Netscout Systems Inc (NTCT) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to NetScout's First Quarter Fiscal Year 2010 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; and NetScout's Chief Operating Officer, Mr. Michael Szabados. Also with Mr. Singhal is NetScout's Director of Investor Relations, Ms. Cathy Taylor.

At this time, I will now 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 2010 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 then discuss our financial results and company performance in more detail. At the conclusion, Anil and David will take your questions.

Before we begin, however, let me remind you that the course -- 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 individual judgments may vary. Forward-looking statements include expressed or implied statements regarding future economic and market conditions, our guidance for fiscal year 2010 and our new product releases. It should be clearly understood that the projections on which we base our guidance and other forward-looking statements 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 call. We do not plan to update that guidance otherwise.

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 the further discussion of the risks and uncertainties that could cause our actual results to differ, see the specific risks and uncertainties discussed in NetScout's Form 10-K for the year ended March 31, 2009 [sic] and subsequent quarterly reports on Form 10-Q on file with the Securities and Exchange Commission.

Also, in our discussion, non-GAAP revenue excludes the effect of purchase accounting adjustments representing the fair value Network General's deferred revenue, and non-GAAP net income excludes share-based compensation expenses, amortization of acquired intangible assets and related income tax adjustments.

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

Thank you, Cathy.

We are reporting our first quarter results which reflect (inaudible) effect of the economy on IT spending across most of our verticals. Despite the economy, we are executing well on cost and expense management. We have grown our non-GAAP operating margin by 2 points and grown non-GAAP EPS by 13% year over year. We expect that, in the second half of our fiscal year, the economy will improve, driving increased buying by our customers, and our quarterly revenue will return to year-over-year growth.

We are reaffirming our fiscal year 2010 guidance. For the longer term, we expect to return to annual growth in the high teens, similar to the levels we saw prior to the economic downturn.

Summarizing the quarter's results, GAAP revenue was $58.1 million, down 4% year over year and down 12% sequentially. Non-GAAP revenue was $58.7 million, down 10% year over year and down 12% sequentially.

GAAP net income for the quarter was $5.2 million, with earnings per diluted shares of $0.13, more than tripling last year's first quarter profit and EPS.

Non-GAAP net income was $7.3 million, with earnings per diluted share of $0.18.

Even though our business is impacted by the economy, we are aggressively managing cost and expense, driving a non-GAAP operating margin of 21%.

Our non-GAAP gross profit margin was strong at 81% because of our continued cost management program and improved discounting performance. Our lower overall discount level in the quarter demonstrates that our lower revenue levels are caused only by the economy and that the value proposition for our solutions remains strong despite the recession.

We are beginning to see signs of improvement in the economy and an improving pipeline. We expect top-line growth to return in the second half of this fiscal year. Our pipeline consists mainly of (inaudible) projects with existing customers that take several quarters to go from opportunity to order. Because of this, our business usually lags other companies in reacting to changes in the market demand, as we have seen over the last year. We expect that that (inaudible) will delay our return to revenue growth until IT buying has already been demonstrated elsewhere.

However, the signs that we see and our improving pipeline give us confidence that we will achieve the full-year guidance that we issued last quarter.

We remain focused on our high-growth vertical markets, which are wireless services providers, financial services and government. Over the course of the year, we will be bringing to market the results of multiple development efforts which are building specialized solutions specifically focused on the needs of wireless service providers. Wireless service providers continue to represent our largest growth opportunity. We are focusing increased resources at this segment. We'll be developing a service provider product line by the packaging of our market-leading technology and adding new service provider-focused functionality into a solution designed to compete even more strongly for this business.

That, combined with a stronger, more [carrier-focused go-to-market] plan will allow us to carriers as a major driver of our growth. We expect to (inaudible) this new product line later this fiscal year.

This quarter, government was our leading vertical, with large orders resulting from increased government spending and the 2009 stimulus package. We are increasing resources focused on the US federal government and working more closely with a broad range of partners to reach and gain more business from the rapidly-increasing federal spending.

We expect government to remain very strong for the remainder of the year.

During the quarter, we announced an existing new partnership with Cisco's Unified Wireless Network Program, based on our Sniffer global enterprise troubleshooting solution. Beginning in the fall of 2009, our Sniffer Global Network Analyzer will be integrated with Cisco's mobility services engine to more quickly identify and resolve network and service performance issues over wireless LAN networks. We'll be training Cisco resellers on Sniffer Global and introducing them to the rest of our product line.

In summary, we believe we'll see significantly increasing business in the second half of our fiscal year, and once the negative effects of the economic downturn on IT spending have subsided, we believe our growth will be even more robust.

We are confident that we'll return to the strong growth rates that we achieved prior to the recession. Our long-term [order] is targeted at returning to revenue growth in the high teens with non-GAAP operating margins in the 24% to 27% range. We'll remain the premier high-end vendor provider, providing state-of-the-art (inaudible) solutions to solve new problems for our customers on the cutting edge of the use of IP infrastructures.

I would like to now turn the call over to David.

Thanks, Anil.

Our quarterly results are in our earnings release -- earnings press release financial statements. We report our results on a non-GAAP basis as well as on a GAAP basis. Our non-GAAP results eliminate the GAAP purchase accounting effects of the acquisition of Network General by adding back revenue to deferred revenue revaluation and removing the cost and expense of various acquisition-related items.

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

I'll give you the specifics about the differences between GAAP and non-GAAP as I discuss our results.

The differences 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.

For the first quarter, GAAP revenue was $58.1 million; non-GAAP revenue $58.7 million. Non-GAAP excludes a $609,000 purchase accounting adjustment to record at fair value the acquired Network General deferred revenue.

Product revenue on both a GAAP and non-GAAP basis was $28.4 million, down 19% year over year and down 23% sequentially. Service revenue on a GAAP basis was $29.7 million, up 15% year over year and up 1% sequentially.

Non-GAAP service revenue was $30.3 million, flat year over year and up 1% sequentially.

GAAP income from operations was $8.9 million and GAAP operating margin was 15%.

GAAP net income for the quarter was $5.2 million, yielding earnings per diluted share of $0.13. The GAAP net after-tax margin was 9%.

Non-GAAP income from operations was $12.2 million and operating margin was 21%.

The following items, totaling $3.4 million, are adjustments to arrive at non-GAAP operating income. The purchase accounting adjustment to recorded at fair value the Network General deferred revenue of $609,000 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. Share-based compensation of $1.3 million was removed from GAAP expenses.

Non-GAAP net income was $7.3 million, or $0.18 per diluted share. Non-GAAP after-tax margin was 12%.

We've used the statutory tax rate of 38% to tax-effect the $3.4 million total non-GAAP adjustment amount, removing $1.3 million from GAAP tax expense. The non-GAAP adjustments to our GAAP results are summarized in that reconciliation table in our financial statements.

Provision for income taxes is recorded based on a full-year effective tax rate of 36% on both a GAAP and non-GAAP basis.

Our GAAP gross profit for the quarter was $45.9 million. GAAP gross margin was 79%. On a non-GAAP basis, gross profit was $47.6 million and non-GAAP gross margin was 81%.

We made the following adjustments to non-GAAP gross profit. The $609,000 added back to revenue. We removed $84,000 of share-based compensation expense and $995,000 of amortization of acquired intangibles. GAAP and non-GAAP gross margin were up 2 points from last quarter. Gross margin strength was due to accelerated cost improvement actions as part of our (inaudible) cost and expense management program, improved discounting performance and revenue mix.

We expect non-GAAP gross margin to remain in our long-term target range for the rest of the year.

Our long-term model is the following. Non-GAAP gross margin of 78% to 81%; R&D expense to revenue, 13% to 15%; sales and marketing expense to revenue, 33% to 35%; G&A expense to revenue, 6% to 8%, yielding an operating margin range of 24% to 27%. This model remains unchanged from our last announcement.

Our balance sheet remains strong. Cash and short-term -- short and long-term marketable securities were $141.6 million, compared to $135.9 million as of the end of the prior quarter, up $5.7 million. We had good cash growth despite the payout in the quarter of our annual employee bonus.

Long-term marketable securities include investments and auction-rate securities valued at $28.8 million. As of June 30, 2009, the value of these securities include the temporary decline in the value of $3.8 million below par to reflect liquidity concerns. All of these securities are rated -- are single-A or above rated by Standard & Poors, with underlying support by the federal government through the Federal Family Education Loan Program, and we believe they have no credit issues -- only short-term liquidity problems.

We've classified these securities as long-term on our balance sheet and recorded the temporary decline in value to accumulated other comprehensive loss on the balance sheet.

With our strong cash position and positive cash flow, the illiquidity of these securities poses no liquidity problems for us, and we believe we will achieve liquidity well before the maturity of the underlying bonds, and our temporary valuation adjustment reflects that outlook.

Because of our strong cash position and cash flow, our board has approved a reinstatement of our previously-authorized stock buyback program. Depending on market conditions, we expect the buyback to be active at times during the balance of the fiscal year. The previous buyback authorization, which remains in place, has 3.5 million shares remaining.

Accounts receivable net of allowances was $29 million, down from $39.8 million last quarter. Days sales outstanding were 44 days for the quarter based on GAAP revenue, which is within our typical DSO range of 40 to 50 days. This is down from 53 days in the prior quarter.

Using non-GAAP revenue, DSO were 43 days.

Inventories were $7.3 million, up from $6.9 million in the prior quarter. Inventory was up despite lower revenue as we prepare for a significant product transition later this year. Inventory turns were 2.5 times.

Turning to other metrics, revenue contribution from direct customers was 36%; reseller revenue $64 million. Revenue from international sales was 21% of total, down from 33% last quarter. Europe, EMEA, and Middle -- Europe, the Middle East and Africa were 9 points, down from 22 points; and Asia was 4 points of the total, up from 3 points last quarter. Other -- Americas outside the US was 8 points.

Summarizing large deals that we booked in the quarter, 102 customers gave us orders over $100,000, down from 107 in the fourth quarter; 20 customers with orders over $500,000, including 7 orders over $1 million. Three of the $1 million orders came from the government, two from financial services, one from high-tech and one from a wireless service provider.

We saw strong bookings coming from the government sector with 30% of the order volume. The financial services sector was up slightly with 25%, and the telecommunications sector was 15%. High-tech was 7% and health care followed with 6%.

As of June 30, our product backlog and product deferred revenue totaled $6 million, compared to $10 million last quarter. This quarter, we consider product backlog to be firm and the sum of product backlog and product deferred revenue to be material to the understanding of our financial results and guidance. The product backlog decline was clearly the result of weak spending -- of the weak spending environment during first quarter.

Our first fiscal quarter is typically our seasonally weakest quarter when we often see backlog decline as we have seen this year. We do not expect that our Q1 bookings level, which is affected by this seasonality, combined with the weak IT spending environment, to be indicative of our future bookings. I refer you to Anil's discussion of our view of the second half of the fiscal year and our growth target.

And now to guidance. We are reaffirming the fiscal year 2010 guidance that we gave last quarter that projects flat to down revenue with growth in net income per share through higher operating margins.

We expect GAAP revenue to be in the range of $259 million to $279 million and non-GAAP revenue to be in the range of $260 million to $280 million.

GAAP net income per diluted share is expected to be in the range of $0.60 to $0.75 and non-GAAP net income per diluted share between $0.80 and $0.95.

The fiscal year 2010 non-GAAP revenue and net income per share estimates exclude a purchase accounting adjustment to fair value of approximately $1.3 million from Network General's deferred revenue; amortization of acquired intangible assets of approximately $5.9 million; share-based compensation expense of approximately $5.6 million; plus the related impact of these adjustments on the provision for income taxes of $4.9 million.

In the event that the economy improves significantly in the second half of the year, we would expect to exceed this guidance. However, we're not basing our guidance on uncertain economic or business spending outlooks, either better or worse. It is clearly possible that economic conditions could worsen, in which case the low end of our guidance range would be more relevant.

That concludes the financial discussion this afternoon. Thank you for joining us and we look forward to taking your questions. Go ahead, Andrew.

(Operator Instructions.) And sir, your first question comes from the line of Alex Kurtz. Go ahead.

How are you guys doing?

Hi, Alex.

Hi, Alex.

I think the first question is, looking at the wireless contribution this quarter was pretty low compared to the last couple of quarters. Was there a couple of large orders that maybe got shifted out of this quarter, or can you just give us a sense of what's going on in that vertical and why the decline this quarter there?

Sure. So our wireless business is particular lumpy, and we've seen increases and decreases in it in the past. It represented, as we said, about 15% of our total business this quarter, and that's down from -- in the mid-20's in the past two quarters, but up from where it was a year ago as a percent of our business in Q1 a year ago. The real issue here is some quarters we get -- these deals come in multi-million-dollar lumps typically, and some quarters we'll get one or two multi-million-dollar orders and then, in this quarter, we didn't have a large multi-million-dollar order. We had one order in excess of $1 million from the wireless space. So that's really all there is. We do not believe that this lower content of wireless carriers is indicative of our future in the wireless business, and Anil's discussion of our new to-be-rolled-out wireless service provider initiative with a new product line and our increasing investment in that space is indicative of our confidence there.

Okay. So not a competitive loss issue during the quarter.

No.

No. In fact, our discounting levels are indicative of the fact that we didn't have price pressure -- competitive pressure.

(Inaudible) question and I'll jump back into the queue. If you look at the midpoint of your guidance for the year, you're obviously calling for a pretty steep move -- back-end-loaded kind of year, especially in Q3 and Q4, if you just sort of spread it out over sort of your typical seasonality across the four quarters. Looking into your pipeline, what gives you the confidence right now to maintain the top-line guidance considering the environment hasn't really gotten that much better for you guys right now?

Well, I'll just make a comment, Alex, and then maybe David could add something to it. Our Q3 and Q4 are usually very strong and -- compared to Q1 and Q2. And second is we are coming out with some new functionality which will be rolled out in the product line in the second half. And thirdly is we expect the economy to improve, and that's what is giving us the confidence that you see right now.

Right. The other thing is, Alex, as you know, over the last couple quarters, our backlog has been declining, and so we no longer have a substantial enough backlog to require us to ship more product than we have orders. So the seasonality that we're talking about here is more typical of our booking seasonality than perhaps you saw last year driven by higher backlog and customer satisfaction needs to ship that backlog. So -- but as Anil said, this seasonality that you're seeing implied in Q1 versus the full-year guidance is not particularly unusual for us.

Okay. I'll jump into the queue. Thanks.

Yes. Thank you.

Your next question comes from the line of Mark Kelleher. Go ahead.

Good evening. Hi, guys.

Hi, Mark.

Hello.

Can you talk about pricing strategies? You touched on your discounting strategy a minute ago. Gross margins came in very strong. How do you think about using lower pricing as a lever to drive faster top-line growth?

Well, we -- our experience has shown that we are playing at the high end of the market, and so our pricing strategy has been to play at -- in that level. And there are a lot of players who are at the low end, and we basically are going after Fortune 1000, Fortune 2000 companies. So our pricing strategy is based on going to the high end. We do have -- announced a product for the low end, but it's still going after the mid-market.

So we deal with pricing pressures where -- Mark, where customers, say, have got a -- got some problem -- budget problems, some target they need to hit with discounting. Right? So the -- and we're basically a value-based sell. We don't have exact head-to-head competition in much of our market. So lowering -- we don't believe that there's a substantial price elasticity in our market and that taking, for example, a 10% price reduction on list price would result in more than 10% increase in volumes. And that's based on our experience with discounting and how customers deal with discounts. So it's not a -- because it's really not a commodity-like market, it's -- we don't think it's amenable to that kind of elasticity management.

Okay. That's very helpful. And then just quickly, could you just touch on international? That was down. Can you just kind of give us an update on what's going on there?

Yes. So international was down mostly in Europe, and Europe is heavily driven by our wireless service provider business. And we said, as you know, that wireless service providers -- we didn't have a big order this quarter, and that's basically all it is. Europe will be back. We expect Europe to be strong again, and when we get one of those (inaudible), we'll see the European content and the telco wireless service provider content leap up.

Great. Thanks.

Andrew?

Your next question comes from Eric Martinuzzi. Go ahead.

I'm just -- I want to clear something up. In the prepared remarks and in the Q&A, Anil, you talked about your outlook being -- you seeing improvements in the economy, and then, David, in your part of the commentary was that the guidance sees no improvement. Which is it? Is -- does the guidance anticipate economic recovery or does it not?

Yes. So there's a second order effect that I was talking about, so I'm sorry you're confused. So we have expected from the beginning of giving our full-year guidance four -- as we were thinking about it four months ago -- that the economy would improve in the back end of the year. Right? That's consistent with all of the economic pundits and with what we seem to see actually happening in the marketplace one sign at a time. The -- so that's been in our guidance from the beginning. The point I was making was -- in discussing the guidance that if we see a substantial, significant upturn in the economy -- I think we're not going to see that.

We think we're not going to see a substantial upturn. It'll be a modest upturn that will help, as Anil pointed out, our seasonal -- normal seasonality that's caused by government spending in September and budget year-ends in December and our quota year-end in March. That's our normal -- those are major normal seasonal factors that drive the back three quarters, and particularly the back two quarters, of our fiscal year higher. We expect the economy -- Anil's point -- will help boost that versus where it is now. That's all in our guidance. The thing I was commenting on -- just to say it one more time -- is if it's bigger than we expect, which is modest, then we may be able to do better, but we're not putting that in our guidance. We're not expecting some major upturn in IT spending this year. Modest. I hope that helps. I know this is very --

No, that does. That clarifies it. The -- I guess then the implication here is that -- I know you're not giving quarterly guidance, but we should anticipate sequential revenue growth for Q2. Is that fair?

Well, I can't comment on Q2 for the reason you cited, but I think to Alex's question earlier, there has to be a ramp from the current run rate. You knew that before you asked the question, so I'm sorry I'm not being very discretely helpful to you. And it may start in Q2, but I can't really comment without giving guidance.

Okay. Then lastly, the buyback -- happy to see that reinstated. Is that any sort of -- are we to take anything away from that regarding your corporate development efforts? Is it to say that you're focused on acquisitions? Maybe you're not seeing things of the value in the market that you would consider a better value than your own shares?

No. You should not take that away. We do think our shares are a value at the current levels versus where we expect to be and as the business performance improves, but you should not take that away. Our priorities for acquisitions are -- for our cash use are, first, acquisitions when we find the right target that is -- will help drive our growth; second, stock buyback; and third, debt retirement if -- beyond the mandatory retirement schedule.

That's been the case; it remains the case. It is that we think we have enough cash now to be able to do what we need to do with acquisitions and still do the buyback. One thing to keep in mind is that as we buy back shares, we put those shares into treasury and those shares become currency, particularly if the stock price is strong. Those shares become currency for acquisitions. So it's not as if we're using up (inaudible). Yes, we're using up cash, but we're turning it into a different sort of ammunition.

I see. Thank you.

You bet.

(Operator Instructions.) Your next question comes from Rohit Chopra. Go ahead.

Can you hear me?

Yes. You're a little faint but we can hear you.

All right. I just wanted to get a sense of where the training of the Cisco channel was and when do you expect to get revenue from that channel.

Well, training is coming up right now but we don't expect any major contributor to revenue this year from the Cisco partnership. I think we're -- by the time we get some benefit from there -- I don't -- David, do you have any comment? -- but we don't expect this year to be anything -- any significant [value] from Cisco.

Yes. We will start to see revenue generation in Q3, but as Anil says, it'll be modest. I know that there have been other views about how fast this will ramp, and we certainly hope it will ramp, but we know how long it takes to train hundreds of resellers and get them moving, and these rollouts -- major rollouts from major partners -- move deliberately, and we expect this one to.

All right. Government ticked up this quarter and I just was wondering -- are you seeing a lot of extra RFP activity there due to the stimulus or is there anything else going on there?

We are seeing additional activity and I think what's really happening is a change of tone in the government whereas prior to the new administration and the expansive stimulus, there was hesitation in the government. I think we commented on that in the December quarter. We're now seeing the opposite. We're seeing no hesitation, much less concern. And I think you're probably seeing that from other suppliers to the government as well. So it's -- yes, there's more activity and less concern about allocation of funds.

Would you expect that to go up next quarter as far as government goes?

Well, the September quarter is a strong government quarter. Right? That's their fiscal year-end and they're certainly not slowing their spending. So the odds are it'll go up.

All right.

Usually it's our best -- fiscal year Q2 -- the September quarter -- is our best in federal, but we had such a great quarter in Q1, we'll have to see how much better it'll be in Q2.

Okay. Yes. That's what I was wondering. If it was good now, can it still be good next time? And then my last question is this, and it comes back to what Anil was talking about. There's a slew of new products, I guess, geared at the wireless channel that are supposed to come out in the second half, and that's also supposed to be a contributor to revenue so you can at least hit the guidance. Is that what I understand?

Well, we are not specifically doing it to hit the guidance. This is -- we are bringing our product with -- first of all, the new product line will have higher performance -- higher-performing hardware -- and because of that higher cost, it'll be higher priced. And it has a specialized module for 2G and 3G network and moving on to 4G. And plus, if there is a customized portion, basically the product is customized to the wireless service provider need. So there is already a demand for this and we think that taking -- building a separate product line, customized for the wireless service provider, will enhance our chances of really taking the carrier numbers to the higher level.

Right. And I think what I was really trying to understand here is that if you release something in the second half and you're telling everybody that the budget cycle is already set or that your sales cycles are very long, how would something that's released in the second half be a contributor to this fiscal year?

Well, David, do you want --

Yes. So that has to do with the way we sell with our big partner customers, and the telcos that we sell to are some of our closest and most intense customer relationships. When we talk to customers, we talk much more openly and freely about what we have coming down the road than we are able to talk to with financial audience. So they know what's coming. They know the general direction and we will tell them in advance. And so it's not that we start the selling cycle when the product's released; we start the selling cycle well in advance of that.

I think I want to point out that we do have a service provider -- we don't have a special product line, but we do have a product which is being sold to the service providers. So until the new product line is ramping up, we'll continue to sell the product. And so there's not going to be any -- nobody's necessarily waiting for it and not buying in the wireless service provider. There are other products they're buying.

Thanks, guys.

Thank you.

Your next question comes from the line of Alex Kurtz. Go ahead.

Thanks. Just a couple quick follow-up questions. What was your cash flow from operations and free cash flow in the quarter? And the gross margin very strong this quarter. It looks like it's helped maybe by the service line. What should we be thinking about as far as -- is that gross margin level sustainable, I guess, is the direct way of asking it.

Okay. So first question first. We actually anticipated this for the first time, I think, this quarter. Thanks for asking it. We're ready. Cash flow from operations was $9.8 million. Free cash flow was $7.8 million. CapEx $2 million is the difference. Somebody's going to ask about depreciation, so I'll preempt that. Depreciation was $2.1 million. Amortization of intangibles -- I think we might have said already -- was $1.5 million, but --. So that, I think, was question one.

Gross margin -- yes, gross margin was helped by the mix of revenue from product to service because our service margins -- because of the software subscription component, our service margins are higher than our product margins. We -- as you know, our long-term model is 78 -- or for non-GAAP gross margin is 78 to 81 and we're now at the top end of that range.

There were two other elements besides the revenue mix that influenced our gross margins. One was the improved cost in our products that we talked about. That will continue. Second was improved discounting performance, and that will probably not continue to the same extent that the cost improvements will continue absolutely. Some discounting performance may continue. It depends on the mix of deals and the size of deals.

And then there is the mix question. As we ship more product and the product content goes up, then that will cause a decline in gross margins, but we expect, as we said, to have it stay within that long-term model range. Ultimately, cost reductions in the product are the things that drive gross margins up. The rest of it are fluctuations that will come and go as long as our discounting performance remains within range, and it has stayed pretty solidly within a good range for many years. So as long as we're able to do -- continue to do that, and the product mix will fluctuate -- I'm sorry -- the revenue mix will fluctuate. What really is the underlying trend is the cost improvements, which are the reason why we've raised our long-term -- our gross margins and our long-term model over the last several years.

And just to finish up back on the pipeline questions. Can you comment on what you've seen so far in July? Have you seen more deals sort of slip out or are you sort of -- is your sales force sort of executing on plan from what you've seen?

Well, the pipeline is improving, as Anil said, and we are -- I can't comment on July, but we expect that that pipeline improvement will continue. We obviously look hard at the pipeline when we look at our full-year guidance and assess it before we reiterate guidance, and we've done that. So that's probably the best I can say. If the -- if we achieve -- maybe one more thing. If we achieve our revenue guidance, then the -- which we expect to -- then the sales force will be essentially on plan. So --

So no deterioration in sort of the close rates or just sort of the overall flow of deals last quarter and heading into the rest of the fiscal year. So you're on plan from what you've seen.

Well, that's essentially true, but let me just perhaps state the obvious, that we had lower bookings and that was due to lower overall activity driven principally by the economy.

Right.

And so with that caveat, no, our yield from the deals we saw was about normal, and we did not -- we have not seen -- I don't want to give you the idea that we've seen -- there was this handful of deals or a significant amount of business that we thought we were going to close that we didn't close. It wasn't that. We saw what the pipeline was at the beginning of the quarter and that's about what we closed. And so we're -- the business is being managed tightly to forecast through pipeline as is normal. It's just it's not as robust as it has been in the past and as we expect it to be in the future.

Thank you.

You bet.

We have your next question from Gabe Lowy. Go ahead.

Good afternoon. It's really been asked about four or five different ways, but in terms of your visibility into particularly your larger vertical accounts has usually been pretty good. Has that changed? Am I asking too nuanced a question or has been -- has there been any material change in what you think you saw that just was not ready to be released for purchasing?

Let me make a comment. I think visibility is also -- pipeline is indicative of the visibility, and our pipeline is improving. And so we see in the second half -- many of our deals take six to nine months to close, so in that sense -- and that's reflected in the pipeline. And so we think we have better visibility than what we had in the last quarter.

So regarding your other -- the other aspect of your question, Gabe. The -- our relationships with our good customers remains strong, and when there's -- when they have budget problems or lower budgets or told to put projects on hold, we find out about it. We know it. It doesn't come usually as a surprise. There's always exceptions, but it doesn't usually come as a surprise. And that was true of Q1. We -- as I said a moment ago, we saw the performance that we achieved coming at the beginning of the quarter and we hit it. It wasn't as strong as we would have liked, but we hit what we thought.

And has anything changed in the competitive dynamics in the marketplace? Seeing anyone more? Seeing anyone less? Anyone being more aggressive? Anyone fading?

I think it's about the same as the last two quarters or last year. There's no major change, I think, in the enterprise. As we have mentioned in the past, in the enterprise area we have a lot of small players and so nothing big has changed there. In the wireless service provider (inaudible), there are a couple of big players and we are trying to grow our business in that area, so there is competition for that. But all that was true a couple of quarters ago also.

The lower revenue is not due to competitive forces. I think if you look at some of --. It's hard to assess, and I understand why you're asking the question. If you look at some of our competitors in the enterprise space, I think one of them has preannounced a weak quarter. Many of the others are private so you won't see anything in the enterprise space. If you look at the wireless service provider space, one of our large competitors -- a conglomerate -- just announced weakly, and I think if you sift through some of those results, you will find that the unit that we compete with was also weak -- maybe down double digits, if you can read through the words. So I think you will find evidence that this is not somebody coming in and beating us in our market. It is the market.

And then last, if I may. Again, sort of nuanced in terms of customers treating this product category. Part of the growth driver the last year and also coming out of the merger or acquisition of Network General was that the market was catching up with technology and that, in that process, visibility was becoming more strategic. Are you seeing that or has that sort of gone on the back burner as budgets are being sort of allocated more tactically?

Well, I think we have said it's continued to be strategic for two reasons. One is with the combination of Network General and NetScout, we are providing the lowest cost of ownership, even though we have a higher price -- high-priced products. There's a lower cost of ownership because our solution can do multiple functions in the same product. And so they don't have to buy multiple products. And secondly is as with virtualization and moving on to cloud computing and things like that, the need for -- things getting more complex (inaudible) bigger need for our products in terms of management and monitoring. So I believe that our strategic importance is roughly the same or better compared to last year's.

Thank you.

Does that answer your question?

Yes it does. Thank you.

Thanks, Gabe.

Your final question, sir, comes from the line of Jill Mastoloni.

My question -- most of my questions have been asked. Just regarding the buyback, it's good to see that you're reinstating that. In the past, at what levels have you been buying back stock?

Well, you see in our filings that we have had a 4-million-share authorization outstanding for a couple of years, and we've exercised only about half a million of that. We are opportunistic in the market and we will continue to be. We do feel strongly that our share price is a good buy right now and so we will be as active as we think is prudent. We do have parameters, of course, that the board authorizes that we have to operate within. So I know that doesn't answer your question precisely, but I hope that gives you some idea of -- we may be -- expect to be active with the program. Perhaps more so than we've been in the past.

So it's realistic to say that, given that you generate close to $0.20 in cash a quarter and the valuation of the stock, that at these levels is an attractive valuation for the company to potentially be buyback stock?

I didn't understand the last part of that question. Could you repeat?

At about $10, given how cheap the stock is, is it a fair assessment to say that you would potentially be active at these levels with the pipeline that you're talking about?

Well, certainly -- so two aspects of that. Certainly we intend to be active with the buyback subject to the parameters. I'm going to decline to comment, as I probably wouldn't ask you when you're ready to buy our stock. I'm not going to answer that part of the question. But as we consider, as I said, the stock is a value at this level, we expect to be active.

Great. Thanks, guys.

Okay.

Thank you.

And sir, at this time, we have no more questions.

All right. Well, thank you very much. Very good questions. We appreciate your interest and we look forward to talking with you in a quarter's time at the end of our next earnings release. Thank you again. Have a good day.