Netscout Systems Inc (NTCT) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to NetScout's second quarter fiscal year 2010 operating results conference call. (Operator Instructions.) 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 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 Second Quarter Fiscal Year 2010 Conference Call for the period ended September 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, David, or Michael will take your questions.

Before we begin, however, 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 individual judgments may vary. Forward-looking statements include express 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 annual report on Form 10-K for the year ended March 31, 2009 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 of Network General's deferred revenue, and non-GAAP net income excludes share-based compensation expenses, amortization of acquired intangible assets, costs and expenses of various acquisition related items, and related income tax adjustments.

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

Thank you, Cathy. Today, we are reporting our second quarter results of fiscal year 2010. Those results are up from last quarter, but are still reflective of the slow economy and depressed IT spending across most of our verticals. Second quarter GAAP revenues were $59.7 million, up 3% sequentially. Non-GAAP revenues were $60.1 million, up 2% sequentially. We are encouraged by the growth we are seeing in our pipeline and we continue to expect the economy and IT spending to improve in the second half of our fiscal year.

As we have said since the beginning of the year, we expect the economic uplift to amplify the normal second half seasonal strength of our business. As a result of all these factors, we are reiterating our view that orders and net revenues will escalate significantly in Q3 and Q4.

Our second quarter bottom line results were good. GAAP net income for the quarter was $7.1 million, up 35% sequentially, with earnings per diluted share of $0.17. Non-income net income--non-GAAP net income was $9 million, up 23% sequentially, with earnings per diluted share of $0.22. Our continued diligence on controlling costs and expenses is paying off, raising our GAAP operating margin to 20%, which is an improvement of five points over the last quarter. Our non-GAAP operating margin was 25%, a gain of four points sequentially. As a result, we are raising the low end of our fiscal year 2010 EPS guidance by $0.05.

Recognizing that the first half of our fiscal year was relatively weak, we have tightened the fiscal year 2010 guidance range by lowering the high end of our revenue guidance. Because of our strong margin performance, we are maintaining the high end of the EPS guidance despite the reduced revenue outlook. David will give you those specifics in a few moments.

Looking forward, we see strength in our core verticals and the market remains strong for our solutions. We see increasing opportunity in the wireless service provider market and (inaudible) of our investment (inaudible) to escalate market gains in the sector. We are working on delivering our market leading technology and adding new functionality particularly focused on the needs of the service provider space. We will be communicating our service provider strategy to the market place in greater detail later this quarter.

As part of the service provider solution, earlier this month we released a new add-on software product for the wireless carrier market that delivers a unique analysis of session performance, network and service response times, and deep packet drill down of mobile data traffic. It provides visibility for managing the exploding number of mobile data sessions from smart phones and other devices. With this and the rest of our full service provider solutions, we are optimistic about the future growth of the wireless space and believe it will continue strongly to the achievement of our (inaudible) organic growth target.

In addition, we have recently released a new product focused on the increasingly important private cloud and virtual computing environment. Our new nGenius Virtual Agent software significantly enhances NetScout's role in managing and optimizing application traffic from within virtual servers located in data centers and in private cloud. We believe this new capability improves our position in the market by adding value to our solution and lowering the barriers to expanding use of our solution into the data centers of our customers while implementing virtual technologies.

On the partnership front, we are working closely with Cisco in a number of different areas. We have joined the Cisco Developer Network Program and we are participating in Cisco's wireless LAN and unified communications categories. The Cisco wireless LAN initiative that we announced last quarter uses our newly released enhancements to our Sniffer Global product. Sniffer Global now integrates with Cisco's Mobility Services Engine to have Cisco customers more quickly identify and resolve network and service performance issues over wireless LAN networks. We recently announced that two of our products have successfully completed interoperability testing with Cisco's Unified Communications Manager 6.1. NetScout's nGenius Performance Manager version 4.6, and Sniffer Intelligence version 4.6, have been certified to support Cisco's voice-over-IP installations with monitoring and troubleshooting capabilities.

In summary, we are rolling out new products, technology, and expanded relationships at a faster pace. We have seen financial improvement in the economy and expansion of our pipeline. Our guidance for fiscal 2010, as it has been all year, is based on our product plans and expectation of the improved global economy, combined with normal seasonality in the second half of the fiscal year. In addition, we expect that our new wireless service provider product initiative will boost our business in the second half.

Over the strategic horizon we see a return to our high teens revenue growth target as our continued investment in technology in distribution channels bear fruit and as we compete even more aggressively from our leadership position in the instrument and network performance management space. We expect to increase our level of partnering with major players, such as HP and Cisco. We are planning to grow both organically and through acquisitions to achieve or exceed our growth targets. Stay tuned for announcements in the near future in all of these areas, and we look forward to speaking to you again next quarter.

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

Thanks, Anil. Our quarterly results are in our 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 related deferred revenue revaluation and removing the cost and expense of various acquisition related items. In addition, we removed the GAAP effects of stock based compensation, which increased significantly as a result of the acquisition. I will give you the specifics about the difference between GAAP and non-GAAP as I discuss our results. These 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 second quarter, GAAP revenue was $59.7 million and non-GAAP revenue was 60.1 million. Non-GAAP revenue excluded $387,000 of purchase accounting adjustment to record at fair value the acquired Network General deferred revenue. Product revenue on a GAAP and non-GAAP basis was $30.6 million. The GAAP revenue was down 22% year over year and non-GAAP revenue was down 25% year over year. Both were up 8% sequentially.

Service revenue on a GAAP basis was $29.1 million, down 1% year over year and 2% sequentially. Non-GAAP service revenue was $29.5 million, down 8% year over year and 3% sequentially. GAAP income from operations was $11.7 million. GAAP operating margin was 20%. GAAP net income for the quarter was $7.1 million, yielding earnings per diluted share of $0.17. GAAP net after tax margin was 12%. Non-GAAP income from operations was 14.8 million and operating margin was 25%. The following items totaling $3.2 million are adjustments to arrive at the non-GAAP operating income. The purchase accounting adjustment to record at fair value the acquired Net Gen deferred revenue of $387,000 was added back to GAAP revenue. Amortization of acquired intangibles of 1.5 million, which was principally from the Network General acquisition, was removed from GAAP cost and expense. Share based compensation expense at $1.3 million was removed from GAAP expenses.

Non-GAAP net income was $9.0 million, or $0.22 per diluted share. Non-GAAP net after tax margin was 15%. We've used a statutory tax rate of 38% to tax effect the $3.2 million total non-GAAP adjustment amount, removing $1.2 million from GAAP tax expense. The non-GAAP adjustments to our GAAP results are summarized in the reconciliation table included with the press release financials.

The provision for income taxes is recorded based on a full year effective tax rate of 35% on a GAAP basis and 36% on a non-GAAP basis. Our GAAP gross profit for the quarter was $46.8 million, GAAP gross margin was 78% in the quarter. On a non-GAAP basis, gross profit was $48.3 million and non-GAAP gross margin was 80%. We made the following adjustments to non-GAAP gross profit. The $387,000 was added back from revenue. We removed $85,000 of share based compensation expense and $995,000 of amortization of acquired intangible assets. GAAP and non-GAAP gross margin were down one point from last quarter.

Gross margin remained strong due to the accelerated cost improvement actions as part as our aggressive cost and expense management program and due to steady discounting performance in the quarter. We expect non-GAAP gross margin to remain in our long term target range for the rest of the year. Our current long term model is the following. Non-GAAP gross margin is 78 to 81%; R&D expense to revenue is 13 to 15%; sales and marketing expense to revenue is 33 to 35%; and G&A expense to revenue is 6 to 8%, yielding operating margin range of [24] to 27%. This quarter we achieved that range based on our strict cost and expense management. In the future, as we invest in driving revenue and return to sustainable expense levels, we expect that higher revenue levels will be required to achieve our target margin range.

Our balance sheet remains strong. Cash and short term marketable securities were $142.8 million, compared to $141.6 million as of the end of the prior quarter, up $1.2 million. Long term marketable securities include investments in auction rate securities valued at $28.9 million. As of September 30, the value of these securities included a temporary decline in the value of $3.8 million below par to reflect liquidity concerns. All these securities are rated A or above by Standard and Poor's with underlying support from the federal government through the federal family education loan program, and we believe they have no credit issues, only short term liquidity issues. We have classified these securities as long term on our balance sheet and recorded the temporary decline in value to accumulate another 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. We believe we will achieve liquidity well before maturity of the underlying bonds and our temporary valuation adjustment reflects that outlook.

Because of our strong cash position and cash flow, last quarter our Board approved 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 has 3.5 million shares remaining. Due to the strong upward movement of our stock and other factors, we did not buyback any shares during the quarter.

Accounts receivable net of allowances was $33 million, up from $29 million last quarter. Days sales outstanding were 49 days for the quarter based on GAAP revenue and within our typical DSO range of 40 to 50 days. This is up from 44 days in the prior quarter. Using non-GAAP revenue, DSOs were 48 days. Inventories were $7.4 million, up from 7.3 million in the prior quarter, and inventory turns were 2.8 times.

Turning to other metrics, revenue contribution from direct customers was 35% and reseller revenues, 65%. Revenue from international sales was 25% of total revenue, up from 21% last quarter. Europe delivered 13%, up four points, and Asia came in at 5%, up one point from last quarter. Other international sales were 1%--or 7%, down one point. Summarizing large deals that we booked in the quarter, 119 customers gave us orders over $100,000, up from 102,000 in the first quarter. 21 customers gave us orders over $500,000, and six were over $1 million. Three of the $1 million orders came from the government, two from wireless service providers, and one from financial services.

We saw bookings from the following sectors. The financial services sector was up slightly with 27% of total, government was 23%, and telecommunications was up this quarter to 19%. Healthcare was at 7% followed by high tech at 5%. We expect much of our second half growth to come from pent up demand from financial services and from the return of our lumpy wireless carrier buying.

As of September 30, our product backlog and product deferred revenue was not substantial enough to disclose. Last quarter, it was $6 million. The product backlog decline was a result of the continued weak economy. Our first two fiscal quarters are typically our seasonally weakest quarters when we often see backlog declines as we saw this year. We do not expect that our Q2 bookings level, which is--which was affected by seasonally--by seasonality combined with weak IT spending, to be indicative of our future bookings. I refer you back to Anil's discussion of that in his comments.

And now, the guidance. As Anil mentioned earlier, recognizing that the first half of our fiscal year was relatively weak, we have tightened the fiscal 2010 revenue guidance range by lowering the high end of the revenue guidance. We now expect GAAP revenue to be in the range of $259 to $269 million. The non-GAAP revenue range we expect to be $260 to $270 million. In addition, despite the weak first half of our year, we've been successful in managing costs and expenses with consequent improvements in operating margins, and as a result we've raised the expected low end of the range for fiscal 2010 net income per diluted share and we have not lowered the high end of the EPS range despite lower expected full year revenue at the high end.

GAAP net income per diluted share is now expected to be in the range of $0.65 to $0.75, and non-GAAP net income per diluted share between $0.85 and $0.95. The fiscal year 2010 non-GAAP revenue and net income per share estimates include a purchase accounting adjustment to fair value of approximately $1.3 million of Network General's deferred revenue, amortization of acquired intangible assets of approximately $5.9 million, share based compensation expenses of approximately $5.6 million, plus the related impact of these adjustments on the provision of--for income taxes of $4.9 million.

That concludes our financial discussion this afternoon. Thank you for joining us for our prepared remarks, and we look forward to taking your questions. Sean, would you go ahead, please?

(Operator Instructions.) Your first question comes from the line of Mark Kelleher from Brigantine Advisors. Your line is open.

Thanks. I was just wondering if you could dig a little deeper into the wireless opportunity, what you're seeing there. Where are the new products in that development cycle? How much benefit are you seeing? Maybe you could quantify it from the Cisco relationship on the wireless side. And maybe touch on the competition that you're seeing in that sector as well.

Well, I will answer a few things and maybe David can add a few other things and Michael can add other things to this. On the product front we have made quite a few investments and most of the product is already developed and ready to be used by the customers. On the competition side, we continue to see the competition from Tektronix and Agilent and a host of other vendors, Tektronix being part of Danaher. And I don't think the Cisco relationship is directly tied to our service provider business. We receive more help from them on the enterprise side.

Mark, this is David. The Cisco relationship is--has expanded a bit from what we announced earlier in the year. And--but as Anil said, it's not service provider focused. It's enterprise focused. And even on the enterprise side, it's yet to yield significant--any significant revenue. We expect that to happen over time, but it will take a while.

Okay, thanks.

Thank you.

Your next question comes from the line of Jonathan Ruykhaverfrom Think Equity. Your line is open.

Yes, hi. Congratulations on the execution as it relates to profitability. My question is, David, when you look at the growth targets and what it implies for revenue in the second half, do those assumptions basically imply that telco as a percent of bookings gets back to where it was let's say in the third quarter of last year, fourth quarter of last year, in the mid 20% range?

Well, Jonathan, we certainly expect telco to grow. When we talk about lumpiness, we haven't had in the last two quarters a significantly sized telco deal. And we did have in the last half of last year. So, yes, implied in that is a return of significant telco big lumps and we're not just--that's not a strategy of hope. We have them in the pipeline and we're working on them actively as you would expect.

Okay. Just as it relates to those--the new service provider focused products, are those products important to driving that telco business or is that somewhat of an incremental opportunity on top of what you think you would normally do in the telco market?

So as you would expect, we have a continuing flow of products that our customers expect from us always. What's different here is we have now a telco focused stream of products and as we always do, we share our roadmaps with our customers and they have some general idea of what's coming. And it's on that basis that we can today provide them value and even more value tomorrow that they buy our products. It is not that the step up in the business is--that we're guiding to is dependent upon that. But clearly, without that kind of continued investment and focus in the service provider business we wouldn't continue to make--to penetrate and gain share in that market. So there is an indirect link, but not a direct one for the--.

--Okay, good enough. Good enough. And then, I have a question on the new InfiniStream 2900 product that started shipping in September. Is that product viewed as a cost effective solution targeting maybe a lower segment of the enterprise market relative to where you have sold historically, or is it more of a focus on existing customers within secondary network links of maybe some of the--as opposed to some of the high capacity links where deep packet captures have historically been placed?

Yes. So we see that the second of the two--as--in the early part of this [VCs], second of these, which is people putting 2900 on lower or smaller size segment or medium size segment of our big enterprise customers who are buying the high end product also. But over time, we hope we can go after customers who are not currently using InfiniStreams.

Okay. And is this an important component in terms of what you're seeing on the part of customers in the need to more holistically have probes, deploy in a broader network environment in order to troubleshoot and to remediate?

Yes, that's right. And I think you used the word "holistic" to talk about widespread coverage. And in order to get the complete value out of our product you really need visibility across the network. And for that you have to [implement] both the big segment and the small segment.

Okay, good enough. And just final question. As it relates to the Cisco partnership, when would you expect to see some pull from that Cisco channel?

We expect it in several quarters, probably not much this year, but into the beginning of next year we expect to see some--hope to see some results.

When you say next year you mean--I'm sorry, when you say next year you mean calendar year or fiscal year?

Fiscal year. Fiscal year, sorry. Sorry.

Okay.

No dependency on this second half of this year.

Okay, good enough. Thank you.

Thank you.

Your next question comes from the line of Alex Kurtz from Merriman Curhan Ford. Your line is open.

Yes, thanks. Can you guys hear me okay?

Yes, we can. Thanks, Alex.

Yes. So the government vertical looked like it was down sequentially here. You would've thought that that would've been a little bit better this quarter considering their fiscal year end. Could you give us a little bit of understanding what may have happened there? Maybe some of that spending was done in the June quarter. A little color would be great.

Sure. Yes, there may have been some pull ahead. It's hard to tell exactly. There were--there are still deals in the government pipeline that didn't close in the quarter. We obviously weren't--our quarter wasn't dependent upon them, but there is business. We didn't see the--what was--has often been the seasonal fiscal year end crush with the government. And some deals that we thought might be benefited by that didn't happen. And we still expect them to happen at some point, but quite frankly, we're trying to figure that out, why that is, whether it's new administration issues or--and with alternative priorities or what. But it was weaker, you're right. It was down. And it wasn't so much that our second quarter, September quarter, results were low, it's that the June quarter results were high in relation to normal. Right?

Right. It was 30% then. So looking at the enterprise vertical, David, what are you seeing there as far as improvement in demand outside of your core verticals?

Well, I think it's fair to say that we read the same papers everyone else on the call reads and we see the predictions that things are going to turn up and we're expecting to see that. We haven't yet seen that in terms of significant deal flow. Our pipeline is healthier in the back end of the year. But certainly with financial services, part of enterprise. We expect government to continue to be--to grow for us and be strong. Some of the seasonality we just talked about is a little difficult to get our hands around at the moment. And outside the enterprise space, service provider we expect to be strong. But general enterprise is--we still need to see what's going to happen with that. But we--that's all part of our guidance fabric.

Just to finish up here, when you guys were lowering your--the high end of your guidance on the top line, was there one specific vertical that stood out that made you say, you know what, looking into the pipeline in that vertical we need to lower our estimates? Is there--.

--I think, yes, David may have a comment also on this. But they were not particularly on any one segment. I think it's just (inaudible) in the first half is the reason for lowering the high end of the guidance. And obviously, it will--proportionately it will be higher on the big segments. But it will not really (inaudible) to any one segment.

That's correct. I have nothing to add to that.

All right. Good job on the operating side. Thanks.

Thank you.

(Operator Instructions.) Your next question comes from the line of Eric Martinuzzi from Craig-Hallum Capital. Your line is open.

On the lumpy wireless carrier buying comment, I'm curious to know, a lot of times you guys are not the primary CapEx that's being acquired. You're part of the larger project. Just curious to know if there's milestones that--has the project already been laid out and it's just a question of achieving milestones, or is the larger project yet to be committed to and you're anticipating that to happen?

Yes. I think most of the projects which we are bidding for and for (inaudible) and they are clearly defined. And there are some other projects we start on (inaudible) which are on the--in the lab right now. But the rest of the business is the projects are clearly well defined and requests for proposals are being sought out aggressively by these vendors.

Eric, everything that's in our Q3 and virtually everything that's in our Q4 pipeline is subject to--and service provider is subject to a project that's already defined and being [worked]. The miles--the timeline is set, obviously subject to change always, but the timeline is set and we're working against that--down that timeline. As Anil said, sometimes they're competitive and we--there's not a guarantee that we're going to win them all. But there's nothing that's really--we're--if it's not in the pipeline now, we're not counting on it.

Shifting gears to the competitive landscape and acquisitions in the space, CA acquired NetQoS back in September. Just curious to hear your thoughts as to how you believe that impacts the competitive landscape in both the near term and longer term?

Well, I think (inaudible) of this acquisition shows the importance of network management and the types of things which we are providing. But we competed with NetQoS only on a small portion of their product line. And we think that competition overall will be lesser with the CS acquisition and somewhat because of their slightly different focus than NetQoS. As a small vendor, I think they were--they got more chances as a second choice against other products in the marketplace. So overall, we see similar--we expect a similar effect as what happened when Cisco--when CS bought Concord. We were seeing more competitive deals against Concord at that time than we saw after CS acquired Concord. So we see roughly the same thing playing out again.

Do you believe any of the larger hardware or networks--the dashboard guys--see them deciding that this space is much more strategic than it may have been perceived as in the past?

I'm not sure--I think--I'm sure that those people are thinking about it. But we're not providing any more specifics than--it's not really clear right now. I think they were already interested in that. We have done integrations with many products in the marketplace and dashboard for HP and IBM and Smart. And we see continuing interest in this space.

Thank you.

Thank you.

Your next question comes from the line of Sanjit Singh from Wedbush. Your line is open.

Hi, guys. Can you hear me?

Yes, we can. Thanks.

Thanks, Dave. A couple of bookkeeping questions. Do you have CapEx, headcount, and depreciation and amortization?

CapEx is 1.2 million. Depreciation in the quarter was 2.1 million. Amortization, 1.5. Headcount, 770.

770. Thanks. And now, with this quarter, could you talk about the sales cycles and whether they were longer or shorter this quarter?

Sure. Yes, we saw some lengthening of sales cycles, principally due to the economic effects we believe. And it was pretty much across the board. And that has to do with people thinking hard and committing slowly. It normally happens this time in an economic cycle. It's not unusual. And it has been part of our expectation for the first half of the year versus the second half. We expect that that will--as people start to spend, as we talked earlier about enterprise spending that we really haven't seen the turn on yet, but as it does turn in the general enterprise, and we think is turning now in financials and certainly service providers we expect to pick up--those--part of the effect of that is that cycles shorten, yields out of the pipeline increase, and we expect that that will happen in our second half.

Thank you. And two quick follow ups. Again, on the competitive landscape, are you seeing any competition from SolarWinds maybe coming upstream into your business? And then, my follow up after that is on the guidance, without getting too specific into numbers, but what is the risk that as we go into fiscal Q4 that we're going to be faced with an uphill challenge in terms of seeing a significant ramp?

Let me cover the first question on the competitive front. We are not seeing any competition. I know there is a little bit competition for budget. But we are not seeing any competition from SolarWinds. I think there are two or three kinds of (inaudible) of products customers need as part of their management portfolio. And we are in a different category than SolarWinds. The SolarWinds company is more with other dashboard players, people who are using existing instrumentation in the network to drive their management solution. So SolarWinds has literally no effect on--competitively for NetScout. So guidance there is (inaudible).

Regarding the second half ramp, yes, there is a significant up tick. And we tried to address that in the prepared remarks to give you some clarity on that. We expect that our normal seasonality that always occurs in our back half, which is typically 20 to 30% higher than the first half, will be accentuated this year by the--sort of the pent up demand in both service provider and financial services and that it will be accentuated further by any economic impact. You can sort of look at our--think about our guidance as at the low end it's those first factors, normal seasonality and sort of the pick up in demand that we can see today, and the high end of our guidance as the added benefit of an economic tailwind as opposed to headwind.

Having said that, I don't want to leave you with the impression that we just look at those macro factors and say, well, that's got to be where our revenue goes. We don't do that. We have a pipeline that is substantial. It's much bigger now in the second half [because of] the first half and we track those deals deal by deal and we have them all in sight to achieve that second half guidance. Otherwise, we wouldn't get it.

Thank you. That's helpful.

Your next question comes from the line of Gabe Lowy from Noble Research. Your line is open.

Thank you and good afternoon, folks.

Hi, Gabe.

A couple of quick ones here. David--or maybe not so quick. In the broader enterprise market, and to an extent within your financial and telco verticals, to what extent do you think it's possible that as virtualization is taken deeper into the organization for consolidation projects and as customers are looking for next generation data center builds, do you think that might be having a bit of a lag effect on you as they would bring you in sort of--even though they design you in, they would bring you in after the fact once they've committed the dollars and started these projects? Is that sort of having an ancillary impact to the overall macroeconomic environment?

No. Yes, we don't see that impact like that. In fact, we made the announcement on the virtualization front of a new product and we are getting a lot of good feedback from analysts and customers. So we feel that we don't--we feel that the importance of our products will be as much, if not more, in the virtualized environment as for the non-virtualized or previous environment. And also, we see virtualization instrumentation not necessarily replacing the other part. It's in addition to the non-virtualized environment. There are three concentration points that continue use InfiniStreams. And then, deeper down, their virtualized environments are there and there is reduced visibility on which applications are running on which server. They will need additional instrumentation in the form of Virtual Agent (inaudible) need. So overall VC incremental gain because of virtualization better than the effect on existing projects.

Okay, thank you. Also, I was wondering if you had any thoughts on the recent acquisition by Compuware of Gomez and if you think that that sort of lays out a new market extension that could affect you as well?

Well, so we don't know why Compuware bought Gomez any more than anyone else. But it's an interesting extension that--not--doesn't do what we do, obviously. But--and therefore, won't affect we think our competitiveness. We don't really compete much with Compuware in the first place. But end user experience with active agent technology is something that we've looked at in the past and we continue to assess whether or not that kind of thing would ever be useful to us. So it was an interesting transaction.

I think there is one thing I want to add to that is there are products which again improve the user experience, and then there are products we can use to just measure the user experience. And we believe the things which help us--the end user experience are more important comparatively versus the thing that measures that. So Gomez (inaudible) and bought the (inaudible) product which they're really talking about. It really addresses the first category of measuring the end user experience. And we think that once you know it's not right, then you need other products to really drill down and figure out what's going on. And that's where we--our product comes into the picture.

Okay. And just a last quick one. Has any of the media noise about high speed trading platforms and competitive advantage affected you at all on the financial services budget planning, or is this going ahead full throttle? And do you have any thoughts on whether there is going to be any added regulation there?

(Inaudible), David. Do you have any on the regulation front?

Yes, I mean, I don't--I think the issue from my perspective at least--and this isn't a company perspective, because we don't have one on this. But I think the high speed trading issue for regulation isn't one of high speed trading. It's a way--principally one of how high speed trading is done. And it seems unlikely that high speed trading will be--the growth of high speed trading will be stopped. Some people may think twice about how they do it, and I think that's the purpose or probable purpose of the regulators. But in any case with regard to our near term pipeline and projects, we can't tell any change, any impact from any of that.

Thank you very much.

Thank you.

There are no further questions in queue.

All right. Well, thank you very much all for coming. Thanks for a good round of questions. We appreciate your interest in NetScout and our quarterly results. And we'll look forward to seeing you in 90 days at the end of our next quarter. Thanks, again.

This concludes today's conference. You may now disconnect.