Netscout Systems Inc (NTCT) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to NetScout's fourth quarter fiscal year 2012 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, Ms. Jean Bua; NetScout's Chief Operating Officer, Mr. Michael Szabados and Mr. David Sommers, NetScout's Executive Vice Chairman. At this time, I will turn the call over to Ms. Cathy Taylor, NetScout's Director of Investor Relations to provide the opening remarks. Ms. Taylor, please proceed.

Thank you, and good afternoon, everyone. Welcome to NetScout's fiscal 2012 fourth quarter 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 the discussion of the factors that we currently anticipate may influence our results going forward. These statements are forward-looking statements made pursuant to the Safe Harbor Provisions of Section 21(e) 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 2013, acquisitions, integration success and 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, 2011 on file with the Securities and Exchange Commission. 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 differed revenue reevaluation and removing the amortization of acquired intangible assets, as well as a GAAP effect of stock-based compensation.

Our non-GAAP results also exclude certain extraordinary expenses relating to our acquisitions, including compensation of post-combination services. We exclude the related impact of all these adjustments on the provision for income taxes. The differences between GAAP and non-GAAP are disclosed in reconciliation tables in 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.

I would like to add that we have included on our webcast today a slide presentation that provides a summary of key financial data that accompanies the financial section of today's discussion. For those listeners who have dialed in to the call this morning and would like to view this slide presentation, it is available on our webcast at www.netscout.com/investors, and then click on today's webcast.

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

Thank you, Cathy. We are pleased to have completed our fiscal year with a strong quarter. We posted record quarterly non-GAAP revenue of $89.6 million, an increase of 7% sequentially and 16% year-over-year. Non-GAAP earnings by share were up 11% sequentially and 30% over the last year.

Our full year results surpassed the $300 million mark, which was an important milestone for NetScout. Fiscal year 2012 non-GAAP revenue was $309 million, up 7% over the prior year. Non-GAAP earnings per share was $1.10, up 6% over last year. Revenue for the year came in at the high-end of the narrowed guidance we issued in January, which was $305 million to $310 million.

Fiscal year 2012 GAAP and non-GAAP net income per diluted share was within the narrowed guidance ranges. For the year, total bookings were up 17% over last year. These increases were driven by total bookings from our service providers, which are particularly strong with an increase of 31% over last year.

As we have expected, growth accelerated in fiscal 2012 from wireless carriers expanding their 3G and 4G LTE rollout and from our growing base of competitive wins globally. Total bookings for our broader enterprise sector was 13% over last year. And in the enterprise vertical financial services, which was volatile across the year, total bookings were up 15%. The government sector finished the year with an 8% increase in total bookings despite a very slow start.

Service renewals, which are included in total bookings, were up 30% year-over-year and drove, therefore, the revenue up 12%. The ascent of our service renewal business is due to the increasing value that our service delivery solution brings to our customers. Our fourth quarter bookings were particularly strong. Total bookings were 32% year-over-year and up 33% sequentially.

In the quarter, business from our financial services service provider and government came in strong over last quarter and year over year. Michael will provide details shortly on our achievements within these sectors. We close the fourth quarter with $13 million of product backlog. We plan to maintain a significant backlog going forward.

To recap our fiscal year, we have an unusually slow start in the first quarter when we saw minimal bookings from the US government due to the budget stalemate and lower than normal orders from financial services, which further exacerbated our historical seasonality. Q2, however, was very strong with financial services and government bookings up substantially from the first quarter and from the year before and we built a sizeable backlog. We continued the Q2 momentum into the second half of the year with bookings up 37% over the first half as we saw greater than normal seasonality. This momentum was primarily fueled by orders from service providers as they gain market share.

During the year, we made significant enhancements to our service provider solution and we won new business as a result, seeing an increase in the number of new LTE accounts. Our proprietary patent-pending Adaptive Session Intelligence or ASI technology is giving us an edge over competition, providing superior real-time analytics, scalability, and price performance. The large tier one carriers and an increasing number of tier two carriers are directing their CapEx dollars toward our solution because we help them better manage their overall CapEx spend and deal with the ongoing hyper-growth of data traffic.

We expect to continue to win market share in IT-based service assurance for wireless carriers globally. During the year, we completed three acquisitions. First, Psytechnics, a recognized leader in IP, voice, video telepresence quality monitoring for unified communication services based in the U.K. Second, Fox Replay, a leading provider of session reconstruction and replay technology in support of cyber-intelligence based in Netherlands. And third, Simena, a leader in solution selling packet flow aggregation switches for high performance networks based in Virginia.

These acquisitions were small companies with unique technologies that enhance our service delivery and management platform, with products and skill that will accelerate our time-to-market, especially in our enterprise segment. All of these acquisitions fit well into our solution set and we'll have -- plus take advantage of growing market requirements and unified communications and cyber-security. The acquisition of Simena was a natural addition to our existing InfiniStream product line.

All three acquisitions are complete and fully integrated. They will help us achieve the aggressive 10% to 15% topline growth target that we are planning in fiscal 2013. Our fiscal year '13 growth is our next step on the path to achieving our long-term 15% to 20% revenue growth target.

The success we are seeing with our unified service delivery management platform as a total solution for advance application and service assurance makes it clear that our market position and product strategy are strong and that our value proposition is resonating with the customers. We will continue to develop new products and acquire organizations and technologies to further enhance our competitive advantage in helping our customers to assured mission critical services across their infrastructures and to optimize their end-users' experience.

As always, I would like to thank all of our employees, customers, investors and stakeholders for their continued support and we look forward to sharing of our accomplishments with you throughout the coming year. Michael will now discuss some additional highlights of our performance and direction.

Thank you, Anil. I would like to share our high level summary of our Q4 and fiscal year 2012 accomplishments and provide some insight into our path forward for fiscal in 2013.

We are very pleased with our growth trajectory both in the enterprise and service provider parts of our business. Our strong service provider bookings were visible on multiple fronts. In both tier one and tier two wireless communications companies, there are continued investments in LTE service assurance, as [users access] a number of wireless service providers globally has certified NetScout service assurance solution as LTE-ready. And as a result, we are seeing an uptick in orders for 3G products and technologies also.

In other words, being 4G ready gets NetScout significant 3G business as well, and 3G is where a big portion of the traffic growth and CapEx spend will be in the coming year. We are also winning deals based on the significantly improved scalability of ASI technology, which is designed for network speeds reaching 100 gigabits per second, giving us a significant competitive advantage. This allowed us to win significant new business from an established tier one carrier in Europe for current 3G operations and the potential for future LTE business.

We also made major enhancements to our service delivery manager or SDM product, prompting our service provider customers to expand their SDM deployments, moving beyond post-event session trace, subscriber by subscriber measurements to real-time, top-down user experience by region, by mobile device type, and service. For example, a tier-one carrier has recently extended their use of our solution to help identify and mitigate issues they have been having with their new LTE rollout, which a competitive solution could not resolve quickly enough.

In addition to wireless carriers, cable companies have become a significant component of our telecommunication sales. As with wireless carriers, our products are now being selected to provide service assurance for cable provider's customer facing networks, as they continue to move to IT based service delivery.

In enterprise share worldwide, we saw a good -- year-over-year growth, which has been supported by our new unified service delivery management or USDM capabilities. This past year, we release new functionality for unified communications, applications performance management, and with the addition of our packet-flow switch products, we are enabling our customers to leverage their existing investment in our product into the new functional areas.

In unified communications, we integrated the technology we acquired from Psytechnics, with our InfiniStream data collectors into a product called nGenius Voice Video Manager, a performance analysis module for managing the user experience for unified communication services, such as telepresence, video and voice. We have won some new enterprise customers with this product. This past quarter, we saw that our nGenius Voice, Video Manager Solution to a large network infrastructure supplier for managed cloud services.

With the Replay acquisition, we have added cyber-security to our USDM portfolio and have been focused on the integration of that technology. Based on integration success to date, we plan to launch that new cyber-security functionality as part of our USDM portfolio in the near future.

In the area of application performance management, our nGenius Service Delivery Manager and our nGenius Enterprise Intelligence products are helping us to build expanded presence. Earlier in the year, we enhanced these products, incorporating our new ASI technology, creating a management system with automated analytics of system-wide performance with proactive [in-flow] management of the IT services and applications as experienced by the users. Our expansion of USDM functionality extends the value of existing customers' investments in NetScout instrumentation and makes new sources of budget funding available to us.

Thank you. I will now hand the call over to Jean for our financial discussion.

Thank you, Michael, and good morning everyone. As Cathy said earlier, we have slide presentation to accompany this section of the call. You may feel free to follow along with the slides as I speak. However, I will discuss our results without needing to reference the slide.

We're starting with the third slide, which shows our fourth quarter income statement. As Anil outlined, our business produced solid result for the fourth quarter of FY 2012. Our non-GAAP revenue grew 16%, while our non-GAAP earnings per share grew 30%.

Our fourth quarter non-GAAP total revenue was $89.6 million, which is an increase of 16% from the same quarter in fiscal year '11. Within non-GAAP total revenue, non-GAAP product revenue was $54.5 million, which is an increase of 21% over the same quarter in fiscal year '11.

Service revenue was $35.1 million on a non-GAAP basis, which is an 8% increase from the same quarter in the prior year. The GAAP total revenue for the same period was $89.5 million, which is an increase of 15% from the same quarter in fiscal year '11. Within GAAP total revenue, GAAP product revenue was $54.5 million, which is an increase of 19% over the same quarter prior year.

Service revenue was $35 million on a GAAP basis, which is an 8% increase from the same quarter in the prior year. On a non-GAAP basis, our earnings per share for the fourth quarter were $0.39. This is a $0.09 higher than the fourth quarter of fiscal year '11 and represents a 30% increase. On a GAAP basis, our earnings per share was $0.30. This is $0.05 higher than the fourth quarter of fiscal year '11 and represents a 20% increase.

Turning to slide four, the business maintained strong gross profit margins and growing operating margin. On a non-GAAP basis, our gross profit was $72 million representing an 80% margin.

This margin is consistent with the same quarter from the prior year. Our GAAP gross profit for the quarter was $70.5 million and GAAP gross margin was 78.8%. Non-GAAP income from operations was $26 million. Our non-GAAP operating quarter was 29%, which is a 280 basis points increase from the same quarter prior year driven by the 16% revenue growth and continued prudent operating cost maintenance.

GAAP income from operations was $20.4 million. GAAP operating margin was 23%, which is a 120 basis points improvement over the same quarter in the prior year. Non-GAAP net income was $16.4 million or $0.39 per diluted share.

The non-GAAP net income after tax module was 18% was up 170 basis points from a year ago. GAAP net income for the quarter was $12.9 million, yielding earnings per diluted share of $0.30. GAAP net income after tax margin was 14.5%, which is an increase of 70 basis points from a year ago.

The major differences between our non-GAAP and GAAP income from operations for the quarter is the exclusion of stock-based compensation for $2.6 million and about $2.6 million of cost associated with our acquisitions, which includes amortizations of intangibles for $1.8 million and business development expenses totaling $500,000. These are details in our reconciliation of our non-GAAP to GAAP results presented in our press release.

The quarter's provision for income taxes is recorded based upon a full-year tax rate of 36.3% on a GAAP basis. Our GAAP tax rate for the quarter is 35.65%. Consistent with past practice, we have used the statutory tax rate of 38% to tax effect the non-GAAP adjustment. The adjustments reconciling our non-GAAP results to our GAAP results are summarized in the reconciliation table included with our press release.

Turning to slide five, which shows our total booking and total bookings components, total bookings in Q4 were $110 million, an increase of $26.4 million or 32% year-over-year. Within total bookings, our new business bookings were $75 million, an increase of $14.1 million or 23% over the prior year fourth quarter. Service contract renewal booking in the quarter was $35 million, an increase of $12.3 million or 54% year-over-year.

Product backlog at the end of the quarter was $13 million. The components of our total bookings for the fourth quarter of fiscal year '12 were as follows; service provider, 33%; financial, 30%; government, 13%; and other enterprise, 24%. This compares with the prior year's quarter total booking component as follows; service provider, 38%; financial, 22%; government, 14%; and other enterprise 22%.

Slide six is a summary of our deals for this quarter. The large deal within the quarter 157 customers gave us orders of over $100,000 in comparison to 129 customers from last year. 41 customers gave us orders over $500,000 in comparison to 38 customers from last year.

We receive 21 orders over $1 million of which nine come from telecommunications, six from financial services, two from government and four from others. This compares to 17 orders over $1 million that we received last year in the fourth quarter. Last year's orders that were greater than $1 million included 8 from telecommunication, 4 from financial services, 2 from government and 3 from others.

For the full fiscal year 2012, slide seven shows our results. The fiscal year '12, non-GAAP revenue was $309 million, which is an increase of 7% from fiscal year '11. GAAP revenue for fiscal year '12 was $308.7 million, which is an increase of 6% from fiscal year '11.

Non-GAAP and GAAP product revenue was $168.1 million for fiscal year '12. An increase of 6% over prior year non-GAAP product revenue and 5% over prior year GAAP product revenue. Non-GAAP service revenue was $140.9 million and GAAP service revenue was $140.6 million for fiscal year '12. This is an increase of 8% over prior year for both non-GAAP and GAAP service revenue.

On a non-GAAP basis, our growth profit was $248.4 million representing an 80% margin. This margin is consistent with prior year. On a GAAP gross profit for the -- our GAAP gross profit for the fiscal year was $243 million and GAAP gross margin was 79%, which is consistent with prior year.

Non-GAAP income for the fiscal year from operations was $75 million. Our non-GAAP operating margin for the year was 24%, which is consistent with prior year. GAAP income from operations for the fiscal year was $54 million. GAAP operating margin was 17.4%, 2.6 points lower than the previous year.

On a non-GAAP basis, our earnings per share for fiscal year '12 were $1.10. This is $0.06 higher than fiscal year '11 and represents a 6% increase. On a GAAP basis, our earnings per share were $0.76.

Turning to slide eight, which show our total bookings and total bookings growth for the full year of 2012. Total booking in FY '12 was $333.8 million, up $48.2 million or 17% over year. Within total bookings, new business bookings were $238 million, up $26.2 million or 12% over the prior year. Renewal bookings were $95.8, which is an increase of $22 million or 30%.

All of our business verticals experience growth from the prior year of 2011. Our total bookings for service provider sector grew 31% on a year-over-year basis, which was helped by our investment and expansion to service providers on a global basis as well as LTE deployment from the major global carriers.

Our total bookings for the financial sector grew 15% on a year-over-year basis in spite of weakness in this vertical within our European geography. Our enterprise sector increase 11% aided by our recent acquisitions of technology.

The total bookings for government vertical increased 8% year-over-year as the government continued its buying after a slowdown in our first quarter of the fiscal year. Within this sector, our federal government total bookings increased 8% while the rest of the government business, which includes foreign governmental agencies and state governmental agencies, increased 8% also.

Slide nine shows our new business bookings by vertical. The component of our new business bookings from fiscal year '12 were as follows; service provider, 34%; financial 27%; government, 15%; and other enterprise, 24%. This compares with the prior year new business booking components as follows; service provider, 30%; financial, 28%; government, 17%; and other enterprise, 25%.

Product backlog at the end of Q4 was material. We are entering fiscal year '13 with product backlog of $13 million.

Turning to slide ten, this is a depiction of our revenue by geography. For the full year revenue from international sales was 25% of total revenue as compared with 27% of total revenue for fiscal year '11. Within our international sales, Europe delivered 10.7% as compared to 13% last year. Our Asia sales percent was 5.7%, which is consistent with fiscal year '11. Other international sales were 9% as compared to 8.5% from the same quarter a year ago. Additionally, our total deferred revenue was $112, which is an increase of $12 million from last year.

Slide 11 includes highlights from our balance sheet. We continue to maintain strong liquidity. At the end of the quarter, we have invested cash, short-term marketable securities and long-term marketable securities of $212 million. This represents a decrease of $17 from the prior year's ending balance of cash and short and long-term marketable security of $229 million. Our free cash flow generation of $57 million for fiscal year 2012 was comparable to fiscal year 2011. However, during 2012, we invested in acquisitions of product technology as well as executing against our share repurchase program.

Accounts receivable net of allowances was $70 million up from $62.8 million a year ago. Day sales outstanding were 70 days for the quarter. This is down from 71 days for the fourth quarter of last year.

Inventories were $8 million. This is a $900,000 decrease from the fourth quarter of fiscal 2011. Inventory turns were 3.7 times for this quarter versus 3.1 times for the fourth quarter of FY '11.

Turning to our guidance of fiscal year '13, slide 12 illustrates our growth for revenue and earnings per share. For fiscal 2013, we expect GAAP and non-GAAP revenue to be in the range of $340 million to $355 million.

This represents a growth range of 10% to 15% over fiscal year 2012. This also represents a product revenue growth in the 15% to 20% range. Non-GAAP net income for diluted share is expected to be between $1.21 and a $1.30.

This represents a growth of 10% to 18%. At the midpoint of the range, our growth would be 15% over fiscal year 2012. GAAP net income per diluted share is expected to be in the range of $0.96 to $1.05. Our GAAP net income for diluted share is not inclusive of the effects of valuing any intangible assets related to acquisitions that have not yet closed or any associated incremental costs for business development activity.

The fiscal year 2013 non-GAAP net income per diluted share expectation excludes the purchase accounting adjustment to fair value of approximately $300,000 deferred revenue, forecasted share-based compensation expenses of approximately $9.8 million, estimated amortization of acquired intangible assets of approximately $6.4 million, compensation for post combination services of $900,000 and the related impact of this adjustment on the provision for income tax of $6.6 million.

As a result of shift in expenses to the first quarter of fiscal year 2013, we're also issuing guidance for the first fiscal quarter.

Slide 13 shows our guidance range for Q1 of 2013. For the first quarter of fiscal year 2013, we expect GAAP and non-GAAP revenue to be in the range of $73 million to $76 million. Non-GAAP net income for diluted share is expected to be between $0.16 and $0.19. GAAP net income per diluted share is expected to be in the range of $0.10 to $0.13.

For the first quarter of fiscal 2013, the non-GAAP net income per diluted share is expected to be in the range of $0.10 to $0.13 cents. For the first quarter of fiscal 2013, the non-GAAP net income per diluted share expectation excludes the estimated purchase accounting adjustment to fair value of approximately $100,000 for deferred revenue; forecasted share-based compensation expenses of approximately $2.2 million, estimated amortization of acquired intangible assets of approximately $2 million; compensation for post-combination services of $200,000 and the related impact of these adjustments on the provision for income taxes of $1.7 million.

We do not plan to issue quarterly guidance in the future and will maintain our practice of annual-only guidance. Additionally, our long-term operating model remains unchanged.

This concludes our financial discussion this morning. Thank you for joining us and we look forward to taking your questions. Stephanie?

(Operator Instructions). I will pause for just a moment to compile the Q&A roster. And your first question comes from the line of Chad Bennett with Craig-Hallum Capital, your line is open.

Yes. Hey, guys, nice quarter. Just a few questions from me. I think the biggest surprise relative to what I was thinking is probably the financial services results in the quarter from a booking standpoint. Can you give us a sense for what you saw there during the quarter in terms of a pick up and maybe a little of insight as to how sustainable you think that is and if there was anything that was abnormal in that specific segment in the quarter that helped it.

Well, I'll just say a couple of things and maybe David can add to this in more details. We don't see a trend right now to really see what may happen moving forward. I think this was -- some good deals we got this quarter but it will take some time for us to see a pattern that financial services if fully coming back for the coming year.

So I think it's affected by a couple of big deals and hopefully, this is not an anomaly and we'll continue to see good business especially with some new products we have coming out for that space.

Let me just add that we did -- we saw a strong business, particularly from one very large customer who has been strong for us all year and as Anil suggests, some of the rest of the financial services industry has not been so strong.

We think, however, that at some point in the fiscal year, the rest of the financial services business for us will start to pick up as our customers start to compete with each other based on their infrastructure, as this one large customer for us has been implementing new initiatives with their infrastructure including our solutions. So we are upbeat on the ultimate upturn of financial services as is included in our guidance.

Great. And then, as much as you can give us guidance on -- for the year guidance -- revenue guidance that you gave, how should we think about the growth rates on the service provider side and then on just lumping all the enterprise business together. How should we think about those two segments growing as much as you can say?

Well, we have a very optimistic view of service provider business as we've tried to indicate to you. And the growth in the service provider bookings that Jean talked about for this year, we think are indicative of the future and perhaps better for the service provider business. We're at early days of the penetrating wireless carriers globally. And for some carriers in the major markets that we have been taking business from in North America and Europe -- even some of the major carriers there we're still at very early days.

We are having success in gaining share. So you can look at our current bookings growth in FY '12 and think about that going forward or better.

We think that in the enterprise, including financials, that the kind of growth that we saw this year is likely to continue and that is the belief that supports our guidance. We see, as financials come back, as Anil suggested -- we talked about that that may provide some acceleration to that business. But we think the enterprise business coming -- and following the pick up in the economy and the pick up in their businesses -- the topline growth of their businesses that we see in the future will continue to be stronger in the future than it has been over the past several years for us. Is that helpful?

Yes, absolutely. And then one last one for me, maybe for Jean. The service bookings renewals in the quarter up 54% year-over-year seems like a really big number to me. Was there anything -- is that just seasonality? Was there anything abnormal or was there a catch-up kind of renewals in there or some renewed early or anything like that -- abnormal in that number?

I would tell you it's probably three things. One, if you recollect, the FY '11 service renewals bookings were depressed from multiyear from pull forwards into FY '10, so the comparable is probably a little easier to achieve.

Yes, you are correct about seasonality. The last few quarters of the year are generally higher in renewal bookings and we have been working with some of our larger installed based and creating large multiyear contracts that one of them came through in this quarter.

Is there any way to quantify that?

I don't think we divulge that level of analysis.

Okay. No. That's very helpful. Thanks. Nice quarter.

Thank you.

Your next question comes from the line of Matt Robison with Wunderlich. Your line is open.

Yes. Let me add my congratulations especially to the bookings. Can we talk a little bit about this expense pattern that you've identified for the first quarter? It sounds a little bit structural as -- that you're going to front-load it. That'd be my first question.

Sure. I think -- I don't know that we would describe it as front-loaded as much as one of the effects in the first quarter is that the two acquisitions that we made, Simena and Replay, came in late in Q3. So the run-rate on Q1 over Q1 is higher.

And then, as you remember last year, we put in -- we decided that we were going to, for efficiency reasons and other reasons, combine our user forum with our sales meeting. So we didn't have a user forum last year. We are having that actually, next week. So the expenses associated with that user forum is happening in this quarter, where we didn't have any in the prior fiscal year. That's mostly the genesis of the expense shift.

Okay. And you mentioned cable companies, I thought that was interesting. Why are cable companies stepping up now? And what's the catalyst for that change?

Well, cable companies have the same needs ultimately in their IP service assurance project. And so we have been participating in voice and other -- and also video projects for the cable companies and Wi-Fi hotspot providing service and that sort of thing. So the cable companies are coming up the IP curve very fast also and they have constituted a relatively small but fast-growing component of our non-tier one service part of the business.

So you're starting to see these Wi-Fi proxies for 4G materialize in demand at cable companies a little bit?

Again, that's part of it.

I think overall, as just Michael was saying that -- I mean we are IP expert from the enterprise and probably the only company who had IP expertise for the cable and telcos prior to this whole trend moving in. And so I think we're just benefiting from the trend. We are in right place at the right time and as the transition is going to IP in various segments, whether wireless or radio access network, which it will be upcoming, LTE or cable provider, I think we are benefitting from the trend because it's roughly the similar set of problems we need to address for them and they have similar challenges.

Jean, you mentioned DSO in the year-over-year comparison but the cash flow was pretty strong given that there was a big increase in DSO from a sequential standpoint. Can you talk a little bit about linearity and what we should expect in the first quarter and also, I didn't catch it if you could give me the headcount, that would be nice.

So, regarding our DSO, it is just generally -- we maintain our collection activity and we still have a very high quality portfolio of receivables. The DSO skew from the prior quarter is more related to the timing of renewal bookings. And when they come in, as we mentioned, we had a few larger ones at the end of this quarter. So, that's why the DSO went up.

And what was your headcount question?

Well, I didn't catch it, if you said it. Could you repeat it?

What, the number of headcounts for the end of the year?

Yes.

About a little less than 900, about 890 employees.

Thank you very much. I'll yield the floor.

Your next question comes from the line of Alex Kurtz with Sterne Agee. Your line is open.

Yes. Thanks for taking the question. Dave, my head almost rolled off the shoulder -- my shoulders with the quarterly guidance. But we'll discuss that later, I guess.

When I look at the strength of the telco bookings and then caution with a little bit of the Q1 outlook here. And then obviously from my calculations, there is a deceleration in Europe in the quarter.

Can you just give a little bit more color and then -- and on top of the government, can you just give us a little bit more push and pull in the near-term demand functions across all the key verticals? So, it sounds like something is sort of amiss in government. It seems like there is a deceleration in Europe. But then, obviously, mobile had a very strong quarter. So, just a little bit more content, that would be great.

So, the demand in our verticals, the deceleration in Europe, I would -- we would -- what we have noticed in Europe is that we still have good demand in service provider, which is -- as you have noted in the vertical for service provider has been very strong, which is just the execution against our strategies for LTE and 3G.

The deceleration in Europe is mostly due to -- there's a large percentage of banking industry over there. And in the -- with the Eurozone, economically, the way they are right now, we're not seeing a lot of activity within those financial industries. That is most -- that is at the heart of the deceleration in the European market.

And then just a little more clarity on government, and it's just sort of just a pause ahead of typical September budget flash or is there something more systemic that you guys are starting to see out in the government.

No, I think with our long-term relationship in the project that the government is still doing, we don't see any kind of a pause in our relationship with the government. We have spoken in the past about their buying processes and just general wariness with when they actually execute. But other than that, we don't see any trend that would be significant.

Just last question from me. How should we think about services growth versus product growth for the year? Obviously, you had significant product growth year-over-year in March. And I'm just wondering out how you guys sort of think about that.

Would you expect product to outgrow services, which I imagine you'd say? But give a little bit more color on those two growth rates for the year versus what you gave for guidance. Thank you.

Yes. Let me do it, Alex, just a high level view and then David will provide more details.

So, as Jean mentioned that I think some of the growth is a result of advance bookings in fiscal year '10. So, a number in fiscal year '11 was sort of artificially low. But overall, I think we -- we don't see a big growth there, but we don't see some of the challenge we had with -- previously because of some refresh and some other things going on with our earlier product acquired from Network [Jammers].

So while we don't see this growing anywhere close to the -- I mean the rate at which we have seen -- but a lot of the growth is going to really come from the product side as we mentioned. But we -- some of the negative effects of renewal growth in the past are sort of behind us.

So, just to frame it, again, what Anil was, of course, referring to was the big bubble of multiyear renewals that we had that we talked about a couple of years ago, that depressed FY '11 and therefore made the complete growth in FY '12 look larger. And I'll be touching that as well.

Alex, you anticipated that as we historically said, the product revenue growth will precede service revenue growth, and that we expect that to be the case in FY '13. Anil mentioned in his prepared remarks that against a total revenue outlook of 10%, 15% growth, we expect product to be in the 15% to 20% range, or perhaps Jean mentioned that. Sorry. And that's indicative of that spread, right? So, product revenue outgrows service revenue yielding a total revenue growth in the 10%, 15% range. Is that what...?

Thanks for the clarification.

And by the way, don't expect to see quarterly guidance going forward.

Oh, come on, David.

And your next question comes from the line of Aaron Schwartz with Jefferies. Your line is open.

Good morning. You talked a little bit about in the service provider side, I guess, achieving certification in a number of different providers. It's not something I really heard you guys talk about before. Can you just walk through sort of what that means? Does that sort of put you on a sort of standardized list or purchasing list where you could expect to maybe steadier purchases quarter in and quarter out? Or maybe you can just kind of walk through what you were referring to there?

Yes. There is no real standardization. I think there are still multiple vendors, be it supplying the products to tier one providers. I think we are just getting used in more bricks than before. So, it's not that we are the sole vendor and provider, it's just we are being invited into more situations with the tier one.

We have business with tier one customers last year also. But now, we are in a better shape with other product and other feature sectors improved and the [Aztec] technology is coming about.

Maybe a better term would be operationalized other than certified. So, we can deployed into operational networks in LTE in particular. And that's really the right way to characterize what I had said about certifications. And that acceptance and [defect] to deployment is what created our acceptance as the LTE IP leader and created subsequent. And that adds 3G opportunity as well.

Okay. Thank you.

And then just a quick question on the services revenue in the March quarter was down -- fairly sizeable on a sequential basis, was anything going on there? Was that just the fact -- I think you alluded to some timing of renewals coming late in the quarter? I mean, can you just walk -- would that have the impact on the sequential decline in services?

No, the sequential decline is just a representation of the seasonality of the renewal pattern.

Okay. And then last question from me, on the financial services customer that you're working with, can you just talk to the magnitude that you have in the quarter here? Was it sort of $5 million or $10 million plus dollar deals? Is there any way you can help us out with sort of the size of that transaction in the quarter?

We don't talk about -- I mean don't characterize beyond $1 million. Clearly, it was in the above $1 million dollar deal. But beyond that, I think we have just decided not to report on that and -- so, that's where it is. It' s a $1 million dollar deal. But how big it is we are not going to be disclosing.

It was significantly above $1 million dollars. But as Anil said, we don't disclose that. And it was not the only -- there was not only one major customer. That's what I highlighted. There were actually three financial customers in our top 10 deals for the quarter.

Okay. Terrific. Thank you and congratulations on the quarter.

Thank you.

Your next question comes from the line of Dan Cummins with ThinkEquity. Your line is open.

Thanks very much. A couple of things here, David, could you give us -- or I'm sorry, could you just go through your maintenance business, or however you define your recurring revenue, the growth rate for just completed Fiscal '12 and projection going forward.

With regard to the sales and marketing spend, the quarterly profile is very, very flat. Yet, you obviously have a steep seasonality to your business. Can you just explain why that is, why we shouldn't expect some skew sort of tracking the revenue profile seasonally given that you do have a substantial direct model?

And the organic growth rate, please, year-over-year for the company. Thanks.

Well, I think -- let me answer the question on organic growth and then let Jean can cover on the renewal side.

We have -- the organic growth is -- I mean almost all of our stuff is organic growth because, yes, some of it is driven by acquisition but it's not because of the big revenue stream coming directly from the acquisition. So, we have lot of drag effect because we sell, let's say for instance, we have voice product. We can sell more application product or enterprise application product.

So, I consider the revenue from -- over a wide company enterprise, very, very small compared to our total revenue. And so, in that sense, everything which we are forecasting for the next, I would say, almost everything is really organic growth. It won't be there if our sales force and the -- [platform] was not there.

Okay. And how about the question on maintenance, please, and the sales and marketing?

Can you reiterate the service revenue question, please?

Sure. Just trying to get at your service line in a little more detail, specifically the maintenance base or the recurring revenue base, what was the growth rate for fiscal '12 and how are you feeling about it? Looking ahead, it feels like the business is accelerating to some degree.

So, let me give you some insight into that. Of our services revenue line, the vast majority 95% plus is maintenance renewal contracts that are renewed annually. Our renewal rates, they have been improving year-over-year and remain in the 80% range, which given the fact that most of our product is hardware-based and hardware boxes have four- or five-year life. 80% renewal rate is excellent.

So, underneath renewals or maintenance service, the annual maintenance service, we have been seeing an acceleration caused in large part, as Jean had mentioned, by some of our large customers deciding that they really wanted to make multiyear commitments to renewals and, of course, negotiate the price in the process.

And that has led to the higher bookings that we talked about. But also to a little bit accelerated flow of revenue recognition because when you do multiyear booking, there's -- there comes that time at the annual point when there might be a hiatus in revenue recognition if the renewal isn't timely. And, of course, this -- multiyear eliminates that so revenue flows better.

You can see the growth in our bookings that we talked about, I think. And you can also see the growth in differed revenue on the balance sheet that Jean mentioned that are signed to the growth of our service business. But service business growth will always lag product revenue growth.

Was that -- again, was that your question? I'm sorry.

Yes. Well, I mean -- it feels it -- sorry?

I just wanted to add a point that -- let me just explain that there has been a recent uptake in the service momentum primarily because the burden of the legacy hardware has finally been removed from our renewal base and also our growth is proportional to new sales rather than having this other factor which has dragged it down. So, now, I think we're going to be stabilizing.

So, Michael is referring to some of the legacy hardware that we inherited a long time ago with the network general business, legacy product in general, which has depressed our renewal rates for several years as people drop off of those products in a faster rate because we were not enhancing them the way we do with current product. So, that depressed renewal rates, and that's part of the reason, a major part of the reason why our renewal rates in FY '12 were up. But did that get up the essence of your question?

Yes. I mean it feels like the recurring business is growing easily 8% to 10%. I just want to be sure we're projecting forward that -- it just feels like it shouldn't really be falling below 8%. I just wanted to be sure about that. And I think you've answered it.

Oh, yes, and the sales and marketing please, it just seems so flat quarter or on quarter, yet that's really not what your business is about seasonally.

So our marketing business obviously is -- has a significant -- our marketing expense has a significant program component and that does go up and down and you can see that in our -- reflected in the sales and marketing line, but it's masked by the overwhelming element, which is headcount. And because of the way we manage expenses, as you would expect, we spread incentives in our accounting -- we spread incentives over the year, so that even though we will pay more for successful completion or exceeding quota, at the end of the year, we accrue for that across the year.

So you don't see -- so that's, to some extent disconnected with the seasonality of revenue in the way we account. So essentially, if we're not growing headcount in sales and marketing, then you won't see -- you will see relatively flat -- or growing it only modestly, which has been our pattern. You will see relatively flat quarter to quarter expense in sales and marketing, even though our revenue is a little more seasonal than that as you pointed out. I hope that helped you.

Yes. That's fine. Thank you.

Your next question comes from the line of Rohit Chopra with Wedbush. Your line is open.

Yes. Thank you. I just wanted to ask you about Asia. I know it's a small component of your business but it was down 15%. Just take a look at the quarter, is there anything going on in Asia?

I think again, that one or two big deals can really make a difference there but overall, our business percentage is the same for the last year as it was in previous year. So the percentage of Asia-Pac business is not quite different from what we had in the previous years.

Yes. I just wanted to add some color to that. In Asia, the multinationals are definitely down while service provider business continues to be strong. So that -- those are the dynamics.

Okay. So there's more enterprise based. And were any 10% customers in the quarter? I know you didn't call any out but I just want to make sure.

Yes, there was one.

Okay. And then the last couple of things -- Michael, you didn't mention any partnerships or anything like that contributing or helping in the previous and even going forward. Can you just give us a sense of what's happening?

Yes. Probably our partnerships have been mostly on the marketing and sort of positioning front and have not materially contributed to our revenues. I can't really -- really that has not been our primary driver in 2012. I think going forward, we are working on a number of angles but I cannot really predict how much they're going to contribute directly. And I think that's probably consistent between '12 and '13.

Okay. And then lastly, I just want to ask about competition. There are people who are trying to be a little bit more aggressive, more on the enterprise side. And I just want to get a sense of what you're seeing in this competitive landscape on the enterprise side of the business?

Well, I think we always talk about the budget issues far outweigh compared to competition. I mean, we don't see anything on the horizon. There are small companies coming up as has been the case over the last five, ten years. And we really see that nobody has -- can match solution we have, especially as we are going to move forward and our single appliance will be able to support voice, video, enterprise applications, as well as security.

I mean, there are players in each of these sub-segments, but nobody is trying to create this holistic picture and I just the sheer amount of energy we have spent in the space in the last 10 years. As you know that NetScout and [Network Jammers] were the top two leaders for a long time in the enterprise space and now are together.

So, yes, the competition is there a little bit and it's going to be -- it will continue and investment is good for market awareness. But we don't see any real issue with the competition.

Thanks, Anil.

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

Hi. Good morning, guys. You talked a little bit about coming into the next quarter with more product backlog and probably carrying that for the foreseeable future here. The business doesn't seem like it's changed all that much. You are more getting more traction with service providers, but that's been true for the past year. So I'm just curious, what's changed and you why guys are now able to carry such significant levels of backlog in any given quarter?

Well, I think the booking numbers were already high compared to last year. So, it's not the -- I mean, it doesn't look like -- it's single digit growth on the revenue side but on the booking side, it's a huge number. We have almost more than $40 million, $50 million in bookings. So that is what is allowing us to have a big backlog.

And what changed? I mean, very importantly -- is we have a lineup of the USDM portfolio, all the acquisitions we made, this is going to drive more growth and has already started that ascent in enterprise.

And just on the acquired solutions -- and I know you guys have a difficult time breaking out those revenues. But maybe if you could speak qualitatively towards when you got Simena versus the VoIP and video monitoring solutions, which functionality are your customers demanding more frequently and how has the product sales kind of corresponded with your expectations when you bought these companies?

So, the easiest addition to our product portfolio is the Simena switch because it doesn't require any different selling and it involves the same decision makers and a straight expansion of our product and there has been a pent-up demand for this component to be supplied by ourselves instead of having to be bought from somebody else. And voice is the second. It's probably -- it's a little slower to evolve but it'll be strong and especially the video component of the QC technology will give us [gold]. But Simena is definitely the most easy. The handling glove kind of fit into our selling model.

And then just lastly for me, on the sales and marketing side; where did you guys end up on headcount for the year and what are kind of your hiring plans specifically the sales in the coming year?

So, we ended the year around 300 to 325 people and we plan in fiscal year '13 to invest in marketing heads to continue with our USDM messaging and strategy. And then we also plan on investing heads in sales within the emerging markets where we've been gaining traction in service provider and in the enterprises in some of the other emerging markets, as well as some of the tier twos domestically.

Thank you.

You're welcome.

There are no further questions at this time. We'll turn the call back over to the presenters.

Thanks everyone for your question and comments and support this last fiscal year. We'll talk to you again in July -- late July. Thank you.

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