Netscout Systems Inc (NTCT) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to NetScout's first quarter fiscal year 2013 operating results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a Q&A 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 Operating Officer, Mr. Michael Szabados, NetScout's Chief Financial Officer, Ms. Jean Bua, 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 morning everyone. Welcome to NetScout's fiscal 2013 first quarter conference call for the period ended June 30th.

Before we begin, let me remind that you during the course of this conference call, we will be providing you with a discussion of the factors 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 2013, acquisition 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 discussions of the risks and uncertainties that can 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, 2012, on file with the Securities and Exchange Commission.

Our quarterly financial results today are included with our earnings press release. We report our results on a GAAP basis as well as on a non-GAAP basis. Our non-GAAP results eliminate the GAAP effects of our acquisitions by adding back revenue related to deferred revenue reevaluation, and removing expenses relating to the amortization of acquired intangible assets, the GAAP effects of stock-based compensation, and restructuring charges. Our non-GAAP results also exclude certain expenses relating to our acquisitions including compensation for post-combination services and business development charges. We exclude the related impact of all 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. 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. We have included on today's webcast 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 into the call this morning, I would like to review this slide presentation, you can find it by going to our website at www.netscout.com/Investors,and then clicking on today's webcast.

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

Thank you Cathy. We are pleased to start our new fiscal year with a solid quarter. First quarter GAAP revenue was $76.4 million and non-GAAP revenue was $76.5 million, slightly exceeding the high end of our revenue guidance range we issued at the end of last quarter. We also hit the high end of our earnings per share guidance with GAAP earnings per share of $0.12, and non-GAAP earnings per share of $0.19.

Our first quarter revenue was up 21% year-over-year. GAAP earnings per share were up 100% over last year, and non-GAAP earnings per share were up 46% over last year. Total bookings were up 27% year-over-year. Total bookings are comprised of new business bookings and maintenance renewal bookings. New business bookings which are an indicator of future growth for our Company increased 37% over last year. Several renewal bookings were up slightly over last year by 4%, on a trailing four-quarter basis, which is the most stable measure of our business performance, new business and renewals and total bookings all grew 23%.

We saw strength across all of our verticals, new business bookings from service providers were strong, and within enterprise we saw particular strength coming from the financial services sector. The government sector returned to typical spending patterns, as compared to Q1 last year when orders were delayed due to federal budget holds. We are pleased that strong results in our seasonably slow first quarter enabled us to maintain a significant backlog.

Looking beyond our quarterly results today, in a separate press release we announced the acquisition of certain technology and assets from Accanto Systems. Accanto Systems Srl is privately held and located in Modena, Italy. They are a subsidiary with the same name that is headquartered in Helsinki, Finland. Accanto Systems is a provider of service assurance products for telecommunication service provider. They sell their products worldwide, and focus on intelligence customer assurance, that encompasses a combination of tradition netbook service assurance, and customer experience management. Accanto has developed a strong technology base around monitoring and assessing voice services for service provider networks.

Their products help enable mobile and wireline carriers to monitor and manage delivery of voice services over converged next-generation telecommunications architectures. Accanto's voice capability include both legacy circuit switched voice, such as SS7 and SIGTRAN, as well as next-generation packet switched voice, which encompasses voice-over-IP, IMS, and voice over Long Term Evolution, or VoLTE. We are acquiring elements of Accanto's intelligent customer service assurance product line, that include both probe systems and analysis software. This acquisition is synergistic with our packet switch strategy, and brings important voice service monitoring for legacy voice environment, and next generation network wide services.

With this acquisition, we will now be able to offer customers our most robust set of legacy and next-generation wide services capability, that will address current customer requirements very well. Even though carriers are migrating to next-generation packet switched voice services, the base of migration varies among them. The majority of calls today, both signalling and voice traffic still traverse the subject's switched network. At the same time, with the continued drive toward all IP networks, and the accelerated rollout of LTE, which will drive subsequent growth in voice over LTE carriers, will experience substantial growth in IP based voice traffic as well.

Our strategy remains focused on expanding our technology leadership in IP based packet switched environments, to handle all traffic traversing a single link, captured by a single probe, and does provide the lowest cost of ownership, total cost of ownership to our customers. In addition with the acquisition of Accanto technology, we will be able to support legacy circuit switched voice environments, and will have incremental capabilities for packet switch next-generation voice. This is important because more and more service providers are looking for a single vendor solution, and most of the service providers will maintain both legacy and next-generation packet switched networks. We now have a more complete solution supporting legacy voice over IP, and next-generation wire network environments further extending our already-established leadership for the data network.

We are only acquiring certain assets, technology, and people from Accanto Systems. Accanto will maintain their current customer relationships, but will business exit the hardware probe development business. We have established Accanto as a reseller of our existing and newly-acquired products. We expect that approximately 35 Accanto employees will transfer to NetScout, and we will continue to maintain a facility in Modena, Italy, that will support research and development and customer support and sales functions. We will be integrating the technology, employees and operations over the balance of fiscal year 2013. We will share our product integration plan and go to market strategy later this year. We are not disclosing the financial terms of this acquisition which is expected to close this month.

For the remainder of fiscal year 2013, we expect the acquisition to be EPS neutral on a non-GAAP basis, and slightly dilutive on a GAAP basis. We expect to be accretive on a non-GAAP and GAAP basis for the 2014 fiscal year and beyond. Overall, we continue to be excited about our opportunities in both telecommunications deployed and enterprise markets. We will continue to enhance our nGenius service assurance solution, to serve the needs of our customers, we are focused on maintaining market leadership and expanding our market share. We believe we have a solid foundation for the accelerating revenue growth and earnings that our guidance anticipates this year.

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

Thank you Anil. As Anil mentioned we are pleased with this quarter's results, new business bookings remain on a steady base of growth, two of our enterprise segments, financial services and government returned to their normal purchasing patterns. Within financial services we saw a large deal from a returning major player in the industry, where our strength in assuring unified communications and financial trending through the purchase in a competitive setting.

Our service provider segment remains strong. We had five multi-million dollar wireless orders coming from a mix of Tier 1 carriers around the world. The majority of these five large carriers are building out LTE networks. As Anil mentioned, with our new acquisition, we expect 4G or next-generation voice and coming voice over LTE to be a big driver for future growth in this segment. We also continue to see a large number of Tier 1 and Tier 2 carriers while purchasing our products for our 3G networks, which comprise the majority of our product deployment globally.

Servicing results are in line with our expectations for the first fiscal quarter and continue to demonstrate our solid customer loyalty. In the first quarter we further sharpened our focus on execution in our two markets, with clear messaging, selling and positioning training, and the strengthening of our sales and implement, and support through dedicated service provider and enterprise solution teams. With these teams, we are able to include responsiveness to large customers existing needs, and achieve a deep understanding of emerging requirements at these accounts. We are making some progress in integrating our acquisitions to expand our service delivery management portfolio, supporting new work flows for a number of IT operations teams. We are network operations users.

In the quarter we announced nGenius forensic intelligence, a new product based on technology acquired with the FoxReplay acquisition late last year. This new product is extending the value of our products for packet flow data, through the cyber security teams investigating suspected security breaches.

On the voice/video delivery front, we have enhanced our nGenius voice video manager product and have continued cross-integration with our core engineer segregations providing the voice, video, and unified communications teams with new leverage in maximizing their end users experience. We are also integrating the management of our packet flow switched product line acquired as part of the Simena last year. The integration allows our customers to optimize their InfiniStream deployment, and adapt the instrumentation, or as the network evolves over time.

At the end of April, we completed our back to back sales kickoff and are engaged in user following events in Orlando, Florida where we saw a very good turnout from customers around the world. This is the first time we combined the two events, which have historically been held on different occasions at separate locations. This combined event has proven to be particularly effective in maximizing customer interaction, while reducing sales and engineering disruption, as well as producing significant expense savings as compared to having two separate events in the past.

Finally, we have won some additional awards for our market leading products in the service provider area that I would like to share briefly with you. We are getting some attention from the cable NSO side of our service provider business. In May we received the DMC 2011 Cable Spotlight Product of the Year Award for vision leadership innovation and accomplishments in the cable technology industry. We also won from the same publication the DMC 2012 Next-generation Network Leadership Award for transforming the industry to excellence in the next generation of communications technologies for advanced networks. In addition, we received a 2012 NGN Leadership Award from Internet Telephony, a next-gen mobility magazine for service assurance solutions in the service provider markets.

I would now like to turn the call over to Jean for the financial discussion.

Thank you Michael, and good morning everyone. As Cathy said earlier, we have a 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 you needing to follow the slides. We will be starting with the third slide, which shows our first quarter income statement.

As Anil outlined, our business produced solid results for the first quarter of fiscal year 2013. Our non-GAAP revenue grew 21%, while our non-GAAP earnings per share grew 46%. Our first quarter non-GAAP total revenue was $76.5 million, which is an increase of 21% from the same quarter in fiscal year 2012. For the non-GAAP total revenue, non-GAAP product revenue was $40.3 million, which is an increase of 36% over the same quarter in fiscal year 2012. Service revenue was $36.2 million on a non-GAAP basis, which is a 7% increase from the same quarter in the prior year. The GAAP total revenue for the same period was $76.4 million, which is an increase of 21% from the same quarter in fiscal year 2012. Within GAAP total revenue, GAAP product revenue was $40.3 million, which is an increase of 36% over the same quarter prior year.

Service revenue was $36.1 million on a GAAP basis, which is a 7% increase from the same quarter in the prior year. On a non-GAAP basis our earnings per share for the first quarter were $0.19. This is $0.06 higher than the first quarter of fiscal year 2012, and represents a 46% increase. On a GAAP basis, our earnings per share were $0.12. This is $0.06 higher than the first quarter of fiscal year 2012, and represents a 100% increase.

Turning to slide four, business maintains strong growth profit margins and growing operating margins. On a non-GAAP basis our gross profit was $61.2 million, representing a 80% margin. This margin is consistent with the same quarter from the prior year. Our GAAP growth profits for the quarter was $59.5 million, and GAAP gross margin was 77.9%. Non-GAAP income from operations was $13.2 million, our non-GAAP operating margin for the quarter was 17.3%, which is a 3.6 point increase from the same quarter prior year driven by the 21% revenue growth and continued prudent operating cost maintenance.

GAAP income from operations was $8.2 million. GAAP operating margin was 10.8%, which is a 4 point improvement over the same quarter in the previous year. Non-GAAP net income was $8.1 million, or $0.19 per diluted share. The non-GAAP net income after tax margin was 10.6%, which is up 2 points from a year ago. GAAP net income from the quarter was $5 million, yielding earnings per diluted share of $0.12. GAAP net income after tax margin was 6.6%, which is an increase of 2.8 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 $2.2 million and about $2.7 million of costs associated with our acquisitions, which includes amortization of intangibles for $2 million, and business development expenses totaling $357,000. These are detailed 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. Consistent with past practice, we have used the statutory tax rate of 38% to tax effect the non-GAAP adjustments. The adjustments reconciling our non-GAAP results to our GAAP results are summarized in the reconciliation tables in our press release.

Turning to slide five, which shows our total bookings and new business bookings components. Total bookings in Q1 was $67.2 million, an increase of $14.4 million or 27% year-over-year. Within total bookings, our new business bookings were $51.3 million, an increase of $13.8 million, or 37% over the prior year's first quarter. Service contract renewal bookings in the quarter were $15.9 million, an increase of $600,00, or 4% year-over-year.

Product backlog at the end of the quarter was $11.1 million. In FY 2013, we will placing more emphasis on the composition and growth of new business bookings in contrast to total bookings. As new business bookings are more consistent and comparable indicators of our business performance. The components of our new business bookings for first quarter of fiscal year 2013 were as follows, service providers, 33%. Financial enterprise, 30%. Government enterprise, 14%. General enterprise, 23%. This compares with the prior year's quarter's new business booking components as follows, Service providers 38%, financial enterprise, 25%. Government enterprise, 9%. General enterprise, 28%.

Slide six is a summary of our deals for this quarter. The large deals within the quarter, 127 customers gave us orders over $100,000, in comparison to 118 customers from last year. We received nine orders over $1 million, of which five came from service providers, three from financial services, and one from government. This compares to eight orders over $1 million that we received last year in first quarter. Last year's orders that were greater than $1 million included five from service providers, one from financial services, and two from other.

Turning to slide seven, which shows our total bookings and new business growth in Q1 of fiscal year 2013. All of our business verticals experienced year-over-year growth. Our new business bookings for service provider sector grew 18% on a year-over-year basis, which was held our by our investment and expansion to service providers on a global basis, as well as LTE deployments in the major global areas. Overall, our enterprise new business bookings as a whole grew 48% on a year-over-year basis, held by strong growth in the financial and government enterprise bookings.

Within our enterprise vertical, our new business bookings for the financial enterprise sector grew 64% on a year-over-year basis, largely driven by domestic growth. Our new business bookings for the general enterprise sector increased 12%, aided by our recent acquisitions of technology. The new business bookings for government enterprise vertical increased 114% year-over-year, as the government continued its buying after a slowdown in our first quarter of fiscal year 2012. Within the sector, our federal government new business bookings increased 292%, while the rest of the government new business which includes foreign governmental agencies and state governmental agencies increased 20%.

Turning to slide eight, this is a depiction of our Q1 revenue by geography. For Q1 of fiscal year 2013, revenue from international sales was 28% of total revenue as compared with 27% of total revenue for Q1 of fiscal year 2012. Within our international sales Europe delivered 14% as compared to 12% last year. Our Asia sales were 5% as compared to 7% in Q1 of fiscal year 2012. Other international sales were 9%, as compared to 8% from the prior quarter a year ago.

Slide nine 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 $239.2 million. This represents an increase of $25.7 million from the prior year's ending balance for cash, and short and long term marketable securities of $213.5 million. Our free cash flow was $33.4 million for Q1 of fiscal year 2013. This compares to free cash flow of $2.6 million for Q1 of last fiscal year.

Additionally, during the quarter, we repurchased 250,000 shares of Treasury stock for $5 million. We have enacted a share repurchase program to remove the dilution from our employee stock purchase plans. Accounts Receivable net of allowances was $38.8 million down from $69.8 million at the end of the last fiscal year. Day Sales Outstanding were 45 days for the quarter. This is down from 70 days for the fourth quarter of last year. Inventories was $7.5 million. This is a $500,000 decrease from the fourth quarter of fiscal 2012.

Inventory turns with 3.2 times for this quarter versus 3.7 times for the fourth quarter fiscal 2012. Additionally, our total deferred revenue was $106.8 million, which is a decrease of $5.4 million from the end of last fiscal year. This is due to the seasonality of our renewal bookings.

Turning to our guidance for fiscal year 2013, slide 10 illustrates our growth and revenue earnings per share. For fiscal year 2013, we are reiterating the non-GAAP guidance we issued last quarter. We expect non-GAAP revenue to be in the range of $340 million to 355 million, and non-GAAP net income per diluted share to be between $1.21 and $1.30. The acquisition of Accanto is not expected to be material to our fiscal 2013 results. We anticipate that the acquisition will depress EPS slightly in the second and third quarter, but that revenue contributions in the fourth quarter will offset those effects, so that the effect is neutral on our non-GAAP guidance for the year.

For fiscal year 2013, we are also reiterating our GAAP revenue guidance of $340 million to $355 million. However we are adjusting our GAAP net income per diluted share. Our GAAP net income per diluted share will be in the range of $0.91 to $1.00. This adjustment reflects the incremental amortization of intangible assets, and the anticipated restructuring of the current NetScout EMEA organization to accommodate the Accanto acquisition. Additionally, we are continuing to investigate complimentary acquisitions, which we expect to cause additional business development expenses in the near term.

For fiscal year 2013, the non-GAAP net income per diluted share expectation excludes the purchase accounting adjustment to fair value of approximately $300,000 for deferred revenue, forecasted share based compensation expenses of approximately $9.9 million, estimated amortization of acquired intangible assets of approximately $7 million, compensation for post combination services of approximately $1 million, restructuring charges of approximately $1.1 million. Business development charges of approximately $1.2 million, and the related impact of these adjustments on the provision for income taxes of $7.8 million.

That concludes our financial discussion this morning. Thank you for joining us. And we look forward to taking your questions. Michelle?

(Operator Instructions). Your first question comes from Mark Kelleher from Dougherty & Company. Your line is open.

Great. Thanks for taking the questions. You are seeing some particular strength from some interesting verticals and geographies. Could you talk about what you are seeing in Europe. I wasn't quite expecting such strength there? And just as an additional question, did you see any 10% customers in the quarter?

10 %, yes. We didn't have any 10% customers, but I think if you look at Europe or any other places, just looking at one quarter in isolation I think is not the best way to look at it. But I think part of the thing is the acquisitions we have done, and some of the other things we have done in the product area is what is helping us. And so if you look at the overall percentage, it looks good. But yes, there are challenges in Europe, the European market, much more than in the US market. So this is not necessarily an indicator of the environment is improving in Europe.

Are the verticals consistent among geographies, so that if telco is strong in the US, it is similarly strong in Europe, or are different verticals different, showing different strengths in different geographies?

In service provider, we generally see strength across the globe, and as we talked in the past, we have been making a lot of inroads with a lot of the international service provider carriers. So that market on a global basis seems to be growing well. However, as we discussed in the past also, the financial markets that, the financial services markets that we have in EMEA, that also sometimes expand into the Asia PAC, have been depressed due to the economic conditions. And while we see some strength in the domestic, we still continue to be cautious about the financial services sector throughout the rest of the world.

Okay. Thanks.

Your next question comes from Chad Bennett from Craig-Hallum Capital. Your line is open.

Good morning, nice execution on the quarter. Just a couple of questions for me, drilling down a little bit more on the prior question. Specific to service providers, can you give us a sense -- I don't know if you have the data in front of you -- looking back 12 months, and possibly look forward 12 months from an expectation standpoint, how much of the service provider revenue was 3G or 4G related, if you can tell?

Yes. I think it is since we have the same product with software changes only which can be used for 3G and 4G, and sometimes we can move the probes around, the functions also, it is very hard for us to estimate. And we don't necessarily keep track of that. But the value that we need for the products as they add on one versus another so if you didn't have a 4G offering then we will not have a 3G. We will be seeing a lot of 4G projects. But that is also driving a lot of 3G business.

Yes. Okay. Fair enough. And then there has been stories out there or rumors out there about potential kinds of a pause, at least, domestically in some 4G spending by the Tier 1s here, and maybe even a little bit in Europe also. Are you seeing any of that relative to what you were thinking three months ago, in terms of any of your service providers or potential service providers kind of pushing out plans on 4G rollouts?

No. We are not seeing that. In fact, you might have seen in the recent news from AT&T, and Sprint especially, that they are aggressively moving forward with AT&T. I saw press releases from them just in the last couple of weeks. So I don't think, I don't see a slowdown there, or at least we are not seeing even in international or Asia.

Okay. And then one more for me. Financial services really strong again this quarter. And I think it was very strong in the March quarter also. Maybe it is a function of pretty easy comps. But it seems like you are still a little cautious there. Are you adding new customers in financial services or existing customers just returning to normal patterns, and we are just it is more of a function of that than it is, you are seeing spending come back in that sector? Is there any way to kind of give more detail into what you are seeing there?

I don't know about the total but it has increased. But the reason we are cautious is as Jean mentioned is because of outside of US Because we do 20% to 25% of business outside of US overall. So that is one of the reasons for cautiousness, as well as things happening even in US. But a lot of the customers are the same, but they are spending on our products for additional reasons, and we acquired some voice technology. We have developed some features in our product for the financial market and web services. So I think finally people are starting to use our product in other parts of their networks, which they were not necessarily doing before, because either lack of functionality, or maybe they were looking at other solutions before.

Okay. Fair enough. I lied. One last question for me, can you just mention if anything has changed in the competitive landscape?

I think it is if at all it is slightly better for us now, and especially with the latest acquisition, we have everything in the service provider. Enterprise, we have always been a leader, and yes there are a lot of small competitors, but there is no fundamental change in that.

Okay. Thank you.

Your next question comes from the Aaron Schwartz at Jefferies. Your line is open.

Good morning. I had a follow-up question on the financial services domestically. I know you do have some large customers within that segment. But can you talk about sort of the run rate business domestically, is sort of the volume based sales outside of large deals, or can you give us a view on sort of how you see that business?

You want to know the breakdown of financial in US versus the rest of the world?

Well in domestic markets I believe, or I believe financial services in general you typically have some larger customers there that sort of carry the sector sometimes. But beneath just the run rate financial services there, has the volume base services there continued to track to your expectations?

Hi this is Jean. As we mentioned we are cautious about financials in general. What we have been seeing in the last few quarters, including this quarter is that some of the larger customers within the financial services group that are domestic based are continuing to spend on their data centers, or refreshing hardware for infrastructure coverage and those things. Those are what has been driving the financial sector for the last few quarters. Internationally still it still is very slow and struggling.

Okay. And given those remarks as we think about the seasonality and linearity of your model through the year here, I know you gave commentary on your expenses here through the acquisition, but would you expect this September quarter to be maybe a little more seasonally slow? Is there any high level comments would you have for us as we build our models for the rest of the year?

So Q2 for us is generally a strong quarter for the government sector. And in talking with the sales force, we still have a lot of very good projects and a very good project pipeline. However, as the governments have still been cautious about spending and budgeting, and we are getting a lot of budget scrutiny, so we are still reaffirming our guidance. So we are comfortable within that range. But we still are cautious about the actual release of dollars when it comes to the government vertical

Okay. And last question for me if I could, on the acquisition you did comment on gaining some assets maybe on the legacy side or on the voice centric side. Has this been sort of a gating factor for you to expand within some Tier 1 telcos, and now that you have these assets does that sort of go away? I was wondering if you could sort of comment on how that fits in with the expansion or introduction of new telcos?

Yes. Legacy, the comment we are making is that we have now be at now covering that I expect, ranging from not just data network but to legacy-wise as well as IP-wise. I think over time I think this will be very helpful for us to be established as a single vendor, which is very unusual in service provider. But in the short term it is going to be just incremental business. It is not necessary for our survival, or to do the numbers we talked about. But it is going to allow us maybe year down the road to be established as the only vendor in some of the Tier 1 accounts, and that we could have captured larger budgets, because overall, and at the same time there will be significant cost savings for the customers.

If I might, just one statement. This is Michael. There are two significant dimensions to this acquisition. One is that in the strategic sense, it is going to position us in a very strong way for 4G voice, and that is, Tier 1 impact is going to be. And I think the Tier 2 business, the international business will benefit immediately, because these are smaller operators looking for a vendor with a full line of product. So these are the two different dimensions.

Got it. That is helpful. Thanks for take my questions.

Your next question comes from Matthew Robison from Wunderlich Securities. Your line is open.

Thanks for taking my questions. Congrats on the bookings and cash flow performance. I know that in the telco space you had a relatively tough comparison. Can you maybe comment on your pipeline, and if you are still looking for bookings growth from that segment that is comparable to the kind of growth we saw last year?

Yes. Yes. That exact assumption based on the guidance. And the guidance is based on that assumption. That will continue to improve.

Okay. Are we pretty well set for the kind of customers we are going to see this year, or are we going to be, what kind of customers might we be adding in terms of types of networks?

I think we are already there in all of the Tier 1s, which is a big portion of the business. But we are not fully penetrated in many of them. So that will be the biggest opportunity. But with this new acquisition and a few other things that Michael talked about, there will be some expansion in Tier 2. Which has not been our area of focus until last year. Last year, if you remember, we did some good Tier 2 business in US. But outside of US, we have not done that. So this will allow us to focus on Tier 2. So that -- so we have still more business from existing customers in Tier 1, but then we will have some new Tier 2 customers.

When you say Tier 1, are we talking international?You include Vodafone, America Mobile, TMobile?

Yes. We are talking about like for example, in the US, TMobile, Sprint, Verizon, and AT&T. And outside of the US we are talking about [Tmo, Bill], Vodafone, then you are talking about SKT in Japan, China, Unicom. So I mean that is what we mean really big companies worldwide, which I think we do have some presence and contact in almost everywhere, but not necessarily enough

Okay. Thanks. That is it for me.

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

Yes. Thanks for taking the question. Just to the group. Over the last couple of years through different macro economic cycles, mostly bad for everyone, but there have been some misfires from you guise on quarters and guidance. And obviously, congratulations on this quarter, and sort of the outlook. Can you just sort of net it out why this time around things are a little bit different? Was there a change in managing the sales force or managing the pipeline that you guys did, where it gave you a little bit sort of better visibility than maybe in prior cycles?

I don't see that as any, I mean fundamental change. Last time, last year also I think we had some bad experience in Q1, even though we did provide the guidance, we had significant booking growth in last year which I think nobody expected after the first half performance. So I would just while we are concerned about this year, we should not just look at one quarter performance. Because of big deals, things can go from one quarter to another quarter. So while we are happy that we are on the growth trajectory already, which maps to our guidance for the rest of the year, I think we have to look at more on the longer feeder to see the impact of it. But I think we do have more things to sell. And we have added, for example, we have a fully functional LT product now. As I mentioned, we have come up with a new strategy, USDM. We have a new ASI technology, and all of these things are going to have an impact. So the pipeline is not just bigger but higher quality.

So maybe more products are the sort of broader range to the customers, Anil is that maybe one answer?

Yes. I think maybe people see that we are on to something, and we have been making lot of investments which has not been seen in the product, and also that we acquired this company in the packet flow switch area also, which is a good incremental revenue stream for us. So, yes, in that sense, there are some new products, but the biggest change is fuller functionality in existing products. Like we are doing only 3G now we are doing 4G also, and we have done some other things in intrepid links, so just we have more things to offer to our sales force. I don't think it is because of a sales force increase in size. Just we have much more focus and we sort of reinvented the Company in the last 18 months

And Jean, if you could just recount. There has been a lot of acquisitions over the last 12 months. If we were to look at the fiscal 2013 revenue guide, is there a way to sum up how many points of top line growth if you aggregate all of these acquisitions, what kind of number you would net out with?

So the guidance for those acquisitions, as we talked about before, they are product technology acquisitions, and then they are subsumed onto our platforms and sold over the existing sales force. So to that end, we consider it all organic growth, and we don't necessarily track nor is it easily trackable, to know which acquisition did which amount of revenue. But at this point, the performance of the three acquisitions that we made last year have been satisfactory to us.

Okay. So no material, even in the aggregate sense, not a material revenue uptick from all of these acquisitions, correct?

Sorry. The biggest thing that Jean is saying is we are on to this pro consolidation strategy. That means everything on that link, whether it is data, voice, web services, whatever, whether service provider or enterprise or 3G or 4G, we have an architecture so we can address all of that stuff in a single box. So for example, getting the security technology from FoxReplay, and voice technology from Voice for the enterprise, and quality measurement technology from Psytechnics last year, we have put those agents inside of our InfiniStream vault. We didn't increase the price but that helped sell more InfiniStream. but it is very hard to keep track of why somebody bought that InfiniStream. And the reason we say organic growth is because the revenues for these companies was very small before we acquired them. So that is why for those two reasons, we look at all of this as organic growth.

Okay. Thank you, guys.

Your next question comes from Scott Zeller from Needham & Company. Your line is open.

Thank you. Could you clarify the comments from earlier around financials, the financials vertical? It seems that there are pockets of strength, there are large deals, yet you are cautious on the international question around financials. But it appears that domestically, where most of your revenue is coming from, the financials footprint is doing quite well. So can you clarify the net outlook for the financials piece, please?

Well, first of all, everything is more tipped towards the US, not just financial. Service providers, [Vetrel], I mean that is even more tilted towards the US, than in some sense financial. And but I think overall, a lot of the projects which are there in financials are multinational companies, so if somebody limits the decision in one place, it affects others. And so in that sense, I think we will get some good reasonable business even on the international side on financial, but some things are driven from let's say UK or outside. That is what we are cautious about.

Okay. And the next question is around 3G and 4G. I believe Anil you had mentioned earlier in your comments that the 4G capabilities and with this acquisition, it is helping you win deals. But is there a way to actually attribute revenue or bookings to 4G, and the traction that you are getting and how material 4G is to revenues at this point?

I think it is material from an impact point of view. But I think it is like I said, it is very, very hard for us to measure, that sometime these things are shared also between the two sites, and handovers and all of those, sowe don't even try to track that, and a lot of times we get a single purchase order from a Tier 1 which includes both 3G and 4G. And unlike other vendors, we have the same track number for both and it is just the software image which is different. So that makes it widely convenient for the customer. And because they can use it for whatever they want if they have the right software version from us. It is very hard for us to track what is going on.

Thank you.

David has something.

Scott, David Sommers. I think maybe a crystallization of those SP 3G, 4G discussion that we have had here a couple of times would be useful. We make our business in service providers because we are a technology leader on the data side, and now we are adding voice to that. And that really means that our customers are viewing us as a vendor of the future for their 4G networks. If we weren't able to do that, then we would not have the success that we have today. And what we are trying to say here is that spills over. So once we have qualified with them as a 4G vendor, they buy us for their 3G networks and that is where most of the spending is happening. So it is impossible as a known, as Michael said, to really sort it, parse it between 3G and 4G but it all depends upon their impression of us as competitive vendor for their future 3G and 4G environments.

Yes earlier they are looking for, 3G and 4G, a common solution from a single vendor for the data network and obviously a natural extension to that is to be able to do that across voice and video also.

A follow-up question. Thanks. Thanks for the color, David, that is helpful. But a follow-up question, we have heard, I believe from the field that 4G networks are not overtaxed. Could you explain again the impetus or the around spending in 4G if there is one, and why people would be compelled to spend on 4G in advance of the network being overtaxed?

Well, I mean visibility is needed just to know whether it is overtaxed or not. So you still have to know what is going on. And the investment in next core solution is still a fraction of that, so when LT said they are 48 or 47 zones, or rollouts on those, or Verizon said or Sprint said that they have this more markets added, they are making investments, they are making money in that area, and they expect the traffic to increase there. And that is why when we go and sell them a product, we have to justify the scalability for the future. So they are not just buying for today. They are buying partly for the future. And just to know that it is not overtaxed or that they should be able to combine two markets or not. Even for that, they need the visibility which only a product like ours can provide.

A lot of the issues associated with a 4G deployment have nothing to do with the volume of traffic. It has to do with the complexity of connecting 4G with 3G segments of the network, and just the whole deployment, the dynamics, right? So you cannot just ascribe demand to the degree to which the network is taxed

Thank you.

(Operator Instructions). Your next question comes from Kevin Liu from B. Riley & Co. Your line is open.

Hi. Good morning. I guess going back over the prior quarter, and then maybe into the early weeks of this one, I am just wondering if there have been changes in the length of sale cycles or approvals or anything of that nature that you are seeing with deals environment?

No, we are not seeing any measurable change.

And then on the service provider side you guys had a nice number of multi-million dollar deals. Can you just characterize for us the time frame for which those products are expected to roll out, whether you see any sort of significant concentration in terms of your pipeline for the remainder of the year with any of these service providers, or whether it would be more broad based across Tier 1 and Tier 2 customers you are serving?

Tier 1 will still be a big portion. I don't know the exact portion, maybe 70% or 80%. And so you will see when you look at a quarter by quarter basis, you may get the impression that something is working better in one quarter versus another one for service providers, because it depends is it the end of the quarter or just first week of the next quarter. But overall, our guidance assumes that we have a lot of traction, and a lot of, and the pipeline size and quality is very good

Great. Thank you.

Your next question comes from Rohit Chopra from Wedbush Securities. Your line is open.

Hi. Can you hear me?

Yes.

Hi. This is Sanjit Singh for Rohit Chopra. I want to dig into the service contract renewals. 4% year-over-year growth when I compare that to last year, a little bit weaker. I want to see what was going on with the service contract renewal business? Is there anything there that was unusually weak?

Well, Q1 is seasonally our lowest quarter for renewals in general. On a year-over-year basis, on a quarter-over-quarter basis, the renewals have actually grown 4%. So it is up $600,000. There is nothing that's really necessarily trending in that. It is down from Q4, Q4 was a very large renewal quarter. We also probably had what we would call some pull forward, some large deals where the customer decided, pardon me?

Multiyear.

Multiyear deals where the customer decided to purchase prior to their contract expiring and to purchase a multiyear. We did see that effect a little bit in Q4. But in Q1, we are comfortable with the renewals growth and what the renewals were for that quarter. So we don't see any kind of a trend on any kind of a long term basis at this point.

Great. Thanks and then on the DSOs that came down a lot. Is that sustainable as a strong DSO performance? And my follow-up to that is just in general, when do you think voice over LTE will be generally available for most the LTE providers currently today?

On the DSO question, the DSO came down dramatically from Q4 because Q4 is a very large quarter for us seasonally for bookings, and we collected at least $30 million worth of Accounts Receivable. So again, the 45 days for the DSOs this quarter is also down from Q1 of last year. We would have to continually have strong quarters for that. strong performance for that DSO to trend that way, and also to probably maintain backlog.

On the 4G voice, I mean the other people are already coming in looking at this, and we will, that is why we think we need to be in a position to bid for those, and this acquisition will allow us to do that. We are planning to have an integrated product with the rest of the product line based on this technology towards the end of this fiscal year. So we will be ready in six months or so to deal with these things, but we have enough information and to bid for thos0 other pieces right now.

Would you say commercial voice over LTE offerings would be available in the second half of 2013 or early 2014? What is your sense on when these fees for services will be launched?

Yes. I don't have at this point good information. I know that every meeting we go to people talk about it. And it could be hype. But even with hype, I think we have to, the customer have to feel good about that whenever it happens, even one year down the road, that they can stay with a veteran vendor and use an interface and everything. So it is very important to have credibility that we will be the person, we will be the Company with this kind of solution for voice as they roll it out sometime next year.

I appreciate it. thank you very much.

(Operator Instructions). Your next question comes from Jonathan Ruykhaver from Stevens Incorporated. Your line is open

Yes. Congrats on the strong billings performance. I just have a couple of quick questions. Growth. Growth in Europe surprisingly strong. What do you expect from a sequential standpoint in the coming quarter from Europe?

We don't give guidance by, I don't know, maybe Jean has something to add. But we don't give guidance for the sequential, for any quarter based on geographical markets.

I think the composition generally has been pretty consistent over the last few quarters. I think just from a trending basis, we would expect that composition to remain in the range that it has been. I am just looking at bookings and everything to see if there is anything interesting in there. But there is nothing that comes to light at this point. It is just again we continue to grow in service provider in the larger service providers throughout EMEA, and we are just very cautious on the financial environment.

Right. Okay. And I know that you don't give quarterly guidance. But if you look at the comparison from last year from a sequential standpoint 2Q from Q1 obviously that was a bit of an anomaly because of the weakness in June. But if you look back at earlier periods it looks like sequential growth from 1Q to 2Q generally trended in the low to mid single-digit range, and just given the macro concerns, don't you think it is prudent that we take hair cut to those historical seasonal trends? Again, I know you don't give quarterly guidance, but just from what kind of perspective should we have from your standpoint regarding the September quarter? scenario no.

I think we are comfortable with our guidance. I think as we had said, that the revenue, the revenue patterns that we see in Q2 over Q1, they generally do grow. It is a strong quarter for our government business. And we have very good projects and pipelines which is cautious about actually the release of the money from the different people. On EPS as we mentioned though, we will be integrating Accanto, so we will see a slight depression in Q2 and Q3 for that integration, but then we do expect it to rebound in Q4 as we start to sell the product. So we think that will be neutral. But I think we are comfortable right now we don't really anticipate you should take any haircuts for revenue in the out quarters.

Okay. Good. Thank you.

Thank you.

I have no further questions in queue. I will turn the call back over to the presenters for closing remarks.

Thank you, everyone. And we will see you in three months. I will talk to you in three months again.

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