NETSCOUT SYSTEMS INC (NTCT) FY 2024 MD&A

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the audited consolidated financial information and the notes thereto included in this Annual Report on Form 10-K. In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking statements that involve risks and uncertainties. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially due to competitive factors and other factors discussed in Item 1A. "Risk Factors" and elsewhere in this Annual Report. These factors may cause our actual results to differ materially from any forward-looking statement. See the section titled "Cautionary Statement Concerning Forward-Looking Statements" that appears at the beginning of this Annual Report.

Overview

We are an industry leader with nearly four decades of experience in providing service assurance and cybersecurity solutions that are based on our pioneering deep packet inspection technology at scale, which is used by many Fortune 500 companies to protect their digital business services against disruption. Service providers and enterprises, including local, state and federal government agencies, rely on our solutions to achieve the visibility and protection necessary to optimize network performance, ensure the delivery of high-quality, mission-critical applications and services, gain timely insight into the end user experience and to protect their networks from attack. With our offerings, customers can quickly, efficiently and effectively identify and resolve issues that result in downtime, interruptions to services, poor service quality or compromised data, thereby reducing meantime-to-resolution of issues and driving compelling returns on their investments in their networks and broader technology initiatives. Some of the more significant technology trends and catalysts for our business include the evolution of customers' digital transformation initiatives such as the migration to cloud environments, the rapidly evolving cybersecurity threat landscape, artificial intelligence and business analytics advancements, and the 5G technology evolution in both the service provider and enterprise customer verticals.

Our operating results are influenced by a number of factors, including, but not limited to, the mix and quantity of products and services sold, pricing, costs and availability of materials used in our products, growth in employee-related costs, including commissions, and the expansion of our operations. Factors that affect our ability to maximize our operating results include, but are not limited to, our ability to introduce and enhance existing products, the marketplace acceptance of those new or enhanced products, continued expansion into international markets, expansion into new or adjacent markets, development of strategic partnerships, competition, successful acquisition and integration efforts, and our ability to control costs and make improvements in a highly competitive industry.

Global and Macroeconomic Conditions

We continue to closely monitor current global and macroeconomic conditions, including the impacts of the ongoing war in Ukraine and hostilities in the Middle East, global geopolitical tension, stock market volatility, industry-specific capital spending trends, exchange rate fluctuations, inflation, interest rates, and the risk of a recession, including the manner and extent to which they have impacted and could continue to impact our business, customers, employees, supply chain, and distribution network. The full extent of the impacts of these global and macroeconomic conditions remain uncertain. For the fiscal year ended March 31, 2024, we observed that our cybersecurity revenue grew, likely due to heightened geopolitical tensions and the evolving cyber threat landscape, while our service assurance revenue declined, primarily related to the domestic service provider industry which is challenged by a constrained spending environment. In this environment, we continued to focus on advancing our products, expanding revenue, enhancing earnings per share, and generating free cash flow. In response to the war in Ukraine, we ceased business operations in Russia, including sales, support on existing contracts and professional services. The macroeconomic environment remains challenging with constrained customer spending and we expect this to persist into the remainder of fiscal year 2025. Although we expect our cybersecurity momentum to continue, this is likely to be offset with continued pressure on the service assurance offerings, primarily impacting our service provider customers. The enterprise vertical of service assurance is anticipated to stabilize. As a result, we have continued our efforts to manage discretionary costs and align spending with the current environment while we continue to execute on our long-term strategic plans.

Though we continue to monitor the impacts of evolving global and macroeconomic conditions on our business, we believe our current cash reserves and access to capital through our revolving credit facility leave us well-positioned to manage our business in today's environment. We expect net cash provided by operations combined with cash, cash equivalents, marketable securities and investments and borrowing availability under our revolving credit facility to provide sufficient liquidity to fund current obligations, capital spending, debt service requirements and working capital requirements over at least the next twelve months. We continue to take actions to manage costs and increase productivity throughout our company, including managing discretionary spending and hiring activities, but are continuing to invest in areas that advance our business for the future. In addition to our cash equivalents, based on covenant levels at March 31, 2024, we had an incremental $700 million available to us under our revolving credit facility.

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Results Overview

Total revenue decreased $85.1 million for the fiscal year ended March 31, 2024 as compared to total revenue for the fiscal year ended March 31, 2023 primarily due to a decrease in revenue from our service assurance offerings from both enterprise and primarily service provider customers, partially offset by an increase in revenue from our cybersecurity offerings, and an increase in service revenue from maintenance contracts and professional service contracts. The decrease in revenue from our service provider customers included lower revenue from radio frequency propagation modeling projects during the fiscal year ended March 31, 2024.

Our gross profit percentage increased by one percentage point to 77% during the fiscal year ended March 31, 2024 as compared with the fiscal year ended March 31, 2023 primarily due to product mix with less revenue during the fiscal year ended March 31, 2024 from radio frequency propagation modeling projects, which have lower margins, as well as lower incentive compensation expense.

Net loss for the fiscal year ended March 31, 2024 was $147.7 million, as compared with net income for the fiscal year ended March 31, 2023 of $59.6 million, a decrease in net income (loss) of $207.3 million. The decrease in net income (loss) was primarily due to a $217.3 million goodwill impairment charge, an $85.1 million decrease in revenue, a $1.4 million increase in contractor fees, a $1.3 million increase in travel expense, and a $1.0 million increase in accounting related expenses. These decreases in net income (loss) were partially offset by a $23.7 million decrease in costs to deliver radio frequency propagation modeling projects, a $17.1 million decrease in employee-related expenses associated with a decrease in variable incentive compensation, a $7.9 million decrease in amortization expense, a $7.2 million increase in the fair value of an equity investment, a $6.0 million decrease in legal fees mainly due to a favorable decision related to the Packet Intelligence LLC appeal, a $5.5 million decrease in expenses related to trade shows, user conferences and other events, a $5.5 million decrease in income tax expense, a $4.7 million increase in interest income, a $3.8 million gain on the divestiture of the Test Optimization business, a $3.4 million decrease in advertising expense, a $2.8 million decrease from depreciation expense, a $1.8 million decrease in restructuring expense, a $1.7 million decrease in recruiting expenses, a $1.6 million decrease in commissions expense, a $1.6 million decrease in interest expense, a $1.3 million decrease in direct material costs, and a $1.1 million decrease in business taxes.

At March 31, 2024, we had cash, cash equivalents, and marketable securities and investments (current and non-current) of $424.1 million. This represents a decrease of $3.8 million compared to the fiscal year ended March 31, 2023. This decrease was primarily due to $50.0 million used to repurchase shares of our common stock, $19.4 million used for tax withholdings on restricted stock units, and $6.3 million used for capital expenditures. These decreases were partially offset by $58.8 million of net cash provided by operating activities, and $7.8 million in proceeds from the divestiture of the Test Optimization business during the fiscal year ended March 31, 2024.

Use of Non-GAAP Financial Measures

We supplement the United States generally accepted accounting principles (GAAP) financial measures we report in quarterly and annual earnings announcements, investor presentations and other investor communications by reporting the following non-GAAP measures: non-GAAP gross profit, non-GAAP income from operations, non-GAAP net income, non-GAAP net income per share (diluted) and non-GAAP earnings before interest and other expense, income taxes, depreciation, and amortization (EBITDA) from operations. Non-GAAP gross profit removes expenses related to the amortization of acquired intangible assets, share-based compensation expense, and acquisition-related depreciation expense. Non-GAAP income from operations removes the aforementioned adjustments and also removes business development and integration expense, compensation for post-combination services, legal (benefit) expense related to civil judgments, goodwill impairment charges, gain on the divestiture of a business, restructuring charges, and transitional service agreement expenses. Non-GAAP net income removes the foregoing adjustments related to non-GAAP income from operations, and also removes loss on extinguishment of debt, change in fair value of contingent consideration, and change in the fair value of derivative instrument, net of related income tax effects. Non-GAAP EBITDA from operations removes the aforementioned items related to non-GAAP income from operations and also removes non-acquisition related depreciation expense.

These non-GAAP measures are not in accordance with GAAP, should not be considered an alternative for measures prepared in accordance with GAAP (revenue, gross profit, operating margin, net income and diluted net income per share), and may have limitations because they do not reflect all our results of operations as determined in accordance with GAAP. These non-GAAP measures should only be used to evaluate our results of operations in conjunction with the corresponding GAAP measures. The presentation of non-GAAP information is not meant to be considered superior to, in isolation from, or as a substitute for results prepared in accordance with GAAP.

Management believes these non-GAAP financial measures will enhance the reader's overall understanding of our current financial performance and our prospects for the future by providing a higher degree of transparency for certain financial

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measures and providing a level of disclosure that helps investors understand how we plan and measure our business. We believe that providing these non-GAAP measures affords investors a view of our operating results that may be more easily compared to peer companies and also enables investors to consider our operating results on both a GAAP and non-GAAP basis during and following the integration period of our acquisitions. Presenting the GAAP measures on their own may not be indicative of our core operating results. Furthermore, management believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures provides useful information to management and investors regarding present and future business trends relating to our financial condition and results of operations.

The following table reconciles gross profit, income (loss) from operations, net income (loss) and net income (loss) per share on a GAAP and non-GAAP basis for the fiscal years ended March 31, 2024, 2023 and 2022, respectively (dollars in thousands, except for per share data):

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Critical Accounting Policies and Estimates

We consider accounting policies and estimates related to revenue recognition, and valuation of goodwill, intangible assets and other acquisition and divestiture accounting items to be critical in fully understanding and evaluating our financial results. We apply significant judgment and create estimates when applying these policies.

Revenue Recognition

We exercise judgment and use estimates in connection with determining the amounts of product and service revenues to be recognized in each accounting period.

We derive revenues primarily from the sale of network management tools and cybersecurity solutions for service provider and enterprise customers, which include hardware, software, and service offerings. Our product sales consist of software only offerings and offerings which include hardware appliances with embedded software that are essential to providing customers the intended functionality of the solutions.

We account for revenue once a legally enforceable contract with a customer has been approved by the parties and the related promises to transfer products or services have been identified. A contract is defined by us as an arrangement with commercial substance identifying payment terms, each party's rights and obligations regarding the products or services to be transferred and the amount we deem probable of collection. Customer contracts may include promises to transfer multiple products and services to a customer. Determining whether the products and services are considered distinct performance obligations that should be accounted for separately or as one combined performance obligation may require significant judgment. Revenue is recognized when control of the products or services are transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for products and services.

Product revenue is typically recognized upon fulfillment, provided a legally enforceable contract exists, control has passed to the customer, and in the case of software products, when the customer has the rights and ability to access the software, and collection of the related receivable is probable. If any significant obligations to the customer remain post-delivery, typically involving obligations relating to installation and acceptance by the customer, revenue recognition is deferred until such obligations have been fulfilled. Our service offerings include installation, integration, extended warranty and maintenance services, post-contract customer support, stand-ready software-as-a-service (SAAS) and other professional services including consulting and training. We generally provide software and/or hardware support as part of product sales. Revenue related to the initial bundled software and hardware support is recognized ratably over the support period. In addition, customers can elect to purchase extended support agreements for periods after the initial software/hardware warranty expiration. Support services generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates, bug fixes and hardware repair and replacement. Consulting services are recognized upon delivery or completion of performance depending on the terms of the underlying contract. Reimbursements of out-of-pocket expenditures incurred in connection with providing consulting services are included in services revenue, with the offsetting expense recorded in cost of service revenue. Training services include on-site and classroom training. Training revenues are recognized upon delivery of the training.

Generally, our contracts are accounted for individually. However, when contracts are closely interrelated and dependent on each other, it may be necessary to account for two or more contracts as one to reflect the substance of the group of contracts.

Bundled arrangements are concurrent customer purchases of a combination of our product and service offerings that may be delivered at various points in time. We allocate the transaction price among the performance obligations in an amount that

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depicts the relative standalone selling prices (SSP) of each obligation. Judgment is required to determine the SSP for each distinct performance obligation. We use a range of amounts to estimate SSP for each of the products and services sold, based primarily on the performance obligation's historical pricing. We also consider our overall pricing objectives and practices across different sales channels and geographies, and market conditions. Generally, we have established SSP for a majority of our service performance obligations based on historical standalone sales. In certain instances, we have established SSP for services based upon an estimate of profitability and the underlying cost to fulfill those services. SSP has primarily been established for product performance obligations as the average or median selling price the performance obligation was recently sold for, whether sold alone or sold as part of a bundle transaction. We review sales of the product performance obligations on a quarterly basis and update, when appropriate, SSP for such performance obligations to ensure that it reflects recent pricing experience. Our products are distributed through our direct sales force and indirect distribution channels through alliances with resellers and distributors. Revenue arrangements with resellers and distributors are recognized on a sell-in basis; that is, when control of the product transfers to the reseller or distributor. We record consideration given to a customer as a reduction of revenue to the extent we have recorded revenue from the customer. With limited exceptions, our return policy does not allow product returns for a refund. Returns have been insignificant to date. In addition, we have a history of successfully collecting receivables from our resellers and distributors.

Valuation of Goodwill, Intangible Assets and Other Acquisition and Divestiture Accounting Items

We amortize acquired definite-lived intangible assets over their estimated useful lives. Goodwill is not amortized but subject to annual impairment tests; more frequently if events or circumstances occur (a "triggering event") that would indicate the fair value of our reporting unit is below its carrying value. We perform the assessment annually during the fourth quarter and on an interim basis if potential impairment indicators arise.

Reporting units are determined based on the components of a company's operating segments that constitute a business for which financial information is available and for which operating results are regularly reviewed by segment management. We have one reporting unit.

To test impairment, we first assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the intangible asset is impaired. If based on our qualitative assessment it is more likely than not that the fair value of the intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if we conclude otherwise, quantitative impairment testing is not required.

The acquisition method of accounting requires an estimate of the fair value of the assets and liabilities acquired as part of these transactions. In order to estimate the fair value of acquired intangible assets, we use either an income, market or cost method approach. The contingent purchase consideration represents amounts deposited into escrow accounts, which were established to cover damages we may have suffered related to any liabilities that we did not agree to assume or as a result of the breach of representations and warranties of the sellers as described in the acquisition agreements. We did not complete any acquisitions and completed one divestiture during the three years ended March 31, 2024.

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Comparison of Years Ended March 31, 2024 and 2023

The sections that follow discuss our consolidated statement of operations data for the fiscal years ended March 31, 2024 and March 31, 2023 including results as a percentage of revenue for those periods. For a discussion of (i) our consolidated statement of operations data for the fiscal year ended March 31, 2022 including results as a percentage of revenue for that period, as well as (ii) our liquidity and capital resources for the fiscal year ended March 31, 2022, see "Comparison of Years Ended March 31, 2023 and 2022" and "Liquidity and Capital Resources" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, filed with the SEC on May 16, 2023 (our 2023 Annual Report).

Results of Operations

Revenue

Product revenue consists of sales of our hardware products and licensing of our software products. Service revenue consists of customer support agreements, consulting, training and stand-ready software as a service offerings. During the fiscal year ended March 31, 2024, no direct customer or indirect channel partner accounted for more than 10% of our total revenue. During the fiscal year ended March 31, 2023, one direct customer, Verizon, accounted for more than 10% of our total revenue, while no indirect channel partners accounted for more than 10% of our total revenue.

Product. The 20%, or $90.3 million, decrease in product revenue compared with the same period last year was due to a decrease in revenue from service assurance offerings from both service provider and enterprise customers, including radio frequency propagation modeling projects, as a result of industry-specific capital spending constraints. This decrease in revenue was partially offset by an increase in revenue from cybersecurity offerings from both service provider and enterprise customers.

Service. The 1%, or $5.3 million, increase in service revenue compared with the same period last year was primarily due to an increase in revenue from maintenance contracts and professional service contracts.

Total revenue by geography was as follows:

United States revenue decreased 19%, or $113.1 million, compared with the same period last year primarily due to a decrease in revenue from service assurance offerings from both enterprise and service provider customers, including radio frequency propagation modeling projects. International revenue increased 8%, or $28.1 million, compared to the same period last year primarily driven by higher revenue from both enterprise and service provider customers from cybersecurity offerings.

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Total revenue by product line was as follows:

The 18%, or $121.1 million, decrease in revenue from the service assurance product line included a decrease in revenue from radio frequency propagation modeling projects from service provider customers as well as industry-specific capital spending constraints among both service provider and enterprise customers. The 15%, or $36.0 million, increase in revenue from the cybersecurity product line was due to an increase in revenue from service provider and enterprise customers.

Cost of Revenue and Gross Profit

Cost of product revenue consists primarily of material components, personnel expenses, packaging materials, overhead and amortization of acquired developed technology. Cost of service revenue consists primarily of personnel, material, overhead and support costs.

Product. The 32%, or $30.8 million, decrease in cost of product revenue for the fiscal year ended March 31, 2024 compared to the same period last year was primarily due to a $23.7 million decrease in costs related to the delivery of radio frequency propagation modeling projects, a $2.8. million decrease in the amortization of intangible assets, a $1.6 million decrease in employee-related costs associated with the timing of certain projects, a $1.3 million decrease in direct material costs, and a $0.8 million decrease in obsolescence charges. The product gross profit percentage increased by three percentage points to 82% during the fiscal year ended March 31, 2024 as compared to the same period in the prior year. The 17%, or $59.5 million, decrease in product gross profit, corresponds with the 20%, or $90.3 million, decrease in product revenue, partially offset by the 32%, or $30.8 million, decrease in cost of product revenue.

Service. The 4%, or $4.9 million, decrease in cost of service revenue for the fiscal year ended March 31, 2024 compared to the same period last year was primarily due to a $5.4 million decrease in employee-related expenses largely due to a decrease in variable incentive compensation partially offset by an increase in employee-related costs associated with the timing of certain projects. This decrease was partially offset by a $1.4 million increase in cost of materials used to support customers under service contracts. The service gross profit percentage increased by two percentage points to 74% during the fiscal year ended March 31, 2024 compared to the same period in the prior year. The 3%, or $10.1 million, increase in service gross profit

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corresponds with the 1%, or $5.3 million, increase in service revenue and the 4%, or $4.9 million, decrease in cost of services revenue.

Gross profit. Our gross profit decreased 7%, or $49.4 million, for the fiscal year ended March 31, 2024 compared to the same period last year. This decrease is attributable to the 9%, or $85.1 million, decrease in revenue, partially offset by the 16%, or $35.7 million, decrease in cost of revenue. The gross profit percentage increased by one percentage point to 77% during the fiscal year ended March 31, 2024 compared to the same period in the prior year.

Operating Expenses

Research and development. Research and development expenses consist primarily of personnel expenses, fees for outside consultants, overhead and related expenses associated with the development of new products and the enhancement of existing products.

The 8%, or $15.0 million, decrease in research and development expenses for the fiscal year ended March 31, 2024 compared to the same period last year was primarily due to an $11.5 million decrease in employee-related costs due to a decrease in variable incentive compensation, a $1.6 million decrease in contractor fees, and a $1.6 million decrease in depreciation expense. These decreases were partially offset by a $0.7 million increase in rent and other facilities related expense.

Sales and marketing. Sales and marketing expenses consist primarily of personnel expenses and commissions, overhead and other expenses associated with selling activities and marketing programs such as trade shows, seminars, advertising, and new product launch activities.

The 2%, or $5.9 million, decrease in total sales and marketing expenses for the fiscal year ended March 31, 2024 compared to the same period last year was primarily due to a $5.5 million decrease in expenses related to trade shows, user conferences and other events, a $3.4 million decrease in advertising expense, a $1.6 million decrease in commissions expense, a $0.8 million decrease in recruitment expense, and a $0.5 million decrease in other marketing related expenses. These decreases were partially offset by a $4.0 million increase in employee-related expenses largely due to an increase in variable incentive compensation as well as an increase in headcount, and a $1.8 million increase in travel expense.

General and administrative. General and administrative expenses consist primarily of personnel expenses for executive, financial, legal, and human resource employees, overhead, and other corporate expenditures.

The 7%, or $7.6 million, decrease in general and administrative expenses for the fiscal year ended March 31, 2024 compared to the same period last year was primarily due to a $6.0 million decrease in legal-related expenses mainly due to a favorable decision related to the Packet Intelligence LLC appeal, a $1.6 million decrease in employee-related costs largely due to a decrease in variable incentive compensation, a $1.3 million decrease in business taxes, and a $0.8 million decrease in depreciation expense. These decreases were partially offset by a $1.7 million increase in contractor fees, and a $1.0 million increase in accounting related expenses.

Amortization of acquired intangible assets. Amortization of acquired intangible assets consists primarily of amortization of customer relationships, definite-lived trademark and trade names, and leasehold interests related to our acquisition of

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Danaher Corporation's communication business (Comms Transaction), Network General Corporation, Avvasi Incorporated and Efflux Systems, Inc.

The 9%, or $5.1 million, decrease in amortization of acquired intangible assets for the fiscal year ended March 31, 2024 compared to the fiscal year ended March 31, 2023 was primarily due to a decrease in the amortization of intangible assets acquired as part of the Comms Transaction and the Network General Corporation transaction.

Restructuring charges. During the fiscal year ended March 31, 2023, we restructured certain departments to better align functions. As a result of the restructuring program, we recorded $1.9 million of restructuring charges related to one-time employee-related termination benefits for the employees that were notified of their termination during the period. The one-time termination benefits were paid in full during the fiscal year ended March 31, 2023.

Goodwill impairment. During the fiscal year ended March 31, 2024, we recorded $217.3 million in goodwill impairment charges. As a result of a sustained decline in our stock price and overall market capitalization during the third quarter of fiscal year 2024, along with other qualitative considerations including the continued impact from the macroeconomic environment, we determined a triggering event occurred, indicating goodwill may be impaired. Accordingly, we performed a quantitative impairment test of goodwill at December 31, 2023. We estimated the implied fair value of our reporting unit using a market approach. As a result of the quantitative impairment test, we determined goodwill was impaired and recorded a goodwill impairment charge of $167.1 million during the third quarter of fiscal year 2024. During the fourth quarter of fiscal year 2024, we performed our annual goodwill impairment test as of January 31, 2024, again using a quantitative assessment and estimated the implied fair value of our reporting unit using a market approach. As a result of the quantitative impairment test, we determined goodwill was further impaired and recorded an impairment charge of $50.2 million during the fourth quarter of fiscal year 2024. The additional impairment charge recorded in the fourth quarter of fiscal year 2024 was primarily due to a decrease in our stock price from December 31, 2023 to January 31, 2024 and an increase in the forecasted interest rate, which impacted our weighted-average cost of capital. At March 31, 2024, we performed a triggering event assessment and concluded no events or circumstances occurred that indicated goodwill was further impaired. During fiscal year 2023, our annual impairment tests was completed as of January 31, 2023 using the qualitative assessment, which indicated that goodwill was not impaired.

The key assumption in the market approach utilized in fiscal year 2024 to determine the fair value of the reporting unit in our quantitative goodwill impairment assessment was the company-specific control premium, which was estimated using expected synergies that would be realized by a hypothetical buyer. We also compared the implied control premium to recent control premiums paid in the industry, as evidenced by guideline public company comparable transactions. This information corroborated that the company-specific control premium was within the range of premiums for other companies operating in the industry. Changes in the estimates or assumptions used in its quantitative impairment test could materially affect the determination of fair value and the associated goodwill impairment assessment. Potential events and circumstances that could have an adverse impact on our estimates and assumptions include, but are not limited to, continued increases in costs, and rising interest rates and other macroeconomic factors. An increase or decrease of 1% in the company-specific control premium used in the determination of the fair value of the reporting unit under the market approach at December 31, 2023 and January 31, 2024 would have resulted in an increase or decrease in the goodwill impairment recorded of approximately $15.6 million and $15.3 million, respectively.

We will continue to monitor relevant facts and circumstances, including future changes in our stock price. We may be required to record additional goodwill impairment charges. While management cannot predict if or when additional goodwill impairments may occur, future goodwill impairments could have material adverse effects on our results of operations and financial condition.

Gain on Divestiture of a Business. During the fiscal year ended March 31, 2024, we recorded a $3.8 million gain on the divestiture of the Test Optimization business.

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Interest and Other Income (Expense), Net

Interest and other income (expense), net includes interest earned on our cash, cash equivalents and marketable securities, interest expense and other non-operating gains or losses.

The 157%, or $14.6 million, change in interest and other income (expense), net was primarily due to a $7.2 million increase in the fair value of the equity investment in Napatech A/S (Napatech), a $4.7 million increase in interest income, and a $1.6 million decrease in interest expense due to debt repayments on the credit facility in March 2023, partially offset by an increase in the average interest rate on the credit facility during the fiscal year ended March 31, 2024 when compared to the fiscal year ended March 31, 2023. In addition, there was a $0.9 million decrease in foreign exchange expense, and a $0.5 million increase in other income.

Income Tax Expense

In 2021, the Organization for Economic Co-operation and Development announced an Inclusive Framework on Base Erosion and Profit Shifting including Pillar Two Model Rules defining the global minimum tax, which calls for the taxation of large multinational corporations at a minimum rate of 15%. Subsequently multiple sets of administrative guidance have been issued. Many non-US tax jurisdictions have either recently enacted legislation to adopt certain components of the Pillar Two Model Rules beginning in 2024 with the adoption of additional components in later years or announced their plans to enact legislation in future years. Considering we do not have material operations in jurisdictions with tax rates lower than the Pillar Two minimum, these rules are not expected to materially increase our global tax costs. There remains uncertainty as to the final Pillar Two model rules. We are continuing to evaluate the impacts of enacted legislation and pending legislation to enact Pillar Two Model Rules in the non-US tax jurisdictions we operate in.

The annual effective tax rate for the fiscal year ended March 31, 2024 was 2.2%, compared to an annual effective tax rate of 12.8% for the fiscal year ended March 31, 2023. The effective tax rate for the fiscal year ended March 31, 2024 is lower than the effective rate for the fiscal year ended March 31, 2023, primarily due to a discrete benefit related to the finalization of our tax return filings and a significant nondeductible goodwill impairment charge.

Commitment and Contingencies

We account for claims and contingencies in accordance with authoritative guidance that requires us to record an estimated loss from a claim or loss contingency when information available prior to issuance of our consolidated financial statements indicates that it is probable that a liability has been incurred at the date of the consolidated financial statements and the amount of the loss can be reasonably estimated. If we determine that it is reasonably possible, but not probable, that an asset has been impaired or a liability has been incurred, or if the amount of a probable loss cannot be reasonably estimated, then, in accordance with the authoritative guidance, we disclose the amount or range of estimated loss if the amount or range of estimated loss is material. Accounting for claims and contingencies requires us to use our judgment. We consult with legal counsel on those issues related to litigation and seek input from other experts and advisors with respect to matters in the ordinary course of business.

Legal - From time to time, we are subject to legal proceedings and claims in the ordinary course of business. In the opinion of management, the amount of ultimate expense with respect to any current legal proceedings and claims, if determined adversely, will not have a material adverse effect on our financial condition, results of operations or cash flows.

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As previously disclosed, in March 2016, Packet Intelligence LLC (Packet Intelligence or Plaintiff) filed a Complaint against NetScout and two subsidiary entities in the United States District Court for the Eastern District of Texas asserting infringement of five United States patents. Plaintiff's Complaint alleged that legacy Tektronix GeoProbe products, including the G10 and GeoBlade products, infringed these patents. NetScout filed an Answer denying Plaintiff's allegations and asserting that Plaintiff's patents were, among other things, invalid, not infringed, and unenforceable due to inequitable conduct. In October 2017, a jury rendered a verdict finding in favor of the Plaintiff and that Plaintiff was entitled to $3.5 million for pre-suit damages and $2.3 million for post-suit damages. In September 2018, the Court entered judgment and "enhanced" the jury verdict in the amount of $2.8 million as a result of a jury finding. The judgment also awarded pre- and post-judgment interest, and a running royalty on the G10 and GeoBlade products until the expiration of the patents at issue, the last date being June 2022. Following the entry of final judgment, NetScout appealed, and in July 2020, the Court of Appeals for the Federal Circuit (Federal Circuit) issued a decision vacating the $3.5 million pre-suit damages award, affirming the $2.3 million post-suit damages award, vacating the $2.8 million enhancement award, and remanding to the district court to determine what, if any, enhancement should be awarded. In March 2021, NetScout filed a petition for a writ of certiorari to the United States Supreme Court, which was denied, challenging, among other issues, the basis for enhanced damages and the patentability of the claimed technology. On September 8 and 9, 2021, in proceedings initiated by third parties that did not involve NetScout, the Patent Trial and Appeal Board (PTAB) invalidated all the patent claims that were also asserted against NetScout in this case. After the PTAB decisions were issued, NetScout moved, among other things, to dismiss the case and enter judgment in its favor on the grounds that the PTAB decisions invalidating the asserted claims precluded Plaintiff from continuing to assert its patent infringement causes of action and from seeking damages from NetScout. The District Court denied NetScout’s motion with respect to its request to dismiss the case and enter judgment in its favor. The District Court entered an amended final judgment awarding Plaintiff $2.3 million in post-suit damages, $1.1 million in enhanced damages, pre- and post-judgment interest, and a running royalty on the G10 and GeoBlade products until the expiration of the patents at issue, the last expiration date being June 2022. On July 20, 2022, NetScout filed a notice of appeal to the Federal Circuit from, among other things, the amended final judgment. On May 2, 2024, in a separate action the Federal Circuit affirmed the PTAB decisions, which as a result found that all of the patent claims asserted by Packet Intelligence against NetScout were invalid. Also on May 2, 2024, the Federal Circuit ruled in NetScout's favor in its appeal, vacating the District Court's final judgment and remanding the case to the District Court to dismiss the case against NetScout as moot. In view of the current circumstances, NetScout has concluded that the risk of loss associated with damages that may result from this case is remote. As a result, we recorded a $4.6 million reduction in contingent liabilities and legal fees during the year ended March 31, 2024.

Warranty and Indemnification- We warrant that our software and hardware products will substantially conform to the documentation accompanying such products on their original date of shipment. For software, which also includes firmware, the standard warranty commences upon shipment and generally expires 60 to 90 days thereafter. With regard to hardware, the standard warranty commences upon shipment and generally expires 60 days to 12 months thereafter. Additionally, this warranty is subject to various exclusions which include, but are not limited to, non-conformance resulting from modifications made to the software or hardware by a party other than NetScout; customers' failure to follow our installation, operation or maintenance instructions; and events outside of our reasonable control. We also warrant that all support services will be performed in a good and workmanlike manner. We believe that our product and support service warranties are consistent with commonly accepted industry standards. Warranty cost information is presented and no material warranty costs are accrued since service revenue associated with warranty is deferred at the time of sale and recognized ratably over the warranty period.

Contracts that we enter into in the ordinary course of business may contain standard indemnification provisions. Pursuant to these agreements, we may agree to defend third party claims brought against a partner or direct customer claiming infringement of such third party’s (i) U.S. patent and/or European Union (EU), or other selected countries' patents, (ii) Berne convention member country copyright, and/or (iii) U.S., EU, and/or other selected countries’ trademark or intellectual property rights. Moreover, this indemnity may require us to pay any damages awarded against the partner or direct customer in such type of lawsuit as well as reimburse the partner or direct customer for reasonable attorney's fees incurred by them from the lawsuit.

We may also agree from time to time to provide other forms of indemnification to partners or direct customers, such as indemnification that would obligate us to defend and pay any damages awarded to a third party against a partner or direct customer based on a lawsuit alleging that such third party has suffered personal injury or tangible property damage legally determined to have been caused by negligently designed or manufactured products.

We have agreed to indemnify our directors and officers and our subsidiaries' directors and officers if they are made a party or are threatened to be made a party to any proceeding (other than an action by or in the right of NetScout) by reason of the fact that the indemnified are agents of NetScout. The indemnity is for any and all expenses and liabilities of any type (including but not limited to, judgments, fines and amounts paid in settlement) reasonably incurred by the directors or officers in connection with the investigation, defense, settlement or appeal of such proceeding, provided they acted in good faith.

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Liquidity and Capital Resources

Cash, cash equivalents and marketable securities and investments consisted of the following (in thousands):

Cash, cash equivalents, marketable securities and investments

At March 31, 2024, cash, cash equivalents, marketable securities and investments (current and non-current) totaled $424.1 million. This represents a decrease of $3.8 million from $427.9 million at March 31, 2023. This decrease was primarily due to $50.0 million used to repurchase shares of our common stock, $19.4 million used for tax withholdings on restricted stock units, and $6.3 million used for capital expenditures. These decreases were partially offset by $58.5 million of net cash provided by operating activities, and $7.8 million in proceeds from the divestiture of the Test Optimization business during the fiscal year ended March 31, 2024.

At March 31, 2024, cash, short-term and long-term marketable securities in the United States was approximately $254.6 million, while cash and short-term investments held outside of the United States was approximately $169.5 million.

Cash and cash equivalents were impacted by the following:

Net cash from operating activities

Fiscal year 2024 compared to fiscal year 2023

Net cash provided by operating activities was $58.8 million during the fiscal year ended March 31, 2024, compared to $156.7 million of net cash provided by operating activities during the fiscal year ended March 31, 2023. This $97.9 million decrease was due in part to a $207.4 million decrease from the change in net income (loss), a $53.3 million decrease from accounts receivable and unbilled costs, a $45.8 million decrease from accrued compensation and other expenses, a $10.9 million decrease from depreciation and amortization, a $10.9 million decrease from prepaid expenses and other assets, an $8.4 million decrease from inventories, a $5.5 million decrease in other gains related to the change in the fair value of an equity investment, a $3.8 million decrease from the gain on the divestiture of the Test Optimization business, a $3.8 million decrease from income taxes payable, and a $1.6 million decrease from the change in fair value of a derivative instrument. These decreases were partially offset by a $217.3 million goodwill impairment charge, a $15.4 million increase from deferred revenue, an $8.8 million increase from share-based compensation, an $8.1 million increase from deferred income taxes, and a $3.7 million increase from accounts payable during the fiscal year ended March 31, 2024 as compared with the fiscal year ended March 31, 2023. Accounts receivable days sales outstanding was 81 days at March 31, 2024 compared to 58 days at March 31, 2023.

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Net cash from investing activities

Net cash provided by investing activities decreased by $1.9 million to $13.4 million during the fiscal year ended March 31, 2024, compared to $15.3 million of net cash provided by investing activities during the fiscal year ended March 31, 2023.

Net cash inflows relating to the purchase and sales of marketable securities and investments decreased $14.0 million relating to the amount of investments held at each respective balance sheet date, from an inflow of $25.9 million during the fiscal year ended March 31, 2023 to an inflow of $12.0 million during the fiscal year ended March 31, 2024. The overall net decrease in cash inflow was due in part to the settlement of the forward purchase contract with Napatech in exchange for approximately 6.2 million shares of Napatech's common stock valued at $6.2 million in April 2023.

There was a $7.8 million increase in proceeds from the divestiture of the Test Optimization business during the fiscal year ended March 31, 2024.

Our investments in property and equipment consist primarily of computer equipment, demonstration units, office equipment and facility improvements. We plan to continue to invest in capital expenditures to support our infrastructure in our fiscal year 2025.

Net cash from financing activities

Net cash used in financing activities decreased $350.0 million to $69.4 million during the fiscal year ended March 31, 2024, compared to $419.4 million of net cash used in financing activities during the fiscal year ended March 31, 2023.

During the fiscal year ended March 31, 2024, we repurchased a total of 1,209,153 shares for $33.6 million in the open market under our twenty-five million share repurchase program authorized in 2017 (2017 Share Repurchase Program), and 614,516 shares for $16.4 million in the open market under the 2022 Share Repurchase Program. During the fiscal year ended March 31, 2023, we repurchased 4,549,329 shares of our common stock under an ASR program for $150.0 million. Purchases during the fiscal year ended March 31, 2023 were under the 2017 Share Repurchase Program.

In connection with the delivery of common shares upon vesting of restricted stock units, we have withheld 653,645 shares for $19.4 million, and 562,360 shares for $19.4 million related to minimum statutory tax withholding requirements on these restricted stock units during the fiscal years ended March 31, 2024 and 2023, respectively. These withholding transactions do not fall under the repurchase program described above, and therefore do not reduce the amount that is available for repurchase under that program.

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During the fiscal year ended March 31, 2023, we repaid $250.0 million of borrowings under the Second Amended and Restated Credit Agreement.

Sources of Cash and Cash Requirements

Credit Facility

On July 27, 2021, we amended and extended our existing credit facility (as amended, the Second Amended and Restated Credit Agreement) with a syndicate of lenders by and among: the Company; JPMorgan Chase Bank, N.A. (JPMorgan), as administrative agent and collateral agent; JPMorgan, Wells Fargo Securities, LLC, BofA Securities Inc., RBC Capital Markets, PNC Capital Markets LLC and Mizuho Bank, Ltd., as joint lead arrangers and joint bookrunners; Santander Bank, N.A., U.S. Bank National Association, Fifth Third Bank National Association, Silicon Valley Bank and TD Bank, N.A., as co-documentation agents; and the lenders party thereto.

The Second Amended and Restated Credit Agreement provides for a five-year, $800.0 million senior secured revolving credit facility, including a letter of credit sub-facility of up to $75.0 million. We may elect to use the credit facility for general corporate purposes (including to finance the repurchase of shares of our common stock). The commitments under the Second Amended and Restated Credit Agreement will expire on July 27, 2026, and any outstanding loans will be due on that date. During the fiscal year ended March 31, 2023, we repaid $250.0 million of borrowings under the Second Amended and Restated Credit Agreement. At March 31, 2024, $100 million was outstanding under the Second Amended and Restated Credit Agreement. On May 13, 2024, we repaid $25.0 million of borrowings under the Second Amended and Restated Credit Agreement.

On February 22, 2023, we entered into a First Amendment Agreement (First Amendment) of our Second Amended and Restated Credit Agreement with a syndicate of lenders. We entered into the First Amendment in order to remove and replace the LIBOR-based interest rate benchmark provisions for U.S. dollar-denominated loans with interest rate benchmark provisions for U.S. dollar-denominated loans based on a term secured overnight financing rate (SOFR).

The First Amendment provides that U.S. dollar-denominated advances under the Second Amended and Restated Credit Agreement will bear interest at a term SOFR rate plus a credit spread adjustment of 0.10% or an Alternate Base Rate (defined in a customary manner), at the option of NetScout, plus a margin that ranges from 1.00% per annum for Alternate Base Rate loans and 2.00% per annum for term SOFR loans if our consolidated gross leverage ratio is greater than 3.50 to 1.00, down to 0% per annum for Alternate Base Rate loans and 1.00% per annum for term SOFR loans if our consolidated gross leverage ratio is equal to or less than 1.50 to 1.00. For the period from the delivery of our financial statements for the quarter ended December 31, 2023, until we have delivered financial statements for the quarter ended March 31, 2024, the applicable margin will be 1.00% per annum for Term Benchmark Revolving loans and 0% per annum for Alternate Base Rate loans, and thereafter the applicable margin will vary depending on our consolidated gross leverage ratio, ranging from 1.00% per annum for Alternate Base Rate loans and 2.00% per annum for Term Benchmark Revolving loans if our consolidated gross leverage ratio is greater than 3.50 to 1.00, down to 0% per annum for Alternate Base Rate loans and 1.00% per annum for Term Benchmark Revolving loans if our consolidated gross leverage ratio is equal to or less than 1.50 to 1.00.

Our consolidated gross leverage ratio is the ratio of our consolidated total debt compared to our consolidated EBITDA as defined in the Second Amended and Restated Credit Agreement (adjusted consolidated EBITDA). Adjusted consolidated EBITDA includes certain adjustments, including, without limitation, adjustments relating to extraordinary, unusual or non-recurring charges, certain restructuring charges, non-cash charges, certain transaction costs and expenses and certain pro forma adjustments in connection with material acquisitions and dispositions, all as set forth in detail in the Second Amended and Restated Credit Agreement.

Commitment fees will accrue on the daily unused amount of the credit facility. For the period from the delivery of our financial statements for the quarter ended December 31, 2023, until we have delivered financial statements for the quarter ended March 31, 2024, the commitment fee will be 0.15% per annum, and thereafter the commitment fee will vary depending on our consolidated gross leverage ratio, ranging from 0.30% per annum if our consolidated gross leverage ratio is greater than 2.75 to 1.00, down to 0.15% per annum if our consolidated gross leverage ratio is equal to or less than 1.50 to 1.00.

Letter of credit participation fees are payable to each lender providing the letter of credit sub-facility on the amount of such lender's letter of credit exposure, during the period from the closing date of the Second Amended and Restated Credit Agreement to, but excluding, the date which is the later of (i) the date on which such lender's commitment terminates or (ii) the date on which such lender ceases to have any letter of credit exposure, at a rate per annum equal to the applicable margin for term SOFR loans assuming such loans were outstanding during the period. Additionally, we will pay a fronting fee to each issuing bank in amounts to be agreed to between us and the applicable issuing bank.

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Interest on Alternate Base Rate loans is payable at the end of each calendar quarter. Interest on term SOFR loans is payable at the end of each interest rate period or at the end of each three-month interval within an interest rate period if the period is longer than three months. We may also prepay loans under the Second Amended and Restated Credit Agreement at any time, without penalty, subject to certain notice requirements.

The loans and other obligations under the credit facility are (a) guaranteed by each of our wholly-owned material domestic restricted subsidiaries, subject to certain exceptions, and (b) are secured by substantially all of the assets of us and the subsidiary guarantors, including a pledge of all the capital stock of material subsidiaries held directly by us and the subsidiary guarantors (which pledge, in the case of any foreign subsidiary, is limited to 65% of the voting stock), subject to certain customary exceptions and limitations. The Second Amended and Restated Credit Agreement generally prohibits any other liens on the assets of NetScout and our restricted subsidiaries, subject to certain exceptions as described in the Second Amended and Restated Credit Agreement.

The Second Amended and Restated Credit Agreement contains certain covenants applicable to us and our restricted subsidiaries, including, without limitation, limitations on additional indebtedness, liens, various fundamental changes, dividends and distributions, investments (including acquisitions), transactions with affiliates, asset sales, including sale-leaseback transactions, speculative hedge agreements, payment of junior financing, changes in business and other limitations customary in senior secured credit facilities. The Second Amended and Restated Credit Agreement requires us to maintain a certain consolidated net leverage ratio and removes the previous requirement under our previous amended credit agreement that we maintain a minimum consolidated interest coverage ratio. Our consolidated net leverage ratio is the ratio of our Consolidated Total Debt minus the lesser of unrestricted cash and 125% of adjusted consolidated EBITDA compared to our adjusted consolidated EBITDA. Our maximum consolidated net leverage ratio is 4.00 to 1.00. These covenants and limitations are more fully described in the Second Amended and Restated Credit Agreement. At March 31, 2024, we were in compliance with all covenants, including the specified total consolidated net leverage ratio range of 4.00 to 1.00.

The Second Amended and Restated Credit Agreement provides that events of default will exist in certain circumstances, including failure to make payment of principal or interest on the loans when required, failure to perform certain obligations under the Second Amended and Restated Credit Agreement and related documents including a failure to meet the maximum total consolidated net leverage ratio covenant, defaults under certain other indebtedness, certain insolvency events, certain events arising under ERISA, a change of control and certain other events. Upon an event of default, the administrative agent with the consent of, or at the request of, the holders of more than 50% in principal amount of the loans and commitments, may terminate the commitments and accelerate the maturity of the loans and enforce certain other remedies under the Second Amended and Restated Credit Agreement and the other loan documents.

We had unamortized capitalized debt issuance costs, net of $2.6 million at March 31, 2024, which are being amortized over the life of the revolving credit facility. The unamortized capitalized debt issuance costs balance of $1.1 million was included as prepaid expenses and other current assets and a balance of $1.5 million was included as other assets in our consolidated balance sheet at March 31, 2024.

Contractual Obligations

Our contractual obligations at March 31, 2024 consisted mainly of (i) principal and interest related to our long-term debt obligations (see Long-Term Debt, Note 12 to the Consolidated Financial Statements), (ii) operating lease obligations (see Leases, Note 18 to the Consolidated Financial Statements), (iii) unconditional purchase obligations, primarily under purchase orders to purchase inventory as well as commitments for products and services used in the normal course of business (see Commitments and Contingencies, Note 19 to the Consolidated Financial Statements), and (iv) pension benefit plan (see Pension Benefit Plans, Note 16 to the Consolidated Financial Statements).

At March 31, 2024, the total accrual of our retirement obligation for our chairman and CEO was $1.1 million. The payment stream for this retirement obligation is based upon the retirement date which is currently not determinable.

At March 31, 2024, the total amount of net unrecognized tax benefits for uncertain tax positions and the accrual for the related interest was $1.2 million. We are unable to make a reliable estimate when cash settlement, if any, will occur with a tax authority as the timing of examinations and ultimate resolution of those examinations is uncertain.

Cash Requirements

We are actively managing the business to generate cash flow and believe that we currently have adequate liquidity. We believe that these factors will allow us to meet our anticipated funding requirements.

We expect net cash provided by operating activities combined with cash, cash equivalents, marketable securities and investments and borrowing availability under our revolving credit facility will provide sufficient liquidity to fund current obligations, capital spending, debt service requirements and working capital requirement over at least the next twelve months.

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We believe we will meet longer-term expected future cash requirements and obligations through a combination of cash flows from operating activities, available cash balances, and our revolving credit facility. However, macroeconomic conditions, including high inflation and interest rates, and a potential recession, could increase our anticipated funding requirements or make it more difficult for us to access capital.

A portion of our cash may be used to acquire or invest in complementary businesses or products, to obtain the right to use complementary technologies, to repay borrowings under our Second Amended and Restated Credit Agreement, or to repurchase shares of our common stock through our stock repurchase programs. From time to time, in the ordinary course of business, we evaluate potential acquisitions of such businesses, products or technologies. If our existing sources of liquidity are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities. Macroeconomic conditions, including high interest rates and volatility in the capital markets, may make it difficult for us to secure additional financing on favorable terms or at all. Any sale of additional equity or debt securities could result in additional dilution to our stockholders.

Recent Accounting Standards

For information with respect to recent accounting pronouncements on our consolidated financial statements, See Note 2 contained in the "Notes to Consolidated Financial Statements" included in Part IV of this Annual Report on Form 10-K.

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