenue growth and margin expansion.

Our latest DDoS Threat Intelligence report, which was released in March 2026, assesses the current global threat environment, including newer AI-powered attacks. Foundational services such as DNS and NTP remain under persistent pressure and recent botnet attacks on government, financial and transportation infrastructure show how quickly threat actors can disrupt critical services with either legacy tools or by using AI to increase the scale and sophistication of their attacks.

Large coordinated attacks are outpacing traditional defenses and organizations are increasingly turning to automated intelligent protection to keep up. NetScout is well positioned to help customers protect their digital services. Many of our newest innovations support distributed detection and mitigation solutions to provide a more robust and resilient adaptive DDoS protection environment.

Additionally, as noted in our earnings release, we just completed a tuck-in acquisition of the assets of DigiCert Incorporation's DDoS protection business that brings the back-end infrastructure of our Arbor Cloud network to fully in-house. We believe this transaction provides us with a greater control of the platform and a clearer path to scaling cloud-based services over time while providing immediate incremental recurring revenue in the cloud DDoS space.

Before touching on some of our recent customer wins, I would like to briefly discuss AI and what we believe this new era would mean for NetScout over time. We believe AI will create additional opportunities for both Service Assurance and Cybersecurity by amplifying the need for network visibility and protection. As networks grow more complex and cyber threats increasingly leverage AI tools, we believe the need for adaptive real-time visibility and intelligence protection will continue to rise. These dynamics play directly to NetScout's strengths.

We have long been recognized for our packet level approach to network detection, investigation and response. Now our patented deep-packet inspection and metadata aggregation capabilities can generate complex, high fidelity, AI-ready smart data at scale that is purpose-built for advanced analytics like never before. More importantly, we are not competing with foundational AI models. Instead, we are leveraging our differentiated data and domain expertise to enable automation that integrates into our customers' broader observability and AI workflows, helping to enhance visibility and operationalize AI within those environments.

From a financial perspective, we believe AI advancement could reinforce the durability of both our cybersecurity and service assurance businesses by supporting upgrade cycles and expanding use cases across our installed base. Taken together, we view AI as a promising opportunity that enhances the value of what we already do best and extends our relevance within customers' critical infrastructures over the long term as they develop and implement their broader AI strategies and initiatives.

Turning to customer wins, both Service Assurance and Cybersecurity continue to gain traction. In addition to new customers, we continue to secure a significant amount of repeat business from loyal customers buying new solutions and upgrades along with maintenance services.

Two wins from the fourth quarter were: A mid-seven-figure deal with a large European telecom that has been a longtime Cybersecurity and Service Assurance customer. They upgraded their DDoS protection with our Adaptive DDoS offering and our Distributed Threat Mitigation System to enhance their cyber protection.

Our adaptive's DDoS mitigates all types of multi-vector attacks before they can impact critical services, while DMS provides enterprise-level protection across both cloud and edge environments with physical and virtual platforms and multiple usage configurations. This client also values our subscription model, which includes support and maintenance and a flexible scale-up and scale-down approach to minimize license wastage.

A second deal in the low-seven- figures was with a new customer that is a global leader in chip manufacturing for a variety of industries, including automotive, mobile communications and data centers. This contract included our engineered solution to maintain traffic visibility and address system reliability issues across the network that spans multiple countries. They chose NetScout because of our reputation and ability to provide the critical solutions required to manage the complex interdependency of their networks and applications.

With that, let's move to Slide #8 to review our outlook.

In fiscal year 2026, we returned the business to revenue growth, improved margins, expanded profitability, delivered strong free cash flows and continue to advance our product capability across both Cybersecurity and Service Assurance.

Looking ahead, we are excited about the year in front of us and are leaning into this momentum. We see significant opportunities over the long term to leverage NetScout's deep expertise in cybersecurity and network observability together with our AI-ready data platform to help customers advance their AI and digital transformation initiatives and to manage an increasingly complex digital environment where network performance, availability and security are mission-critical.

We believe we are well positioned to drive profitable growth, generate strong free cash flow and enhance long-term shareholder value. These growth dynamics are reflected in our fiscal year 2027 outlook, which Tony will review during his remarks.

While we remain mindful of the macro environment, ongoing carrier spending discipline and demand trends across both enterprise and service provider customers, our priorities remains clear. We aim to drive sustained revenue growth by executing against a healthy pipeline with particular emphasis on Cybersecurity and enterprise-led Service Assurance. At the same time, we'll continue to invest in innovation across AI, observability and DDoS protection as well as maintain a disciplined focus on cost management and a balanced capital allocation strategy. We are energized by what lies ahead and look forward to updating you on our progress throughout the year.

With that, I will turn the call over to Tony for a review of our financial performance and our outlook for fiscal year 2026 -- 2027.

Thank you, Anil, and good morning, everyone. We appreciate you joining us today. I'll start by walking you through the key financial metrics for our fourth quarter and full fiscal year 2026. After that, I'll share some additional commentary on our fiscal year 2027 outlook. As a reminder, other than revenue and balance sheet information, which are on a GAAP basis, this review focuses on our non-GAAP results. All reconciliations with our GAAP results appear in the presentation appendix. I will note the nature of any such comparisons accordingly. Also, as comparisons are on a year-over-year -- also all comparisons are on a year-over-year basis, unless otherwise noted.

Slide #10 details the results for the fourth quarter and full fiscal year 2026. Focusing on our fourth quarter performance first. Total revenue was $203 million, down 1% from the same period last fiscal year. This reflects the impact of timing-related order shifts discussed on last quarter's earnings call as certain orders originally expected in Q4 were pulled forward into Q3 as customers utilize remaining calendar year-end budgets.

Product revenue totaled $80.7 million compared with $89.5 million last fiscal year, reflecting the timing and mix of certain orders across quarters. Service revenue increased 5.9% year-over-year to $122.3 million, driven by underlying growth and favorable timing of service renewal orders and the mix associated with an enterprise license agreement.

We ended the fourth quarter with total product backlog of approximately $50 million, which included $45.8 million of fulfillable backlog. This compares to total product backlog of approximately $33 million, including $25.1 million of fulfillable backlog at the end of the same period in 2025.

Our gross profit margin was 79.7% in the fourth quarter, an increase of 0.5 percentage points for the same period -- from the same period in the prior year, reflecting higher gross -- product gross margin due to favorable product mix. Quarterly operating expenses were $117.9 million, up 2.4% year-over-year, primarily related to the timing of variable incentive compensation expense.

Our operating margin was 21.6% compared with 23.1% in the same period last fiscal year. We delivered diluted earnings per share of $0.52 for both periods. Moving to the full fiscal year 2026. Revenue increased $4.5 million to 859. -- 4.5% to $859.5 million. Product revenue increased 2.8% to $370.1 million and service revenue increased 5.7% to $489.3 million.

As mentioned earlier and in prior quarters, product revenue was impacted by a year-over-year shift in the classification of revenue associated with an enterprise license agreement, reflecting the nature of the customer's composition mix.

Service revenue correspondingly benefited from this classification shift as well as the timing of renewals, including back maintenance.

Our gross profit margin rose 0.8 percentage points to 80.8%, driven by an increased product margin attributable to higher volume and a favorable product mix. Annual operating expenses increased 2.9% from the prior year. We reported an operating profit margin of 25.4%, up 1.7 percentage points compared to the prior year based on higher revenue, enhanced product margin -- gross margin and disciplined cost management.

Diluted earnings per share increased nearly 12% to $2.48. Our annual non-GAAP effective tax rate was 19.9% compared to 19% in the prior year, which benefited from a valuation gain in a foreign investment with favorable tax treatment.

Let's turn to Slide 11, where I'll walk you through the key revenue trends by product lines and customer verticals. For the full fiscal year 2026, Service Assurance revenue increased by 2.6% and Cybersecurity revenue grew by 7.8%. During the same period, Service Assurance accounted for approximately 64% of total revenue and Cybersecurity accounted for the remaining 36%. Cybersecurity continues to grow faster than the company average. And over time, we expect it to become a larger portion of our mix, which should be a positive driver of growth.

Turning to our customer verticals. For the full fiscal year 2026, Enterprise revenue grew by 5.4% and Service Provider revenue grew by 3.3%. During the same period, Enterprise accounted for approximately 58% of our total revenue and Service Provider accounted for the remaining 42% Additionally, no customer accounted for more than 10% of our revenue for the quarter or the full fiscal year 2026.

Turning to Slide 12. This shows our revenue mix between the United States and international markets. For the full fiscal year 2026, the United States represented 55% of revenue and international represented the remaining 45% of revenue.

Slide 13 shows some key balance sheet items along with our free cash flow for the period. We ended fiscal year 2026 with $705.1 million in cash, cash equivalents and short- and long-term marketable securities, representing an increase of $212.7 million since the end of fiscal year 2025. Free cash flow was $150.1 million for the fourth quarter and a near record high of $285.4 million for the full fiscal year.

During fiscal year 2026, we repurchased approximately 2.5 million shares of our common stock at an average price of $24.29 per share for a total of approximately $61 million under our share repurchase program. From a debt perspective, at year-end, we had no outstanding balance on our $600 million revolving credit facility, which expires in October 2029.

To briefly recap some other balance sheet items, accounts receivable net was $151.5 million, representing a decrease of $12.2 million since March 31, 2025. Days Sales Outstanding at the end of the fourth quarter was 62 days compared with 68 days in the same period in the prior year. This change in DSO in the fourth quarter reflects the timing and composition of bookings as well as working capital enhancement initiatives.

Let's move to Slide 14 for our outlook. I will focus my remarks on our revenue and non-GAAP earnings per share targets for fiscal year 2027. As Anil noted, we expect to build on our current momentum by driving sustained revenue growth and expanding profitability. For fiscal year 2027, we anticipate revenue in the range of $885 million to $915 million and a non-GAAP diluted earnings per share in the range of $2.65 and $2.80, both representing year-over-year growth on the top and bottom lines.

This outlook incorporates the DigiCert DDoS asset acquisition that Anil mentioned during his remarks, which is expected to be immediately accretive and assumes an initial annualized revenue run rate contribution of approximately $20 million, with a partial benefit for fiscal year 2027 given the May 1 transaction close.

For the full fiscal year, we expect our non-GAAP effective tax rate to be approximately 20% and weighted average diluted shares outstanding of approximately 74 million to 75 million shares.

Our guidance reflects a growing contribution from our Cybersecurity offerings and awareness of the trends in our Service Assurance offerings, including continued spending discipline in the carrier market as well as the current dynamic macro environment.

Additionally, I'd like to provide some color on the first quarter of fiscal year 2027. We expect revenue to grow in the mid-single digits range and earnings per share to increase at approximately twice the rate of revenue growth compared with that same -- with the same quarter last fiscal year. So in summary, we delivered on our fiscal year 2026 strategic objectives through new innovations, a return to revenue growth and enhanced margins, resulting in strong performance for the fiscal year.

Looking ahead to fiscal year 2027, we plan to build on this momentum by advancing innovation, sustaining revenue growth, further improving profitability and continuing to generate strong free cash flow. Our capital allocation priorities remain consistent, investing in the business for profitable growth, maintaining a strong financial position and returning excess capital to shareholders primarily through share repurchases.

We currently have capacity under our share repurchase authorization and subject to market conditions, intend to be active in the market during fiscal year 2027. With a strong cash position, no drawn revolver and ongoing free cash flow generation, we have meaningful flexibility to support our growth initiatives and shareholder returns with a clear focus on long-term value creation.

That concludes my formal review of our financial results and outlook. I would also like to note that we will be participating in the Annual Needham Technology, Media and Consumer Conference as well as the Annual B. Riley Securities Institutional Investor Conference in May. I look forward to engaging with many of you there. With that, let's open it up for questions. Operator?

Our first question is from Matthew Hedberg with RBC Capital Markets.

This is Sanika Merchant on for Matt Hedberg. Congrats on the quarter. I guess to start, could you talk more about the broader macroeconomic landscape and what demand trends have been like? More specifically, are you seeing any uncertainties from tariffs, AI supply chain dynamics or the war in Iran? And has there been any impact to close rates as a result?

I think there is a general concerns about what could happen tomorrow. But so far, we have not seen a big impact. We have a strong financial position. We have partners who are supplying the hardware, and we have been able to procure in advance. So overall, the impact on us and even the tariff impact was minimal. So it has not been a big impact on us so far, but we are still cautious about what could happen because of what's happening with Iran war and other thing.

But so far, the direct impact has been minimal on NetScout. And yes, just one more thing. So yes, people are always cautious and hold budgets. And that's why sometimes those are flushed in the December quarter, and we benefit from that.

So I think overall, while our internal conditions and chances have improved substantially as a result of innovation on -- during the last year, the external environment is -- could get worse, and that's why we are cautiously optimistic on our guidance.

Got it. And as a quick follow-up, could you tell us more about how the Fed business performed this quarter and any trends you're seeing there?

So the Fed business was good for NetScout for the full fiscal year. Federal generally runs in the mid- to high single digits of total revenue. And this year, fiscal year ran at the high end of that particular range. And so we see good -- we have a strong pipeline in the federal business, but it was really high for us in fiscal year '26.

And so therefore, one of the things we're cognizant in the Service Assurance business is if that trend starts to normalize back to what we've seen in the past. But right now, we're seeing good federal traction and a nice pipeline.

And we'll move next to Erik Suppiger with B. Riley Securities.

Solid quarter, very good. One, can you just -- last quarter, you had indicated that I think the sensor and streaming business was about $15 million for the first 3 quarters of the fiscal year. Can you give us an update on that? And then we saw some legal actions taken against some of these large botnets where the governments cross-country governments were shutting down some of these botnets. I'm curious if you think that's going to reduce the threat landscape and are customers responding at all to that in terms of their purchasing?

Yes. So the business which you talked about, about $15 million, we were in the range, somewhere between $10 million and $15 million. And so this is good news as we just launched this solution later in the fiscal year. Regarding the DDoS..

Just to be clear, are you saying you were $10 million to $15 million for fiscal '26. Or was that in the fourth quarter?

Fiscal year '26. And it was in the second half mostly because the product was introduced only in -- at our ENGAGE conference in October.

I think, Erik, like Anil said, that's a relatively new product. We're pleased with the first year out here. And we see opportunity even within some of our backlog, there's some opportunity we already have in there. So we see the opportunity there. I think with regard to some of these sensors and streamers, which target bringing DPI to the observability space and the AI space. I think what we're finding is that there's tremendous interest in this right now.

And so we're talking to customers about it, but customers are still trying to figure out what their AI strategy and execution is. And so we're working through that. So even though we've gotten some good initial traction and we see good opportunity, it does take a little while for these type of..

Another thing is there is an indirect impact because this strengthens our value proposition of a smart data company. And it makes our core business more sticky because this runs -- our AI solution runs on the foundation of Service Assurance and DDoS solutions. As to your other question about government taking action on the DDoS, I mean that was sort of backward looking. I think these actions were too late for people to be able to fully helped by that. So that will continue. hackers will keep finding new ways. Our product will be used in the initial stage at some point, partly because of some of our innovations and other people who are helping the industry in cybersecurity area, the government will then identify and take some action.

And this doesn't reduce the need for our solution and it doesn't reduce the threat landscape, which we'll see in the coming years.

I think what we've seen in our threat reports and what's been highlighted by us and others is that AI is actually just accelerating threat landscape. So I don't know that taking out any one party is going to impact the long-term trajectory of the threat landscape.

And we will move next to Kevin Liu with K.Liu & Company.

Just kind of on the topic of enterprise customers and what they're doing with AI. I'm curious with a lot of your larger, more regulated players, what are you seeing them doing in terms of kind of moving from pilots into more production use cases? And ultimately, do you feel NetScout gets a lot of incremental workloads to kind of monitor and secure there? Or do you think it's more just kind of a shift in kind of what they monitor within their own networks?

Yes. So Kevin, on the -- I mean, obviously, monitoring the AI infrastructure is an extension of our monitoring and protecting. So the new infrastructure, there's always incremental business that's going to keep the core business growing. But the real AI opportunity for incremental revenue besides that is playing in the agentic AI space, whereas our data either was not easy to consume by third parties. But even if it was consumed, it was not mixed with other data sets so easily. So the promise of agentic AI driving automation is to be able to mix NetScout data with other data set to drive good outcomes.

And in that said, we believe our data set may be the most important because it's only available from us in this current form at a scalable level. And yet it's a multiplier to the rest of the data set who generally tell you what is going wrong or what's happening, but not necessarily provide the context of why. And that's what why we do.

So I think it's going to highlight the value of our data beyond our existing customer and use cases, which was a dream for last so many -- I mean, last couple of decades. And now it might come through with all the things happening in the AI area.

A quick follow-up on that. How quickly do you think kind of these agentic AI use cases manifest? Is that within your fiscal '27 or kind of more beyond that? And then just on the backlog that you're carrying today, how much of -- it's up meaningfully year-over-year and sequentially. So just wondering how much of that is kind of due to maybe supply chain constraints impacting your ability to ship versus just kind of timing of orders closed in the quarter?

I'll let Tony cover after I answer the first question about AI traction. So I think we have to look at there is a lot of investment going on. As you know, part of the supply chain problem is because people by buying a lot of hardware for the AI infrastructure. But it's going to take some time. But I feel that the indirect impact on NetScout core business is already happening. For example, our AI solution runs as a software module on top of the existing deployments.

So that makes those deployment more sticky. And even if we -- if the pace of adoption in terms of third-party solution consuming our data, AI solution consuming our data, it may take some time. I think it will have an impact on the core business in the short term. And that's why we have provided this new guidance for the coming year.

And then, Kevin, on the backlog, it's really more about timing. It was some large orders that really came in at the end of the quarter and the customer didn't need them yet. And so we've prioritized what had to go out. So it's really more timing. It didn't have anything to do really with any supply chain constraints.

All right. Great. Congrats on a strong quarter and outlook.

Thank you. This does conclude the Q&A session, and it also concludes the conference call. Thank you for joining us today. You may disconnect at any time.

Thank you for standing by, and welcome to NETSCOUT's Third Quarter Fiscal Year 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. [Operator Instructions].

I would now like to turn the call over to Scott Dressel, NETSCOUT's VP of Corporate Finance. Scott, please go ahead.

Thank you, operator, and good morning, everyone. Welcome to NETSCOUT's Third Quarter Fiscal Year 2026 Conference Call for the period ended December 31, 2025. Joining me today are Anil Singhal, NETSCOUT's President and Chief Executive Officer; and Tony Piazza, NETSCOUT's Executive Vice President and Chief Financial Officer.

Please note that a slide presentation accompanies our prepared remarks. You can advance the slides in the webcast viewer to follow our commentary. Both the slides and the prepared remarks can be accessed in multiple areas within the Investor Relations section of our website at www.netscout.com, including the IR landing page and the Quarterly Results page.

As discussed in detail on Slide #3, today's conference call will include certain forward-looking statements about NETSCOUT's views on expected results of future performance and business strategy. These statements speak only as of today's date and involve risks, uncertainties and assumptions that may cause actual results to differ materially, including, but not limited to, those described in the company's most recent annual report on Form 10-K and subsequent filings with the Securities and Exchange Commission.

As discussed in detail on Slide #4, today's conference call will also include discussion of certain non-GAAP financial measures that the company believes to be useful for investors. While the slide presentation includes both GAAP and non-GAAP results other than revenue and balance sheet information, which are presented in accordance with GAAP, we will focus our discussion on non-GAAP financial information. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations of all non-GAAP metrics to the nearest GAAP measures are provided in the appendix of the slide presentation in today's financial results press release and on our website.

I will now turn the call over to Anil for his prepared remarks. Anil?

Thank you, Scott, and good morning, everyone. Thank you for joining us today. Our third quarter fiscal year 2026 revenue and earnings results were ahead of expectations. These results were enhanced by certain product orders and service renewal that had been anticipated for the fourth quarter as customers use their remaining calendar year-end budgets. The acceleration supported solid year-over-year results for the first 9 months of our fiscal year, driven by growth across both our Cybersecurity and Service Assurance offerings. Given our year-to-date performance, including the acceleration of certain orders and our current pipeline, we are raising the midpoint of our top and bottom line outlook for fiscal year 2026.

Let's turn to Slide #6 for a brief recap of our financial performance for the third quarter and the first 9 months of fiscal year 2026. For the third quarter, total revenue was approximately $251 million, ahead of expectations and in line with the same period last fiscal year. Diluted earnings per share totaled $1, an increase of approximately 6% year-over-year. For the first 9 months ended December 31, 2025, revenue was approximately $656 million, an increase of approximately 6% year-over-year, driven by solid growth in both our Cybersecurity and Service Assurance offerings, which included the previously mentioned acceleration of certain orders. We expanded both our gross and operating margins during the first 9 months of the fiscal year and delivered diluted earnings per share of $1.96, up approximately 15% from $1.75 for the year ago period.

Now let's turn to Slide #7 for some perspective on our business and some market insights. Starting with our Service Assurance offering. Revenue in the first 9 months of the fiscal year increased approximately 5% year-over-year, driven by growth in enterprise customer vertical with strong contribution from both federal and nonfederal government-related spending. Within our Service Assurance offerings, our enterprise customers continue to advance their digital information initiatives focused on aid advancement and observability at the edge, and we continue to innovate in those areas.

Our recently released Omnis AI sensor and AI streamer work together as an AIOps solution to analyze, convert and stream high-fidelity network packet data into actionable intelligence. The sensor captures traffic across complex environments, while the streamer process this data for real-time visibility. The result is reduced risk and faster troubleshooting for IT and security systems.

In January, we announced the upcoming launch of the nGenius Edge Sensor 795, which uses patented ASI technology and synthetic test analysis to generate the NETSCOUT smart data that enables continuous observability across modern enterprise environment. This launch reflects the expansion of our capabilities with respect to remote site observability, next-generation WiFi and digital experience mapping with expanded healthcare support and digital experience monitoring.

Among our service provider customers in the Service Assurance area, we continue to see measured investment in 5G-related initiatives as they balance that investment with monetization opportunity. As we have discussed in the past, some of the newer opportunity related to fixed wireless access and potential for 5G network slicing could potentially be real revenue drivers and cost savers for communication service providers. Network slicing services are scaling rapidly as 5G stand-alone adoption start to accelerate, and we believe NETSCOUT is well positioned to support this advancement.

In January, we announced how NETSCOUT 5G observability solutions give communication service provider end-to-end visibility into 5G stand-alone network slices that support high-performance services like immersive gaming, large-scale live sporting events and mission-critical applications like remote surgery.

Moving to our Cybersecurity offering. Revenue in the first 9 months of the fiscal year increased 9% year-over-year, driven by growth in both our enterprise and service provider customer verticals. Organizations continue to invest in this area in response to a dynamic and complex cyber threat landscape, which, as we discussed last quarter, is explained in our latest research on evolving distributed denial of service attack landscape and how these attacks can destabilize critical infrastructure. This threat landscape continues to evolve rapidly, and we believe our Adaptive DDoS and Omnis Cyber Intelligence solutions are well suited to the growing security needs of our customers.

In fact, in December, NETSCOUT's Omnis Cyber Intelligence with Omnis CyberStream was named as 2025 CyberSecured Award winner by Security Today in the network security category. This recognition reflects the platform's strong market relevance and advanced capabilities such as scalable deep packet inspection, real-time and historical analytics and seamless integration to help security teams detect, investigate and respond to digital threats.

Additionally, in January, Frost & Sullivan named NETSCOUT in its 2025 Global Company of the Year in the global network monitoring industry in recognition of our outstanding achievements in real-time visibility, performance assurance and cyber-resilient network intelligence. The award cited NETSCOUT leadership in delivering measurable results as well as our record of innovations across complex hybrid, cloud and enterprise environments. We are honored by these recognitions and look forward to showcasing NETSCOUT's innovative solution at upcoming industry events, including Mobile World Conference in early March and RSA Conference later that month.

Customer wins. Moving on to customer wins. Our Service Assurance and Cybersecurity solutions continue to gain traction with customers seeking to enhance their visibility, observability, AI and cybersecurity capabilities. A few highlights for the third quarter include a mid-7-figure order in our Service Assurance area from a new customer within the insurance industry. This customer engaged with us after their previous provider fell short in delivering a comprehensive scalable visibility solution as the customers' need expanded to include greater cloud and AI functionality. They also sought to consolidate multiple tools in favor of a single simplified platform. Overall, this engagement reflects a broader market trend. Organizations are prioritizing unified solutions built on high-quality data over fragmented tools that lack adaptability and scalability.

Another Service Assurance win in the third quarter was a low 7-figure deal with an existing customer. This is a large electric utility. They are focused on capacity expansion and using AI to improve safety and better monitor infrastructure health. This order included our AI streamer, which transforms high fidelity packet-derived metadata into actionable intelligence. Customers are increasingly turning to NETSCOUT to support their AI initiatives and recognize that our high-quality smart data is an important component for successful AI and machine learning outcomes.

In the Cybersecurity area, we continue to see positive momentum. For example, we secured 2 additional mid- to high 7-figure deals in Europe with existing customers. One is using our Omnis Cyber Intelligence for forensic analysis, regulatory compliance and threat analysis along with our Adaptive DDoS products to upgrade and expand their DDoS protection. The second is upgrading to our Adaptive DDoS for its advanced capability, performance and reporting features. In all, these developments reflect our success in executing our long-term growth strategy as well as our strong position in the industry.

With that, let's move to Slide #8 to review our outlook. Looking ahead to the final quarter of our fiscal year, we remain focused on execution as we pursue our key objectives of delivering product innovation, achieving a return to annual revenue growth and enhancing our margins through disciplined cost management. We continue to successfully navigate a complex and dynamic macro environment, including tariff-related and AI-driven supply chain dynamics. Our software-driven model helps insulate us from some of that variability, though it could influence the timing and size of certain customer orders.

That said, based on our performance over the first 9 months and the strength of our pipeline, we are raising the midpoint of our top and bottom line outlook for the fiscal year 2026 while staying mindful of these external factors. Tony will provide more details on our outlook in his remarks. As always, we remain committed to helping customers meet the performance, availability and security demands of today's digital landscape by leveraging the power of NETSCOUT AI-ready data platform. We look forward to sharing our progress with you after we complete the final quarter of our fiscal year.

With that, I will turn the call over to Tony.

Thank you, Anil, and good morning, everyone. Thank you for joining us. I'll start by walking you through the key financial metrics for both third quarter and the first 9 months of our fiscal year 2026. After that, I'll share some additional commentary on our outlook for the full fiscal year. As a reminder, other than revenue and balance sheet information, which are on a GAAP basis, this review focuses on our non-GAAP results. All reconciliations with our GAAP results appear in the presentation appendix. I will note the nature of any such comparisons accordingly. Also, all comparisons are on a year-over-year basis unless otherwise noted.

Slide #10 details the results for the third quarter and first 9 months of our fiscal year 2026. Focusing on the quarterly performance, total revenue for the third quarter was $250.7 million, which was relatively consistent with the same period last year at $252 million and ahead of our outlook provided last quarter. This outcome reflects the impact of timing-related shifts in customer purchasing behavior. As we noted last quarter, we had originally expected certain orders to land in the third quarter. However, a number of those were received earlier than anticipated in the second quarter. Similarly, in Q3, we observed some orders that we expected for Q4 being pulled forward as customers leverage their remaining calendar year-end budgets. In some cases, this included service contract renewals, which included backdated maintenance components.

While this dynamic provides short-term support to revenue this quarter, it's important to note that it can also create unevenness across reporting periods. We monitor and manage such changes closely, and we remain guardedly optimistic given the dynamic macro environment and the potential for variability in buying patterns as customers continue to manage their budgets conservatively.

Product revenue totaled $121.7 million compared with $128.2 million last year, primarily due to the timing of certain orders between quarters. Service revenue increased 4.1% to $129 million, reflecting both underlying growth and favorable timing of service renewal orders, some of which included backdated maintenance components as well as the treatment of certain enterprise license agreements.

Gross profit margin was 82.8% in the third quarter, consistent with the same period in the prior year. Quarterly operating expenses decreased 1.1% year-over-year to $117.6 million. The decrease reflects the previously disclosed benefit associated with shifting our Annual Engage User and Technology Summit out of the third quarter, where it occurred last year, to our second quarter in this fiscal year. This benefit was partially offset by increase in employee-related costs.

Our operating margin increased to 35.9% compared to 35.6% in the same period last year. We delivered diluted earnings per share of $1, an increase of 6.4% year-over-year. This improvement reflects, in part, the absence of a negative impact in the prior year period related to a foreign investment that we sold earlier in this fiscal year. This created a favorable year-over-year comparison for the third quarter, but the impact is not expected to have a material effect on our full year results.

Let's turn to Slide 11, where I'll walk you through the key revenue trends by product lines and customer verticals. As a reminder, revenue presented is on a GAAP basis, and all comparisons continue to be on a year-over-year basis. For the first 9 months of fiscal year 2026, Service Assurance revenue increased by 4.8% and Cybersecurity revenue grew by 9%. During the same period, our Service Assurance product line accounted for approximately 64% of our total revenue, and our Cybersecurity product line accounted for the remaining 36%. Turning to our customer verticals. For the first 9 months of fiscal year 2026, our enterprise customer vertical revenue grew 9.4%, while our service provider customer vertical revenue grew 2.2%. During the same period, our enterprise customer vertical accounted for approximately 58% of our total revenue, while our service provider customer vertical accounted for the remaining 42%. Additionally, one customer and one channel partner each accounted for approximately 10% of our total revenue during the third quarter, with no customer accounting for more than 10% of our revenue for the first 9 months of the fiscal year.

Turning to Slide 12. This shows our revenue mix between the U.S. and International markets. For the first 9 months of fiscal year 2026, the U.S. represented 57% of revenue and International represented 43%.

Slide 13 shows some key balance sheet items along with our free cash flow for the period. We ended the third quarter of fiscal year 2026 with $586.2 million in cash, cash equivalents, short and long-term marketable securities and investments, representing an increase of $93.7 million since the end of the fiscal year 2025. Free cash flow for the quarter was $59.4 million. From a debt perspective, we had no outstanding balance on our $600 million revolving credit facility, which expires in October 2029. We currently have capacity under our share repurchase authorization and subject to market conditions, intend to be active in the market during the remainder of fiscal year 2026 and into fiscal year 2027.

To briefly recap other balance sheet items, accounts receivable net was $234.6 million, representing an increase of $70.9 million since March 31, 2025. Days sales outstanding at the end of the third quarter of fiscal year 2026 was 82 days compared with 75 days in the same period in the prior year. The change in DSO in the third quarter reflects the timing and composition of bookings.

Let's move to Slide 14 for our outlook. I will focus my remarks on our revenue and non-GAAP earnings per share targets for fiscal year 2026. We are raising the midpoint of our fiscal year 2026 top and bottom line outlook ranges. This outlook reflects our solid execution, the continued demand for our solutions and the resilience of our business model. Revenue is now expected to be in the range of $835 million to $870 million, representing a 3.6% year-over-year growth at the midpoint. Although we are not guiding to a specific number within the range, to provide a little color, performance around the midpoint reflects our current directional view based on what we know today, while the broader range captures the timing-related factors Anil mentioned earlier. This compares to our prior outlook of $830 million to $870 million.

Non-GAAP earnings per diluted share is now expected to be within the range of $2.37 to $2.45 compared to the previous range of $2.35 to $2.45. A reconciliation between our GAAP and non-GAAP numbers is included in our earnings release. The full year effective tax rate is expected to remain at approximately 20%, and we are assuming approximately 73 million to 74 million weighted average diluted shares outstanding, reflecting our repurchase activities for the first 9 months of the fiscal year.

That concludes my formal review of our financial results. Before we transition to Q&A, please note that we will be on the road over the coming months meeting with investors and look forward to continuing our dialogue.

With that, let's open it up for questions. Operator?

[Operator Instructions] our first question is from Matt Hedberg with RBC Capital Markets.

This is Simran on for Matt Hedberg. Congrats on the quarter. I guess to start, so Q3 performance was good relative to expectations, realizing that the quarter benefited from some deal pull-ins. And it sounds like you guys are seeing healthy demand trends. But can you comment on if some of those demand signals are actually improving?

Well, we talked about the demand signals are similar or improving, but we also are cautious about some of the supply chain challenges, which could delay the timing of the orders because even though we are a software company, they have to run our software on servers. And if there are delays in procuring those servers, which we don't control, then that could delay in the software procurement process also. But in terms of demand for both our current solution and future offering and interest in AI-based solution, use of our data for those use cases, I think it's equal or better versus maybe 6 months ago.

Yes. I would just comment that it's really about timing versus demand because demand remains strong. We have a robust pipeline. So we've benefited from acceleration. And it's just a matter of timing in some of these deals given the dynamic environment and some of the factors that Anil had mentioned.

Okay. Got it. That makes sense. And then as a follow-up, could you quantify the pull-ins this quarter? And does your Q4 guide assume any additional deal pull-ins?

So the pull-ins were, say, approximately $15 million, a combination of product revenue and service revenue. It impacted both. And right now, we've given that range. Timing, again, is really the factor. And we -- although we're not guiding to a particular number, what we see right now is something around the midpoint. And so it doesn't factor in a lot of pull-ins or anything at this point.

We'll take our next question from Erik Suppiger with B. Riley Securities.

Congrats on a solid quarter. First off, can you walk through just the -- how the budgets worked where customers were pulling orders from the March quarter into December because I don't typically think of pulling budgets from one calendar year into another calendar year the way they do maybe from Q4 of a calendar year into Q3.

And then secondly, can you talk a little bit about the use case that is driving the Service Assurance business? It seems like your enterprise business was strong. And could you just provide some detail about what kind of maybe AI use cases are driving the Service Assurance uptick that you saw?

Good. Thanks, Erik. So I think, first of all, I mean, it's always interesting because many of our customers are not on the same fiscal year as we are. And that has left our budget for them. Even though it's a quarter 3 for us, it's a quarter 4 for them. And sometimes, it takes time to budget to set in, in the new fiscal year. So if they have a demand and they want to use up all the budgets they can, and that's what happens typically all the time. This time we saw even in Q2 because of the federal fiscal year ends at that time.

Now coming back to Service Assurance, at some point, we might start separating some of the AI revenue, but it's too small right now. But if you look at, there are 2 use cases of our data in the Service Assurance market. One is the traditional service triage where somebody says, "I have an IT issue and why don't you use NETSCOUT product to troubleshoot." And so our smart data, which is our differentiator, we have over 100 patents in that area, which converts in real-time packet data or conversation data to telemetry. That was not benefiting the use case outside of our own applications because they didn't have the ability to consume that and in the future, even Agentic AI can take advantage of that.

So AI use cases simply mean that you can use the slightly enhanced data which is used only by our own application in Service Assurance can now be mixed with other use cases for companies like Splunk or, as I mentioned, Agentic AI. And so we are now -- IT people and other businesses can use it for similar data for other purposes, and that's our AI use case. So now we are not just limited to the use case of the application NETSCOUT has developed, which is the nGeniusONE, but can also be used for AI-related use cases, which is -- I mean, a big variety of those.

Can you quick comment on how much that was a contributor in the quarter?

I don't know in the quarter, but maybe for the 9 months, it was about $15 million.

We'll take our next question from Kevin Liu with & K. Liu & Company.

Let me add my congrats as well here. Maybe starting with your Service Provider business. Obviously, there are various competitive dynamics and they're all kind of impacting both the wireless folks and the traditional cable MSOs a little differently. So just wondering what you're seeing in terms of kind of their appetite to spend, whether there's any sort of difference between kind of the 2 sides of the coin there?

Well, so first of all, there is no -- they may have their own competitive dynamic between the carriers. There is no competitive dynamic versus NETSCOUT. I mean most of the players are privatized companies, and they're much, much smaller than us. And in some sense, they're struggling for budgets and things like that. Yes, we do have price pressures from them. And so when there is RFP, we have to deal with the next best player. And usually, the competition is pricing, which sometimes affects our deal size.

What is happening on the service provider side is and especially U.S., there have been big layoffs at some of the many companies and despite some of the monetization opportunity of 5G slicing, there's constant pressure, certainly in the Service Assurance area. But we are hoping, there will be less pressure even from these people in the Cybersecurity and AI area. But our AI initiative is in it's very early stage. So we think that Service Assurance portion of service provider will continue to be challenging next year also, but it will be more than made up by a good or better environment in DDoS and definitely in the new areas of AI is all upside.

Understood. Appreciate the color there. And I just wanted to parse out some of the impacts to you guys on supply chain, specifically around component costs and availability. I know you guys ship more of it software only nowadays, but just wondering how you're feeling about your ability to maintain kind of your product gross margins given the cost environment.

And then to your point on just kind of shortages potentially impacting timing, are your customers starting to order product from you with longer lead times and you guys will carry more backlog? Or how are they responding to kind of the current potential for shortage?

So lead time for NETSCOUT, very few people buy our appliance-based product, which hardware comes from us, and we have enough supply there to deal with that, but we sell less and less of those nowadays. So the lead times of the hardware they buy directly from the server vendors like Dell and all those, those are really impacted and they might impact timing of software order also. And so far, we have not seen a big impact related to that. But moving forward, they could be tied together and we might see some delayed order. [indiscernible] comes to margins, since we are not shipping the hardware, the increased cost for the servers, which they use to run our software doesn't really impact our margins. It impacts the timing and timing of the orders definitely, timing for deployment, but it doesn't affect the margin.

Tariff impact has been very small. But yes, that impacts some margin, only for short-term deals when customer says, I have allocated only so much money for the hardware. And -- so we may have to discount the software slightly, and it may have a small impact on the margin, but we have not seen much so far. Tony...

And I would just echo what Anil says. It's really more about does it affect our customers' timing and behavior versus our direct cost because the majority of our revenue is in services and software. And so in our cost of sales, the direct material cost, isn't that significant. And so any implications on that can be managed or mitigated through either price increases, working with our vendors on absorption or if we had to absorb something ourselves. So we don't see the cost element as material to us.

And this does conclude the question-and-answer portion of today's call. And this does conclude the NETSCOUT's Third Quarter Fiscal Year 2026 Financial Results Conference Call. Thank you for your participation. You may now disconnect.

Ladies and gentlemen, thank you for standing by, and welcome to NETSCOUT's Second Quarter Fiscal Year 2026 Financial Results Conference Call. [Operator Instructions]

As a reminder, this call is being recorded. Scott Dressel, AVP, Corporate Finance and his colleagues at NETSCOUT are on the line with us today. I would now like to turn the call over to Scott Dressel to begin the company's prepared remarks.

Thank you, operator, and good morning, everyone. Welcome to NETSCOUT's second quarter fiscal year 2026 conference call for the period ended September 30, 2025. Joining me today are Anil Singhal, NETSCOUT's President and Chief Executive Officer; and Tony Piazza, NETSCOUT's Executive Vice President and Chief Financial Officer.

There is a slide presentation that accompanies our prepared remarks. You can advance the slides in the webcast viewer to follow our commentary. Both the slides and the prepared remarks can be accessed in multiple areas within the Investor Relations section of our website at www.netscout.com, including the IR landing page under Financial Results, the webcast itself and under Financial Information on the Quarterly Results page.

As discussed in detail on Slide #3, today's conference call will include certain forward-looking statements about NETSCOUT's views on expected results of future performance and business strategy. These statements speak only as of today's date and involve risks, uncertainties and assumptions that may cause actual results to differ materially, including, but not limited to, those described in the company's most recent annual report on Form 10-K and subsequent filings with the Securities and Exchange Commission.

As discussed in detail on Slide #4, today's conference call will also include discussion of certain non-GAAP financial measures that the company believes to be useful to investors. While this slide presentation includes both GAAP and non-GAAP results, other than the revenue and balance sheet information, we will focus our discussion on non-GAAP financial information. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations of all non-GAAP metrics to the nearest GAAP measures are provided in the appendix of the slide presentation in today's financial results press release and on our website.

I will now turn the call over to Anil for his prepared remarks. Anil?

Thank you, Scott, and good morning, everyone. Thank you for joining us today. We delivered another solid quarter in Q2, driven by revenue growth from both our cybersecurity and service assurance product lines as we continue to advance our strategic initiatives, including AI-driven product innovation. Our strong top and bottom line performance also benefited from the acceleration of some orders originally anticipated in the second half of the fiscal year. Given our strong first half performance, we are raising our revenue and earnings per share outlook, which Tony will detail in his financial review.

Let's turn to Slide #6 for a brief recap of our financial results for the second quarter and the first half of fiscal year 2026. Revenue was approximately $219 million, representing an increase of nearly 15% year-over-year, driven by solid growth in both our cybersecurity and service assurance areas of our business, along with the acceleration of certain orders originally anticipated to occur in our second half. We expanded both our gross and operating margins during the quarter and delivered diluted earnings per share of $0.62, an increase of approximately 32% year-over-year.

For the first half of the fiscal year or the 6 months ended September 30, revenue was approximately $406 million, an increase in approximately 11% year-over-year, which benefited from a solid growth in both cybersecurity and service assurance area of our business, along with the previously mentioned acceleration of certain orders. We expanded both our gross and operating margin during the first half of the fiscal year and delivered diluted earnings per share of $0.95, an increase of approximately 27% year-over-year.

Now let's turn to Slide #7 for some perspective in our business and some market insights. Starting with our Service Assurance offering. Revenue in the first half of the fiscal year increased approximately 10% year-over-year, driven by growth from both our enterprise and Service Provider customer verticals. We achieved solid growth across most of our major enterprise sectors with the federal government being particularly strong in the first half. This sector benefited from both underlying demand and the acceleration of certain orders expected in the second half. In the Service Provider area, growth was largely attributable to the timing of maintenance renewals, including back maintenance that processed in Q2 versus Q3 in the prior year.

Our Enterprise customers are continuing to invest in digital transformation initiatives related to enhanced visibility, Observability and AIOps initiatives. Accordingly, we are driving intelligence into Observability and AIOps to feed the need for actionable telemetry derived from wire data and to leverage the unmatched power of our scalable DPI and metadata technology. We also recently launched our Omnis KlearSight Sensor for Kubernetes, which provides comprehensive observability within the complex cloud environment. It delivers deep, actionable and real-time insights into the system performance, health and cost drivers. The solution reflects our vision of visibility without borders and is specifically designed to support dynamic and distributed architectures, which are challenging environments to monitor due to their encrypted nature.

On the Service Provider side, domestic and international carriers continue to align their investment with clearly defined 5G monetization opportunities such as fixed wireless access and private 5G. Although the Service Provider space remains challenging, we remain optimistic that NETSCOUT can capture further opportunities by delivering differentiated value as we continue to navigate the current environment. For example, we recently announced solutions to support cable providers and multiple service operators or MSOs with Omnis AI Insights, which generates a high fidelity curated data set to provide real-time network visibility, ensuring a high-quality user experience for video streaming and over-the-top services to help MSOs deliver high-quality user experiences more cost effectively.

Moving to our cybersecurity offering. Revenue in the first half increased nearly 13% year-over-year, driven by growth in both our Enterprise and Service Provider customer verticals. Organizations continue to prioritize this area as they seek to protect themselves against an increasingly complex and expanding cyber threat landscape.

In late August, we released our latest research detailing the evolving Distributed Denial-of-Service attacks landscape and how such attacks can destabilize critical infrastructure. Just in the first half of this year, Activist groups launched hundreds of coordinate attacks each month, targeting communications, transportation, energy and defense system. What is particularly concerning is how DDoS-for-hire services has made sophisticated attack tools available to virtually anyone. These attacks now use AI-enhanced automation, multi-vector approaches and carpet bumping techniques that overwhelm traditional defenses. Bot are compromising tens of thousands of IoT devices, servers and routers to deliver sustained attacks that cause real disruption and are creating an unprecedented level of cyber risk for organizations and Service Provider networks. NETSCOUT's solutions are designed to mitigate this risk by leveraging our unparalleled visibility into global attack trends.

Moving on to customer wins. Our solution continued to gain traction with customers seeking to enhance their visibility, observability and cybersecurity capabilities, leading to combined solution wins across our Service Assurance and cybersecurity offerings within customer orders. Highlights for the second quarter include an Enterprise deal with multiple orders totaling an amount in the 8-figure range, part of which we received earlier than anticipated related to a U.S. government agency that we have been a loyal and long-standing user of our solution. These orders are follow-on orders from orders received last quarter and consist of both Service Assurance and cybersecurity solutions, including our new AI and cyber intelligence product. This user values our solution for the smart data we provide, which they are leveraging to enhance their user experiences and support AI-driven operations initiatives as they modernize their technology environment.

Additionally, in the Service Provider area, we won a low 7-figure deal with a major U.S. telecommunication company that's another loyal and long-standing customer. This deal included our Adaptive DDoS and Distributed TMS cybersecurity solution that the customer had opted to purchase on a subscription basis. The cybersecurity solution purchase are designed to defend against the kind of carpet-bombing DDoS attacks that recently targeted a large number of high-profile platforms. The deal also included solutions from our Service Assurance offerings related to the customers' 5G expansion. The cybersecurity and Service Assurance purchases were implemented to improve the subscribers' user experience and to reduce churn among their 5G and Wi-Fi customers. In all, these developments reflect our momentum in executing our long-term strategy.

With that, let's move to Slide #8 to review our outlook. Looking ahead, we remain focused on driving product innovation, returning to annual revenue growth and enhancing our margin through disciplined cost management. Accordingly, based on our strong first half performance and our pipeline of opportunities, we are raising our revenue and earnings per share outlook. Tony will provide more details on the outlook in his remarks.

As we navigate the second half of the fiscal year, we will continue monitoring the uncertain macro environment while remaining motivated by strong and positive customer feedback, including at our recent Annual Engage Technology and User Summit. We hosted this event in September and showcased our latest solution focused on Observability, AIOps and Cybersecurity. It is clear that our customers rely on our highly curated data to drive improved business outcomes across all ecosystems, which we believe positions us well to capture new opportunities through our differentiated solutions.

As always, we are committed to empowering our customers to meet the demands of today's complex digital landscape by delivering mission-critical solutions that address performance, ensure availability and safeguard security. We look forward to sharing our progress with you throughout the remainder of our fiscal year.

With that, I will turn the call over to Tony.

Thank you, Anil, and good morning, everyone. Thank you for joining us. I'll start by walking you through the key financial metrics for the second quarter and first half of our fiscal year 2026. After that, I'll share some additional commentary on our outlook for the remainder of the fiscal year, including some color on our expectations for the third quarter. As a reminder, other than revenue and balance sheet information, which is on a GAAP basis, this review focuses on our non-GAAP results and all reconciliations with our GAAP results appear in the presentation appendix. I will note the nature of any such comparisons accordingly. All comparisons are on a year-over-year basis unless otherwise noted as well.

Slide #10 details the results for the second quarter and first half of our fiscal year 2026. Focusing on the quarterly performance, total revenue for the second quarter increased 14.6% to $219 million. Product revenue increased 16.9% to $94.7 million, which benefited from the acceleration of certain orders expected in the second half. Service revenue increased 12.9% to $124.3 million, reflecting both underlying growth and favorable timing of maintenance renewals, including some back maintenance that was processed this quarter. Adjusting for these timing benefits across both areas, underlying total revenue growth for the quarter was in the mid-single digits year-over-year, demonstrating solid momentum in our business.

The gross profit margin increased 1.7 percentage points to 81.4% in the second quarter, primarily driven by product volume and mix. Quarterly operating expenses increased by 11%, which, as previously disclosed, included the shift of our Engage User Summit into the second quarter compared to the third quarter last year as well as the timing of commissions and variable incentive compensation, all of which are expected to normalize, resulting in a low single-digit increase in operating expenses for the full fiscal year. We reported an operating margin of 26.5% compared with 23.1% in the same quarter last year. Diluted earnings per share increased 31.9% to $0.62.

Let's turn to Slide 11, where I'll walk you through the key revenue trends by product lines and customer verticals. As a reminder, revenue presented is on a GAAP basis and all comparisons continue to be on a year-over-year basis. For the first half of fiscal year 2026, Service Assurance revenue increased by 10.1% and Cybersecurity revenue grew by 12.7%. During the same period, our Service Assurance product line accounted for approximately 65% of our total revenue and our Cybersecurity product line accounted for the remaining 35%.

Turning to our customer verticals. For the first half of fiscal year 2026, our Enterprise customer vertical revenue grew 12.7%, while our Service Provider customer vertical revenue grew 8.4%. During the same period, our Enterprise customer vertical accounted for approximately 60% of our total revenue, while our Service Provider customer vertical accounted for the remaining 40% Additionally, one customer accounted for 10% or more of our total revenue during the second quarter with no customer accounting for more than 10% of our revenue for the first half of the fiscal year.

Turning to Slide 12. This slide shows our revenue split between the U.S. and international markets. For the first half of fiscal year 2026, 57% of our revenue was generated from the United States, with the remaining 43% coming from international markets. Additionally, all geographies grew in the first half of the fiscal year.

Slide 13 shows some key balance sheet items along with our free cash flow for the period. We ended the second quarter of 2026 with $526.9 million in cash, cash equivalents, short and long-term marketable securities and investments, representing an increase of $34 million since the end of the fiscal year 2025. Free cash flow for the quarter was $4.3 million. During the second quarter, we repurchased approximately 741,000 shares of our common stock for approximately $16.6 million at an average price of $22.34 per share. We currently have capacity under our share repurchase authorization and subject to market conditions, intend to remain active in the market during the remainder of fiscal year 2026. From a debt perspective, we have no outstanding balance on our $600 million revolving credit facility, which expires in October 2029.

As previously disclosed as a Q1 subsequent event, on August 4, 2025, we completed the sale of our entire foreign investment highlighted in past quarters for the equivalent of $11.8 million. The original purchase price was $7.5 million.

To briefly recap other balance sheet items, accounts receivable net was $130.2 million, representing a decrease of $33.5 million since March 31, 2025. Days sales outstanding, or DSO, at the end of the second quarter of fiscal year 2026 was 51 days compared with 53 days in the same period in the prior year. The improvement in DSO in the second quarter reflects the timing and composition of bookings.

Let's move to Slide 14 for commentary on our outlook. I will focus my remarks on our revenue and non-GAAP earnings per share targets for fiscal year 2026. As Anil noted, our strong first half performance gives us increased confidence in our full year outlook. We are raising our full year expectations for both revenue and non-GAAP diluted earnings per share from what we shared in August on our first quarter earnings call.

We now expect revenue in the range of $830 million to $870 million compared with our prior range of $825 million to $865 million. Non-GAAP diluted earnings per share is now anticipated to be in the range of $2.35 to $2.45 compared to our prior range of $2.25 to $2.40. The full year effective tax rate is expected to remain at about 20%, and we are assuming approximately 73 million weighted average diluted shares outstanding, reflecting our first half share repurchase activities.

In closing, let me provide some color on our third quarter expectations. Given the acceleration of orders we saw in the second quarter, orders originally expected in the third quarter, we are anticipating third quarter revenue in the range of $230 million to $240 million. We expect non-GAAP diluted earnings per share in the range of $0.83 to $0.88 for the third quarter.

That concludes my formal review of our financial results. Before we transition to Q&A, please note that our upcoming IR conference schedule is provided on Slide 15. We will be attending the RBC Global TIMT and Needham Tech conferences in November and the UBS Global Technology and AI conference in December. We hope to see many of you at the events.

Thank you, and I'll now turn the call over to the operator for questions.

[Operator Instructions] We'll take our first question from Matt Hedberg with RBC Capital Markets.

This is Simran on for Matt Hedberg. Congrats on the quarter. To start, I just wanted to double-click on the strength that you saw in the quarter. Could you talk a little bit about the acceleration of orders that were originally expected in the second half? And what drove that shift? And then on the Fed piece, that was also great to see. So if you could speak to some of the demand trends there as well.

Well, I think this was always -- when we look at the Fed orders, especially, they are always on the edge of the end of the fiscal year. Sometimes we get it end of the federal fiscal year, which is September. So sometime in the past years also, we get it afterwards. And this time, we got -- we had the reverse effect. And second thing, as Tony talked about, we had some big maintenance order, which was recognized later in the year. And those were the 2 big factors. Tony, anything else you think?

No, those were 2 of the factors that pushed us into the -- exceeds expectations. But it was a strong federal quarter. Some of that, again, was the acceleration of that particular order. And we did see the acceleration, we believe, because they were prepping for the federal government shutdown, so accelerated those orders into our second quarter to be prepared when that shut down.

Got it. Got it. And then just one more for me. On GenAI, could you speak to a little bit about what's been resonating with customers on your AIOps offering and then how Enterprise customers have been leaning into it?

Yes. So I always talk about and you may have -- I mean, in the script, you notice all the time, we use the word differentiation because that's the starting point. Before we say we are better, we have to differentiate and get the year plus out. So what's different for NETSCOUT in the generative AI and observability and AI world is that we have smart data telemetry, which we have never shared outside our own applications in the past because the data lakes and other solutions were not ready to consume it like a company like Splunk, ServiceNow, AWS and things like that.

So how we are differentiating is not that we have better algorithms in that area because there are so many available even in open source. We're feeding smart data to algorithms in a unique way so that they have better outcomes. So we are basically using our branding as a smart data company, but that smart data was not experienced by third parties because we were not willing to share the data. So we created a new product called AI sensor, AI Insight, basically, which allows it makes it easier to mix our data with other data set, but more importantly, now they can apply their algorithms, whether it's in the ChatGPT area or any other observability to our data, and that's very unique in the industry.

We'll take our next question from Eri Suppiger with B. Riley.

Congrats on a very solid quarter. A couple of questions. First off, on the 10% customer, can you comment as to whether that was a service provider, federal or enterprise? And then on the threat landscape, you talked about for denial of service. Can you discuss how some of these attacks are evolving and whether your end customers are capable of defending against some of the changes in the attack landscape?

So on the first part, Tony, do you want to cover that?

Yes. So on the first part, the over 10% customer's related to the federal government orders. So it was a channel partner.

Okay. On the second one that -- so when we talk about security area, we believe that DDoS market is underserved. A lot of people are looking at more sophisticated attacks. But the DDoS attacks are much, much more easier to orchestrate and they are getting more sophisticated, but they're still easier to orchestrate and they create a new sense factor. like, for example, a carpet bombing attack, a previous DDoS attack will attack a target or a server. The carpet bombing attack is an evolution of that. It's not that difficult to be orchestrated by botnets, which goes after multiple targets at the same time.

So now instead of one server or 10 machines, you have hundreds of machines who have to defend themselves. So that's what is happening in the DDoS area. We believe that the industry is doing a great job outside of DDoS area. But within the DDoS area, it's only relegated to specialists and yet nation state actors and even the university students can orchestrate the DDoS attack. So what we did, Erik, in the last 3, 4 years is as we integrated the Arbor DDoS business into NETSCOUT, we brought our scalable DPI technology to that solution. And that was necessary to deal with these new and more sophisticated DDoS attacks.

And what is the timing of some of this evolution? Is this taking place this year? Is this something that's been just kind of gradually evolving over a few years? And how is the state of the market right now?

So we released an option to our product called Adaptive DDoS last year. And that includes this functionality. One of the reasons it's called Adaptive is that -- and that Adaptive DDoS option is sold as a subscription. And because we will keep adapting every 6 months, a new release to deal with new attacks and people can just take advantage of that with the subscription. So some of the adaptive DDoS revenue is already in this year's numbers. And so the adaptive DDoS is our definition of dealing with these new and evolving attacks on a periodic basis through that option.

We'll go next to Kevin Liu with K. Liu & Company.

I'll add my congrats on the results as well. Just on the impact of the government shutdown, it certainly sounds like it accelerated some orders. I was wondering if you could talk about what's happening with kind of the existing pipeline there, whether deals are essentially paused or if they continue to move forward? And then whether there's any sort of fulfillable backlog that was associated with the government orders secured and whether they would still continue to take those even amidst the shutdown?

Yes. I mean I'll let Anil talk a little bit about his perspective on the government. But with regard to the backlog or fulfillable orders, there was some backlog related to the federal government order. And so we already have that order, and so that's already been fulfilled.

Yes. Overall, I think the shutdown has not affected the nonfederal business and even federal business so far not affected, but we are sort of watching it. And so if you look at the uncertainty in the second half, potential uncertainty is the shutdown. If it lingers on, it may affect -- we are expecting more orders in that from the same customer. And second is the impact of tariff. That situation is still evolving, potential impact of that on nonfederal customers. So those are the things we are watching and continue to be -- see whether that affects anything in the second half.

Understood. And Anil, since you mentioned the tariffs, to the extent those are rolled back, what sort of benefits or would you expect to see either from your existing customer base or even if your own business has been impacted, which I don't think it has?

You said benefit?

Yes. I think, Kevin, we haven't really seen any detriment of it at this point. From a business perspective, as we talked about before, given that a lot of our product comes from Canada, the U.S. and Mexico and right now is protected under the various agreements, we haven't seen an impact from a cost perspective. From a customer perspective, I think what Anil is referring to is if they were to change behavior, but we've heard noise around it, but really haven't seen a large impact.

I think the impact will be like on the end user pricing, not necessarily margin because we sell software, which is very high margin. So the potential impact on certain deals are budgets were set up, let's say, 8, 9 months ago. We have long sales cycles, 6 to 12 months. And now if the tariff affects the total price of even the hardware portion, which is they're buying it, then we may have to just make them whole. But it's just all up in the air right now, and we just need to watch.

And Kevin, just on the federal government, we do have a strong pipeline opportunity with the government, the federal government orders. And so we continue to look at that. I think we're a little bit insulated in the near term because of the pull forward of orders as they prep for the shutdown. So we'll continue to watch that.

Got it. And just lastly, if I could ask about your product gross margin, that's as high as I've seen it before. Is there anything in terms of how you guys are going to market or which products are in demand from customers right now that's contributing to that? And how sustainable do you think this level is?

Well, I think the biggest part is that we are generally counting on selling our AI. And so we have 2 segments, as you know, the core business, DDoS and Service Assurance. The AI solution will be marketed to the Service Assurance customers. Largely that, I mean, less than 10% will be new customers. And Cybersecurity solution, which we call it Omnis Cybersecurity will be marketed to DDoS customers. So we are looking at these products as sort of adjacencies to the existing product line and yet attracting new budgets. So that's a good situation, and we don't need to hire a lot of salespeople or train them to do that yet we have new opportunities.

Yes. And so I'd say, Kevin, for the quarter, our product gross margin was in the high 80% range, where it's typically in the mid-80% range. And it was particularly strong given the volume of software sales in the quarter. And in the future, we're continuing to move more and more to software-related type sales.

Ladies and gentlemen, with no further questions at this time, this will conclude our call. Thank you for joining us today.

Ladies and gentlemen, thank you for standing by, and welcome to NETSCOUT's First Quarter Fiscal 2026 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Paul Canavan, AVP, Corporate Finance and his colleagues at NETSCOUT are on the line with us today. [Operator Instructions] I would now like to turn the call over to Paul Canavan to begin the company's prepared remarks.

Thank you, [ Margo ], and good morning, everyone. Welcome to NETSCOUT's First Quarter Fiscal Year 2026 Conference Call for the period ended June 30, 2025. Joining me today are Anil Singhal, NETSCOUT's President and Chief Executive Officer; and Tony Piazza, NETSCOUT's Executive Vice President and Chief Financial Officer. There is a slide presentation that accompanies our prepared remarks. You can advance the slides in the webcast viewer to follow our commentary.

Both the slides and the prepared remarks can be accessed in multiple areas within the Investor Relations section of our website at www.netscout.com, including the IR landing page under Financial Results, the webcast itself and under Financial Information on the Quarterly Results page. As discussed in detail on Slide #3, today's conference call will include certain forward-looking statements about NETSCOUT's views on expected results of future performance and go-forward business strategy.

These statements speak only as of today's date and involve risks, uncertainties and assumptions that may cause actual results to differ materially, including, but not limited to, those described in the company's most recent annual report on Form 10-K and subsequent filings with the Securities and Exchange Commission.

As discussed in detail on Slide #4, today's conference call will also include discussion of certain non-GAAP financial measures that the company believes to be useful for investors. While this slide presentation includes both GAAP and non-GAAP results, unless otherwise stated, financial information discussed on today's conference call will be on a non-GAAP basis only.

The rationale for providing non-GAAP measures, along with the limitations of relying solely on those measures is detailed on this slide and in today's financial results press release. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.

Reconciliations of all non-GAAP metrics to the nearest GAAP measures are provided in the appendix of the slide presentation in today's financial press release and on our website. I will now turn the call over to Anil for his prepared remarks. Anil?

Thank you, Paul, and good morning, everyone. Thank you all for joining us today. We delivered a solid start to fiscal year 2026 with Q1 performance reflecting strong execution and positive momentum across both our top and bottom lines. Growth in our cybersecurity and service assurance product line supported these results as we continue to position NETSCOUT for long-term success in the market.

Let's turn to Slide #6 to review some non-GAAP financial highlights for the first quarter of fiscal year 2026. Revenue was approximately $187 million, representing a 7% year-over-year increase driven by strong growth in our cybersecurity area and the timing of orders received. We expanded both our gross and operating profit margins during the quarter and delivered non-GAAP diluted earnings per share of $0.34, an increase of approximately 21% year-over-year.

This result reflects the benefit of restructuring and cost management initiatives that we executed in the past fiscal year. As such, these effects will begin to normalize in our year-over-year comparisons starting in the second quarter.

Now let's move to Slide #7 for some perspective on our business and some market insights. Starting with our service assurance offering. Revenue in the first quarter increased approximately 1% year-over-year. The growth was driven by our enterprise customer vertical, which offset a decline in our service provider customer vertical.

In the service assurance space, our enterprise customers are investing in digital transformation initiatives, AIOps and enhanced visibility at the network edge. We experienced solid growth across most of our major sectors in this customer vertical. On the service provider side, we continue to see both domestic and international carriers invest in 5G-related initiatives. They are proceeding at a measured pace, aligning investment with clearly defined monetization opportunities such as fixed wireless access and private 5G.

While we remain mindful of ongoing macroeconomic uncertainty, we believe NETSCOUT is well positioned to capture further opportunities by delivering differentiated value in this evolving environment. This was recently demonstrated at the TM Forum's NeuroNOC Catalyst, where our Omnis AI Insights Solution showcased how high-value network data can drive closed-loop automation and self-healing of networks.

This provided strong validation of our ability to support AI-driven operations in complex 5G environments, reinforcing our role as a technology partner for next-generation telecom transformation. Moving to our cybersecurity offering. Revenue in the first quarter increased approximately 18% year-over-year, driven by strong growth in both our enterprise and service provider customer verticals.

Customers continue to prioritize spending in this area as they seek to protect themselves against an increasingly complex and expanding cyber threat landscape. We believe cybersecurity continues to represent a strong growth opportunity for NETSCOUT, and we continue to advance our portfolio with new innovations in this area. For example, we recently announced new AI-backed enhancements to our NETSCOUT Arbor Edge Defense and NETSCOUT Arbor Enterprise Manager Adaptive Distributed Denial of Service attack solutions to help customers further automate operations, enhance defense and improve reporting.

These powerful enhancements are designed to leverage AI and our ATLAS Intelligence. Feed to automate defense is against an expanding array of attack vectors, enabling customers to mitigate up to 80% of all DDoS attacks without the need for further analysis. We also announced that our Omnis Cyber Intelligence platform aligns with the NIST Zero-Trust security framework.

We believe this further reinforces our product offerings and strengthens our relevance as a strategic partner for the U.S. federal agencies in both service assurance and cybersecurity. Finally, we introduced Adaptive Threat Analytics, a key enhancement to our Omnis Network Detection and Response or NDR solution. It empowers SOC analysts with faster, smarter incident response through continuous packet capture and enriched metadata.

This innovation improves our competitive edge in the market where speed and precision in threat response are critical. Our solution continued to gain strong traction with customers seeking to enhance both visibility and cybersecurity capabilities, leading to robust multi-solution wins across three verticals. Notably, we secured a high 7-figure order earlier than anticipated with a U.S. government agency that has been a long-standing and loyal customer.

This order consisted of both service assurance and cybersecurity solutions, including our new Omnis AI and Cyber Intelligence products. This customer values our solution for the smart data we provide, which they are leveraging to enhance user experience and support AI-driven operations and initiatives.

We also won a low 7-figure deal with major Latin American financial institution, where we replaced 2 incumbent vendors in a competitive situation focused on online banking applications. This customer purchased both service assurance and cybersecurity solutions and is exploring our Omnis AI products. Our clear differentiator was our integrated platform, which combines cybersecurity performance and user experience visibility with valuable smart data to support AIOps initiatives.

These wins demonstrate the value of our innovative and integrated solutions, solid reputation and strong customer relationships, which help organizations address the performance, availability and security needs of the connected digital world. Additionally, they reflect the momentum we are building as we continue to execute our strategy.

With that, let's now move to Slide #8 to review our outlook. Looking ahead, we remain cautiously optimistic amid ongoing macroeconomic uncertainty. Our focus remains firmly on driving product innovations, returning to annual revenue growth and enhancing margin through disciplined cost management. Based on our first quarter performance and solid pipeline, we are reaffirming our fiscal year '26 revenue and non-GAAP EPS outlook. Tony will provide a recap of the outlook in his remarks.

Looking ahead, during the second quarter, we are hosting our customers and partners at our Annual Engage Technology and User Summit in late September in Arlington, Texas. At Engage 2025, we'll be showcasing both our existing solutions as well as our latest AIOps innovations. We'll demonstrate how our highly curated data drives improved business outcomes across key ecosystems focusing on cybersecurity as well as network and service observability.

We'll also be highlighting how our solution provides protection against modern-based DDoS attacks with our AI-powered Arbor DDoS protection. Longer term, we are committed to empowering our customers to meet the demand of today's connected complex digital landscape by delivering mission-critical solutions that address performance, ensure availability and safeguard security. We look forward to sharing our progress with you throughout the remainder of our fiscal year. With that, I'll turn the call over to Tony.

Thank you, Anil, and good morning, everyone. Thank you for joining us. I'll start by walking you through the key financial metrics for the first quarter of fiscal year 2026. After that, I'll share some additional commentary on our outlook for the remainder of the fiscal year, including some color on our expectations for Q2.

As a reminder, this review focuses on our non-GAAP results unless otherwise stated, and all reconciliations with our GAAP results appear in the presentation appendix. I will note the nature of any such comparisons accordingly. All comparisons are on a year-over-year basis unless otherwise noted.

Now let's turn to Slide #10, which details the results of the first quarter of our fiscal year 2026. Total revenue for the first quarter increased 7% to $186.7 million. Product revenue increased 19.3% to $73 million, while service revenue increased 0.3% to $113.8 million. Gross profit margin increased by 1.6 percentage points to 78.7% in the first quarter, primarily driven by product volume and mix.

Quarterly operating expenses were relatively consistent year-over-year as the final quarter of benefit from the prior year's restructuring helped offset higher employee-related expenses, commissions and professional fees. Accordingly, we reported an operating profit margin of 14.2% compared with 8% in the same quarter last year.

Diluted earnings per share was $0.34, up 21.4% from $0.28 in the same quarter last year. Both the current and prior year's quarters included unrealized gains related to a foreign investment. In the current quarter, this resulted in a benefit of approximately $0.03 per share compared to a benefit of approximately $0.10 per share in the same quarter last year.

Turning to Slide 11. I will review key revenue trends by product lines and customer verticals. Please note that all comparisons here are on a year-over-year basis, consistent with our other remarks. For the first quarter of fiscal year 2026, service assurance revenue increased by 1.4%, while cybersecurity revenue grew by 18.3%. During the same period, our service assurance product line accounted for approximately 63% of our total revenue and our cybersecurity product line accounted for the remaining 37%.

Turning to our customer verticals. For the first quarter of fiscal year 2026, our enterprise customer vertical revenue grew 17.7%, while our service provider customer vertical revenue decreased 5.6%. During the same period, our enterprise customer vertical accounted for approximately 59% of our total revenue, while our service provider customer vertical accounted for the remaining 41%.

Turning to Slide 12. This slide shows our revenue split between the United States and the international markets. For the first quarter of fiscal year 2026, 54% of our revenue was generated from the United States, with the remaining 46% coming from international markets. Additionally, no single customer accounted for 10% or more of our total revenue during the first quarter.

Slide 13 outlines select balance sheet items alongside free cash flow for the period. We ended the first quarter of fiscal year 2026 with $543.5 million in cash, cash equivalents, short- and long-term marketable securities and investments, representing an increase of $51 million since the end of fiscal year 2025. Free cash flow for the quarter was $71.7 million.

During the first quarter, we repurchased approximately 761,000 shares of our common stock for approximately $15 million at an average share price of $19.72 per share. We currently have capacity under our share repurchase authorization and subject to market conditions, intend to remain active in the market through the rest of fiscal year 2026.

From a liquidity perspective, we have no outstanding balance on our $600 million revolving credit facility as of June 30, 2025, which expires in October 2029. To briefly recap other balance sheet items, accounts receivable net was $92.2 million, representing a decrease of $71.5 million since March 31, 2025.

Days sales outstanding, or DSO, at the end of the first quarter of fiscal year 2026 was 41 days compared with 63 days in the same period in the prior year. This improvement in the DSO in the first quarter reflects the timing and composition of bookings.

Let's move to Slide 14 for commentary on our outlook. I will focus my remarks on our non-GAAP targets for fiscal year 2026. As Anil noted earlier, we are reaffirming our non-GAAP outlook for fiscal year 2026 that we presented during our fourth quarter and full fiscal year 2025 earnings call in May. As a reminder, for our fiscal year 2026, we continue to anticipate revenue in the range of $825 million to $865 million and non-GAAP diluted earnings per share within the range of $2.25 to $2.40. The full year effective tax rate is expected to be approximately 20%.

Our weighted average diluted shares outstanding are assumed to be approximately 74 million shares, which does not incorporate any future share repurchase activities. I would also like to note that on August 4, we successfully completed the sale of our entire previously disclosed foreign investment for the equivalent of approximately $12 million. Our outlook anticipates that this investment would have a relatively neutral impact on our full fiscal year financial performance, which remains the case as a result of this transaction.

Finally, let me now provide some color for our second quarter expectations. We currently anticipate year-over-year second quarter revenue growth in the range of 4% to 6%. In terms of non-GAAP earnings per share, we anticipate a range of $0.43 to $0.45 for the quarter.

This outlook reflects several key factors: the shift in timing of our Engage customer event, which will occur in Q2 this fiscal year versus Q3 last fiscal year; the normalization of operating expenses in Q2 as benefits from the prior year's restructuring actions lapse and the impact of the sale of our previously disclosed foreign investment in Q2, which will offset the gain recorded in Q1 and is expected to have a relatively neutral impact on our full fiscal year outlook.

That concludes my formal review of our financial results. Before we transition to Q&A, I'd like to quickly note that our upcoming IR conference participation is listed on Slide 15. Thank you, and I'll now turn the call over to the operator for questions.

[Operator Instructions] We'll take our first question from Matt Hedberg, RBC Capital Markets.

This is Simran on for Matt Hedberg. Congrats on the quarter. So just to start, could you talk a little bit about what you are seeing in the macro environment relative to 90 days ago? And can you give a little bit more color on the outlook around the service provider spending in fiscal year '26 and compare it to what you were seeing this time last year?

So thanks for your question. So if you're talking about the external environment related to tariffs, I think the jury is still out, and we are not seeing any effect at this point. Also, as I mentioned on our last call that we are more of, let's say, mostly a software business, which is less impacted by tariff. So we still remains to be seen whether we'll have any serious impact this fiscal year.

The second thing on question of service provider spending, I would not look at the quarter-over-quarter comparison in any serious way because of lumpy deals in service provider. We think that it's too early to compare this year with last year. Overall, the spending climate looks very similar to what we saw last year.

Okay. Great. And then just one more from me. Can you talk a little bit more about the security portfolio this year? What keeps it going? Where are you seeing the most demand around the newer products like mobile security, adaptive DDoS, distributed threat mitigation. Yes, any color on that would be great.

So biggest thing, as we have talked about over the last couple of years, the Arbor DDoS business is fully integrated into NETSCOUT, the main business. As a result, we are cross-breeding some of the technologies like we are bringing scalable DPI to the DDoS world, which results in adaptive DDoS and other feature sets, which were not previously available and are big differentiators, even though we are already a big leader and incumbent in this market.

So that's one area, and that's obviously the biggest portion and the biggest area of growth also. We have some traction on the OCI product, which is basically in the NDR space and -- but we are repositioning that into what we call post-incident response.

And third area is that even our new AI sensor product, which sends curated data to third parties is not only useful for observability, but also used for cybersecurity use cases with partnership with Splunk and likes of Palo Alto. So we think that, that's a big area of growth, which has -- we have made big advancements in that area, plus spending climate is much better versus service assurance.

Our next question comes from Kevin Liu with K. Liu & Company.

Nice start to the year here. First question, I just wanted to ask about how spending amongst your federal government customers trended within the first quarter. It did sound like you guys got a nice deal that came in earlier than expected.

And then as you look towards the September quarter, any initial thoughts on whether you'd expect kind of the usual federal government budget flush and maybe put that in context for kind of the $1 trillion-plus defense bill for next fiscal year as well and how that could benefit you?

Yes. So I'll let Tony maybe give -- add to what my commentary is, Kevin. So yes, we had a good quarter and pipeline looks good. And it's possible that we will get more -- I mean, much better performance in the first half as we enter -- exit this fiscal year. But as you know, the timing is always of suspect. So we have a good line of sight into further traction and improvement in the federal area. But whether it exactly happened before September 30 is not clear right now.

Yes. So Kevin, I would say fed was strong in the quarter. It grew mid-teens, but -- and we see opportunity in this particular area. As we alluded to in the prepared remarks, we did have an order come in earlier. So that was some of the strength in the quarter.

But we do see a lot of opportunity in the federal area. But as you know, it's always subject to the approvals and the timing of those orders given everything going on in the federal government. But we're cautiously optimistic for that sector right now.

Understood. And then more generally, just with the strength you're seeing on the enterprise side of the business right now, can you speak to how much of a contributor kind of these investments in AI data centers is impacting that or whether there are other kind of strong secular growth drivers that can help sustain that trend moving forward?

So I think the biggest change, which has not impacted the revenue stream yet is that our service assurance market, which was more of a niche market where we had almost 40%, 50% market share is getting expanded into the larger observability market. And so where our data is even more useful. So I think it's getting legitimacy to what we used to do in the scalable DPI and smart telemetry area.

And we have made corresponding product improvements into this -- using this product called Omnis AI Insights, which some of it will contribute to revenue this year also. So that's the biggest -- most interesting thing going for us that AI is making some of the things which are very important for our customer into the mainstream and in directly increasing our market size, which was one of the challenges in the service assurance area we had.

And Kevin, I would say that it's early on for this product, and we're seeing good interest and momentum. It did have some contribution because as we said in the prepared remarks, that we did highlight a customer that did invest in it, but it's small at this point, but we see opportunity in this area.

Got it. And maybe just one last one. With the passage of the tax bill last month, wondering what you're hearing from some of your service provider customers at this point in terms of potential incremental investments they're making in their network and how that could translate in a business for you?

We have not heard anything specific from those this year so far. And even in the past when the changes happened, that didn't necessarily translate into more or less business for us.

Thank you. And this concludes our call. We thank you for joining us today. Have a wonderful day.