Every month, I will profile a supplier which is either outperforming peers in a respective market segment, or carving out a niche in a new high growth market.
NetScout Systems, Inc. (NASDAQ:NTCT) is a supplier of passive network probe technology to CSPs and enterprise companies. NetScout has been growing much faster than its peers and posted double-digit growth this past year. In 2014, CSPs accounted for 45% of its sales in the first six months. Revenue for the first six months was $211.5 Million. My estimate for growth in the overall passive network probe market was 7% in 2014. Netscout’s ability to outgrow its peers is a result of strong demand from communication service providers (CSPs) for its nGenius products to support mobile broadband technology.
I have been following NetScout for 15 years and have seen a dramatic transformation of the company that supplied DS3 and ATM OC3 probes to mostly Fortune 500 companies at the start of 2000. Since then, NetScout has acquired small technology focused suppliers such as Psytechnics and Accanto, and larger well established firms, most notably, Network General.
The pending acquisition of the Danaher assets which includes Tektronix Communications, Fluke Networks, and Arbor Networks changes the supplier landscape and will vault Netscout into the leading service assurance supplier globally. Assuming the deal is completed in mid 2015, it raises questions on how the company will be structured and which products will be supported in the future.
The size and scale of the Danaher businesses will require a lot of time and attention from the NetScout senior leadership team to assess the target company’s management team and understand the capabilities of the diverse portfolio. A key outstanding question for me is; “Will the Danaher companies operate independently or will they eventually be incorporated into NetScout?” All other NetScout acquisitions to date have been integrated into the company. If NetScout plans to eventually integrate the Danaher companies, it will take at least two years to complete the restructuring effort. In the first year, I would expect each operating entity to maintain autonomy until a plan has been established. During the second year, a restructuring of the new company will be necessary to align Netscout to focus on high growth segments. At this point, NetScout will need to shed non-core assets and boost investments in higher growth areas of the business.
Arbor Networks brings a strong domain expertise in the security threat detection market and proven Distributed Denial of Security products deployed at tier 1 CSPs including AT&T, Verizon, DT, and NTT. The Arbor solutions expand the NetScout product arsenal. NetScout also gains entry into the threat detection market which will remain strong for the foreseeable future.
Fluke Networks is mostly a handheld business, which one could argue, is non-core to Netscout -why would Netscout want to compete in a lower margin business where Fluke is not in a leading position?
Tektronix Communications strengthens NetScout’s reach into the top tier CSP market and provides excellent cross selling operations across IT and operation groups inside existing CSP accounts. Most of Netscouts growth has come from CSPs in the mobile segment of the market which deployed nGenius in the data center. Tektronix Communication has a larger business in the CSP segment and a large part of the revenue mix is comprised in the core network. Tektronix Geoprobe is widely deployed in the signaling network at many large Tier 1 CSPs, both mobile and fixed. Tektronix Communications portfolio certainly needs to be pruned – and it’s long overdue. Of all three assets under the Danaher umbrella, the Tektronix pairing will solidify Netscout’s dominance in the passive probe market. The next closest competitor JDSU is a distant second.
The ability of NetScout to remain focused on its IP probe business; support the demands of Tektronix Communications large existing install base; and transition the company to future markets in the NFV, 5G, VoLTE, and video based services; will require the NetScout leadership team to shuttle some assets quickly and prioritize R&D investments. I would argue that Fluke Networks is not essential to NetScout’s vision and should therefore be sold off, pending close of the deal. The entire portfolio of products needs to be evaluated. Some of the products that have been sustained have not achieved success in the market. The most lackluster products within the Tektronix portfolio that have underperformed include Iris and touchpoint. The risk for NetScout is not moving quickly enough to rationalized the portfolio and restructure the company. The interim period will create doubt in the customer base and open up opportunities for NetScout competitors.
For more insight contact me at Patrick.firstname.lastname@example.org