Netscout Systems Inc (NTCT) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to NetScout's fourth quarter and fiscal year-end 2011 operating results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time. 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 Chief Operating Officer, Mr. Michael Szabados. Also with Mr. Singhal is the 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 morning, everyone. Welcome to NetScout's fourth quarter and fiscal year-end 2011 conference call for the period ended March 31.

Before we begin, let me remind you that during the course of this conference call, we will be providing you with a discussion of the factors that we currently anticipate may influence our results going forward. These statements include 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, guidance for fiscal year 2012, acquisition integration success and new product releases. It should be clearly understood that the projections on which we base out 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 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 today, non-GAAP revenue excludes acquisition purchase accounting adjustments for the reduction to fair value of deferred revenue and the GAAP effect of the early adoption of new accounting principles. Non-GAAP net income excludes the non-GAAP revenue adjustments as well as share-based compensation expenses, amortization of acquired intangible assets, certain business development costs, and related income tax adjustments.

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

Thank you, Cathy. We are pleased to be reporting another successful year for NetScout. Our revenue for fiscal 2011 was $290.5 million on a GAAP basis, up 12% over the prior year and $289.7 million on a non-GAAP basis, up 11% over the prior year. Fiscal 2011 earnings per share were $0.87 on a GAAP basis and $1.04 on a non-GAAP basis for year-over-year non-GAAP EPS growth of 31%. These results were in the middle of the revenue range and above the high end of the EPS range of the guidance that we issued a year ago.

We also set a goal of 20 million to expand operating margins which we achieved with full year non-GAAP operating margin of 24%, up 2 points over a year ago.

Our full year revenue growth was fueled by new business booking growth of 14%. As the year progressed, we drove (inaudible) growth in our broader enterprise sector that finished the year with a 17% increase in new business.

In the enterprise vertical, financial services was strong and new business bookings up 25% as financials recovered from the economic downturn. New business from our service provider customers increased 12% and we expect that growth to accelerate in fiscal 2012 as we support expanding 4G, LD and network rollouts.

Our fourth quarter results were good. We expect that new business booking growth in the fourth quarter over the third quarter, while we delivered 8% sequential growth, we have expected (inaudible) more because of our exceptional enterprise business trend in Q3 which grew 20% year-over-year. Enterprise growth moderated to 9% year-over-year in Q4. It was not high principally because of lumpiness in our big deals (inaudible) Q3 and Q4 a year ago, those big deals that are done.

GAAP revenue was $78 million; non-GAAP revenue was $77.4 million, both up 8% over the same period last year. These results were at the low end of the guidance we issued at the end of Q3 when we narrowed our guidance. Our fourth quarter profitability was strong with GAAP and non-GAAP EPS exceeding the high end of the revised guidance. Non-GAAP operating margin was 26% at the high end of our target range.

We recently announced our acquisition of privately held Psytechnics Ltd. based in Ipswich, United Kingdom. We are very excited to be joining forces with this company, as they are a market leader in the area of monitoring IP voice, video and Telepresence. Psytechnics has 40 patents covering the (inaudible) standards and proprietary technology and are recognized as a world authority on voice and video quality assessment.

The company is also bringing us important new customers and exciting strategic partnerships. This acquisition enables us to access new service managing market segments associated with unified communications, Telepresence and Telemedicine. We welcome Psytechnics experience into our company and we look forward to further strengthening of our unified service delivery platform of our unified communications deployment over the course of the year. We expect our new voice and video capability to contribute significantly to our growth in fiscal 2012 and beyond.

Over the past year, we delivered a half a dozen significant new products, all in that broadening of our penetration across the enterprise, government and (inaudible) markets. In 2012, we have plans to [lever] the new technologies, particularly ASI and the new Psytechnics products. The market for our products is larger than ever, as virtualization, the cloud, media services and mobility (inaudible) the IT landscape.

We expect new business from the telco sector to continue to accelerate as carriers compete with their investment in 4G and LD networks, and as we roll out a number of product enhancements for LD implementation. We are well positioned at tier one carriers globally and have been gaining significant (inaudible) to business substantially focused on new (inaudible).

Looking into the next fiscal year, we continue to be excited about the opportunities ahead of us. We have set even higher goals for fiscal 2012 with revenue growth targeted for 12 to 15% and EPS growth in the range of 12 to 18%. David will provide the details of our guidance for fiscal year '12 in a few moments.

We are on the path to our long-term target of high teens annual revenue growth. We have a product and technology platform and marketplace footprint that are unequaled and that along with insightful strategy and with that execution will make NetScout the leading provider of end-to-end unified services delivery management that is becoming increasing critical to our customers across all of our vertical markets.

As always, I would like to thank all of our employees, customers, investors and other stakeholders for their continued support. We look forward to sharing our accomplishments with a view toward the coming year. Michael will now give some additional highlights of our performance and direction.

Thank you, Anil. I want to review at a high level some of our accomplishments in 2011 and our operational directives for fiscal 2012. To recap our last fiscal year, we are pleased with our growth trajectory. This growth has been accelerated by the unique new product offerings and enhancements we have launched over the past year. Early last year, we began shipping NG new Service Delivery Manager which has greatly extended our service management capabilities providing an integrated end-to-end view of service delivery.

During the year, we released follow-on [nGenius] Service Delivery Manager and to subscriber intelligence with CDMA and other protocols to support our mobile operators' 3G expansion and fast growing LTE deployments.

We launched the new high-performance InfiniStream 7900 series appliance offering extendable storage from 32 to 96 terabytes for high-tech [SD] environment such as wireless service provider infrastructures and cloud data centers.

For our enterprise customers, we launched the nGenius Integrated Agent for Cisco's ISR routers and HP's E-series switches to support our customers with management capability (inaudible).

Last quarter, we (inaudible) announced our next-generation Deep Packet Analysis technology called Adaptive Session Intelligence, or ASI. This proprietary technology, which we have been developing over a year, will be rolled out (inaudible) in 2012 across our service (inaudible).

In 2012, you will see exciting evolution of the nGenius Service Assurance solution aboard the enterprise and service provider fronts, including session and transaction level visibility and intelligence for business services. These are all (inaudible) special intelligence technology for enterprises and substantial [SE] and IMS enhancements for mobile operators.

Over the next few months, we will integrate the Psytechnics products with our nGenius platform and provide upgrade pads for both Psytechnics and NetScout customers with the integrated solution. We are already marketing this capability to our enterprise customers base and are experiencing significant interest even in the first few weeks of discussions. Later in the year, we plan to extend the solution to service providers and managed service providers.

Our agile R&D initiative is gathering steam and we expect to substantially transition our worldwide development organization to this methodology by the end of the year with the recent release of nGenius Service Delivery Manager being our first fully agile developed product. This change will allow us specifically to [have] control over the software [development] process and is also expected to raise productivity and increase the quality of the (inaudible).

We are also very pleased that NetScout has been receiving a growing number of industry awards for our visionary technology, as well as our financial achievements, including from Frost and Sullivan into Forbes and Fortune, providing evidence of our growing industry leadership and market-based (inaudible).

In summary, we are confident in our fiscal year 2012 growth prospects based on a strong organic new product lineup featuring advanced proprietary technology, the addition of our proven voice video (inaudible) solution to our portfolio, the investments we made last year in new service provider territories, the continued rapid growth of the service provider data market and our increasing visibility in all of our key market segments.

Thank you, and I would like now to turn the call over to David.

Thanks, Michael. Our quarterly financial results are included with our earnings press release. We report our results on a GAAP basis, as well as a non-GAAP basis. Our non-GAAP results eliminate the GAAP purchase accounting effects of our acquisitions by adding back revenue related to deferred revenue revaluation and removing the amortization of acquired intangible assets. In addition, we remove the GAAP effects of stock-based compensation and our early adoption of new accounting principles.

Our non-GAAP results also exclude certain extraordinary business development expenses for outside services that we incur from time to time in pursuit of potential acquisitions, and we exclude the related impact of these adjustments on the provision for income taxes. The differences between GAAP and non-GAAP are disclosed in reconciliation tables in the press release financial tables. 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.

During fiscal 2012, we adopted among -- along with many other technology companies -- new revenue guidance that [scoped] tangible products sold with software components out of the software revenue recognition guidance. As we've discussed in prior quarters, most of our hardware products, like the InfiniStream, now fall under these guidelines. During fiscal 2012, the impact of adopting this new accounting standard was an increase to our GAAP revenue of $900,000. As the majority of our sales now fall into the new guidance, changes in discounting patterns during fiscal 2012 could impact our ability to demonstrate vendor-specific objective evidence for a portion of our software and appliance software sales still falling under the software rules.

If this were to occur, we would be required to recognize this revenue ratably over the term of the maintenance period sold with the software. This would result in slower recognition of software revenue, particularly during the initial phase-in period.

We reported 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 the financial summary table in the press release for comparative purposes. Accordingly, the results discussed now are presented as GAAP under the new current accounting standards and is non-GAAP under the former historical accounting standards.

Starting with fiscal 2012, we will discontinue reporting of historical GAAP and historical non-GAAP, as we believe the differences will not be material and that will simplify the reporting of our quarterly results.

And now to the financial results -- for the fourth quarter, GAAP revenue was $78 million, up 8% year-over-year; non-GAAP revenue was $77.4 million also up 8% year-over-year. Product revenue on a GAAP basis was $45.7 million and on a non-GAAP basis, was $45 million. GAAP product revenue was up 8% year-over-year and non-GAAP product revenue was up 6%. Service revenue on a GAAP basis was $32.3 million and on a non-GAAP basis was $32.4 million, both up 9% year-over-year.

Our GAAP gross profit for third quarter was $61.6 million. GAAP gross margin was 79%, up 1 point year-over-year. On a non-GAAP basis, gross profit was $62.1 million and gross margin was 80%, no change year-over-year.

GAAP income from operations was $17 million; GAAP operating margin was 22%, up 6 points from a year ago. GAAP net income for the quarter was $10.8 million yielding earnings per diluted share of $0.25. GAAP net after-tax margin was 14%, up 4 points from a year ago. Non-GAAP income from operations was $20.3 million and operating margin was 26%, up 5 points from a year ago and a point below the high end of our target operating margin range. Non-GAAP net income was $12.8 million or $0.30 per diluted share. Non-GAAP net after-tax margin was 17 points, 17%, up 4 points from a year ago. Non-GAAP adjustments to our GAAP results are summarized in the reconciliation table in the press release.

Provision for income taxes are recorded on a full year effective tax rate of 33.8% on a GAAP basis. Our GAAP tax rate in the quarter was 34.6%. We expect our fiscal 2012 tax rate to be 34.5%. We have used the statutory tax rate of 38% to tax affect the non-GAAP adjustments.

Our current long-term model, which is subject to regular review, remains as follows. Non-GAAP gross margin is 78 to 81%; R&D expense to revenue was 13 to 15%; sales and marketing expense to revenue is 33 to 35%; and G&A expense to revenue is 6 to 8%, yielding an operating margin range of 24 to 27%. This model applies, of course, to our full year results. Individual quarters may be outside the range.

Looking back over the 2012 fiscal year, full year GAAP gross margin was 79%, up 1 point; non-GAAP gross margin was 80%, no change from prior year. Operating margin was 20%, up 2 points over last year; non-GAAP operating margin was 24%, up 2 points from a year ago and within our target margin range. GAAP net margin was 13% compared to 11% the prior year; GAAP EPS was $0.87; non-GAAP net margin was 15%, up 1 point over year-over-year and non-GAAP EPS was $1.04.

We exited the year with cash and short and long-term marketable securities of $228 million, up $18 million in the quarter and an increase of $58 million year-over-year. We intend to continue to use our cash judiciously with a focus on M&A activity.

Free cash flow was $19.2 million. Capital expenditures were $3.3 million. Depreciation was $2.0 million. Amortization of acquired intangible assets was $1.5 million.

Marketable securities include investments in auction rate securities valued at $21.5 million. For the 12 months ended March 31, 2011, $8.6 million of auction rate securities were redeemed at par with another $4 million redeemed on April 20, 2011. As of March 31, 2011, the value of these securities includes a temporary decline in value of $2.3 million below par to reflect liquidity concerns. All of these investments have investment-grade ratings ranging from AAA to A with underlying support from the federal government through the Federal Family Education Loan Program. After the April 20 redemption, the remaining holdings are all AAA rated.

We believe they have no credit issues, only short-term illiquidity. We classified these securities as long-term on our balance sheet, with the exception of the $4 million redeemed on April 20, which was classified under short-term marketable securities. We've 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 overall liquidity problems for us.

Accounts receivable net of allowances was 62.8 million, up from $56.8 million last quarter and down from $65.6 million a year ago.

Days sales outstanding were 71 days for the quarter, above our typical DSO range of 45 to 55 days. This is up from the prior quarter of 68 days, but below DSO of 81 days last year.

Inventories were $8.9 million, flat sequentially and down from $9.2 million a year ago. Inventory [terms] were at 3.1 times.

Turning to other metrics, revenue contribution for the quarter from direct customers was 46% and reseller revenue, 54%.

Revenue from international sales was 27% of total revenue, down 4 points from last year. Europe delivered 11%, down 4 points from last year; Asia came in at 6%, down 1 point and other international sales were 10%, up 1 point from last year.

Summarizing large deals, 129 customers gave us orders of $100,000 or more, a decrease of 10 customers from the same period last year; 38 customers gave us orders over $500,000, equal to last year. We received 17 orders over $1 million of which 8 came from telecommunications, 4 from financial services, 2 from government, 1 from healthcare, 1 from manufacturing and 1 from information services. This compares to the identical $17 million orders we received last year, but last year, including 9 from telecom, 5 from financials, 2 from government and 1 from high tech.

We saw total bookings from the following sectors in the quarter. The enterprise sector was 49%; telecommunications was 38; government was 14. Within enterprise, financial services was 23, healthcare was 4, followed by energy at 3 and high tech at 3. A year ago, enterprise was 57%, telecomm, 38, government was 12. Within enterprise, financials was 30, healthcare at 6 and high tech at 5.

Total bookings in Q4 were 83.6 million, down 2.7 million or 3% year-over-year. New business bookings were 60.9 million, up 4.7 million or 8% year-over-year. New business bookings were strongly influenced by the lumpiness of our telecommunications service provider business and increasingly, our enterprise business.

Service provider new business bookings were up 26% year-over-year. In the enterprise, our new business bookings were down 11% over Q4 last year. Financial services subset of enterprise was down 27%. Correspondingly, the growth of the rest of the enterprise sector was up 9%. In Q4 a year ago, we had a significant multi-million-dollar enterprise order, a lump of business that did not happen again this Q4. The government sector globally was up 45% year-over-year.

Service contract renewal bookings were 22.7 million, down 7.4 million or 25% year-over-year. Adjusting for the multi-year renewals bubble that we had occur in fiscal 2010, renewal bookings would have been down only 8% year-over-year.

We believe it's important to view the Q4 bookings in the context of our full year performance because of the volatility of quarterly comparisons. On a full-year basis, total bookings were up 3% or 12% as adjusted for the fiscal 2010 bubbles renewal. New business bookings were up 14%. This growth is approaching our long-range growth target of high teens annually. Renewals as adjusted would have been up 6% year-over-year, naturally lagging new bookings growth.

Product backlog at the end of Q4 remained immaterial. Deferred revenue was $99 million, down $2 million or 2% year-over-year.

And now to our guidance for fiscal 2012 -- we expect GAAP and non-GAAP revenue to be in the range of $326 million to $337 million. GAAP net income per diluted share is expected to be in the range of $0.98 to $1.04 and non-GAAP net income per diluted share between $1.17 and $1.23.

In terms of the quarterly skew of our guidance, we expect the revenue will follow recent seasonality in fiscal '11, although somewhat more pronounced. That is a decline in Q1 from fiscal '11 Q4 comparable to the prior year, but followed by a somewhat larger growth ramp from Q1 to Q4. This more pronounced skew is viewed to the lead time required to produce significant revenue from recently acquired Psytechnics products, as well as to growing demand from the enterprise sector as the economy continues to strengthen. We expect gross margins to remain stable.

Further, we expect operating expense to have noticeably less skew and be more front-end loaded than revenue because of the impact early in the year of the acquired expense of Psytechnics and a major marketing program that we'll be executing in Q1 and with the completion of the hiring ramp that we have been driving for some time. This will cause an EPS decline to slightly below the level of Q1 a year ago, followed by a rapid growth of EPS throughout the rest of the year.

The fiscal year 2012 non-GAAP net income per diluted share expectation includes forecasted share-based compensation expenses of approximately $7 million, expected amortization of acquired intangible assets of approximately $5.9 million, integration expenses related to the Psytechnics acquisition of approximately $700,000, and the related impact of these adjustments on the provision for income taxes of $5.2 million.

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

(Operator Instructions). Your first question comes from Aaron Schwartz with MKM partners. Your line is open.

Hi, good morning. I had a question about the fiscal '12 revenue guidance. It seems like we've seen for a couple of quarters here some lumpiness which we always (inaudible) with your business model, but can you help us with your conviction in some of these larger deals coming in in fiscal '12 and sort of what the impact that has to the acceleration in the growth rate? And then secondly, can you also help us with what type of contribution you have in your guidance from the acquisition of Psytechnics?

Thanks, Aaron. Our confidence in the fiscal '12 revenue numbers stems from a number of factors, but the overriding one is our management of our pipeline. Underneath that is, of course, a lot of growing and increasingly strong customer relationships, particularly in the service provider space, but also in financials and other major enterprise sectors, [meaning] that as we introduce these new functions that Michael and Anil have talked about, both past and future, we're responding to customers' requirements and delivering what they want, and in response, we expect new purchases. That all rolls up into a pipeline which for us extends out a year or more at any point in time and we look at that pipeline and assess the quality of that pipeline and the specific opportunities in that pipeline before we come up with our guidance. And our pipeline has been growing faster and is stronger and larger now than ever before. So that's why we believe strongly in the guidance.

Now, with regard to Psytechnics, we are not, of course, disclosing, as we've said before, the contribution of Psytechnics to that guidance. It is, of course, included, but it does augment our growth rate noticeably. It's not -- it doesn't provide the substantial portion of our growth. Most of that is organic, and as we do -- plan to do additional acquisitions, you should expect to see them also contribute to growth going forward.

I think one thing to add is the product will be integrated with the rest of our technologies, so it will be hard to carve out the number for -- a clear number for Psytechnics.

Okay. And maybe a follow-up question on that. I know historically with new product introduction, you sort of embedded them in your solution and monetized that through the maintenance upgrade path. I would assume this is similar, but can you just help us in terms of how you've monetized that? Is it just selling more boxes and then eventually getting the maintenance upgrade around that, or are we actually priced this separately?

It will be a combination of both. It will be upgrading, providing an upgrade to existing customers, but they do have to buy a new application. Just like we have Performance Manager for data services, there will be a solution like that. Even for existing customers, they only provide that product. The second thing is that even though we are not charging for the functionality in our boxes, having this addition of functionality will allow us to put boxes in more places than we have done before. So [inherently], it's going to affect the number of boxes in a positive way.

Okay, terrific. Thanks for taking my questions.

Thank you.

Your next question comes from the line of line of Mark Kelleher with Dougherty and Company. Your line is open.

Okay, great. Thanks for taking the questions. If -- just as a follow-on to the Psytechnics, that seems to be targeted at the Telco vertical. So should we assume that that would help the Telco, that that would be included in the Telco bucket when those sales get made?

Mark, no. This is Michael. No, actually the [size of the mix] product, first and foremost, is targeted to the enterprise. We are planning to extend it into the service provider and managed service provider segments towards the end of the year, but the first product will be explicitly marketed to launch enterprise users. So, no, the service provider number is not assuming a sizeable contribution from the Psytechnics acquisition this year.

And as with the rest of our products, the categorization of that revenue will depend on the customer it's sold to. It'll be included in both sectors.

Okay. That's helpful, thanks. And just maybe an update on the Cisco and HP partnerships, how's that progressing? What do you think of those these days?

Yes, the Cisco partnership is progressing strongly internally. We have not been able to ascribe a go-to-market significance to it yet, but that's still coming. However, internally, we have engaged in a number of new projects where our technology is evaluated and planned to be included in other Cisco products in addition to the ISR. So we are very encouraged, especially with the Psytechnics acquisition where our Telepresence becomes a very strong meeting point with Cisco. So, yes, that's definitely gaining momentum. The HP relationship, there's no significant change in that relationship at this time.

Okay. Thanks.

Your next question comes from the line of Eric Martinuzzi with Craig-Hallum. Your line is open.

Thanks. Your comments about the seasonality, I want to make sure I understand them in the context of the historical and non-GAAP versus -- basically, the $0.21 you did a year ago in Q1 on the adjusted EPS basis, you're talking about something slightly below that for Q1 2012.

Correct.

And then I wanted to talk to you about the new product offering from VMWare. One of the things that I see NetScout's future in is a good footprint in the cloud. Obviously, if one of the leading players in virtualization software is coming out with an operationally oriented analytics product, I would think that would be a threat to you guys. Do you have any insight on the VMWare product and how it stacks up versus NetScout?

Well, I think it's -- first of all, it's not competitive to NetScout. They're doing what (inaudible) monitoring that has (inaudible) and all the virtual machines running on the (inaudible). We are looking for the traffic and the applications that -- between the [merchant] machines, so we are looking at the traffic or the communication or the relationship between the virtual machines from a network point of view, basically how various (inaudible) are performing as a single entity. And so VMWare product is (inaudible) more to where the settle management side, or system management side, which is traditionally the big players, the big four SBC, IBM and [BMP] are engaged in. So I don't see this as a competition to our product. It's more of a complement to that product.

Okay. And one last question, if I can, on the contribution from service providers, it seems like -- I was obviously anticipating something sometime this summer, which would mean June, July timeframe. This skewing of the year where we have the slightly down year-over-year, at least on the EPS, and I assume that means on the revenue as well for Q1, is the significant ramp. Does that imply large carrier deals in September? Is that what I should take away from the commentary?

Not explicitly, no -- not that there won't be, but that was not our intent. The intent -- our seasonality, our revenue seasonality, is always the way we've projected it. Here, because of Psytechnics and the growing enterprise strength, we expect it to be a little more exaggerated. That's not really a comment on the flow of service provider business, which we expect to continue pretty steadily. There will always be lumps, as we talk about frequently, but we expect those lumps to come pretty ratably across the year.

Okay, thanks.

Thank you.

Your next question comes from the line of Dan Cummings with Bank Equity. Your line is open.

Thank you very much. A couple of questions -- please, if you could address the performance of your direct sales org versus your expectations, I think particularly in financial services in Q4. I'm curious what the Q-on-Q growth rate there was in your fiscal fourth quarter. It looks like you had a big falloff in deal volume at 100,000 to 500,000. I'm curious if that was government perhaps, or was it financial?

And then last question, to do your guidance, if we start off the year obviously around $0.20, you're going to have to be within spitting distance of $0.40 in the fourth quarter if my math is right. Can you just kind of help us with nominal dollars expense-wise? Is anything going to be declining Q-on-Q here over the course of this year, and if so, if you could give us some color on than? Thank you.

Wow. So let's go back to the beginning. You asked about the sales performance and I think regarding financials, is that a correct starting point?

Right.

So there's nothing significantly different about sales performance the end of this year versus prior periods. We did not finish with the same rush that we often -- that we sometimes do, but that was not due to sales performance; that was more due to customer dynamics. And as I mentioned, there was no big financial services lumpy order. That often happens in our Q4. It just didn't happen this year. That doesn't mean it won't next year or again, next quarter. That's not a prediction, but an illustration and it was not -- it was unrelated to financial performance.

We've had very strong sales performance at financial services. We've had very strong sales performance in financials in prior quarters and that strength will resume, particularly with some of the new products that we've talked about, both the ISR product that Michael mentioned and the Psytechnics product regarding Telepresence. They will both, we think, appeal strongly to our financial customers.

And then you asked a question which I'm afraid I'm going to ask you to summarize again for me about the skew.

Sure. You were listing your -- the recitation of the large deals by size. I sometimes like to try to parse those into discrete categories, but even if you don't, it just looks like the $100,000 category seemed to -- kind of weak seasonally. And I was curious if that had anything to do with what you're experiencing in government or any other particular vertical?

No, it was pretty well spread. We were, as we said, a little weaker in financials in the quarter and I don't know actually, but I think it's reasonable to assume that a bunch of those -- that decrease of 10 came from financials, smaller financial customers, but we don't regard that as a secular trend. It's been -- we've had pretty strong consistent growth in large deals and that's what contributes to our lumpiness. But the good news is as we get more and more lumps, lumpiness matters less and less. I don't know how much that helped you, but that's the best I can do with the information we have at the moment.

Okay, sure. And then just the question please on the really strong ramp in earnings and what to expect on operating expense.

Well, we've tried to describe without being -- giving out specific target numbers for the line items, that expense will be much flatter than revenue, and that's probably not a surprise. We've acquired a small company, but it still comes with an expense run rate that continues and it starts in Q1 and while the revenue ramp is on a very different slope, right? So another way to think about that is although we've said the -- and we reiterate here-- the acquisition will be accretive for the fiscal year. It will not be accretive in Q1; it will be dilutive for the reasons we just talked about.

And then in Q1, as I mentioned, we will have a significant marketing program rolling out focusing on our Unified Service Delivery initiatives and we're still finishing up our hiring ramps. So all of those things will basically front-end load expense, particularly in Q1, but also in Q2. That doesn't mean that expenses are going to grow throughout the year; it will. There will be modest, but noticeable operating expense growth throughout the year as volumes grow, but not nearly the same ramp as revenue. I hope that was helpful enough.

That's fine, yes. Thank you very much.

Thank you:.

Your next question comes from the line of Gary Spivak with Noble Financial Group. Your line is open.

Hi, thank you for taking my questions. I want to dig in a little bit more on the large deal activity and the enterprise. First, were there large deals in the pipeline that just didn't close or did they not materially -- materialize in the pipeline as much as prior years, prior quarters?

Well, we always go in with multiple times, three to four times the pipeline in the quarter that we expect to close. Closing rates were down a little bit in the quarter. Otherwise, we would have had more strength as we had anticipated we might, as Anil said, when we gave guidance, the narrow guidance in January.

It isn't that there were a couple of big deals that just almost made it across the finish line, but not quite. We knew early on in the quarter that things were a little slower than we would normally expect to see in Q4, and it was sort of the luck of the -- many draws that we think caused that, not a sequential sort of secular trend. So we're not pointing to a couple of big deals that almost closed, but didn't. If it doesn't close, it doesn't close. So you should expect to see return of big deals, return of enterprise performance, return of financial performance, as we go through fiscal '12. Was that enough, Gary?

Yes, that was good, and will that be back-end loaded?

Well, our performance is -- revenue performance, bookings performance, is always back-end loaded.

Right.

I mean, we -- in Q1, (inaudible) everything gets reset, people, new messaging, new targets, new objectives for the year, and so it takes -- so Q1 is always a slow start; Q4 is always usually a very fast finish. So we expect that, yes, to ramp. That part is normal seasonality and we have added to that the continuing growing strength in the enterprise generally, plus our new product introductions that will be rolling out over the back half of the year. We have been focusing in the last year and half or so -- maybe a little longer -- on competing in the service provider space and we've been doing that, we think, effectively.

We are now focusing with equal vigor on competing in the enterprise space, as you've heard from some of the discussion today and you'll see that impact coming up to meet the growing -- returning demand in the enterprise as the economy recovers and our major customers' businesses turn up, continue to turn up.

Okay, that's helpful. And then on the G&A line, there was -- there seems to be some pretty significant cost controls there. Anything noteworthy to point out?

Can you be more specific as to what you're --

The G&A operating expense?

Yes, so we were down about $200,000 quarter-to-quarter. We're up year-over-year about 3%, so kind of steady. Is that what you were --

Yes, yes, I may need to review that myself. And then the DSOs, David, you indicated they were above the range. Is that reflective of certain linearity in the quarter or --

Yes, it is. DSO is driven by linearity and then in our big quarters, Q3 and Q4, we often have, as we have finishes, fast finishes in Q3, it's usually the customers driving the finish, as their budget year ends and in Q4, it's the sales year end. Those cause skewing toward the back end of the quarter which causes DSO rise. We don't expect that to continue in Q1 and Q2.

Okay, thank you.

Thank you.

Your next question comes from the line of Kevin Liu with B. Riley & Company. Your line is open.

Good morning. Just last quarter, I think you guys didn't see the strength in service providers. It looks like that started to come back and you talked about some acceleration of orders throughout the first half of calendar '11. So I'm just wondering how much of that came through in the March quarter and how much more you would expect coming in over these coming months.

Well, we did see a significant uptick in service provider orders. We continued to characterize those as very lumpy. We had some lumps in Q4 and that's great. We expect more lumps. Sometimes it's difficult to predict, but they're going to come in Q1 or Q2, but they will come, and we expect that strength to continue. We're strongly positioned in most tier-one carriers. We're not the only vendor to them, but we're strongly positioned. The data management solutions that we provide are of increasing relevance to our mobile carrier customers' business.

And in tier two, we're undergoing some significant success, where quite frankly, the competition is a little less intense. And that's beginning to -- the investment, as Michael talked about it, with our overseas sales footprint, the investment we've made over the last year or so, is still to yield results, substantial results, but it's about to happen. We're seeing the start of it, as we have growing results in the Asian geographies, principally from service providers.

Got it. And as kind of a follow-on to that, one of your major tier one customers in the US is looking to roll out their next-gen network by the middle of this year. Does that detract from perhaps order flow ahead of that rollout? And then also on the tier two side, I'm just wondering if the characterization of strength there is more so on the design wins and we should see the orders start to flow through in fiscal '12 or if you're already seeing those orders come through.

Well, the tier one rollouts will continue apace and we expect to participate in them. And to your question as to whether or not that's caused a pause or a hiatus, yes, there is some impact of that continuing, but we expect that to pick up. Whether in Q1 or beyond is a little hard to tell, but we do expect it to pick up.

And in tier two, we have design wins where the initial order is -- usually a design win is indicated by an order, right? But initial orders sometimes are small and where it's indicated as a design win, then we do expect substantial uptick. We're in the phase with some of our earliest design wins where we've seen one or two of those follow-on orders, but it's -- really, with many of them, it's still in the early stages.

Great, thank you.

Thank you.

(Operator Instructions). Your next question comes from Scott Zeller with Needham & Company. Your line is open.

Thanks. Similar to an earlier question regarding the opportunity around the next-generation networks, I mean, we've heard David in previous calls that some of the -- I guess the units and the deal sizes for these next-generation networks are somewhat modest in size. You're looking forward now and could you tell us if you think the opportunities for selling into those newer projects are growing?

We think the opportunities for our product line, the functionality that we provide, are growing. That may not apply to everyone that sells to the carriers. What's going on here is that the rise of data traffic in mobile networks is a rapidly growing -- data traffic is the rapidly growing portion of traffic and the carriers have been wrestling with that and how to manage that and deliver application performance and services across their expanding networks, including the next-gen or 4G or LTD or beyond networks, which are going to be all IP and principally data traffic. It's not yet principally data traffic, but it will be, we understand.

And that is where we play so strongly and where some of the competitors don't play so strongly, and most of the competitors don't play so strongly, so that we will -- we expect that -- another way to say that, our opportunity set, given the shift in technologies and the shift from voice to data in the traffic mix are growing faster than other people's opportunities. And we expect that to continue for some time.

Thank you.

You're welcome.

At this time --

Tracey, any further questions?

Not at this time.

Well, thank you all very much for joining us early morning instead of at the end of the day. We appreciate your attendance and your questions and we look forward to talking to you again in 90 days. Have a good day.

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