Netscout Systems Inc (NTCT) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the NetScout fourth quarter 2013 fiscal year and 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 this 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, and NetScout's Chief Financial Officer, Ms. Jean Bua.

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 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 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 express or implied statements regarding future economic and market conditions, guidance for fiscal year 2014, 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 of 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 the 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 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 revaluation and removing expenses related to the amortization of acquired intangible assets, the GAAP effects of share-based compensation and restructuring charges. Our non-GAAP results also exclude certain expenses relating to our acquisitions, including compensation for post-combination services, inventory fair value adjustment, and business development charges. 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.

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 and would like to view this slide presentation, you can find it by going to our website at www.netscout.com/investors and then clicking on today's webcast.

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

Thank you, Cathy.

We are very pleased with our fiscal 2013 results. Non-GAAP revenue for fiscal year '13 was $352 million, towards the high end of the guidance that we issued a year ago, an increase of 14% over the prior year. Non-GAAP earnings per share were $1.32, up 20% over last year and surpassing the high end of our fiscal year guidance by $0.02. Our non-GAAP operating margin improved by 1 point to 25%, up from 24% in fiscal year 2012. In addition, our non-GAAP product revenue for the fiscal year grew by 18% over last year's.

Over the past two years we have been working diligently to reach our aggressive revenue growth milestones. In fiscal year '12 we passed the $300 million revenue mark and then this year, which is fiscal year '13, we passed the $350 million mark.

Today we are issuing guidance for fiscal year 2014 which could allow us to reach another important milestone, approaching $400 million in annual revenues. Jean will give you more detail on the guidance shortly.

Our fourth quarter results were at the high end of the full year guidance we provided 12 months ago and within the revised narrowed guidance range we issued last quarter. Non-GAAP revenue was $98.6 million, up 10% over last year. Fourth quarter non-GAAP earnings per share was $0.43, an increase of 10% over Q4 of last year.

Keeping with our tradition we will be providing full year guidance today for fiscal year '14.

During the fiscal year 2013 we saw growth in total bookings, which includes new business and service renewal bookings. Our service provider business remained strong with total bookings maintaining a significant growth trend. Additionally, our enterprise verticals displayed growth with the exception of the government vertical. As we have previously discussed, the government sector was down due to well publicized budget constraints. All in all, we are pleased to have achieved these good results against a backdrop of economic uncertainty.

The past fiscal year was the first in our four-year strategic growth plan and has delivered results in alignment with the plan. The key objectives have been to continue to grow market share in the wireless service provider and to accelerate our enterprise growth by expanding into the communication performance management segment. A key component of both initiatives has been our aggressive acquisition of the strongly complementary packet-flow and monitoring switch technology.

Our enterprise direction has passed a major milestone two weeks ago at our Annual User Forum, where we unveiled to our customers our next generation nGenius solution, the result of extensive concentrated development effort throughout the previous fiscal year. Our approach on the product was met with resounding approval and excitement. The new technology is currently in advanced customer trials and will be publicly launched and available to our customers later in this quarter. Our dual objectives with this new technology initiative are to deliver new value to existing customers and to increase our new customer acquisition rate in the enterprise segment.

This new solution expands our scope from NPM, which is network performance management, to NPM plus APM, with new analytics, displays and workflows for application managers. The new solution is based on the latest advancement in NetScout's proprietary and patent-pending ASI technology and is closely aligned with our leading customer's service management initiative.

In late fiscal year 2012 we entered the market with the packet aggregation switch that we acquired from Simena, and we recently added a high capacity chassis-based packet-flow switch line that we acquired from [OnPar Technologies] last November. The combination of the two product lines has provided NetScout with an unparalleled range of price, performance, and scale, and well suited for both large enterprise and service provider applications. Our solution in this area has resonated very well with our customer base and initial interest has been extremely high.

In the wireless service provider sector we continued to gain market share, primarily driven by our leading 3G and LT data service assurance solutions globally. Our strategy here has been to complement our solution portfolio with an integrated legacy and 3G and 4G voice service assurance capability. A critical complement of this strategy has been the acquisition of Accanto early in fiscal 2013, bringing important voice service monitoring for legacy voice environment and next-generation networkwide [solutions].

Overall in the service provider market we continue to capitalize on major growth drivers. The massive IP transformation continues and is a focus of the majority of CapEx spending. We have gained a foothold in the Tier 1 mobile package switch [core] where we are servicing 2G and 3G and now 4G infrastructures that are being driven further with capacity upgrades from existing customers.

We also have been getting new Tier 2 customers as we expand our presence both in the US and around the world. We have been building our product to capture the carriers' rapid expansion of IP services where we have become a leader. In addition, there are large opportunities within IMS where we have been involved on numerous projects.

We are playing a central role in managing the complexity of the explosion of different devices, from handhelds to tablets, and how those users attach to the network in areas such as authentication, authorization, policy and charging. Also, within IMS is the opportunity for us in the service of load balancing and dynamically routing agents. Another area of growth is RAN aggregation, where there is a major transformation of the access and backhaul areas of networks, where carriers are consolidating 2G, 3G, and 4G into one box, combined with new IP rollouts. We are helping to manage the handset and cell tower issues, as well. Over the year we'll continue to expand our capabilities to provide end-to-end monitoring by adding significant enhancements and features to our product set.

In summary, our customers continue to validate our unified service delivery management platform as their total solution for advanced application and service assurance, as validated our performance in fiscal year '13. We are also very excited about the investments we have been making over the last 18 months in technology and new product development, as well as targeted acquisitions which will open up new opportunities across our service provider and enterprise segments.

Based on the resounding positive initial feedback from our customers we anticipate rapid adoption in our customer base and beyond. We look forward to sharing our accomplishments with you throughout the coming year. As always, I'd like to thank all of our employees, customers, investors, and other stakeholders for their continued support.

Michael will now discuss some additional highlights of our performance and direction.

Thank you, Anil. I will focus on the highlights of our operational execution this past quarter and fiscal year and, in particular, (inaudible) framework that Anil has just outlined.

A centerpiece of our customer outreach is our Annual Engage User Forum, which had record attendance and excitement surrounding our new product initiatives. This event continues to be our point of focus for intense interaction between executives, our engineering team, and our customers, ensuring we stay in lockstep with the needs of the market. We utilized this year's Engage to overview the tenets of our 4G strategy to our enterprise and service provider customers. We showcased our next generation nGenius solution for which we received resounding endorsement.

As Anil noted, with the initial release of our for next-generation nGenius solution we'll be focused on delivering network oriented application performance management, initially targeted toward the enterprise segment of our business. With this new generation nGenius product set we are building support for information technology service management, or ITSM, that will provide a differentiated approach to application performance management based on our ability to orchestrate the work of traditional APM tools implemented by our customers. In (inaudible) releases we will deliver enhanced functionality to manage the performance and delivery of our customers' most critical applications and we will provide additional service provider specific functionality [coming] on this new unified platform.

Key to our continuing growth in the service provider segment is the completeness of our integrated voice and data management solution. At Engage 2013 we also unfolded our comprehensive voice and customer experience management directions for the service provider and cable MSO users to positive reception. An important element of our voice direction is the acquisition of the Accanto Team and the technology earlier in fiscal year 2013. This acquisition has accelerated our product roadmap in both legacy circuit switched voice, such as SS7 and SIGTRAN, as well as in next generation packet switched voice, including VolTE, Voice over LTE, Voice over IP, and IMS. The first integrated voice product based on Accanto was launched to the Engage audience at the show under nondisclosure.

As outlined by Anil, a key element of our strategy direction is our packet-flow switch or PFS [set of] products. These products have and will continue to accelerate our growth in the Company's target markets. In November of 2012 we acquired ONPATH, a strategy extension to the earlier acquisition of Simena. We were able to release the new NetScout branded state-of-the-art 3900 series switch in record time in January, the resulting lineup of modular and chassis-based product service already successfully selling into the high-end enterprise and service provider accounts with high density networks that demand also low latency.

The high-end product in this family, called the 3912, has 576 port capacity and is the largest nonblocking switch in the industry. The 3900 has quickly gained market acceptance and we are successfully capturing many of our customers' technology refresh cycles, where we are replacing incumbent vendors. These offerings will also be instrumental to our ability to support customer upgrades to 40 gigabyte and 100 gigabyte networks.

Our PFS product family will enable our customers to extend the reach and impact of the NetScout nGenius service assurance solution and provide them with the ability to quickly adapt to ever-evolving network infrastructure. I'm also pleased to note that NetScout's nGenius 3900 series packet-flow switch has been selected as one of three finalists in the networking category for the 2013 Best of Interop Award.

Also at Engage 2013 we highlighted the continuing relevance of NetScout's performance management in the cyber security arena. Our products are being utilized for network behavior analysis and incident response and, as a result, we are seeing increased demand for our products and solutions in this critical area of IT operations. As confirmation of this important direction, the Info Security Products Guide awarded NetScout's nGenius service assurance as the 2013 gold winner in the security product and solutions for the federal government category. Info Security Products Guide recognized NetScout for an advanced groundbreaking solution that is helping set the bar higher in all areas of security and technologies. And, final, in fiscal 2014 we will continue to work with our top customers to develop product enhancements specific to the cyber category.

Within our broader enterprise sectors, including financial services, we continue to benefit from very strong customer loyalty as measured by the high renewal rate for NetScout maintenance services and high marks for our Omega customer satisfaction survey.

With that, I will turn the call over to Jean.

Thank you, Michael, and good morning, everyone.

As Anil outlined, our business performed well against our plans for the fiscal year, with annual revenue growth of 14%, which was at the higher end of our original guidance from last April. Our non-GAAP EPS result was equally strong, ending above our original EPS guidance. This strong performance was delivered in a fiscal year which was made difficult by the federal budget sequestration and continued uncertainty around the European economy.

We will be starting with the third slide of our presentation, which is accompanying our call and is posted on our website. Our fourth quarter non-GAAP total revenue was $98.6 million, which is an increase of 10% from the same quarter in fiscal year '12. Within non-GAAP total revenue, non-GAAP product revenue was $59.6 million, which is an increase of 9% over the same quarter in fiscal year '12. Service revenue was $39.0 million on a non-GAAP basis, which is an 11% increase from the same quarter in the prior year.

The GAAP total revenue for the same period was $98.1 million, which is an increase of 10% from the same quarter in fiscal year '12. Within GAAP total revenue, GAAP product revenue was $59.6 million, which is an increase of 9% over the same quarter prior year. Service revenue was $38.5 million on a GAAP basis, which is a 10% increase from the same quarter in the prior year.

On a non-GAAP basis our earnings per share for the fourth quarter were $0.43. This is $0.04 higher than the fourth quarter of fiscal year '12 and represents a 10% increase. On a GAAP basis our earnings per share were $0.34. This is $0.04 higher than the fourth quarter of fiscal year '12 and represents a 13% increase.

Turning to Slide 4, the business maintained strong gross profit margins. On a non-GAAP basis our gross profit was $78.6 million, representing a 79.7% margin. Our GAAP gross profit for the quarter was $77 million and GAAP gross margin was 78.5%.

On a comparative basis last year's quarter included a nonrecurring vendor credit for a component that we had replaced in our product line. Without this credit Q4 fiscal year '12 non-GAAP gross profit margin would have been approximately 80.0%. Both non-GAAP and GAAP gross margins are within our long-term operating margin expectations.

Non-GAAP income from operations was $27.6 million. Our non-GAAP operating margin for the quarter was 28%, which is a 1 percentage point decrease from the same quarter of prior year. The decline is due to this quarter's gross profit margin difference from the comparable quarter of last year and the operating costs associated with integrating the legacy voice product from our Accanto technology acquisition with our current service provider offering.

GAAP income from operations was $21.9 million. GAAP operating margin was 22.3%, which is a 60 basis point decline over the same quarter in the previous year. Non-GAAP net income was $18.1 million or $0.43 per diluted share. The non-GAAP net income margin was 18.3%, which is flat from a year ago. GAAP net income for the quarter was $14.6 million yielding earnings per diluted share of $0.34. GAAP net income margin was 14.8%, which is an increase of 30 basis points from a year ago.

The major differences between our non-GAAP and GAAP income from operations for the quarter are the exclusion of the accounting adjustment to fair value of deferred revenue for $500,000; stock-based compensation for $2.3 million; and about $2.8 million of costs associated with our acquisitions, which includes amortization of intangibles for $1.5 million; business development expenses totaling $200,000; $900,000 for deal related compensation; and $200,000 for inventory fair value adjustment. These are detailed in our reconciliation of our non-GAAP to GAAP results presented in our press release.

This quarter's provision for income taxes is recorded based upon a full year tax rate of 36% on a GAAP basis. Our GAAP tax rate for the quarter is 32.8%. Consistent with past practice, we have used the statutory tax rate of 38% to tax affect a 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 5, which shows our total bookings and new business booking component, total bookings in Q4 were $99.1 million, a decrease of $10.9 million or 10% year over year. Within total bookings our new business bookings were $64.8 million, a decrease of $10.2 million or 14% over the prior year's fourth quarter. Almost half of the new business bookings decline was related to the drop in government business. Service contract renewal bookings in the quarter were $34.4 million, a decrease of $600,000 or 2% year over year. Product backlog at the end of the quarter was $7.2 million.

The components of our new business bookings for the fourth quarter of fiscal year '13 were as follows -- service provider 38%, financial enterprise 24%, government enterprise 8%, general enterprise 30%. This compares with the prior year's quarter's new business booking component as follows -- service provider 42%, financial 25%, government 13%, general enterprise 20%.

Slide 6 is a summary of our deals for this quarter. For large deals within the quarter, 167 customers gave us orders of over $100,000 in comparison to 157 customers from last year. We received 16 orders over $1 million, of which 9 came from service providers, 4 from financial services, 1 from government, and 2 from general enterprise. This compares to 21 orders over $1 million that we received last year in the fourth quarter. Last year's orders that were greater than $1 million included 9 from service providers, 6 from financial services, 2 from government, and 4 from general enterprises.

Slide 7 shows our results for fiscal 2013. For fiscal year '13 non-GAAP revenue was $351.8 million, which is an increase of 14% from fiscal year '12. GAAP revenue for fiscal year '13 was $350.6 million, which is also an increase of 14% from fiscal year '12. Non-GAAP and GAAP product revenue was $198.7 million for the fiscal year '13, an increase of 18% over prior year non-GAAP and GAAP product revenue. Non-GAAP service revenue was $153 million, and GAAP service revenue was $151.8 million for fiscal year '13. This is an increase of 9% over prior year for non-GAAP and 8% for GAAP service revenue.

On a non-GAAP basis our year-to-date gross profit was $283.3 million, representing an 80.6% margin. This margin was 20 basis points higher than the prior year. On a GAAP year-to-date gross profit was $27.5 million, and GAAP gross margin was 78.9%, which is 20 basis points higher than the prior year.

Non-GAAP year-to-date income from operations was $88.6 million. Our year-to-date non-GAAP operating margin was 25.2%, which is a 1 percentage point higher than prior year. GAAP year-to-date income from operations was $64.5 million. GAAP operating margin was 18.4%, also 1 percentage point higher than the previous year.

On a non-GAAP basis our earnings per share for fiscal year '13 are $1.32. This is $0.22 higher than fiscal year '12 and represents a 20% increase. On a GAAP basis our per-share earnings were $0.96. We continue to operate at the high end of our gross margin model and along the midpoint of our operating model.

Turning to Slide 8, which shows our total bookings and new business bookings growth for the fiscal year 2013, total bookings for fiscal year '13 were $352.8 million, up $19 million or 6% year over year. Within total bookings new business bookings were $252.5 million, up $14.5 million or 6% over the prior year. Renewal bookings were $100.3 million, which is an increase of $4.5 million or 5%.

Our new business bookings for service provider sector grew 22% on a year-over-year basis as we continued to win new customers and LTE deployments across the globe. Our new business bookings for the financial enterprise sector have grown 2% on a year-over-year basis. Our general enterprise sector grew 15%. The growth in this sector has come from the diversified subgroups, including high tech, manufacturing, business services and utilities, and shows the strength of our packet-flow switch technology, since this segment was the leading consumer of the product.

The new business bookings for the government vertical decreased 35% year over year, largely due to the federal government deferring spending on long-term strategic initiatives. Within the government vertical, our federal government new business bookings decreased 40%, while the rest of the government business, which includes foreign governmental agencies and state governmental agencies decreased 24%.

Slide 9 shows our new business bookings by vertical. The components of our new business bookings for fiscal year '13 were as follows -- service provider 39%, financial enterprise 26%, government enterprise 9%, general enterprise 26%. This compares with the prior year new business booking component as follows -- service provider 34%, financial enterprise 27%, government enterprise 15%, general enterprise 24%.

Turning to slide 10, this is a depiction of our full year revenue by geography. For fiscal '13 revenue from international sales was 25% of total revenue, which is flat with fiscal year '12. Within our international sales Europe delivered 12%, which is 2 percentage points higher than last year. Our Asia sales and rest of world sales were relatively consistent with the past fiscal year. Europe revenue of $42.9 million has grown 30% over the fiscal year '12 results. While we continue to see a difficult climate for our European and Asian financial institutions, we have been able to expand our footprint in our European service provider market.

Slide 11 includes highlights from our balance sheet. We continue to maintain strong liquidity. At the end of the fiscal year we have invested cash, short-term marketable securities, and long-term marketable securities of $154.1 million. This represents a decrease of $59.4 million from the prior year's ending balance for cash and short-term and long-term marketable securities of $213.5 million.

Our fiscal year '13 free cash flow generation of $83.5 million was $26.5 million higher compared to fiscal year 2012. In the quarter we repurchased 250,000 shares for $6.5 million. On a fiscal year basis we have repurchased 1 million shares for $23.5 million.

Accounts receivable net of allowances was $73.9 million, up from $69.8 million at the end of fiscal year 2012. Days sales outstanding were 68 days for the quarter. This is down from 70 days for the fourth quarter of last year.

Inventories were $7.6 million, which is a $400,000 decrease from the fourth quarter of fiscal 2012. Inventory turns have increased to 5.4 times in the quarter from 3.7 times for Q4 fiscal '12.

In November we paid down the outstanding balance of $62 million on our revolving debt facility. Since this is a revolver we have the full facility of $250 million should we need it for the remaining term of the agreement. Our liquidity at the end of the fiscal year was approximately $400 million.

Additionally, our total deferred revenue was $121 million, which is an increase of $8.8 million from fiscal '12 year end.

Turning to our guidance for fiscal year '14, slide 12 illustrates our growth for revenue and earnings per share. For fiscal year 2014 we are issuing non-GAAP revenue guidance of $385 million to $400 million yielding a revenue growth rate of 10% to 14%. We are issuing non-GAAP net income per share guidance of $1.40 to $1.50 yielding EPS growth of 6% to 14%. For fiscal year 2014 we are issuing GAAP revenue guidance of $384 million to $399 million and GAAP net income per diluted share of $1.06 to $1.16.

For fiscal year 2014 the non-GAAP net income per diluted share expectation excludes the purchase accounting adjustment to fair value of approximately $800,000 for deferred revenue, forecasted share-based compensation expenses of approximately $13 million, estimated amortization of acquired intangibles, assets of approximately $6.7 million, compensation for post-combination services of approximately $2.8 million, and the related impact of these adjustments on the provision for income taxes of $8.9 million.

Regarding revenue, we believe that the release of our new products and the associated sales pipeline build will skew our revenue patterns more dramatically in fiscal year '14. As such, we anticipate that the first half of fiscal '14 [could] carry approximately 40% of our revenue, while the second half of fiscal '14 could carry approximately 60%.

Regarding non-GAAP earnings per share, on a comparable basis the first quarter of fiscal year '14 will include approximately $5 million of operating expenses for the two acquisitions, Accanto and ONPATH, that were not part of our operations during Q1 of fiscal year '13.

We also project that our effective non-GAAP tax rate for fiscal year '14 will be approximately 37%.

Lastly, we plan to continue our share repurchase program to offset the dilutive effect of our employee share-based compensation.

That concludes our financial discussion this morning. Thank you for joining us, and we look forward to taking your questions. Jessica, we will now take the questions. Thank you.

(Operator Instructions)

Your first question comes from Mark Kelleher from Dougherty & Company. Your line is now open.

Great, thanks for taking the questions. Wanted to look at the product and service line. The product line has had some pretty strong growth; the service line seems to have kind of flat lined for the last few quarters. And then connected to that maybe you could talk about deferred revenue and backlog. It looks like the deferred revenue was up fairly significantly. The backlog has pulled back a bit. And I know those are connected to those two lines, as well. Could you just tell us what's going on between the service and the product lines there, and the growth?

Well, let me -- first of all, deferred revenue is not directly tied to the backlog. It includes other things. I mean backlog is purely product related. But as we are growing faster than in the past, I mean the product line will always be higher than the service revenue. And we have been also doing refreshes of technology which impacts the renewal stream. So I mean, as you know, we had products all the way down from the (inaudible) time and many of these projects are end of life right now, which have impacted the renewal stream. So we see a slight pickup in that, but overall the growth of product will always be faster, which is good news as well as challenging to some extent.

So with the increase (multiple speakers)

I'm sorry, go ahead, please?

Would the increase in deferred revenue that we saw in the balance sheet imply a pickup in the service line?

Sure. I mean, the deferred revenue is where we park all of the renewal booking and it varies -- it continually increases because the renewals increase. But it also varies in the composition, how many people are doing one year, three year, five year maintenance.

What we see, though, going forward from 2013 probably into say the midpoint of the guidance, 2013 had higher service revenue growth, probably about 9% on a year-over-year basis. That has to do with ONPATH coming in towards the end of our fiscal year. And it would have contributed service revenue from those, so that's why 2013 grew slightly faster than 2012. And, as Anil mentioned, as we move forward, like any technology company, we do end of life certain products. So I think going forward in the midpoint of our guidance for service revenue we probably would see a decrease in that growth over FY '13.

Okay. Thanks.

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

Yes, hey, thank you. A couple questions for you. So not to get obviously too detailed on guidance, but should we expect that the June quarter, Jean, the way you kind of laid out first half versus second half, the June quarter is the low quarter of the year, which I believe it normally is?

That's true, June is usually from a seasonality perspective one of the lowest quarters that we have for revenue. And then, as I mentioned, this quarter we will have the effect of the ONPATH and the Accanto acquisitions that we did not have in the same quarter prior year, plus, as we talked about on the call we were very excited about the attendance, which was record attendance, at our User Forum, so that in Q1 also went through our operating costs.

Yes, so our operating cost, what Jean is talking about -- just one other thing. We always had first half in the 40% to 45% range, and in the first half of any fiscal year, and for the last so many years. So, and this time we are just seeing that it could be at the lower end of that range.

I guess do you have visibility into a second half of the year in any part of your business, whether it's service provider, enterprise, or anything? I guess I'm trying to get a level of comfort of you going into this year with maybe a little more back-end weighted second half than last and kind of your comfort level there.

I think we have as much visibility as any other company, like us, will have for the second half. And -- but if we were not feeling good about it we wouldn't be providing the full year guidance. So I think the best way to look at it, there are always challenges. It's hard to see too much into the future, but we think we have made a lot of investment in the last 18 months which will allow us both on the acquisition front and coming up with new products and technologies that we think that's a reachable goal.

Okay. And a couple more. Jean, do you have roughly what acquisitions provided in terms of revenue for the last year?

So the acquisition of ONPATH probably provided combined between test automation and PFS in the last quarter, in the low to mid single digits of revenue.

Okay. And, Anil, how should we expect the packet aggregation switch market -- how impactful should we expect that to be for your business this year?

I think it will be in the higher single digits this year. And, yes, I think basically we are not directly giving out those numbers because many of those deals are combined with the [InfiniStream] sales. But our long-term plan is that we could get to 10% to 15% share of our revenue will be packet-flow switch.

Okay. And last one for me -- so the midpoint of your guidance range for this year you kind of imply, if I'm just kind of doing rough numbers right, maybe a 15% to 20% growth rate in service provider, if I'm thinking about the mix right, and then potentially a mid single digit growth rate for enterprise. Is that the right way of thinking about the mix?

I think if you look at 15% growth you can look at [then] 14% growth. It could be around 10% or so in the enterprise and 20% or so in the service provider, which would result in a blended 14% number.

Yes, and we have consistently felt that the service provider vertical was a 20% to 25% growth vertical. We've done that over the last few years. And, as Anil mentioned, the enterprise, we're very excited about the products coming out and the reception to the products we've received. So the enterprise, we are believing will grow in closer to 10-plus this year.

I think one other thing to mention is that when you start breaking it down, if you look at product revenue only, that will be higher than if you were to meet our guidance. We will be hitting higher than 14% and closer to 20%, and that's why I think we will need 10% plus on the enterprise to reach these goals.

Okay, thanks much.

You're welcome.

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

Good morning. I had a follow-up question on the service provider vertical. It's been extremely choppy for the tech industry so far this year. I know it's a very lumpy vertical. It's sort of difficult to get I guess a read on how you believe you fared in the quarter. Obviously, you had the optics of a difficult comp there, but it sounds like you're pretty optimistic for growth here in the year, you know, contrasting that with the drop in backlog. Can you just sort of talk to us about service provider? Did it come in relative to your plan, up or below? And what gives you the confidence for that 20% growth this year or are you just being brought into sort of more run rate purchases and avoiding some of the lumpiness that maybe some other technology peers are seeing?

I think it was basically aligned with what we thought this year. Moving forward, I mean, like any other company, more than 60% of the service provider business is going to come from less than 10 customers. And we have very good relationships and we have special conferences going on with them. We don't have estimates from all the deals we can do there, but there are plenty of projects which are in the works throughout the world. And so that is what is giving us the confidence that the top 10, which will bring 60%, 70% of the service provider revenue, we have very good visibility, contacts, and good feeling about NetScout and all, some of the things which we announced this month.

Okay. And then just shifting to the product release, I think you said it's in sort of the final beta stages and it should come out later this quarter. Can you just talk about how you expect the growth to come in from that product release? Is it more so a refresh in units? I think you alluded to that. Or, given that you've added a lot of capabilities to the product, you know, how do you view pricing there? Would you expect a price increase with the product, as well? Thanks.

Yes, there's no real price increase. And, in fact, many of the customers on the software side with the latest hardware and appliances will get the upgrade for free. The real gain will come in the enterprise from re-instrumenting the application side of the house because, as you know, our big strategy which we talked about since November even at the Investor Meeting and today, as well as in the User Forum a couple of weeks ago, is that we are transitioning from MPM space to MPM plus APM space. But since it's a new area for us, all right, in some sense a new set of customers, that's why, as Jean mentioned, that the impact will be seen more on the second half.

On the service provider side we are going to be announcing something new, but we are not able to talk about it today. But one big change is our voice product is finally getting online from that Accanto acquisition. And there's a lot of money being spent on LTE, on IMS and the Voice over IP. So that allows us to not only get new projects, but also build confidence whilst we continue to do some refreshes of the 3G and 4G stuff they bought from us or other vendors in the past.

Terrific. Thank you.

Your next question comes from Eric Martinuzzi from Lake Street. Your line is now open.

Thanks, and congratulations on the year just finished. I know it's difficult to predict a business 12 months out, but you guys did a nice job last year.

Thank you, Eric.

Thank you.

Yes, I have a question, first of all, just a housekeeping, the cash from ops and the CapEx. And then I want to ask a question about the forecast, the federal business, but first the housekeeping item?

So you want cash from operations for the fourth quarter?

Correct.

It was $28.4 million and CapEx was $3.6 million.

Okay, the federal business, I mean that's -- it's just been in freefall here. And you guys have done a nice job growing in the other verticals. But I was just curious. As you put together the 2014 forecast I would assume you're feeling, you know, things are probably pretty ugly here through the end of September, the current federal fiscal year. But the other half of your own fiscal year will be the first half of the next federal fiscal year. So just curious to know how you thought about that as you put together the projections for the coming year.

Well, we have assumed that it'll be slightly better than fiscal year '13 but not any better than fiscal year '12. So, yes, we have a lot of projects sort of on hold, and we are assuming it will be slightly better than -- somewhat better than last year, so no growth from fiscal year '12 to fiscal year '14 in the best case.

But we are continuing to keep the investment in the federal sector --

Yes.

-- and continue to build our customer relations and support the installation. So we want to be prepared when the market comes back and our commitment remains strong.

And is there anything anecdotally you could say gives you that hope or expectation for a slight recovery?

Well, I do think that the drift of our product, increasing the (inaudible) product into the security space by our customers using our technology, both for (inaudible) detection and incident response is going to be definitely an upside in the federal segment in particular.

Okay. Thank you.

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

I've got a couple questions. First on the modeling effort here and the mix and the pace of revenue, can you comment on the customer projects and how they've stretched in the fourth quarter relative to maybe three and six months ago? And how that aspect of the industry pace affects your outlook in terms of the revenue percentage in the first half and whether that's impacted it or if it's all just the timing of new product releases?

I think that the first half will still be, I mean still be higher than the first half of last year. So what Jean was talking about is the [results] will be more -- I mean, the component of the reserves will be much higher than usual in the second half because a lot of the products we are announcing are really not going to be selling actively until the end of this quarter. And those are the ones which we are using, we may be counting on to do the growth for us, both in the voice area, for example, for the service provider side, and entering the APM space -- sorry, on the service provider side for the voice product and for the APM side for the enterprise. So those are the reasons why, but we don't see any lengthening of projects. We see a lot of interest. Except for federal we are not seeing any real change in terms of projects getting delayed

Right. So as we've talked about in the past quarters, and actually probably over the past couple of years, with the continuing economic condition, you know, the pipeline always remains strong. There is always interest. Where we've lost some visibility in the past year-plus was when it goes into funding. We have found, as we've talked before, that companies, large enterprises, have put in more cycles for funding and have delayed them. So there's no change that we have seen in Q4 over that, and I don't really anticipate that our fiscal year '14 will have much more of an economic rebound, but that funding scrutiny part of our pipeline doesn't improve significantly.

Anil, I expect that as SDN becomes more prevalent you'll have more things to measure and monitor. But there's been a fair amount of interest I guess of the TAPS that are part of the open flow standard and the use of these types of functions for distributed Ethernet monitoring. And was wondering if -- how you will plan around that and how it impacts the way you look at this packet switch business?

Well, as we said, that our packet-flow business here is going to increase from single digit to double digits starting this year and moving forward, and so that's an indicator that we'll be taking market share there. And second is not only increasing the share but off a bigger number. And the second thing is we are doing, also, initially packet-flow switch competes with a budget for flow but overall it enables the instrumentation more effectively and you'll see bigger sales for everyone, especially for somebody like us who is a leader in both the spaces.

As to the SDN and open flow, it's still a lot of marketing hype, but we are very involved with SDN initiatives and we'll be upgrading our switch also to that as other people do it.

And we do see additional opportunities in SDN-based networks for monitoring solutions, as well. So we are very aggressively exploring just additional, but new ways of applying our technology to SDN.

Does the Voice over LTE augmentation for the service provider offering -- is that release timing also this quarter or is that later in the year?

I think it's later in the year. Like I said, our product will be fully ready later in this quarter. And because, as you know, part of the technology is being coming from the Accanto acquisition and that has been migrated to the NetScout platform now. And now we're ready to go full bore with that. And so by the time -- these deals take time, and so more impact will be seen in the second half than in the first half.

Will we start to see R&D moderate as a percentage in that timeframe? I know you will just because of the top line, but it seems quite a push (multiple speakers) for [ASI2] and these other products?

Right. So as we've talked in the past, R&D is a little higher than our long-term operating model would suggest, mostly due to the acquired technology and the engineers that we have in huge development mode now. That 16-ish percent as we increase revenue will go back to the 13%, 15% range.

Depending on acquisitions which we can't predict at this point, so that factors in.

Jean, can you give us a depreciation number?

Sure. Depreciation for the quarter was $2.1 million.

Thanks a lot for taking my questions.

You're welcome.

Thank you.

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

Yes, thanks, Cathy, for sneaking me in here. Great quarter, guys. I just had a quick question, Jean, about how we should be really thinking about product growth. First up, I know you mentioned low mid to single digit acquisition revenue for fiscal '13. Is that all in product, Jean, or is that just spread across [those] product services?

That is -- hold on one second -- it's mostly product.

I just want to also mention, while Jean is looking at it, that in the past I think there have been a lot of questions about --

It was product, yes.

-- a lot of question about organic versus -- organic growth and acquisition related. All of our growth is mostly -- most of our growth is organic. All these companies were, I mean practically, very small in revenue. And also in some of the areas we shifted around so some of it is acquisition related but it's being sold by the same sales force. It's being developed by the same team. The teams in (inaudible) have been integrated. And so we look at it as part of -- really, we didn't inherit too much revenue from -- existing revenue from the acquisitions.

So, Anil, fiscal -- so fiscal '13, let's say organically it grew maybe 15% product. Obviously fiscal '12 had some issues. So is it fair to say that product growth for fiscal '14 should be roughly 10%? Is that the right way to think about it on a normalized basis?

No, I think it would be closer to high teens.

It should be -- product growth at the midpoint of our guidance would imply mid teens.

Yes.

For fiscal '14?

Yes.

Yes, just like this year we had at the high end of the guidance. This year we had -- fiscal year '13 was 14% and 18%. [Is that right, Jean?] Last year was 14% and 18%.

Last -- so last year our product revenue growth was 18%, yes.

Yes, so that's always a few points higher than the overall growth, which will be the trend, and depending on where we end up this year.

So just to finish here, mid teen product growth and most of that's organic for fiscal '14?

Yes.

Okay, thanks, guys.

Thank you.

Your next question comes from Gary Spivak from ABR Investment Strategy. Your line is now open.

Hi. Thank you. Jean, I believe you mentioned that the decrease in bookings this quarter over last year, that half of that was from the government. If that's true then what was the other contribution to that?

Decrease in bookings for the quarter or for the year?

For the quarter?

Well, all of the verticals for this quarter were down on a year-over-year basis with the exception of general enterprise. As was previously mentioned on the call, last year's comp was a difficult comp. We had -- we passed the $100 million. So all of the verticals with the exception of general were down slightly or down. In general what we saw was over the year different -- some of our new products, NVVM and the packet-flow switch technology, really taking hold in the multitude of industries that fit within the general enterprise. So government on a new business basis for the fourth quarter year over year was down about 50%. The rest of them were down in the mid to upper teens, with the exception of general enterprise, which was up.

But, Gary, as we have mentioned before and as well as this morning, because -- you can see the number of million dollar deals we do, especially on service provider business. It's so lumpy, that's why we give yearly guidance. It's good to track how a company is doing every quarter, but I think it's just -- the best way to look at our business is on a yearly basis. And despite what Jean said, I think that's -- when you start looking at quarter-over-quarter comps it becomes difficult. One quarter suddenly looks so great, another quarter looks real bad. So I think you should just keep that in mind as we compare the quarter versus the years.

Yes, I understand that. Thank you for that clarification. My next question is regarding the security space. With incident response do you have any partnerships or natural alliances that you can either tell us about or point at as potential alliances or partnerships going forward?

Yes, we have a couple of very important ones. But I should have checked before the call whether -- yes, I don't think we can talk about it. But we'll make sure that we talk about it in the next quarter, assuming we have the clearance. But we have a couple of high profile ones. But overall this year we were highlighting APM stuff and, like Michael said, we'll probably announce something towards the end of the year, a special initiative on the cyber space. What Michael was talking about is currently how people are using our product for cyber security. That itself has a lot of interest, and that has resulted in at least one partnership, maybe two already.

Okay. And then my last question is on the APM. As that going to be application specific? Will there be a targeted application or is it going to be plug-and-play and allow people to instrument whatever they have?

Yes, it's for all applications and they will use -- I mean they will need certain volume of our [past equipment] to be able to get it for free. But I don't know whether your question was about are we targeting, let's say, middleware application or Oracle or (inaudible). Our solution is unique in the APM space that the same solution works with slight reconfiguration and provisioning for all applications in the customer's IT environment once we have the ASA adaptor, which is the customization. And so that's the goal. And so every time you use it for a new application you don't need to necessarily need the whole new product or upgrade.

Great, yes, that was my question. Thank you very much.

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

Hi, good morning. I wanted to ask about the financials vertical. Could you explain the types of projects that you're seeing in that vertical right now? There are, of course, questions around all the verticals, but just the character of projects and if you're seeing any differences or is it more of the same?

Well, let's talk about -- I mean there continue to be things in the trading vertical, I mean some verticals where people want to look at latency of trades and things like that, where it's sort of fragmented competition there. Then we have ecommerce, and we have just released something in the -- which allows us to look at encrypted traffic in real time, which most people just cannot look at it, are blind to that information, or cannot do it in real time. So our traditional competition does it offline. We are able to provide now the same capability for encrypted traffic, which is very important for them to get visibility.

And so some of our product was -- it ended useless in cases where the traffic was encrypted. So we are able to do that, and that's under test right now and that going to be part of this new release we are announcing. So I see those two areas at least, in addition to all financials, have customer applications and can benefit in investing a lot in the APM space. And I think we can use our champion in the networking area to target those budgets.

Okay. And then another vertical, the government area -- there's been some Q&A on that already. But as we look over the past several quarters it's good the Company tempered expectations around government, as you've done. But I guess when you look back to when government was material and doing better for the Company, were the projects concentrated with a few large buyers from the government and perhaps those efforts have rolled off? Because there has been a dramatic slowdown in government, as you have guided us. But how would you characterize what has happened? Was it a few buyers only in the government -- or any color there would be helpful.

I think [top 10] is, again, applicable there, also. We were more on the defense side, not on the civilian side, and that has been impacted quite a bit. But we were doing business in other -- I mean most of the projects were quite large and million dollar deals, as you probably see from a couple of years ago, were quite high in the federal area. And so I don't -- I can't tell you exactly, but it's across the board in the kind of depression we saw last year in terms of how much down it was. It was across the board, but, yes, I think it's mostly big projects.

Okay, and then --

But the big projects long-term in nature. And as we continue to say, we have the pipeline. In fact, the pipeline keeps building. It is just more a question of whether the funding for the types of projects that our customers have will come through or not.

Okay. And then for service provider, I may have missed this in the previous commentary. But there's been some question around the strength of 4G LTE rollouts and how much of a driver that is for your business versus let's say 3G, older network projects or projects around VoIP. Could you give us some color on if it's the new efforts around 4G LTE that are driving or is it a balance of old versus new? Any color would be helpful.

I think our 4G LTE is still -- I think people still continue to expand. And you're right that a lot of the initial investment is done, but they continue to expand. But in the Voice over IP and IMS area they are investing. I mean there is new investment which we are counting on that's traditionally part of -- because triggered by LTE also.

And, lastly, there is a lot of interest on how you -- what kind of analytics you do. We talked about cell base analysis and what kind of issues are impacted by cell tower, the handset types, like Google phone versus other. So there are new features needed on existing LTE, also.

And, thirdly, the vendors are coming out with -- infrastructure vendors like Ericsson, Cisco, are coming out with common boxes to cut down, reduce the shelf space and everything, with 2G, 3G, and 4G combined. So in those cases that requires a refresh of [our] equipment also even though it works for LTE.

Thank you. I'm all set.

Your next question comes from Kevin Liu from B. Riley & Company. Your line is now open.

Good morning. Just looking at your growth for fiscal '13, you guys had strong performance in both North America and Europe, and was wondering if you could just talk a little bit about the geographical expectations for growth as we look towards fiscal '14?

Well, I mean it's still going to be basically similar to this year. It was a little more pronounced internationally, is that right (multiple speakers) --

Portions are relatively consistent, 25 and 25. What we've seen internationally and how we think about the business going forward is that Europe and Asia still, when it comes to the financial institutions, as we've talked about, it's been very, very quiet. We continue to keep up our partnerships and our relationships, and those customers still continue to be loyal, evidenced by the fact that they continue to purchase maintenance and support of the existing product. But they're very focused still internally on their internal operations.

Where we saw some shift and it was, as I mentioned in the comments, only about a 2% increase, it was in Europe and that's mostly focused on service provider. We get a lot of questions on service provider and 4G and 3G. And just to summarize, 3G has been where we've been playing even if it's IP based and 4G is, as Anil mentioned, still rolling out. We still see a lot of opportunity in that area.

In 2014 we probably think it will be spread out a little more through the international operations because we will have the voice product for refreshes. We will also be able to do -- you know, we're a vendor for one stop shopping. So the revenue might be a little more dispersed in FY '14, in SP rather than concentrated like in the top US tiers, but we haven't really seen much of a shift to our revenue base going international.

So US will still be 75% to 80% next year, also. That's what we think.

Thanks, that's helpful. And then just a few quick ones on the new product areas. For the packet-flow switch launch are you getting better reception right now within enterprise or service provider? And then both for that product, as well as the newer stuff you're announcing for APM, what's your sense about your relationships with the appropriate decision makers in your customer set? Do you feel like you already have pretty decent traction and then could, therefore, drive that growth with some confidence? Or is there a lot of I guess business development that needs to be done?

No, I think we have existing relationships in all those,. And initial traction has been higher on the enterprise side, but because service providers make more long-term decision and they have already spent something. So as Michael talked about, as refreshes are coming up for 10G and otherwise [high core density] that's where we have a chance. So moving forward what we see traction sort of equally on both sides as a percentage of revenue.

Right. So regarding the PFS question, if you -- the Simena acquisition that we did about a year ago, that was a lower scale product so naturally it fit more into the enterprise segment. The ONPATH acquisition, the 3900 that Michael also talked about, that is much higher capacity and that would be of interest to the service provider market, also.

Thank you.

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

Yes, thank you for taking my questions. I wanted to get back to what's driving the momentum in general enterprise. We had some nice bookings growth over the last couple of quarters. Is it just a function of the new products or is there something going on in the channel or competitively? Do you see some opportunity there with maybe little bit better op net? Just wanted to get a sense of what's driving the momentum in general enterprise.

Well, first of all, it's not new product yet because even though people knowing that we have been investing and we have been doing a lot of little, smaller user forum type meetings, people are feeling very good about continuing to invest in NetScout. So that's helping to some extent indirectly, but new product has not had a direct impact yet.

PFS, as we talked about, a lot of the growth which we talked about, single digit in PFS, was coming from the enterprise. And the rest of the business, I mean has stayed steady except in a few places where we did some special application work for a couple of large customers. That has helped. But most of the growth so far in the enterprise has been in those areas.

And, as we've talked about, that has a myriad of industries. And in the past we've seen different businesses do different applications, whether it was retail or utilities. And the products that we have invested in in the past -- so for instance NVVM has sold a few times in there. Also, as I had mentioned just a few moments ago, the product that we acquired from Simena, the PFS 1500, has sold nicely into those industries, also.

I appreciate that. I think, Jean, last quarter you mentioned that maybe the shift or the incremental shift might move to more -- in the service provider business might shift to the European Tier 2 service providers. Is that something that you saw this quarter? If you could talk about the mix between the Tier 1s in the US versus the Tier 2 opportunity -- how should we think about that mix for fiscal year '14?

In the quarter I don't -- I think in the quarter we didn't really see much of a shift towards overseas type of service providers. Just to be clear, we will still continue to sell into Tier 1. We still have sort of our top customers of the US Tier 1. We just see, as we've talked about before, to continue the growth of 20% plus and the amazing adoption and recognition that we've gotten in the globe on our IP-based product, that we will naturally just be able to sell more and more into international as the Tier 1s are in the labs right now with VolTE and might come out in the second half with choices and things like that. I don't see that it's going to be dramatic, I just think that it might be a subtle enough shift.

Right, I appreciate that. And my last question, on the gross margin -- that's the first time it's been below 80% in several quarters. Still within your range, but was there anything driving? Was it less federal that has higher gross margin? Was it just simply a mix issue, or was there potentially more discounting, as well?

The gross margin percentages -- I'm just looking real quick. This quarter -- it's been about 80% or so over the last few quarters, so you're correct about that. It is slightly lower this quarter. As we had mentioned in calls before the PFS-based product, which is much more of a hardware product rather than a software that we sell with the incentive stream, also has a lower margin. It has maybe a mid -- 70% to mid 75% margin, gross margin. Going forward I think overall, though, our gross margin should still say around the 80% range.

Got it. Thank you so much.

Good.

Your next questions come from Mark Jordan from Noble Financial. Your line is now open.

Good morning. A couple of questions just related to the GAAP reconciliation. You mentioned that post combination, compensation services of $2.8 million. Two questions related to that. One, is that earn out-related or is that just redundancies that are incurred during the assimilation process? And how does that $2.8 million get spread out over the quarters?

So the $2.8 million is compensation related to acquisitions, so some of the leading personnel from acquisition. It is not an earn-out, it is not performance based. It is time based. So it is relatively consistent over the quarters for the next few years.

Okay. Then, secondly, related to stock comp, $13 million estimated for fiscal '14, a little under -- or $9.5 million last year. And in fiscal '13 versus fiscal '12 you only saw relatively modest, less than $1 million increase year over year. You've got about $3.5 million increase here. Is there a specific reason for the larger jump in this year?

This will be the first year that we will have the full impact of the way we schedule share-based compensation. We're moving more towards annual and in the past few years it has been about two years. So this year it'll have the first time -- it'll be like a [full]-year effect.

Okay. Thank you very much.

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

Okay, thanks, everyone, for your questions. We'll talk to you again in July.

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