Netscout Systems Inc (NTCT) 2011 Q2 法說會逐字稿

Good afternoon. My name is Caroline and I will be your conference operator today. At this time, I would like to welcome everyone to the NetScout second quarter fiscal 2011 earnings call. I will turn the call over to Cathy Taylor.

Thank you. Welcome everyone, at this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given you to at that time. As a reminder, this conference call is being recorded. With us today is NetScout's President & 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, me, Cathy Taylor.

At this time, I'm going to read you the Safe Harbor statement. Before we begin, let me remind that you 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 provision of section 21E of the Securities Exchange Act of 1934 and other federal securities laws. These forward-looking statements may involve judgement and individual judgments may vary. Forward-looking statements include express or implied statements regarding future economic and market conditions, our guidance for fiscal year 2011, 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 overtime. 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 10K for the year ended March 31, 2010 on file with the Securities and Exchange Commission. Also in our discussion tonight, non-GAAP revenue excludes the impact of early adoption of new accounting principles and the purchase accounting adjustments representing the reduction to fair value of deferred revenue. Non-GAAP net income excludes the non-GAAP revenue adjustments as well as share based compensation expenses, amortization of acquired and tangible assets, 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 fiscal year 2011 results and we are pleased to see the underlying growth trends of our business continue to be strong. Our total bookings for the quarter was $67.4 million, up $0.29 year-over-year and up $0.24 sequentially. New business bookings was $2.5 million, up 38% over last year and an increase of 19% sequentially. Service contract renewals grew 5% over last year and were up 43% over last quarter. Our current growth in new business bookings will drive future growth in service renewals as new service contracts turn into annual renewals.

We are seeing strength in new business bookings from our high growth verticals. New business from service provider is up 53% year-over-year. New businesses in financial services is up 50% over last year and new business within the federal government is very strong, up 90% year-over-year. We expect continued demand for our market leading solutions from these sectors, and expect demand to increase another vertical as they begin to use their infrastructure increasingly to drive particular elements of their optimization value. Our revenue was up 15% year-over-year consistent with our full year outlook and guidance. Product revenue, a component of new business, was up 21% year-over-year.

Service revenue was up 9% over last year. We have been investing heavily in developing our R&D, sales team, (inaudible) in order to capture the growth opportunities ahead of us. As a result, operating expenses rose faster than revenue up 19% over last year. We expect expense to decelerate going forward driving operating margin expansion. EPS growth was moderated by this investment in future revenue up $0.01 year-over-year and up $0.02 sequentially. As with revenue, this is in line with our full year guidance.

We are reiterating the full-year guidance that we adjusted last quarter. We are very excited about the growth opportunities ahead of us and we believe NetScout has reached a new stage as a company as we deliver an increasing scope new products to our two major markets, service provider and enterprise. We announced some significant new product enhancements, as well as some new partnership opportunities that Michael will elaborate on in a few moments. We expect to continue to drive growth and profitability both organically and through strategically targeted acquisitions. I would now like to turn it over to Michael who will provide more color on our operational achievement.

Thank you, Anil. Today, I want to share with you a few points about operational execution that we see as the foundation to our continued success in the market. It has been and will continue to be our strategy to make investments in the development of new products and functionality that allow us to outperform the competition in our targeted enterprise and service provider market. These investments are clearly yielding significant returns, strengthening our market position, and driving growth in our major verticals of financial services, service provider and federal government. We are focused on marketing to clearly and consistently drive awareness and strengthen the NetScout brand in all of our target markets.

Along with our land standing leadership at NetWorld Interop, we have expanded our presence at key enterprise events including Cisco Networkers, as well as events targeting the financial services and federal government vertical. In addition, we have driven awareness with wireless service providers globally through our presence at Mobile World Congress and Telemanagement Forum in Europe and at the 4G World in US where yesterday we made a major service provider announcement that I will discuss in a moment. We are also pleased to see that our outreach to industry analysts and top leaders including Gottner and Light Reading, a widely read web blog for the telecom industry have yielded significant and positive coverage. For our enterprise customers, we have recently announced the integration for nGenius Integrated Agent into the HP networking ECS network switching chassis. This builds on our announcement of the nGenius integrated agent integration with the Cisco integrated services router ISR platform.

I'm pleased to note that we are seeing a significant ramp of interest in the fiscal operating with a number of late state field trials on the way and active sales opportunities with leading retail customers. We expect to get traction with the HP customer base going forward. We have also announced with ArcSight, the integration of our nGenius Service Assurance solution with the ArcSight ETRM, or Enterprise Threat and Risk Management platform to deliver more comprehensive end to end, automated threat detection. One of our areas of joint expected success is in response to cyber security demands in the federal government.

I'm also pleased to note that yesterday NetScout announced at 4G World, a number of enhancements to our nGenius Solution for our service provider customers. As mobile operators continue to face user experienced challenges, NetScout has focused on evolving our technology to address current 3G network challenges and to support emerging LTE or long term evolution requirements. These enhancement are part of a new release of our nGenius Service Delivery Manager. SDM now provides visibility to delivery of critical services with intelligent early warning capabilities supporting 3G and LTE deployments.

In addition, we announced to our customers, support for a number of (inaudible) and protocols with a clear roadmap for rapidly evolving LTE requirements over the coming months. These enhancement will be instrumental in executing additional opportunities at Tier 1 and Tier 2 service providers globally. These enhancements leverage their existing installation, enabling our customers to protect and build on their current investments in our solution.

Finally I would like to update you on Engage 10, our upcoming annual NetScout customer event series. We will be hosting customers next month in San Francisco, and later in the month in Paris for our European customers. We expect record turnout at both events. These events provide us a venue to educate and build opportunities across our install base, assuring customers that we are meeting their business requirements and building strategy value for them into our solutions. They are a major showcase for our technological direction, we dedicate it to export financial services, service provider, government and healthcare customers. We will update you on their success next quarter. I would like to now turn the call over to David.

Thank you, Michael. Our quarterly results are in our earnings press release financial statements. We report our results on a GAAP basis as well as on a non-GAAP basis. Our non-GAAP results eliminate the GAAP purchasing accounting effects of our acquisitions by adding back revenue related to deferred revenue revaluation and removing the amortization of acquired and tangible assets. In addition, we remove the GAAP affects of stock based compensation and our early adoption of new accounting principles that I will discuss in more detail in a moment. Non-GAAP results also include the income tax impact related to the non-GAAP adjustments previously noted. The differences between GAAP and non-GAAP are disclosed in reconciliation tables 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 measures internally for the purpose of analyzing, managing, and forecasting our business. Starting this fiscal year, we've adopted along with many other technology companies, a new revenue accounting policy that will begin to materially affect our revenue recognition in the first half of fiscal 2012. As we discussed last quarter, for most of our product sales this will result in a minimal change to revenue recognition.

Our hardware products, like the InfiniStream, will fall under the new guidelines but we anticipate that revenue impact will be slight. For our software and appliance software sales, we now anticipate that in the first half of fiscal 2012, we will begin ratable revenue recognition over the term of the maintenance period sold with the software. This will result in (inaudible) recognition of software revenue than we would recognize under the previous rules and therefore lower period revenue particularly during an initial phase-in period of four more quarters. This is a delay of six months from our earlier expectation that we would see an impact in the second half of the current fiscal year. We are reporting to you revenue and earnings based on both methods of accounting during the phase-in period until ratable revenue recognition is fully established in our results.

Throughout fiscal 2011 we will report current and historical GAAP and non-GAAP results. In our press release and in this conference call, I will be discussing current GAAP and historical non-GAAP. The historical GAAP and current non-GAAP were presented as part of a financial summary table in the press release for comparative purposes. Accordingly, the results discussed now were presented as GAAP under the new, current accounting standards and as non-GAAP under the former historical accounting standard. At a future date, we will discontinue reporting of historical GAAP as the reporting rules allow, and discontinue historical non-GAAP when non-GAAP reporting under the new standards becomes more meaningful in understanding our results.

And now finally, to the financial results. For the second quarter, GAAP revenue was $69.4 million, up 16% year-over-year. Non-GAAP revenue was $69.1 million, up 16% year-over-year. Product revenue on a GAAP basis was $37.3 million, and on a non-GAAP basis $37 million even. GAAP product revenue was up 22% year-over-year and non-GAAP up 21% year-over-year. Service revenue on a GAAP basis was $32.1 million, up 11% year-over-year. Non-GAAP service revenue was $32.1 million also, increasing 9% year-over-year. Our GAAP gross profit for the quarter was $55.1 million. GAAP gross margin was 79%, up 1 point year-over year. On a non-GAAP basis, gross profit was $55.9 million and gross margin was 81%, also up 1 point year-over-year. GAAP income from operations was $13.3 million, GAAP operating margin was 19%, down 1 point from a year ago.

GAAP net income for the quarter was $8.2 million yielding earnings per diluted share of $0.19. GAAP net after tax margin was 12%, no change from a year ago. Non-GAAP income from operations was $16 million and operating margin was 23%, down 2 points from a year ago and a point below our target operating margin. Non-GAAP net income was $9.9 million or $0.23 per diluted share. Non-GAAP after tax margin was 14%, down 1 point from a year ago.

The non-GAAP adjustment to our GAAP results are summarized in the reconciliation table included with our press release financials. Provision from income taxes was recorded based on a full year effective tax rate of 36% on a GAAP basis, we had used the statutory tax rate of 38% to tax effect the non-GAAP adjustments. Our current long term model remains as follows. Non-GAAP gross margins 78% to 81%, R&D expense to revenue 13% to 15%, sales and marketing expense to revenue 33% and 35% and G&A expense to revenue of 6% to 8%, yielding an operating margin range of 24% to 27%. In the future, as we invest in driving revenue, we expect that higher revenue levels will be required to achieve our target revenue range. Target margin range, excuse me.

Cash and short and long term marketable securities hit a record high at $196 million, up $5 million in the quarter and an increase of $53 million year-over-year. Free cash flow was $6.2 million, CapEx $1.9 million, depreciation also $1.9 million. Amortization of acquired intangibles was $1.5 million. Long term marketable securities included in investments, include investments in auction rate securities valued at $21.5 million. During the quarter, $4 million of auction rates were redeemed at par. As of September 30, the value of these securities included a temporary decline in value of $2.6 million below par to reflect liquidity concerns.

All of these investments have investment ratings ranging from AAA to A with underlying support from the federal government through the Federal Family Education Loan Program. We believe they have no credit issues, only short-term illiquidity. We have classified these securities as long term on our balance sheet and recorded the temporary decline in value to other accumulated, comprehensive loss on the balance sheet. With our strong cash position and positive cash flow, illiquidities of these securities pose no liquidity problems for us.

Accounts receivable net of allowances was $41 million, up from $40 million last quarter and $33 million a year ago. Days Sales Outstanding were 53 days for the quarter, within our typical range of 45 to 55 days. This is flat from prior quarter and up from 49 days last year. Inventories were $11.4 million, up from $10 million even in the prior quarter and up from $7.4 million a year ago. Inventory turns were 2.1 times. These turns are seasonally low as our inventory build up carries over.

Turning to other metrics, revenue contribution from direct customers was 35% and resaler revenue was 65% globally. Revenue from international sales was 29% of total revenue up 4 points from last year. Europe delivered 15%, up two points last year. Asia came in at 5%, no change from a year ago. Other international sales were 9%, up 2 points compared to last year. Summarizing large deals that we booked in the quarter, 122 customers gave us orders over $100,000, up from 119 in Q2 last year. 32 customers gave us orders over $500,000 an increase of 11 customers over the same period a year ago. We received 13 orders over $1 million of which five came from telecom, four from financial services and four from government. This compares to 6 $1 million orders we received last year. We saw bookings from the following sectors in the quarter, financial services was 29% of total, government 26% and telecom 22%.

Healthcare followed with 5%, high-tech at 4% and consumer at 3%. Total bookings in Q2 as Anil mentioned were $67.4 million up $15.2 million, or 29% year-over-year. New business bookings were $52.5 million, up $14.5 million, or 38%. The strong growth in new business continues the trend of the last three quarters, and we believe is a significant indicator of future growth. Service contract renewal bookings were $14.9 million, up $701,000, or 5% year-over-year. Product backlog at the end of Q2 remained immaterial. Deferred revenue was $87 million, up $17 million, or 23% year-over-year.

And now to guidance. We are reiterating fiscal 2011 guidance but adjusting it for the delayed impact of the newly adopted accounting standards of our revenue. As I mentioned, we've adopted new accounting principles related to revenue recognition. We're reporting GAAP and non-GAAP results under this new standard, and we disclosed what our results would have been under the previously applied historical standard for comparison with prior periods in the reconciliation tables attached with our press release. This adjustment reflects no change in our business outlook; however, only a change in the impact of the implementation of the new standard. We now expect no material impact of the new standards until the first half of fiscal 2012.

Accordingly, we expect current and historical GAAP and current and historical non-GAAP revenue to be in the range of $281 million to $298 million. Current and historical GAAP net income per diluted share is expected to be in the range of $0.77 to $0.86. Current and historical non-GAAP net income per diluted share between $0.96 and $1.05. In the fiscal year 2011, non-GAAP revenue expectations before and after accounting change excludes the purchase accounting adjustment to fair value of approximately $100,000 of deferred revenue. And the non-GAAP net income per diluted share expectation includes the deferred revenue purchase accounting adjustment, as well as share base compensation expenses of approximately $5.8 million, amortization of acquired and tangible assets of approximately $5.9 million, and the related impact of these adjustments on the provision for income taxes of $4.5 million.

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

(Operator Instructions) Your first question come from the line of Eric Martinuzzi from Craig-Hallum. Your line is now open.

Thanks for taking my question and congratulations on the successful execution in September. The bookings being up 29%, that's a pretty impressive jump. Do you characterize that as maybe an easier converse as a year ago or is it real strength that you're seeing this year?

Eric, it's both. Last year we were in, clearly still in the grips of the recessionary spending. We've been out of that now with most of our verticals for some time. We're still seeing some slowness in the general enterprise sector, aside from our financials and government businesses.

But we think that the overall bookings trend is more indicative of the strength of those major verticals that are beginning to make substantial use of their infrastructure, including our products, to try to drive competitive advantage in their businesses or in the case of the government, their defense competitiveness. So, it's both but we think underlying, it's indicative of the strength of our market position.

Okay. And then on the margin side, the gross margin's here, adjusted margins I'm talking, the 81% that's kind of at the high end. This is yet another quarter where we've been close to the high end. Do you see that -- what drives that down over the back half the year?

Well, part of our gross margin strength here was a product mix that will swing back and forth. We had a good mix of some higher margin products. The margin mix across our product line isn't huge. But there are some variations and we were fortunate to have strength in the product mix. We also saw some modest abatement of discounting pressure and that may be more of mix of the sectors than an ongoing trend. So, put those two things together and it says we'll flip up to the high end and we may see some retracement back toward closer to the middle of our target range.

Underlying all of that ,over the past several years, you've seen a pretty steady uptick in our gross margins, and that is more of a -- that secular trend has been more of a tribute to our continuous cost improvement, plus the strength of our market position that allows us to maintain price levels. So, unless or until we change our margin model, target margin model, I would expect to see margins sort of fluctuate in middle to the high end of the range.

Thank you.

Your next question comes from the line of Alex Kurtz from Merriman & Company. Your line is now open.

Yes, thanks guys for taking the question. So, first congrats on the bookings growth rates year-over-year. My question is to all three of you, if I look at your top three verticals, your growth rates year-over-year, for finance, government and wireless are just 40% to 50%. And then I look at this, the other sector that we always talk about and continues to sort of be a drag on top line growth. Sort of tongue-in-cheek question here but, why participate in that other market when there are such great growth rates and bookings, I understand it was an easy comp, but those other areas are growing so much faster to you. Is there really so many synergies of being involved in an enterprise base?

I think maybe David can answer your thing, but it doesn't cost us extra to support these other verticals. Our product is fairly standard for all of those verticals, outside of financial and service provider. We think as infrastructure's becoming more complex, we want to see renewed interest in those areas also. This is just in preparation of that. Our three verticals will continue to be the highest, continue to be the top three verticals but we think a lot of comp and the rest of the results.

You may recall, Alex, in some of Michael's remarks and I'll let him comment on -- that we begin to talk a little bit about the possibilities in retail and that's driven at the moment by interest in our integrated services agent, the ISR agent, with Cisco. But, what it signifies, as Anil just said, underlying that is that segments of the high end enterprise market we expect to start make more aggressive use of their infrastructures to compete.

Whether the next sector that comes out of, emerges from the enterprise group is retail or something else is to be determined then we just follow that. We don't drive it of course. But we expect -- the enterprise business is our historical business. And it is still a very good business and highly profitable business even though at the the moment the other sectors are growing fast and it's not yet in part because of the economic concerns that are still affecting the average large enterprise, particularly its consumer-sensitive. We expect that, that will turn around.

As Anil said, those businesses, the products that we deliver to those businesses are essentially the same product lines with perhaps a few adjustments. Service provider is the exception. Substantial differentiation there. But we love the enterprise business. And we're going to stay there and compete hard and it's going to start to grow again.

Okay. And maybe Michael you can talk about this then I'll cede the floor, you guys made a small but important change ito how the sales was structured at the beginning of this fiscal year. Sort of carving out groups focused on that fourth vertical, enterprise. You guys have any color on that? Has that shown any early positive signs for the first couple quarters out?

I don't know what you mean by fourth vertical, actually. Could you --

Outside wireless, financial, and government. My understanding --

Oh, I see what you mean. I see. Well, actually our sales force is really just focused on two verticals. Two markets, we don't even call them verticals. And we have an increasingly crystallizing service provider sales detail worldwide, globally. And we have sort of the rest of the enterprise so, that's not differentiated across the three segments, the general enterprise and the federal -- the federal is separate, sorry. But the financial and the rest of the enterprise.

And so I don't see that actually changing, and clearly the differentiation, the focus on service providers has helped and it is also necessary, which is also true for the federal government. Other than we don't intend to -- differentiate further.

So, as Michael said, just maybe put a little matrix around it; we view the two separate markets as we talked about being the enterprise market where the technology that we deliver, the product solutions we deliver, are pretty much consistent across the various industry verticals and then the service provider market where the product is increasingly differentiated. And within the enterprise vertical, of course there's federal ,which is a separate sales force, focused on the federal government, and then there's some geographically focused financial sales groups that aren't really separated out of the separate sales organization.

But because of the natural concentration of financial businesses, they group together. And then there's the general enterprise. Internationally it's structured a little differently, a little less differentiation, but along that same model. Was that helpful?

Yes. It is David, thank you.

Your next question comes from the line of Aaron Schwartz from MKM Partners. Your line is now open.

Aaron? Caroline, let's move on to someone else. It sounds like Aaron's had to drop-off

Aaron Schwartz, your line is now open.

Hi. Can you hear me?

There we go. Sorry, thought it sounded like you --

Technical difficulties there. Anyway, I had a question on the margin, you had talked about a deceleration in your reinvestment in the business and I know you had been hiring sales from the beginning of the year. Can you just give us an update on where you are in that process? Is that pretty much done at this point? When would you expect those new sales resources to be fully productive?

We have been successful in meeting our targets in hiring to our sales target to date and most of the fiscal year 2011 headcount that's in that area are in place. Clearly we have a ramp-up of about -- depending on where these people are coming from, 6 to 12 months of training and learning experience before they become fully productive.

That's what you can expect going forward. But we have been very successful both North America and internationally, across the different segments.

Okay. Is it fair to assume that your revenue guidance this year does not include a whole lot of revenue from the new hires?

That is correct. That is absolutely correct.

Okay and then lastly for me, there's been a lot of focus on your exposure to the wireless sector given the activity there with new devices and the 4G rollout. Is there any way for you to characterize the phase of the infrastructure investment that your larger customers have made around 4G? Just in terms of where they are.

Yes. I think that the 4G investment is at the very, very beginning stage. It's mostly, almost exclusively pilots and field trials. The bulk of the -- big decisions are being made the next several quarters and I think that fiscal year '12 we will see a large, very large budget spend in this area. On actual rollout.

Okay, excellent. That's helpful. And then, David, just a real quick question, what was the reason for the timing adjustment to the rev rec policy. Was that just something that your auditors handed down to you or is there some sort of mix in your pipeline?

So, we might want to take this offline Aaron. So we don't bore everybody to death. But we had expected to lose the SOE under 97-2 for our software by September 30. Our pricing turned out not to require that, pricing flexibility wasn't so large that we lost the SOE, so now we have rev rec under 97-2 for our software products for another six months. We do this analysis every six months. So with an estimate on our part six months ago that we would probably lose it by now, but we didn't.

So now are estimate is we'll lose it six months hence and so you understand that, one more step. The thing where pricing discipline matters is on maintenance renewals and our big bubble, seasonal bubble of maintenance renewals is in front of us. Right? So as we go through Q3 and Q4, pricing pressures may cause us to diverge more broadly from our standards and lose the SOE and that's what we expect. So, that's all it was. It was basically an implementation of pricing policy, discounting policy, and when that started to take effect.

Understood. Congratulations and thanks for taking my questions.

Really? Congratulations on understanding that, that the really great.

Your next question comes from the line of Matt Robinson from Wunderlich. Your line is now open.

Hi. Just couple things, did -- version 4.9 did you book any of that in the September quarter or is that just going to start here in the current quarter?

We usually don't break it down by -- internally, obviously we track how many people have upgraded to that -- we don't really track the revenue by release number.

That's right. One clarification Matt, when we issue a new software release, which is what 4.9 is of course, our customers on master care maintenance get that new release. Right? So there's no more revenue. Basically it's our maintenance revenue stream that is that revenue.

So therefore, unlike some other companies where they come out with a new, major software release and that's sold to their customers as an upsell, that's not our practice. So you will see a continuing flow of releases and a steady flow of maintenance revenue that is the compensation to us essentially, of that maintenance stream.

Okay. So it doesn't -- it wouldn't be the kind of thing that would cause someone to renew their maintenance. That would happen probably independently of it then?

It does. It happens whenever their annual contract expires typically.

Do you expect it to drive any new product sales this quarter?

Yes we do. The reason we come out with these new releases is we put in new functionality that our customers have asked for and when we do that, then that gives them more reasons to buy not just the 4.9 software elements but the rest of our product line.

I think one of the things which may not be clear, is that even though we don't charge for these releases because they're covered as part of maintenance. New functionality forces them to deploy our product in more places and so that's where all the revenue comes in. And just like for maintenance revenue, we are different than other companies on the new business also, we are different.

Our new business is selling more instrumentation and products to -- in more places, in existing customers plus to new customers. So when you talk about new business, it's not just new customers, it's new places in the existing customers.

Is 4.9 specifically oriented towards those new places as you refer?

No, it's basically the more the functionality, the more the reason to buy. So that's what has -- and they decided to put in three places as we add more and more features, the chances of going in more places and data centers is high. It's not that you -- that the functionality is needed in one place than another. It's the whole planning proposition which allows them -- drives them to go to other places.

In terms of 4.9 and any other major release, like 4.9 was, it touches all of our products. 4.9 introduces new functionality across different software applications as well as the agents. So, it's across the front, across the waterfront not just in one area in particular.

Your federal business obviously has some seasonal aspect to it but the year-over-year growth was pretty stunning. Was there anything that we can think of in terms of catalyst there?

So a couple things, first of all, this was the really easy comp. Eric asked about comps earlier. I think it was Eric. So you may recall that last year our September quarter in government was weak, and at the time we pointed to, correctly, the strength we had in June.

We had a sort of a upside down June/September in terms of the normal seasonal pattern with the government. This year we had a much more normal pattern. A regular June and a strong September. In fact, that federal business has continued to come in even after the normal September 30 budget year cut off. So, the first thing is, it was a really easy comp. Second issue is, because that growth rate is not sustainable, year-over-year growth rate in the federal space.

Second thing is though we are getting attraction and success with -- in a stable and expanding federal sales team and we expect that strength to continue. Although not at the pace you saw this year-over-year comparison to be.

Thank you.

Your welcome.

Your next question comes from the line of Kevin Liu from B. Riley. Your line is now open.

Hi. Good afternoon. Starting with the service provider bookings, obviously nice showing with five, seven figure deals there. As you guys continue to increase your exposure to that market and you start to see some of these larger field deployments of your products, just curious if you expect these double digit, seven figure deal type quarters to be more of the norm going forward?

Yes we do. One of the things that's going on in our business as -- that's helping to drive these high growth sectors, is that we are becoming more strategic, more important to the customers in these sectors who are doing more and more critical things, sensitive things with their infrastructure. And that drives -- that strategicness drives bigger buys and more regular buys and that's obviously why we focus on these sectors

I think there's one thing to add is we have been doing most of our business with Tier 1 providers and there the (inaudible) will be in the seven figures but with this year we hired some more people to focus on Tier 2 also. That tier is maybe smaller than those seven figures, but there'll be an up figure also.

Got it, and looking across the seven figure deals in general for this quarter. Just because there was such a large increase in those relative to the same period last year, was curious if anything got pulled ahead from what you might expect from the back half the year?

We don't think so. These things flow with -- we didn't drain the pipeline.

And then, turning back to the enterprise market, we hear a lot of positive growth trends with respect to things like virtualization, public-private clouds, and all of that would serve to increase the complexity in the IT infrastructure environment as you've pointed out. So, why aren't you guys seeing the same need for enhanced visibility in the performance management aspect, and the enterprise market today?

You are saying why are we seeing more growth in the service provider versus enterprise?

Yes in a sense. Certainly all those trends seem like they would play to your strengths. Just curious as to why you haven't seen that strength to date or whether you expect that to be pretty forthcoming.

We talked about, we saw a lot of big deals in the financial sector also and some other areas including federal. But it's not that enterprise is not strong, it's that service provider is much stronger and that's because a larger investment being made by the wireless service provider than on the enterprise side. We think that enterprise will pick up some more but may not be at the same pace as the service provider because of those reasons.

If you look at -- when you talk about enterprise, a lot of companies, not us, but a lot of companies talk about enterprise in the broader sense that Michael discussed it earlier as a market -- the enterprise market. Some will include the government in that, some will not. If you step back and say, and add together all of our non-service provider business, our year-over-year growth there was 23% in bookings. Now, we pull out the really high growth sectors because we focus on those. And we devote resources to those.

But as you compare us to other companies that may talk about their enterprise growth you have to take that into account. Our enterprise growth overall isn't too bad. Even though the nonhigh growth sectors aren't yet active although we expect, as we said earlier, for high growth areas to emerge going forward.

Understood. As you guys look to the December quarter, typically a strong quarter for enterprise spending. I'm just wondering what you see in the pipeline and whether some sort of budget flush to come through there?

We would expect a normal December budget flush. We have projects that are working. We have a pretty healthy pipeline across the board including enterprise. And when that happens then we do typically see budget flush. It's a little early to be confident in that -- that there's going to be a rush at the end of the year, at this point. But we expect it to be there to some degree.

Thank you.

(Operator Instructions) Your next question come from the line of Scott Zeller from Needham & Company. Your line is now open.

Thank you. Wanted to see, was there a 10% customer this quarter?

No.

No. Okay. And when you look back at the September quarter performance versus the spending environment, obviously very solid performance, how would you characterize the spending tone verse in September and then how would you characterize it today as you're in the December quarter?

Well I think we saw a good uptake in September and I think that trend that we've seen for some time continues. We saw some normal hiatus in the summertime, which is seasonally -- happened again this season as it does usually. September came back fine and we expect that trend to carry forward.

Would you say the seasonality you've seen in the September quarter and what you've seen thus far in the December quarter are normal?

Well, I can't comment about their current quarter but in general we have been seeing, Scott, the return of buying, sector by sector, it's happened in a different pattern, in each one.

We've seen the return of buying strength and we expect that to return to the rest of the business as well. How quickly that will happen sort of depends on the macro environment as much as it does on technology trends. But there are clearly projects underway and interest from all of our customers that wasn't there a year ago and that we expect to continue to grow. As Anil said at the beginning of his remarks, with greater and greater interest in driving infrastructure to do really productive things for these organizations.

Okay and then regarding the comments on, I'm not sure if the word is deceleration of expenses, you reiterated your long term model David. And I guess if we're hearing that expenses may moderate, can you explain how we should think about your comments earlier in the prepared remarks about deceleration expenses?

Yes, sure, we said a year ago that we were going to start to invest in high growth and we've done that and Michael talked a little bit about that. And we have, as he said, been on our target, we're not done but the major part of that build up for this fiscal year we took on in the first half. So the hiring pace that we set in place a year ago is going to slacken because we accomplished most of it. That isn't to say that we're not going to invest going forward. We are.

And we are, although we're not commenting yet on fiscal '12, you should expect us to invest in capturing these growth opportunities that we talked about, aggressively, and we have talked about moderating over the last couple quarters. Moderating operating margin expansion. Continuing modest operating margin expansion year-over-year but at a more moderate pace and those comments will carry forward. So, a big build up expense, a couple quarters, starting three or four quarters ago. Moderation in that now, year-over-year as we've accomplished much of it, but a continuing pace of expansion, more in line with revenue however going forward.

Okay and your comments earlier about federal, actually spilling over into the December quarter, can you tell us if that's something that has not been seen previously? Have you typically seen a stoppage at the end of September quarter with federal buying? Is this is a new phenomenon, where you're seeing it spilling over?

No, no. These were just -- it's not new secular phenomenon. My comment was just we had good business and that was coming in at the end of the September quarter and some of it didn't quite come in completely and we've seen it continue. Most of our federal business, although the urgency around it typically comes in September.

Much of our business is program oriented business. It's not unfunded budget year business. That is typically what is most accelerated in a government budget flush. So we're finding is some of those program deals that didn't quite get done in September still happening.

Okay. Thank you.

You're welcome.

Your next question come from the line of Alex Kurtz from Merriman and Company. Your line is now open.

Yes, David I'd be remiss if I didn't ask about your mid to long-term growth rate on topline.

Just couldn't resist? Could you Alex?

You know me. Can you talk about that? Is that something you've talked about in the past? You guys getting to mid to high teen? How do you guys feel about that right now versus sort of how you felt about it last time you spoke with investors?

Well, we said mid to high teens for some time and there was some skepticism that we would get to mid to teens and we said well, we think we're going to get there. And 15 is pretty close to mid to high teens. Doesn't mean we're done, but we're pretty much on target with doing what we said we thought we could do.

I know you're not commenting on fiscal 2012 but if I just interpret what you just said, you have a little bit more to do as far as improved growth rates. Enterprise could be a kicker there right? And maybe high teens is a possibility still?

If you would like a reiteration of our -- we haven't changed our revenue targets of mid to high teens.

Okay. I'll leave it there. Perfect.

And there are no further questions at this time so I'll turn the call back over to the presenters.

All right. Well, thank you very much. We appreciate your questions and your attention. We will plan to see you here again in about 90 days. Have a good evening.

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