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DATE
Thursday, Nov. 5, 2026
CALL PARTICIPANTS
- VP of Corporate Finance - Scott Dressel
- President and Chief Executive Officer - Anil Singhal
- Executive Vice President and Chief Financial Officer - Tony Piazza
TAKEAWAYS
- Total Revenue -- $222.2 million, representing 1.4% growth year over year despite the timing of federal government orders accelerated into the first quarter.
- Non-GAAP EPS -- $0.71, an increase from $0.62 in the prior year period.
- Non-GAAP Operating Margin -- 28.3%, expanding from 26.5% due to cost discipline and the shift of the ENGAGE User Summit from the second quarter to the third quarter.
- Product Revenue -- $89.9 million, a 5.1% decrease reflecting the acceleration of certain federal government orders earlier in the fiscal year.
- Service Revenue -- $132.3 million, increasing 6.4% year over year.
- First Half Total Revenue -- $432.6 million, an increase of 6.6% compared to the first half of the prior fiscal year.
- First Half Service Assurance Revenue -- grew 8.2%, accounting for 66% of total revenue.
- First Half Cybersecurity Revenue -- grew 3.8%, accounting for 34% of total revenue.
- First Half Enterprise Revenue -- increased 9.1%, representing 62% of total revenue.
- First Half Service Provider Revenue -- increased 2.8%, representing 38% of total revenue.
- Product Backlog -- $20.9 million as of Sept. 30, 2026, including $15.4 million of fulfillable backlog.
- Cash and Marketable Securities -- $571.3 million as of Sept. 30, 2026, a decrease from $705.1 million at the end of fiscal year 2026.
- Share Repurchases -- 2 million shares of common stock for approximately $77 million during the second quarter.
- Fiscal Year 2027 Revenue Guidance -- $885 million to $915 million, reaffirmed by management.
- Fiscal Year 2027 Non-GAAP EPS Guidance -- $2.65 to $2.80, representing 9.9% growth at the midpoint.
- Third Quarter Revenue Guidance -- $240 million to $250 million, reflecting a difficult comparison due to $15 million in orders pulled forward in the prior year.
- Third Quarter Non-GAAP EPS Guidance -- $0.90 to $0.95.
- Inventory and Deferred Costs -- $30 million as of Sept. 30, 2026, compared to $13.3 million at the end of the prior fiscal year.
- Federal Revenue -- low teens as a percentage of total revenue for the first half, exceeding the historical range of mid-to-high single digits.
- Strategic Win -- a high seven-figure order with a leading U.S. financial institution to build out infrastructure for customer-facing networks.
- Cybersecurity Win -- a low seven-figure order with a leading global service provider for managed DDoS services and Adaptive DDoS Protection.
- Non-GAAP Effective Tax Rate -- approximately 20% for the full fiscal year.
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RISKS
- Singhal stated, "Service provider spending remains disciplined and tight," noting that consolidation and macroeconomic factors continue to challenge the segment.
- Singhal warned of a "big challenge in the supply chain" where server prices have risen two to three times over the prior year.
- Singhal noted that revenue in certain Middle Eastern regions is "definitely impacted" by regional conflicts.
SUMMARY
NetScout Systems, Inc. (NASDAQ:NTCT) reported second-quarter financial results aligned with its internal forecasts, supported by expansion in non-GAAP operating margins and earnings per share. Management reported that top-line growth was influenced by the timing of federal government orders that were accelerated into the first quarter. The company maintained its full-year guidance while executing on its capital return strategy through significant share repurchases. Strategic focus centered on expanding the Smart Data platform into AIOps and agentic workflows to address the evolving AI needs of its enterprise and service provider clients.
- Management announced a planned name change for the Service Assurance segment to Network Observability starting in fiscal year 2028 to align with industry terminology.
- Singhal stated, "Our 5G observability solution gives them end-to-end visibility for standalone 5G networks and supports emerging use cases, including fixed wireless access and network slicing."
- The company reported the resignation of Sanjay Munshi as Chief Operating Officer, effective Oct. 22, with members of the existing leadership team assuming his responsibilities.
- Singhal noted, "Customers are buying AI solutions designed for Service Assurance and using them for cybersecurity applications, bringing the two areas closer together."
- Management highlighted the launch of nGenius Copilot, a conversational AI tool designed to convert natural language queries into evidence-based answers.
- The company executed a strategic inventory build to $30 million to mitigate potential supply chain disruptions and volatile hardware costs.
INDUSTRY GLOSSARY
- AIOps: The application of artificial intelligence and machine learning to automate and enhance IT operations and decision-making processes.
- ATLAS Intelligence Feed: NetScout's threat intelligence data source used to identify and combat network threats and DDoS attacks.
- DDoS: Distributed Denial of Service; a type of cyberattack that attempts to crash a network or service by flooding it with traffic.
- DPI: Deep Packet Inspection; a method of examining the data part of a packet as it passes an inspection point to manage traffic or detect threats.
- MTTK: Mean Time to Knowledge; the average time required to identify the root cause of a network or service issue.
- Smart Data: Contextualized, real-time evidence derived from packet data used to power analytics, cybersecurity, and AI reasoning.
Full Conference Call Transcript
Operator: Thank you for standing by, and welcome to NetScout's second quarter fiscal year 2027 financial results conference call. At this time, all parties are in a listen-only mode. A question-and-answer session will follow the management team's prepared remarks. As a reminder, this call is being recorded. If you require operator assistance at any time, please press star zero. I would now like to turn the call over to Scott Dressel, NetScout's VP of Corporate Finance. Scott, please go ahead.
Scott Dressel: Thank you, operator, and good morning, everyone. Welcome to NetScout's second quarter fiscal year 2027 conference call for the period ended September 30, 2026. 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 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 number three, 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 our company's filings with the Securities and Exchange Commission, including our annual report on Form 10-K and quarterly reports on Form 10-Q. As discussed in detail on slide number four, 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?
Anil Singhal: Thank you, Scott, and good morning, everyone. We appreciate you joining us today. Our second quarter results were consistent with our expectations, and our first half performance keeps us on track to achieve our objectives for fiscal year 2027. Our continued focus on cost discipline supported operating margin expansion from the prior year. We were also active in our share repurchase program during the quarter, reflecting our commitment to returning capital to shareholders. With that foundation, we are reaffirming our full-year outlook. In October, we hosted our annual ENGAGE Technology and User Summit, showcasing our newest solutions to more than 400 customers and partners.
These innovations extend our scalable DPI-derived AI-ready Smart Data into AIOps and agentic workflows, as well as strengthen our cybersecurity and DDoS attack protection portfolio. While customer AI adoption is still in its early stages, we view this as a strong long-term opportunity. As investment matures, we will be well-positioned to expand within our incumbent base and capture new opportunities. With that kind of context, let me turn to slide six for a brief overview of our financial performance. For the second quarter of fiscal year 2027, total revenue grew 1.4% to $222 million, reflecting the timing of certain orders pulled into Q1 from Q2, as discussed last quarter.
Operating margins expanded, and diluted earnings per share increased to $0.71 compared with $0.62. For the first half of fiscal year 2027, revenue grew nearly 7% to approximately $433 million, reflecting growth in both cybersecurity and Service Assurance. Gross and operating margins expanded, and diluted earnings per share increased to $1.23 compared with $0.95. Now let's turn to slide number 7 for some perspective on our business and some market insights. Starting with Service Assurance, revenue increased approximately 8% for the first half of the fiscal year, driven by the timing of strong federal government-related orders.
Enterprise customers continue to turn to NetScout to close the visibility gaps created by hybrid cloud, automation, and AI workloads, and we centered our solution during the quarter. We expanded our NETSCOUT data platform, which observes digital interactions and converts packets in real time into compact, contextualized evidence for observability, Service Assurance, cybersecurity, and AI. By applying early semantic extraction at the point of observation, our AI systems reason from actual data rather than inference. In our internal testing, this approach meaningfully reduced AI token consumption and mean time to knowledge, helping customers improve decision confidence and lower the cost of AI-driven analysis.
We also launched nGenius Copilot, a conversational AI extension to nGeniusONE that turns natural language questions into evidence-based answers, increasing usability for a broad range of professionals. Our service provider customers remain focused on reducing network costs and complexity, as well as improving automation across fixed, mobile, and edge environments. Our 5G observability solution gives them end-to-end visibility for standalone 5G networks and supports emerging use cases, including fixed wireless access and network slicing. Carrier spending remains disciplined and tight. Even so, customers continue to select NetScout to help improve efficiency and monetize their next-generation network investments. Beginning in fiscal year 2028, we'll rename Service Assurance as Network Observability to better align with industry terminology.
Network Observability is the term the industry now uses for these solutions, and the new name reflects how our customers see this part of our business and the broader opportunity set our solutions are starting to address. Turning to cybersecurity, revenue increased approximately 4% in the first half of the fiscal year, reflecting contribution from our expanded Arbor Cloud capacity. Cybersecurity continues to be an important long-term growth opportunity as the threat environment continues to intensify and DDoS attacks become more frequent, sophisticated, and difficult to mitigate. In our 1H 2026 DDoS Threat Intelligence Report released in October, we noted that high-capacity attacks are no longer anomalies and are now routine.
Adversaries are increasingly using residential proxies, short-duration attacks, and DDoS for hire services. This means customers require finer-grained network controls, selective mitigation, and more scrubbing capacity at the network edge. To address this expanding need, we have extended Adaptive DDoS Protection from attack target to its source by automatically detecting and mitigating outbound attack traffic, helping service providers stop compromised subscriber devices before they disrupt their networks, consume costly capacity, or attack organizations across the internet. Secondly, we have enhanced Arbor Edge Defense to identify attack sources hidden behind content delivery proxies, adding an independent layer of protection for enterprises' revenue-generating applications without requiring CDN provider replacement.
Regarding AI, our packet-derived Smart Data differentiates NetScout by providing AI models with the quality operational context needed for more effective reasoning and outcomes. Customers are buying AI solutions designed for Service Assurance and using them for cybersecurity applications, bringing the two areas closer together. In September, we unveiled Model Context Protocol, or MCP, connectivity to our Omnis AI Insights solution. It gives AI assistants and agents on-demand access to AI-ready Smart Data, NetScout real-time operational evidence, providing the trusted context they need to support more accurate and informed decisions. Customers can stream Smart Data into the platform they already use and add capabilities to their existing NetScout infrastructure without replatforming.
While customers are still defining their AI strategies, we are encouraged by the level of engagement and expect adoption to build over time. Moreover, our installed base and incumbent base provides a meaningful advantage as programs move into production. That brings me back to ENGAGE 2026, our theme moving
Operator: Pardon the interruption. We are experiencing a technical difficulty. Please remain on the line, and we will resume shortly. Pardon the interruption. We are experiencing a technical difficulty. Please remain on the line, and we will restart shortly. Once again, we are experiencing a technical difficulty. Please remain on the line, and we will resume shortly. Once again, we are experiencing a technical difficulty. Please remain on the line, and we will restart shortly. Once again, we are experiencing a technical difficulty. Please remain on the line, and we will resume your program shortly.
Anil Singhal: Hello? Gonna rejoin.
Operator: Thank you for standing by. Your program will now resume. Mr. Dressel, go ahead.
Scott Dressel: My apologies for the interruption. We had some technical difficulties. Anil, we'll continue where you left off.
Anil Singhal: I think I left off when I started talking about ENGAGE, so I'll start from there. We started by talking about ENGAGE 26. Our theme moving from proactive to predictive spoke to how our customers are advancing beyond monitoring to detect issues earlier, predict outcomes more accurately, gain greater insight, and automate more decisions. Our AI-ready Smart Data, our values, and our customer focus provide the trusted foundation for that shift. With more than four decades of experience adapting to each era of technological change, expanding our purpose and innovation solutions, we are built to help our customer as their AI strategies evolve.
Turning to customer wins, we saw continued demand across both Service Assurance and Network Observability and cybersecurity offerings. New and existing customers invested in new solutions, upgrades, and maintenance services. Second quarter highlights included wins from two longstanding customers. We secured a high seven-figure win with a leading U.S. financial institution to build out our new infrastructure to support customer-facing networks, as well as upgrade internal unified communication and network performance capabilities. The repeat business underscores the strength of our relationship and our mission-critical role ensuring the performance and resilience of its digital environment, including large multi-cluster Kubernetes deployments.
We also won a low seven-figure order with a leading global service provider that relies on our hardware products to deliver managed DDoS service to its own customers. The customer purchased our Adaptive DDoS Protection solution, which leverages our ATLAS Intelligence Feed to combat the increasing frequency and complexity of DDoS attacks, including outbound and carpet-bombing attacks, as it adapts to a rapidly expanding threat environment. With that, let's move to slide eight and review our outlook. We remain focused on profitable growth, healthy free cash flow generation, and long-term shareholder value. Based on our first half results, we are reaffirming our full year 2027 outlook. Customers remain disciplined in their spending, and we are managing the business accordingly.
At the same time, we see meaningful long-term opportunity in Network Observability, AIOps, and DDoS attack protection. We'll keep investing in innovation, including using our data and intelligence to power AI-driven workflows that enhance resilience and service reliability for our customers. We look forward to sharing our progress with you throughout the remainder of the fiscal year. Before I turn the call over to Tony, I want to briefly address a leadership change we recently disclosed. Sanjay Munshi resigned as Chief Operating Officer effective October 22. We thank Sanjay for his contribution to NetScout and wish him well. Our experienced leadership team knows our business, customers, and partners, and members of the team have assumed additional responsibilities.
We remain focused on executing our strategy, serving our customers, and delivering on our fiscal 2027 priorities. With that, I will turn the call over to Tony for a review of our financial performance and our outlook.
Tony Piazza: Thank you, Anil, and good morning, everyone. We appreciate you joining us. I'll start by walking you through the key financial metrics for the second quarter and first half of fiscal year 2027. After that, I'll share some additional commentary on our full fiscal year 2027 outlook, including some color on our expectations for the third quarter. 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 number 10 details the results for the second quarter and first half of fiscal year 2027. Focusing on the quarterly performance, total revenue increased to $222.2 million compared with $219 million in the same period last fiscal year. As a reminder, these results reflect the timing of government-related orders that were received earlier than anticipated and benefited the first quarter. Product revenue was $89.9 million, down 5.1%, reflecting the timing of government-related orders as mentioned. Service revenue was $132.3 million, up 6.4%. We ended the second quarter with total product backlog of approximately $21 million, which included $15 million of fulfillable backlog.
The gross profit margin was 80.9% compared with 81.4% in the prior year period, reflecting overhead costs associated with the DDoS asset acquisition. Quarterly operating expenses were $116.9 million, down 2.7% year-over-year. As we noted last quarter, the comparison benefited from our ENGAGE User Summit shifting from the second quarter last year to the third quarter this year, along with continued cost discipline. Operating margin was 28.3% compared with 26.5% in the same quarter last year. We delivered net income of $52.8 million, or diluted earnings per share of $0.71, compared with net income of $45.1 million, or $0.62 per diluted share in the year-ago quarter.
The first half of fiscal year 2027, total revenue was $432.6 million, an increase of 6.6%, and diluted earnings per share was $1.23, compared to $0.95 for the corresponding period last fiscal year. Let's turn to slide 11, where I will 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 2027, Service Assurance revenue increased by 8.2%, and cybersecurity revenue grew by 3.8%. During the same period, Service Assurance accounted for approximately 66% of our total revenue, and cybersecurity accounted for the remaining 34%.
As Anil noted, beginning in fiscal year 2028, we will report Service Assurance as Network Observability. Turning to our customer verticals, for the first half of fiscal year 2027, enterprise revenue grew 9.1%, while service provider revenue grew 2.8%. During the same period, enterprise accounted for approximately 62% of our total revenue, and service provider accounted for the remaining 38%. Additionally, no one customer accounted for more than 10% of our revenue for the second quarter or the first half of fiscal year 2027.
Turning to slide 12, for the first half of fiscal year 2027, 57% of our revenue was generated from the U.S., with the remaining 43% coming from international markets, which is consistent with the prior year period. Slide 13 shows key balance sheet items and free cash flow for the period. We ended the second quarter of fiscal year 2027 with $571.3 million in cash equivalents, and short and long-term marketable securities, compared with $705.1 million at the end of fiscal year 2026. Free cash flow was a use of $17.8 million for the second quarter, driven by the timing of working capital.
We repurchased approximately 2 million shares of our common stock for approximately $77 million during the second quarter. 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 2027. From a debt perspective, we have no outstanding balance on our $600 million revolving credit facility, which expires in October 2029. Let's move to slide 14 for our fiscal year 2027 outlook and some additional color on the third quarter. As Anil Singhal noted, we are reaffirming the fiscal year 2027 outlook we provided last quarter.
We continue to expect year-over-year growth in both revenue and earnings, with the following assumptions for the full fiscal year. Revenue in the range of $885 million-$915 million. Non-GAAP EPS in the range of $2.65-$2.80. A non-GAAP effective tax rate of approximately 20%, and weighted average diluted shares outstanding of approximately 74 million to 75 million. Next, let me provide some color on our third quarter outlook. As a reminder, last year's third quarter included approximately $15 million of revenue from orders that customers pulled forward from the fourth quarter, which makes for a tougher comparison.
Based on our current pipeline and the expected timing of customers' projects and orders, we expect third quarter revenue in the range of $240 million-$250 million. Excluding the $15 million pulled forward last year, that would imply growth in the low to mid-single digits. As mentioned earlier, third quarter operating expenses will also include the cost of our ENGAGE User Summit, which shifted from the second quarter last year to the third quarter this year. As a result, we expect third quarter non-GAAP diluted earnings per share for Q3 in the range of $0.90-$0.95. In summary, we continue to execute on our plan and remain focused on achieving our fiscal year 2027 objectives.
Our capital allocation priorities remain consistent, investing in profitable growth, maintaining a strong financial position, and returning excess capital to shareholders over time, primarily through share repurchases. We believe NetScout is well-positioned to support customers as their network security and operations environments become more complex. Our expertise in network observability and cybersecurity, together with our AI-ready Smart Data platform, gives customers a trusted foundation for digital transformation and AI-enabled operations. That concludes my formal review of our financial results and outlook. Before we transition to Q&A, please note that our upcoming investor conference schedule is provided on slide 15. We will be attending the RBC and Needham investor conferences later this month, and the UBS conference in December.
We hope to see many of you there. Thanks again for joining the call. I will now turn the call over to the operator for questions. Operator?
Operator: Thank you. At this time, if you would like to ask a question, please press star one on your telephone keypad. If you wish to remove yourself from the queue, press star two. In the interest of time, we ask that you limit yourself to one question and one follow-up. We will take our first question today from Erik Suppiger with B. Riley Securities. Your line is now open.
Erik Suppiger: Yeah. Thanks for taking the call, and congrats on a good profitable quarter. First off, any comment on what federal was in the quarter? It sounds like it was continued with some strength from the last quarter. Then, can you comment in terms of what growth you are seeing out of your Smart Data product? I think you talked about that generating around $15 million last year. Any thoughts on what we might think about in terms of annualized growth in FY 2027?
Tony Piazza: Yeah, so just on the federal. So, for the first half, federal revenue generally runs in the mid to high single digits as a percentage of total revenue. So, for the first half, it is running in the, let us say, the low teens. So, it has been strong in the first half. And we have a good pipeline going into the second half of the year. The thing with federal that we always caution is that the timing and magnitude of orders can be less predictable. So, we do have a lot of good pipeline there. We are just looking at when the timing of those projects will hit in the quarters.
Anil Singhal: Maybe I could-
Tony Piazza: Did you have something else?
Anil Singhal: Yeah, I can let Erik talk about it. Last year was the early adopter theme, and a couple of large customers made most of the Smart Data consumption and Omnis revenue. This year, as we mentioned, it is a long sales cycle, but we have a dramatic increase in funnel. Sales cycles are long, so it is not clear right now, and maybe we will have something more to share towards the end of the fiscal year, how much will be the growth in that. But interest level and the traction on the funnel is just very, very impressive, and all the analysts and customers that were engaged even were very excited about this era of growth for us.
Tony Piazza: Yeah, and I think, Erik
Anil Singhal: Okay
Tony Piazza: As we talked about on a prior call, when we launched some of these Omnis AI solutions, we did it to a select customer group as pilots and kind of working through some of it. So, we recently reintroduced it to the larger group at ENGAGE, and like Anil said, there has been a lot of interest in it. But it does take a little time as customers work through their AI strategies and build it into their budgets and stuff like that.
Erik Suppiger: Okay. Since you cannot give me a growth on that, can you give us a sense on what kind of growth you are expecting out of the cyber product in FY 2027?
Tony Piazza: Yeah, I would say cyber, it will probably be in the mid-single digits for cyber. I think in the prior year, we did have some large customer refreshes that we are trying to work through right now. So, my sense is it is the mid-single digits.
Anil Singhal: For the AI product, Erik, whatever growth is there will be part of the Service Assurance. That is how we classify right now. Very good. Thank you.
Tony Piazza: Excellent. Thanks, Erik.
Operator: Thank you. Our next question comes from Sanika Merchant with RBC Capital Markets. Your line is now open.
Sanika Merchant: Hey, guys. Thanks for taking my question, and congrats on the quarter. This is Sanika on for Matt Hedberg from RBC. Could you talk a little more about the broader macroeconomic landscape and what demand trends have looked like? Thanks.
Anil Singhal: Well, I think if you are I mean, there are obviously uncertainty both in U.S. and abroad, and so those are the external factors. Service provider spending continues to be tight, and there is consolidation, continued consolidation. You saw Charter and Cox recently. Some time ago, it was Well, two, three years ago, it was Sprint and T-Mobile. There are things happening in the European front. So that continues to create some challenges. On the Middle East front, our business is definitely impacted by, in selected area of because of the war and other things there in certain countries. So that's the external view.
On the internal side, I think we can make up for this in other areas through the Smart Data platform and Omnis product, which we announced recently. But because of governance issues and lot of hardware investment in AI, there are much longer sales cycle. More impact of this will be seen in the next fiscal year, but we are very excited about the pipeline we are building and the number of customers in the pipeline in a very short time.
Tony Piazza: I think on the enterprise
Sanika Merchant: Thanks, guys.
Tony Piazza: On the enterprise, we are seeing some good demand there and good pipeline on the service provider, as Anil Singhal said, that particular market has very disciplined spending, there is consolidation and stuff like that going on. We see the timing of a lot of the projects and some of the opportunities in front of us to offset some of the stuff.
Sanika Merchant: Got it. Super helpful color. Thank you. Just looking ahead, is there a path to sustainably accelerating revenue growth into maybe the high single digits or beyond over the next two to three years as we think about new products and what the company is investing in across the business? Thanks.
Anil Singhal: I didn't-
Tony Piazza: Yeah, can you repeat the question?
Anil Singhal: Not maybe a little louder. We couldn't hear very well.
Sanika Merchant: Oh, sorry about that. Looking ahead, I was curious on what you would say the key growth drivers for upside are in the next two to three years. Is there a path to sustainably accelerating revenue growth maybe into the high single digits or beyond, especially as we think about new products and what the company has been investing in? Thanks.
Anil Singhal: Yeah, any upside is going to be directly tied to our AI solution and Omnis, and we think once the initial traction takes off, we will see that, first of all, it's a multi-year. Some of the stuff is sold as subscription, so we will be building ARR that results in more predictability and upside in the future. Also, we are not relying. One of the external factors which I forgot to mention earlier to your question of macro environment, there's a big challenge in the supply chain, because of hardware costs are going through the roof. The server prices are two or three times of where it was last year.
What is great about our AI strategy is that we need very little new hardware. It's basically like a second floor on existing building. All these factors, that lot of interest in our Smart Data pipeline build, and as well as sales cycle challenges being over in the beyond the next 6-12 months, not requiring, not dependent on supply chain issues. And a lot of the pipeline build we have, I think is the era where if there is upside, it'll be in there. But we're already. When we talk about single-digit growth, we are talking about double-digit EPS growth. So I think we are already in the class by itself if we can maintain high single-digit growth.
Tony Piazza: Yeah, I would say that the two areas are, we're optimistic about what we're seeing on the AI opportunities and the pipeline. And then also the cyber, in cybersecurity, that landscape keeps changing, and so we think there's good long-term opportunities in that particular market as well. And with regard to Anil's comment on the inventory, as you saw on our balance sheet, we did build inventory as we look to navigate this particular supply chain challenge, so
Sanika Merchant: Got it. Thanks, guys. Super helpful, and congrats again.
Anil Singhal: Thank you.
Operator: Thank you. Our next question comes from Kevin Liu with K. Liu & Company. Please go ahead.
Kevin Liu: Hi, good morning, guys. Maybe just a quick follow-up on that last comment you made, Tony. Just in terms of the inventory levels, it sounds like that is purely, kind of should address any potential supply chain challenges. Just wanted to clarify whether there was any sort of timing in there that impacted that, and whether we can consider this kind of a new normal for the amount of inventory you would like to carry going forward.
Tony Piazza: Yeah, no, I think it is a temporary increase in inventory relative to historical levels. We believe the alternative could have exposed the company significantly to greater risk, but we expect inventory levels to normalize as the secured material is consumed and the supply conditions improve.
Kevin Liu: Understood. Just wanted to double-click a little bit on the demand environment for service providers. As you look to the back half, do you think the pacing at which your pipeline can convert is fairly similar? With some of the newer use cases, whether it is fixed wireless access or enabling AI compute at the edge, just wondering whether they are talking to you about those opportunities and if you see that as incremental to your existing service provider business?
Anil Singhal: Yeah, so first thing we are doing, Kevin, is to stabilize the business, even if it is, like make it more predictable and doing some enterprise agreements and things like that. I think that even if it decrease the ASP slightly. So once we have done that, which is we are in the process of doing, which we call the strengthening the first floor and foundation of our Service Assurance business with service provider. I mean, we talked earlier about enterprise. Then we can go and layer the second floor, which doesn't require a hardware investment and is very, very attractive to people who are there. So, that is what is going to happen next year.
But right now, we are focused on stabilizing, make it more predictable, and with some kind of a multi-year agreement with many of the providers.
Kevin Liu: Understood. Thanks for taking the questions, and good luck here in the second half.
Tony Piazza: Thanks, Kevin.
Anil Singhal: Thanks.
Operator: Thank you. This does conclude today's question and answer session, as well as NetScout's second quarter fiscal year 2027 financial results conference call. Thank you for joining today. You may now disconnect.
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