Netscout Systems Inc (NTCT) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to NetScout's First Quarter Fiscal Year 2009 Operating Results Conference Call. (OPERATOR INSTRUCTIONS.) As a reminder, this conference call is being recorded.

With us today is NetScout's President and CEO, Mr. Anil Singhal. He is accompanied by NetScout's Chief Financial Officer, Mr. David Sommers. Also with Mr. Singhal is NetScout's Director of Investor Relations, Ms. Cathy Taylor.

At this time, I will turn the call over to Ms. Taylor to provide the opening remarks. Ms. Taylor, please proceed.

Thank you, and good afternoon, everyone. Welcome to NetScout's First Quarter Fiscal Year 2009 Conference Call for the period ended June 30. In terms of the format of this call, Anil will begin with an overview of our financial and operating results, and David will follow with a review of our financial results and company performance in greater detail. At the conclusion, there will be opportunity for questions and answers.

Before we begin, let me remind you that during the course of this conference call, we will be providing you with a discussion of the factors we currently anticipate that may influence our results going forward. Such statements are forward-looking statements made pursuant to the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934 and other federal securities laws. These forward-looking statements may involve judgment and that individual judgments may vary. Forward-looking statements include expressed or implied statements regarding future economic and market conditions, our guidance for fiscal year 2009 and our product integration plan. Actual results could differ materially from the forward-looking statements. Risks and uncertainties which could cause actual results to differ include the company's revenues, profitability and growth, and delivery and market acceptance of NetScout products. It should be clearly understood that the projections on which we base our guidance and our perception of the factors influencing those projections are highly likely to change over time. Although those projections and the factors influencing them will likely change, we will not necessarily inform you when they do. Our company policy is to provide guidance only at certain points in the year, such as during the quarterly earnings calls. We do not plan to otherwise update that guidance. Actual results may differ materially from what we say today, and no one should assume later in the quarter that the comments we make today are still valid. For further discussion of the risks and uncertainties that could cause our projections not to be achieved include the specific risks and uncertainties that are discussed in NetScout's Form 10-K for the year ended March 31, 2008 on file with the Securities and Exchange Commission.

And now I will now turn the call back over to Anil Singhal, our Chief Executive Officer.

Thank you, Cathy. We are happy to be reporting another strong quarter and we have started our new fiscal year on already solid footing with good revenue growth and strong profitability.

Following the merger with Network General, this is our second full quarter of combined financial results.

GAAP revenue was $60.6 million, more than doubling last year's first quarter. Non-GAAP revenue was $65.4 million, up under 34% year-over-year. Non-GAAP revenue excludes the effect of purchase accounting adjustment representing the fair value of Network General's deferred revenue.

The GAAP profit for the quarter was $1.5 million, our earnings per diluted share of $0.04. On a non-GAAP basis, net income was $6.6 million, or $0.16 per diluted share. Non-GAAP net income excludes share-based compensation expenses, amortization of acquired intangible assets and integration expenses and related income tax adjustments.

Both our GAAP and non-GAAP profitability was stronger than expected because the (inaudible) costs and expenses principally associated with the integration of the sales force and manufacturing operations. David will go through the details of our expense picture later, but we do not expect these expenses -- expense [underrun] to continue in future quarters as we continue to invest to drive the growth of our business.

Overall, we are quite pleased with these results, as our first fiscal quarter is typically seasonally slow. In addition, we completed the first full quarter of fully integrating the two sales forces without a major impact on order flow. We saw heavy order flow coming from the high-end vertical markets, which are telecommunications, government and, more importantly, financial services. These good results are encouraging despite the challenging economic environment and particularly the slowdown in the financial services sector that we hear about on a daily basis. We have not yet seen any significant cutbacks in spending for (inaudible) products, we believe, because of the high order -- high value our customers derive from our integrated packet/flow-based product solutions.

Nevertheless, we remain cautious about the potential impact on IT spending in the near term resulting from the uncertain economic outlook in the financial services, in particular. Accordingly, we are (inaudible) our previous full-year revenue guidance. However, we are raising our full-year EPS target by $0.05 due to the strong profitability in Q1.

The integration of our two companies has proceeded smoothly and is now essentially behind us. We have successfully combined organizations, including all internal systems and business processes, and we have completed consolidation of our manufacturing operations ahead of schedule. At the beginning of the first quarter, we integrated the two sales forces, which was the last major step in the integration process, without major disruption. Our product integration plan is on schedule, including the release of our first integrated product in the second quarter, and the availability of the fully-integrated solution later in the year. This is the fulfillment of the investment protection promise that we made to our customers after the merger.

Looking ahead, we are focused on taking advantage of the market opportunities which lay ahead by expanding our solutions to address other areas of IT management, which include expanded offerings for some of our vertical markets, as well as extending our value proposition to other areas of IT operations.

Our packet/flow-based solutions have become the mainstay for managing and organizing networks, and we are confident about our position as a market leader in the ever-increasingly important network management space.

With that, I would like to turn the call over to David.

Thank you, Anil.

Our quarterly financial results are in the financial statements, which are part of our earnings release.

We are reporting our results on a GAAP basis, as well as on a non-GAAP basis. To summarize, we've removed the GAAP purchase accounting effects of the merger with Network General by adding back revenue related to deferred revenue revaluation, and we've removed the cost and expense of various acquisition-related items.

In addition, we've removed the GAAP effects of stock-based compensation, which significantly increased as a result of the acquisition.

I will give you the specifics about the difference between our GAAP and non-GAAP earnings as I discuss our results.

The adjustments to GAAP revenue, cost and expense are disclosed in a reconciliation table in the financial tables attached to the press release. We believe these adjusted financial measures will enhance your overall understanding of our current financial performance and our prospects for the future. We use these adjusted financial measures internally for the purpose of analyzing, managing and forecasting our business.

Our first quarter GAAP revenue of $60.6 million is up 117% year-over-year and up 5% sequentially, resulting from organic growth and the second full quarter of financial results following the merger with Network General. Non-GAAP revenue was $65.4 million, up 134% year-over-year and up 2% sequentially. Non-GAAP revenue excludes a $4.8 million purchase accounting adjustment to record at fair value the acquired Network General deferred revenue.

Product revenue on a GAAP basis was $34.9 million, up 99% year-over-year and up 4% sequentially. Service revenue on a GAAP basis was $25.7 million, up 147% year-over-year and an increase of 7% sequentially.

First quarter results from a year ago do not include contributions from Network General's business and are not, therefore, fully comparable to the current first quarter.

GAAP net income for the quarter was $1.5 million, or earnings per diluted share of $0.04. GAAP income from operations was $4.0 million. On a non-GAAP basis, net income was $6.6 million, or $0.16 per diluted share.

The following items totaling $8.3 million are adjustments to arrive at non-GAAP net income as a calculation. The purchase accounting adjustment to record at fair value the acquired Network General deferred revenue of $4.8 million was added back to GAAP revenue. Amortization of acquired intangible assets of $1.5 million, which was principally from the Network General acquisition, was removed from GAAP cost and expense. Non-recurring integration expense of $124,000 million was removed from GAAP expenses, as was share-based compensation of $1.2 million.

To calculate non-GAAP net income, we used the statutory rate of 38% to tax effect the $8.3 million total non-GAAP adjustment amount, removing $3.2 million from non-GAAP net income. These adjustments are summarized in the reconciliation table included with the press release.

The provision from income taxes represents an effective tax rate of 34% on a GAAP basis and 37% on a non-GAAP basis. The non-GAAP tax expense rate is calculated by taking the previously-calculated GAAP rate of 34% and tax effecting the non-GAAP adjustments at the statutory 38% rate, resulting in an overall non-GAAP rate of 37%.

Our GAAP gross profit for the quarter was $45.3 million. GAAP gross margin was 75% in the quarter. On a non-GAAP basis, gross profit was $51.4 million, and non-GAAP gross margin was 79%. Gross margin was up from the prior quarter because of the lower content of lower margin legacy Network General products, and because we achieved some of the cost improvement potential from the integration of manufacturing operations in Q1.

We made the following adjustments to non-GAAP gross profit -- $4.8 million was added back from revenue; we removed $66,000 of share-based compensation expense; $1 million of amortization of acquired intangible assets; and $240,000 of non-recurring integration expenses.

GAAP income from operations was $4 million. Non-GAAP income from operations was $12.3 million.

We made the same $8.3 million adjustment to reach non-GAAP income from operations that I described above.

Now turning to key balance sheet measures. Cash and short-term marketable securities were -- I'm sorry -- short and long-term marketable securities were $109.8 million, up from $100.9 million in the previous quarter. The increase is due to strong cash collections from the high proportion of product shipments early in the quarter. Our long-term marketable securities include investments and auction rate securities valued at $31.8 million. As of June 30, 2008, the value of these securities includes a temporary decline in value of $1.7 million below par to reflect liquidity concerns. We've classified these securities as long-term on our balance sheet and recorded the temporary decline in value to accumulated other comprehensive income and loss on the balance sheet.

Accounts receivable, net of allowances, were $26 million, compared to $32 million last quarter. Days sales outstanding were 39 days for the quarter based on GAAP revenue. This is down from 52 days in the prior quarter. Using non-GAAP revenue, DSO were 36 days. Our DSO of 36 days is the result of strong collections during the quarter and seasonally low maintenance renewals.

Inventories were $12.6 million, up from $12.1 million in the prior quarter. Inventory levels continue to include the cost of product in deferred revenue.

Operationally, the insourcing of Network General's manufacturing and NetScout's facility in Westford has gone smoothly without any major impact to inventory.

Turning to other metrics. Revenue contribution from direct customers was 43%. Reseller revenue was 57%. Revenue from international sales was 24% of total, down from 32% last quarter. Europe, Middle East and Africa were 11 points, Asia at 7 points of the total. Americas outside of the U.S. was 6 points. The main drivers of international business outside the U.S., as before, are wireless service providers and financial services sectors.

Summarizing our large deals for the quarter, 116 customers gave us orders over $100,000, including 22 customers with orders over $500,000 and 5 orders over $1 million. Two of the million-dollar orders came from investment banks, two from the government and one from a wireless service provider.

In our verticals market this quarter, we had strong bookings coming from the financial services sector, with 28% of dollar order volume. Government sector was up with 22% and telecommunications was 13%. Medical sector was 9% and high-tech followed with 6%.

Now to guidance. As Anil mentioned earlier, we are reaffirming our revenue outlook for the 2009 fiscal year. The guidance remains unchanged from last quarter. Our revenue guidance for fiscal 2009 recognizes the challenging economic environment and its potential impact on IT spending, and the introduction of new integrated products to the market in the upcoming quarters. We recognize these changes could cause business disruption, and we are taking into account a normal customer lag in new product adoption as we make these product transitions.

For the fiscal year 2009, we expect GAAP revenue to be in the range of $250 million to $260 million and non-GAAP revenue to be in the range of $260 million to $270 million. We are raising our GAAP and non-GAAP earnings per diluted share range by $0.05. During the first quarter, profitability was stronger than expected due to cost and expense underruns, principally associated with the integration of the sales forces and manufacturing operations, as previously mentioned. GAAP net income per diluted share guidance is $0.13 to $0.23. Non-GAAP earnings per share -- per diluted share guidance is $0.55 to $0.65. The fiscal year 2009 non-GAAP revenue and net income per share estimates exclude a purchase accounting adjustment to fair value of approximately $11.5 million of Network General's deferred revenue and include amortization of acquired intangible assets of approximately $6 million, integration expenses of approximately $1.7 million and share-based compensation expenses of approximately $4.8 million.

That concludes our financial discussion this afternoon. Thank you for joining, and we look forward to taking your questions.

Christy, would you go ahead please?

Thank you. (OPERATOR INSTRUCTIONS.) Your first question comes from Jonathan Ruykhaver with ThinkPanmure.

Hello. Congratulations on the quarter.

Thank you.

Thank you.

Can you give an update on the plan for the rollout of the integrated products and what is shipped to date and what's on the horizon?

We are shipping the standard product from both the companies right now with the promise of the free upgrade in the next quarter, with the full set of integration and -- actually, some time this quarter, and then the next quarter with the fully-integrated set. So basically, anybody who is basically signed up for maintenance has a software upgrade because they are buying the support contract is eligible for that combined integrated solution.

Okay. So that's regardless of how old the product is that they're paying the maintenance on?

Yes. Basically, that was part of the promise we made at the time of selling that --

Right.

That basically, that's part of the roadmap we will be providing the integrated solution and -- which will have the combined functionality of the two products so they can continue buying other products.

Let me just clarify, if I may. That's part of our standard practice with our maintenance agreements, to provide that sort of software upgrade. We're continuing that practice and as we go through and develop the integrated products.

Okay. I guess when you look at the integrated product that's going to begin shipping then, how do you manage and take into account when you give guidance for the pause that might occur as customers -- new customers -- hold off purchase today in the expectation of the newer integrated products?

Well, first of all, the new integration is like new features which are ongoing every year, and so people don't hold off purchases generally because they're -- unless they need that one feature (inaudible), and some of those things could happen, but we had a fairly robust set of features in each of the products already, and instead of buying those features in two separate products, now you'll be able to use it in one product. So we have really not seen any big pause in spending as a result of this because they're getting more than what they expected when they bought it.

Right. Okay. And on a separate topic, you've talked about what you see as an opportunity in the merging wireless market, and you've mentioned Sprint and initiatives on the part of Sprint around WiMax. Who else is out there on the mobile network side that you might be active with, and where do you think that vertical could go over time as a percent of sales?

I think it's going to be over and over the next couple of years -- it could be a very big push and our (inaudible) vertical could be as big as financial. We don't know for sure, but in terms of the customers, we have all the top providers in the U.S. and almost all the major ones in Europe and Asia doing some form of business with us. How big the penetration is going to be in the coming years -- that remains to be seen. But we have been talking to almost all the major players internationally, as well as in U.S., and working closely with them to see what they need for the future. So in terms of access to some of these people, I think it's quite good, but it remains to be seen how far we can go into those accounts moving forward.

I guess, specifically today, are you seeing actual deployments of your products for those wireless networks or is that still waiting to happen?

Yes. Everyone is -- all the people I'm talking about -- all the major carriers -- the major services providers and (inaudible) wireless service providers in U.S., as well as some of the major ones in Europe are using our product in one form or another right now.

Okay. So that's included in the carrier vertical currently then?

Yes. That's right. And (inaudible) the carrier vertical is dominated by wireless service providers.

Again, I guess in the carrier vertical, there's this architecture that's referred to as ATCA, or Advanced Telecom Computing Architecture. Is that something you need to adhere to to do business with those carriers?

No. We have some of the requirements, like DC power and all those, and yes, there are some standards, but no big requirement in terms of what we need to do or what our technology needs to do in those places. But yes, there are some compliance requirements. There is, like I said, a DC power-type requirement. But most of that has been in place in the product for quite some time. The big things are that people are moving to IMS (inaudible) for new standards for wireless service providers. We need to keep up with those features set, and that's what we are working on right now.

Right. Okay. I guess just one final question. Can you give us the total headcount for direct reps?

Total headcount is -- as of now -- is about 114.

114. And is that going to remain fairly stable for the rest of this year?

We'll be [expected] to grow that slightly --

Okay.

Over the next months and quarters.

Okay. That's all I have. And congrats again on the quarter.

Thank you.

Thank you.

Your next question comes from Eric Martinuzzi with Craig-Hallum.

I have a question about the proforma revenue growth. You commented that it was 2% sequentially. Do you have a comp for us for -- from a year ago? Sort of a -- and I know that Network General was on an off-cycle quarter, but --

Yes.

Can you just sort of ballpark it?

Revenue was up, Eric. We're not going to be reporting -- talking about the comparable, because it's so uncertain as to what that really was in the adjusting everything proforma, so we're not doing that. But it was -- I think it was up. How much up -- I'm not sure.

Okay.

Sorry I can't help you anymore.

And then as far as the one product goes, I'm very pleased to see the revenue number that you guys have posted here, but as we shift to the one product from -- the one appliance from the two appliance -- my concern is that the good growth that we're seeing here in fiscal '09 -- that that tapers off. So it's almost like we shouldn't get too aggressive with growth projections -- those of us who are responsible for sort of looking out beyond '09. What sort of -- can you give any color as to how you guys are thinking about the business in -- beyond --

Well, first of all, one appliance or two appliance has no impact on how the business is going to be in the future. In the past -- and for any given length -- our (inaudible) business is proportional to the size of the network and installation, and on any installation, either people were buying the Network General product or NetScout product. They were not -- in 90%, 95% of the cases, never buying both appliances on the same link or same network. So that number of appliances is still going to be of the same order of magnitude in terms of the requirement, and so when they're going from two appliance to one appliance, we're just telling them which one to use -- not necessarily that they would have bought two appliances. In fact, they wouldn't have bought either one because they weren't the best of the both worlds. So I believe, as a result of the combination, certainly the number is not going to come down but probably will increase because the cost of ownership is going to come down.

Okay. And then last question on the gross margins. You had a terrific quarter for gross margins. I have it at 78.6% on a non-GAAP calculation. Now given that you've integrated the manufacturing centers, does that -- is that number stable? Was there a mix issue in June that we should -- is there a reason that we shouldn't be able to project that forward?

Well, there is -- there was a mix issue I mentioned briefly. We had a very strong benefit from mix versus legacy NetGen. And we can't guarantee that that's going to continue that strong as we go forward in shipments in the near-term future. We would expect, however, that strong gross margins as we complete the -- and the financials start to show the benefit of the manufacturing integration, and as we improve the value proposition of our products, as Anil's laid out, that gross margins will be higher than we had projected previously in our model, which was 76% to 78% margin targets, and we will be taking a look at that now that we've got a good base of -- more stable base of financial performance after Q1, and talking with all of you about new financial models going forward. But I would expect that you will -- that, with some variations, you'll see gross margins in the high end of our previous range or slightly above.

Okay. Thanks.

Your next question comes from Peter Jacobson with Brean Murray.

Can you provide me with the rough breakout percentage-wise of financial services carriers and government for the quarter?

Yes. Financial services were about 28% of order flow. Carriers were -- excuse me while I find my notes here. Carriers were 22% and -- I'm sorry. Carriers were 13%. Government was 22%. Carriers were down slightly from prior quarter. There's nothing much to read into that. We comment regularly that quarter-to-quarter fluctuations are more an artifact of what deals came in in the quarter or this quarter versus last quarter than they are, in and of themselves, a trend. If you look at the trend over multiple quarters or over years, perhaps you'll see a more meaningful -- (inaudible) more meaningful statistic. But those were the numbers, Peter.

Okay. And the commentary regarding financial services -- that you haven't seen an impact but it still remains a risk. Are your customers -- are there any indications from customers that they might be more cautious in the upcoming quarters that you're specifically getting in your interaction with them, or were they more general comments based on what you see outside of your own business?

(Inaudible) they're generally more cautious and there are places where, I think, deals have been held up, but in a large number of cases where we did business, we found that people have already made the investment in the infrastructure, which is building data center, as well as Cisco and Juniper (inaudible). And they were almost obligated to make the remaining investment in management to really utilize that properly. So we are at that point on many projects and -- which are really not impacted by the slowdown.

Okay. And can you describe the Network General mix in the quarter between their legacy products and their new products and kind of how that trended in the quarter? And your comment on -- you had a mix benefit. I'm not quite sure why, if that shifted towards a higher mix of newer products -- or actually, maybe that's a clarification.

Yes. So let me --

Is the mix benefit -- are the margins higher on the legacy products or on the new products, and why would it shift back in the other direction in the future?

So our margins are higher on NetScout legacy products and on the new products that are being introduced than on the legacy Network General products. As we had mentioned in prior discussions, we have phased out some of the smaller Network general products that had lower margins, but some -- we satisfied in the quarter some customer requirements for those products. And we've also mentioned, I think, that -- you'll remember that we had pretty good visibility going into the quarter, and that meant we had some legacy from before we started with the new integrated sales force approach this quarter. We had some pent-up quarters for legacy NetGen products at lower margins. And those we fulfilled in Q1. So there was a swing toward more -- I'm sorry -- away --. Despite that, there was a swing away from the legacy NetGen products to the legacy NetScout products at higher margins, and some of the new product that we -- as we repackaged them in the quarter. So that's what caused the margin -- the mix change. Again, we terminated some old NetGen product. We fulfilled some legacy from Q4, but in general, it was more NetScout product mix in the quarter. And then, again, there was some benefit in gross margins from the improvements that we made in manufacturing by insourcing the NetGen manufacturing. I hope that helped, Peter.

Okay. Yes. And just to follow up on the dynamic at the end of last quarter where you had some shipment delays associated with getting a large number of orders, would you characterize that as giving you a significant fast start in this recent quarter? And how is it going into this current quarter as far as -- do you have a similar dynamic as far as delayed shipments that might be helpful in the current quarter?

Well, we have -- we said last quarter we had pretty good visibility -- I think very good visibility -- going into the quarter. We have good visibility going into this quarter -- this September quarter.

Similar to last quarter?

Well, the June quarter is always our weak -- seasonally weak order flow quarter. And so we expected less strength in Q1, and particularly with the anticipated newness of all the things that the NetGen sales force was going through as we integrated the sales forces, and we saw some of that weaker order flow. So not as good as before, but good.

Okay. And then finally, can you maybe characterize what you're seeing competitively lately? And also, any developments with the HP partnership?

On the HP partnership, I think we continue to see a lot of interest. There is nothing new to the quarter at this point. On the competitive front, I think we have several big players in the (inaudible) area and nothing new again, but we have not talked about it and we have not reported competitively on that because we're really going on their turf and it's sort of -- they're competing with us, in a way, because we are new in that area, but there are several -- four to five (inaudible) big players. On the enterprise side, we continue to see some competition, but typically from much smaller players and that's all baked into (inaudible) numbers.

Okay. Thanks very much.

Okay.

Thanks, Peter.

Your next question comes from the line of Manny Recarey with Kaufman Brothers.

Good afternoon and congratulations on a good quarter. Can you talk a little bit about the AMEA region? It was down sequentially fairly nicely there. Are you seeing a particular weakness there, or what kind of was driving that?

Well, Manny, we see fluctuations regularly. I think if you take a look back at our historical quarters, you'll see that and you'll notice that -- although it's hard to tell because the March quarter was our first combined quarter -- fully-combined quarter. We had unusual strengths in Europe in the March quarter, and so what happened was not so much that Europe demand declined, as we had a very, very strong close in our -- to our fiscal year in Europe in March. You probably remember that we did some things with the NetGen sales force to make that -- their final quota quarter a 5-month quarter, and that allowed a lot of sales reps to bring in business -- incented them to bring in business. And that was -- that dynamic was particularly strong in Europe, for no particular reasons having to do with the market, but more having to do with the positioning of deals and how that all worked out. So we expect Europe and international in general to grow as a proportion, and we would not say that the decline from 32% to 24% of international business -- most of which was in Europe, as you point out -- is an indicator, and I know we don't have much trend with the combined company to point to, but I think you'll see that continue to grow as a share of overall as we -- particularly as we penetrate the wireless carriers outside the U.S.

Okay. So you're not seeing any weakness as some of the other companies have reported. You're seeing -- in the month of June, they kind of saw a slowdown there in the AMEA region. You're not necessarily seeing that?

No. You shouldn't read that into the numbers. Not so that we can tell.

Okay.

No weakness that we can see.

Okay. The government, it seemed like, was up nicely, so kind of the outlook for that is continue the strong spending by the federal government?

Well, most of our government spending -- not all, but much of it -- is defense-related -- military-related. And that has continued pretty strongly. We haven't seen an impact to that. So yes, our government business is continuing to have continuing interest from -- and growing interest from -- an increasing sector of the federal government, and NetGen had a very strong presence in the federal government, so that's helped us.

Okay. Thanks.

Thank you.

Your next question comes from Alex Kurtz with Merriman.

Hi, guys. Thanks and congratulations on another good quarter. This is both to Anil and Dave. Linearity seemed pretty good in the quarter. Deferred revenues -- pretty stable. It seems, in general, that your customer base is not showing any signs of concern about spending with NetScout. I know you made some comments in your prepared remarks. Can you just give us a little more color about your conversations, especially in the month of June, with your customers and sort of what's their temperature as far as spending throughout the rest of the year, whether it's with NetScout or in general -- on technology?

I think that overall, we are not seeing -- we see cautious spending, but we are not seeing any changes -- big changes -- from what we had in March versus in June. But I think overall, what's happening to our business is we have been talking for a long time -- even prior to the merger -- the importance of what we do in terms of solving some of the most important problems. And I think more and more of those problems are getting into the mainstream. And that means many more people are having those problems and we are in the best position -- even better position to address it now with the combined technologies. And the second big factor is because of the expanded leadership position and expanded -- and the broader install base of the combined company, we just have access to more such people. And so when you look at those two factors, they basically transcend many of the other issues which we -- which other companies might be seeing. And that's why we're both confident about our guidance and our business moving forward.

Okay. Thank you. And as a follow-up on the wireless telecom vertical, it's been down as a percent of total sales, I believe, for the last couple quarters, but obviously, this is a big opportunity for you. Is that just a factor of the lumpiness in that business, and should we start to see that pick up as we go out through -- throughout fiscal '09?

Yes. I think you're going to see it up and down like that, and definitely in that area, there's a lot more lumpiness than anything else. David, I don't know whether you want to --

Yes. I think that's right. You will see big swings, depending on the size of deals and in relation to our total revenue, and sometimes deals are large. Unlike our financial services vertical where we can get significant deals, but they're typically not as large in relation to our total revenue. So when we don't have a very -- a huge deal -- huge meaning multiple millions -- from a wireless carrier in a quarter, then the number -- the percentage will be lower, and when we do, it'll jump up. And I think you'll see that volatility in that number going forward.

So moving forward, I think, looking at -- over on a yearly basis, which I know we are very early -- it would be a better indicator of the trends and the size of each vertical.

Yes.

And just as a follow-up question on your order size, it looked like you had some pretty large orders in your March quarter and then sort of declining -- deals over $100,000, $500,000, $1 million. How should we read that?

Well, I think the way to -- first of all, Q1 is always seasonally weak and, because of the dynamics that we mentioned earlier with our Q4 and special Q4 with the merger, there was a lot of draining of the big deal pipeline. Despite that, we had a good quarter in Q1. But it was, as you point out -- the big deal flow was down significantly. That's not a -- that's a seasonal issue, we believe. It's probably exacerbated by the fact that we had great incentives in place and pretty good stability in place for the sales force in the March quarter and less stability in Q1. So all of the factors sort of contributed to do that. So our large deal content of the revenue -- the order flow -- as you pointed out, is lower in Q1, but we don't expect that that's, again, a secular trend. That's a seasonal issue.

But that should pick up as we go out -- go throughout the year.

We would expect that. Yes.

Okay. And David, just a couple of follow-up questions for you. What was cash flow from operations in the quarter?

We'll get that number for you. Not on the top of my head, but hold on. I'll take the next question while we're --

And then what's the content of the auction rate securities? What do they consist of? And I'll stop there for a second.

Okay. We have six positions. I'm probably not going to list the exact positions for you here, but there are six positions ranging from about $4 million a piece to $8 million a piece in six different state agencies, all of them backed by the federal Family Loan Education Program of the federal government, and all AAA-rated student loan programs. So without going into exactly which issues we have, they're all pretty much in the same category and they're all still paying interest on the -- according to the prospectus default rates, and still -- and illiquid.

Okay. And we can get the cash flow from operations, I guess, later.

It's $11 million.

Okay. And what was CapEx in the quarter?

CapEx was $1.3 million.

Okay.

And depreciation was $1.9 million.

And just two more questions for you, Dave. Just back on this quarter about your visibility going into the March quarter was pretty strong, and I think earlier on this call, you said it was a similar type of visibility.

Yes. I said it was -- visibility going into the June quarter from March was very good. Visibility going into this quarter is a little less good.

Okay.

But still good. But still good.

Okay. And then just finally, on the margin question again, if you could just clarify. I understand there was some mix -- it seems like one-time mix shift issues. Can you just clarify that point again and how we should think about the next couple of quarters?

Yes. Okay. I'll try again. I think my last effort for Peter was a little convoluted. So we have legacy NetGen products that are at lower margin. We've discontinued some of those, although some of that shipment continued in Q1. We have, of course, the legacy NetScout products that we continue to ship. And we have repackaged the products and put out a new price list and -- with some improved margins as we did so. In this quarter, we had a higher content of the legacy NetScout products and some content of the new products and a little less of the legacy NetGen products, and that mix shift caused us to -- caused much of the margin swing. We cannot guarantee that that's going to continue going forward because there is still content of legacy NetGen products in our order flow.

So when would you expect the legacy NetGen products to exit the price list?

Well, they have already exited the price list. Customers can still get the functionality, but the new price list has sort of repackaged them. So they've exited the price list already, but they haven't exited the order flow yet. (Inaudible.)

Okay. So let me clarify. When would you expect those products to exit the order flow?

That's right. They have quotes in process and we do our best to accommodate those quotes in process and deal with that.

Okay.

So that'll take a little while -- a little long for the pig to go through that (inaudible).

Alright. Congratulations. Thank you, guys.

Thank you.

Your next question comes from Scott Zeller with Needham & Company.

My questions have been answered. Thanks.

Okay, Scott. Thanks.

Your next question comes from Sanjit Singh with Wedbush Morgan.

Hi, guys. I'm calling in on behalf of Rohit Chopra. A couple quick questions. In your script, Anil, you mentioned that you plan to extend your value proposition into other areas of IT operations. Can you maybe give us some detail on what those areas would be?

Well, I think there are -- (inaudible) specifically about which areas, but our product can be used for security folks -- by security folks. It can be used by application people. Market traders could use the information which we have. And the food service people could use our products for similar things. So we think that we'll see us sort of reaching a point where multiple audiences within the IT organization can simultaneously use the data we create (inaudible). And as it is (inaudible), I think there'll be a lot more collaboration and input on what the value we are providing, and that will allow us to be deployed in more places, and hence, more appliances and more revenue.

Got it. And then on the Riverbed alliance, could you maybe describe what opportunities you guys are seeing? Have you -- is there any maybe timing in terms of sort of sales and revenue opportunities?

I think that's too early. Right now, we are almost like in the (inaudible) stage right now. That means we have (inaudible) integration. But customers have really not started using it, so right now, we are not counting on any big opportunity in this area for quite a while.

Okay. And then finally, the mix between direct and indirect. Direct was a greater percentage quarter. Is there anything -- can you maybe describe what the drivers behind that was? I think direct was like 40 -- I think it was 43/57 this quarter.

Yes. I think direct was the lower number, right?

Right. Right.

So that's been consistent with our direct/indirect split in the past. It bounced up and down again -- sort of big deal-driven. Our legacy -- we have legacy relationships with large customers who -- some large customers who like to do business with us directly. New relationships, as we build them, typically are often through resellers. And as we -- and then as the relationships grow, we may have customers who say, "I don't want to go through a reseller anymore. I want to go through direct." So those are sort of the nature of the dynamics that we see, and in any one quarter in any one geography, you can see some of that. Our drawdown in international -- most of our international business is indirect. Obviously affected that proportion. Direct/indirect.

Thank you, guys. Good luck.

Okay. Thank you.

Your next question comes from Aron Honig with Canaccord Adams.

I just had a couple of quick questions. Are you seeing any of the sales cycles lengthening? Are you seeing any extra steps to get a deal approved?

I think we're not seeing a big change, but as I said, whenever the spending is cautious, it does delay the cycle, but we are really not seeing a big change in that either in the last few months.

We're sort of a lagging indicator of that. Have been historically because of the length of our sales cycles. So what we close in the June quarter, we really were working on last fall or before, and when something gets that close, it typically -- unless it's a real run in -- slam into the wall in terms of the customers buying, it doesn't get derailed. So we're not the best one to ask about indicators for tech spending because we tend to see it later than others do. And Anil explained some of the reasons why that is, but the sales cycle and the length of it is one of those reasons. And so we can't really tell. If you start a sales cycle now, you can't -- if it hasn't closed yet, you don't know whether it's going to be short or long. So sorry we're not much help there.

Okay. And how about with the new products coming out, where do you think your inventory levels go to? They've picked up sequentially the last few quarters. Where do you think it --

Yes. Well, part of -- in our discussion, we've pointed out that part of what's in inventory is the inventory for products that are in deferred revenue. You may remember that our deferred revenue -- product revenue, I've mentioned, jumped up over the last couple quarters because we have actually delivered product to a couple customers that we haven't recognized as revenue. When we do that, the cost of those products remains in inventory. So as we recognize the revenue on those products -- those shipments to customers -- that inventory number will come down. We also expect that that inventory number will come down. [Turns] will go up as we get through this integration period. So -- and we don't expect that there's going to be a big jump in inventory because of the product transitions, because essentially, we designed that, as Anil mentioned, so that it's basically a consolidation of product, not an expansion of product -- of platforms -- going forward. I hope that helps.

Okay. Yes, that helps. Now last question from me. You had an operating margin goal in the high teens. It looks like you hit that pretty easily this quarter. Is that -- do you have a new target goal or is it that for the whole year?

Well, we don't have a new one yet, but we don't think that margin expansion is done and we will do some work now that we have a more stable base of financial performance and understanding of the way the business is going to operate on a combined basis, and we will be talking with you more about that.

Alright. Thanks. Thanks for the questions.

Okay.

There are no further questions.

Alright. Well, thank you all very much for coming to our conference and for a very good set of questions. We look forward to talking with you again at our next quarterly conference. Good night.

Thank you. This concludes today's conference call. You may now disconnect.