Netscout Systems Inc (NTCT) 2014 Q2 法說會逐字稿

Welcome to NetScout's second quarter of fiscal year 2014 operating results conference call. At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session and instructions will be given to you at that time. As a reminder, this conference call is being recorded.

With this today is NetScout's President and CEO, Mr. Anil Singhal. He's 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 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 2014 second-quarter conference call for the period ended September 30. Before we begin, let me remind you that during the course of this conference call, we will be providing you with a discussion of factors we currently anticipate may influence our results going forward.

The statements include forward-looking statements made pursuant to the Safe Harbor Provisions of Section 21E of this 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 in the year, such as during the quarterly earnings call. We do not plan to update that guidance otherwise.

Actual results may differ materially from what we say today, and no one should assume later in the quarter that the comments we make today are still valid. For the further discussion of the risks and uncertainties that could cause our actual results to differ, see the specific risks and uncertainties discussed in NetScout's annual report on Form 10-K for the year ended March 31, 2013, on file with the Securities and Exchange Commission.

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.

While the slide presentation includes both GAAP and non-GAAP results, unless otherwise stated, financial information discussed on today's conference call will be on a non-GAAP basis only. Non-GAAP items are described and reconciled to GAAP results in today's press release. I would also point out that growth rate discussions are based on the year over year basis, unless otherwise noted.

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

Thank you, Cathy. I am pleased to report that NetScout delivered a solid second quarter of fiscal year 2014.

Non-GAAP revenue for the quarter was $92.2 million, which is up 9% over the same quarter a year ago, but year-over-year product revenue growth was even higher at 13%. Non-GAAP earnings per share were $0.34, comparable to last year.

Since Michael and Jean will later be providing additional details on our performance this quarter, I would like to primarily concentrate on our prospects in the second half and the full fiscal year. This especially relevant as we are reiterating the revenue and EPS guidance we provided to you at the beginning of this fiscal year.

With two quarters left in the current fiscal year, we are roughly aligned with our historical average trend of 45% of total revenue in the first two quarters. This is despite the fact that our service provider business in the first half of last year included a few library deals which weren't anticipated to recur this quarter.

Our confidence for the second half is attributable to three main reasons. First, the new product nGeniusONE, based on our patent pending ASI technology that we delivered this quarter is already generating a lot of excitement among our enterprise sales force and a lot of interest among our top customers. Over 100 customers are running nGeniusONE in either their labs or in production.

With the introduction of nGeniusONE, we have two major goals in mind. The first goal was to continue to create and expand our value to our NPM customer base.

The creation of value to our customers has served us well over our Company's history, and is evident through our high service renewal rate and customer retention. In this quarter, we have noted that our product roadmap and approach has resulted in a few instances of shorter sales cycles and increased deal sizes as customers have embraced to our new product and workflow.

The second and broader goal of nGeniusONE was to expand our opportunity in the APM space. While we continue to develop the integration of NPM and APM conversions while we continue to drive the integration of NPM and APM conversions and strengthen the APM portion of nGeniusONE, we believe this will be in more impactful in the last quarter fiscal year 2014, and throughout fiscal year 2015.

Coming back to the second reason for our confidence is the second half pipeline in the service provider business, where we have some large deals in motion. We will also be delivering the next version our Voice over IP solution in November. And we expect more of our service provider customers to start deploying nGeniusONE as well, in the second half.

And the third reason for our confidence is the number of competitive wins we are seeing in our packet flow switch business. Our packet flow switch business has grown substantially in the first half, and we expect this to continue moving forward. As a side note, as we mentioned during our last call, we expect our government business to remain flat versus last year, due to US federal government continued budget uncertainty.

I would like to end my discussion by explaining why I decided to name our new product nGeniusONE, as such. As you may be aware, the word nGenius and nGeniusONE is a well-established product branding we have been using for a while. (technical difficulty)

Sorry everyone for the confusion. There was a phone glitch. I will continue and basically resume at the point where I left off last time.

We talked about the three big reasons why we feel confident about the second half and for reiterating the guidance, and I was going to end with some statement about our new product. And then Michael and Jean will cover their portion, and then we will go to question-and-answers.

I would like to end my discussion by explain why we decided to name nGeniusONE as such. As you may be aware the word nGenius and nGeniusONE is a well established product branding we have been using for a while.

The word ONE in nGeniusONE truly represents a one-of-a-kind product in the NPM plus APM space, for the following reasons. It is a single product and part number, not a suite of modules cobbled together with false integration like other solutions in the market space. Complete transparency and scalability, and there are no separately priced or hidden options.

It is a single user interface, and no learning curve is required, as we support more applications using our APM solutions or new environments. Next, it's based on obviously a unique ASI patent pending technology, in which we have already spent over 100 man years in development.

Next we have, it is designed from day one to promote active IT collaboration between the network, application, and server operations team, replacing the traditional finger-pointing which has been the current drama in the industry. Next is the ease of use and quick deployment, which includes backward compatibility with hardware owned by our existing customers, which is one of the big reasons we have 100 installations in the first couple of months. Finally, the scalability from remote sites, to cloud to virtualized data centers and beg enterprises, as how people will decide to deploy their applications.

These unique product capabilities, combined with our long-standing market leadership, customer relationships, and well-trained sales forces will continue success in the future. I will now turn the call over to Michael, who will talk in more detail about the nGeniusONE rollout, as well as some exciting news on our continued market leadership.

Thank you, Anil. As Anil has discussed, we have been experiencing rapid adoption in the our customer base. During the past quarter, well over 100 of our top accounts have deployed nGeniusONE across all different segments, including general enterprise and service providers.

Our interactions with early adopters validates that this new product will drive revenue growth by offering a deeper insight into the applications as they are originated in data center server farms and delivered through the infrastructure, which can only be achieved through additional instrumentation. In the near-term, nGeniusONE also helps by demonstrating to our customer base a new prospect of technology leadership and commitment to their success.

With just two months of general availability nGeniusONE has already made a difference in our business, by hoping to close deals in the quarter, especially in a number of important new accounts against large competitors. Our sales teams are well-trained and are successfully leveraging the new product both in current final deals, and in new opportunities.

As an example, one of our larger deal wins this quarter was a new financial services customer. This new customer had older management tools that needed replacement.

They were involved in a competitive situation with other APM vendors, including largest of this vendor. The customer had specific application monitoring requirements in the area of transaction authorization, as well as a need for network monitoring and aggregation switches in their two major data centers.

NetScout's new nGeniusONE platform won the proof of concept trial because we were the only vendor that could provide a complete unified and fully integrated solution, that was essential in all areas of network and application service management, as well as being able to deliver the best network monitoring switch solution. We are pleased to have won this business against a large established APM vendor.

In other areas, we continue to successfully leverage our unified communication performance management, with our portfolio that includes all nGenius voice video manager product. They have contributed to new customer acquisitions in the past quarters, and are increasingly differentiating us in deals in the current funnel. We are continuing to invest in this technology, and during the quarter we officially qualified on interoperability with Microsoft Lync 2013, rounding out our support for earlier versions of Lync and Microsoft UCS Developer, previous to Lync.

In addition to seeing strong customer acceptance and market impact, our nGenius package continues to receive industry recognition. In just the last three months, we have received six new awards, such as being recognized as the People's Choice for Favorite New Network Hardware and Favorite Telecommunications Product from American Business Awards. The nGenius package also was named Best New Product of the Year by the American Business Awards in hardware and telecommunications categories, and Best New Hardware Product of the Year by International Business Awards.

On a related note, we are extremely pleased to report that NetScout has recently been selected to the Barron's 400 index. This marks the fourth time that we have been selected to the index since its inception in 1997. Given that only about 6% about of all North American publicly listed companies are selected on the basis of their fundamental soundness, underscores the fundamental strength of our financial results.

Lastly, NetScout continues to maintain its ranking by Software Magazine's Software 500 list, ranking sixth in the infrastructure network management category and 177 overall on the Software 500 list. This marks the Company's tenth consecutive year in the annual ranking of the world's largest software and service providers. I will now turn the call over to Jean for detail financial results discussion.

Thank you, Michael, and good morning, everyone. As Cathy noted earlier, my remarks this morning will be based on our non-GAAP results, our accompanying slide presentation has the comparable GAAP results. To begin our financial discussion, we will be starting with the third slide of our presentation, which accompanying our call, and is posted on our website.

Our second-quarter non-GAAP total revenue was $92.2 million, which is an increase of 9% from the same quarter in fiscal year 2013. Within non-GAAP total revenue, non-GAAP product revenue was $52.4 million, which is an increase of 13% over the same quarter in fiscal year 2013. Service revenue was $39.8 million on a non-GAAP basis, which is a 4% increase from the same quarter in the prior year.

Our earnings per share for the second quarter were $0.34, this is equivalent to the second quarter of fiscal year 2013. As we discussed in our earnings call one year ago, the second quarter of fiscal year 2013 was unique quarter from a customer mix perspective, where revenue was concentrated in our service provider sector.

The customer mix added approximately 1 point to gross margin, 3 points to operating margin, and $0.02 to earnings per share. As we commented during our earnings call from last quarter, we did not expect the same customer dynamics that occurred a year ago this quarter, to repeat in the current quarter.

Therefore, turning to slide 4, the business continues to operate within our long-term operating model. On a non-GAAP basis, our gross profit was $73.7 million, representing a 79.9% margin.

Non-GAAP income from operations was $22.6 million, and our non-GAAP operating margin for the quarter was 24.5%. Non-GAAP net income was $14.3 million, or $0.34 per diluted share. The non-GAAP net income margin was 15.5%.

Turning to slide 5, which shows our year to date results, our year to date second quarter non-GAAP total revenue was $174.2 million, which is an increase of 8% from fiscal year 2013. Within non-GAAP total revenue, non-GAAP product revenue was $95.3 million, which is an increase of 10% over the fiscal year 2013. Service revenue was $78.9 million on a non-GAAP basis, which is a 5% increase from the prior year.

Our year-to-date earnings per share were $0.55. This is an increase of 4% from fiscal year 2013.

Turning to slide 6, this shows our year to date product revenue composition. Total revenue through Q2 was $174.2 million, of which product revenue was $95.3 million, an increase of $8.9 million, or 10% over the prior year's first half.

The components of our product revenue for the first half of fiscal year 2014 were as follows. Service providers, $37.2 million, 39% of product revenue. Government, $10.5 million, 11% of product revenue. General enterprise, $47.7 million, 50% of product revenue.

This compares with the prior year's quarter product revenue components as follows. Service provider, $38.5 million, 44% of product revenue. Government, $9.4 million, 11% of product revenue. General enterprise, $38.6 million, 45% of product revenue.

Slide 7 shows our product revenue growth rates by sector. Service provider product revenue was within 3% of our prior year's service provider product revenue.

This is significant in that our first half of last year saw an 80% increase in service provider product revenue growth, which was concentrated in the second quarter of last year. General enterprise grew 24%, as we saw growth from our high-tech and manufacturing customers. Government increased 12%.

Slide 8 shows our total revenue composition. Total revenue full year to date was $174.2 million, an increase of $13.0 million or 8% year-over-year.

The composition of our total revenue for the first half of fiscal year 2014 was as follows. Service provider, $59.8 million, 34% of total revenue. Government, $22.2 million, 13% of total revenue. General enterprise, $92.2 million, 53% of total revenue.

This compares with the prior year's first half total revenue components as follows. Service provider, $58 million, or 36% of total revenue. Government, $22.3 million, or 14% of total revenue. General enterprise, $80.9 million, 50% of total revenue.

Turning to slide 9, which shows our total revenue growth by sector, our total revenue for the service provider sector grew 3% on a year-over-year basis, driven by continuing project wins. As we mentioned earlier, this growth rate is being impacted by the strength of service providers in the first half of last year. Our general enterprise sector grew 14%, total revenue for the government vertical was flat year-over-year.

Turning to slide 10, this is a depiction of our first-half revenue by geography. For the first half of fiscal 2014, the revenue mix between domestic and international revenue of 74% and 26% was generally consistent with our recent historical averages, where domestic accounts for approximately 75% of our revenue and international accounts for the remaining 25%. Within our International sales, the mix is generally consistent with prior results, Europe delivered 12% of our international sales, while Asia delivered 6%, and the rest of the world delivered the remaining 8%.

Slide 11 includes highlights from our balance sheet. We continue to maintain strong liquidity. At the end of the second quarter of fiscal 2014, we have invested cash, short-term marketable securities, and long-term marketable securities of $159.4 million.

For the first six months of FY 2014, we generated approximately $27 million of cash from operations, our capital expenditures were about $6 million, which includes investments in our internal systems and building improvements in our international R&D facilities. Our year-to-date free cash flow is approximately $21 million. Additionally in the quarter, we repurchased 225,000 shares for $5.9 million, for a total year-to-date amount of 475,000 shares for $12 million.

Accounts receivable, net of allowances, was $55.7 million, down from $73.9 million at the end of fiscal year 2013. Day sales outstanding were 54 days for the quarter, compared to 68 days for the fourth quarter of FY 2013. Inventories were $10.7 million, this is a $3.1 million increase from the fourth quarter of fiscal 2013.

Additionally, our total deferred revenue was $109.6 million. This is down from $121 million for the fourth quarter of last year. This decrease is in line with our historical pattern for Q2, as this quarter historically sees lower levels for renewals. Deferred revenue was up 12% from the ending Q2 fiscal 2013 balance sheet.

Turning to our guidance for fiscal year 2014, slide 11 illustrates our guidance range for revenue and earnings per share. We are reiterating our guidance for FY 2014 for both revenue and earnings per share. Our non-GAAP revenue guidance for fiscal year 2014 is $385 million to $400 million, yielding a revenue growth rate of 10 to 14%.

We are extremely pleased with our first order half, which included some deals that were anticipated in our second half, as Anil and Michael had spoken about earlier. We are also pleased to anticipate our first $100 million revenue quarter occurring in Q3 of FY 2014.

Our non-GAAP net income per share guidance for fiscal year 2014 is $1.40 to $1.50, yielding non-GAAP EPS growth of 6% to 14%. We continue to project that our effective non-GAAP tax rate for fiscal year 2014 will be approximately 37%. Consistent with past practice, we have used the statutory tax rate of 38% to tax effect the non-GAAP adjustment.

Before we conclude the financial portion of our remarks, I would like to inform you of the upcoming conferences in which we will be attending. On November 13, we will be attending the RBC Capital Markets Technology Conference in New York City. On November 19, we will attend the Deutsche Bank Small and Mid-Cap Conference in Florida, and on December 3, we will attend the NASDAQ conference in London.

That concludes our financial discussion this morning. Thank you for joining us. We look forward to taking your questions.

(Operator Instructions)

Your first question comes from Eric Martinuzzi with Lake Street, your line is now open.

Congratulations on the good quarter, the good solid execution and I hope we've got as many people as we started with on the call, given that pause in the middle. Question for you, regarding the federal government impact, not necessarily on government business, but on communication service provider spending. Is there any chance that deal approvals for NetScout could be impacted by federal inspectors or federal approvals in your service provider customer base?

No, that's not true. It is not really impacted by anything happening in the federal sector. That doesn't affect the CSD markets at all.

Okay. And then secondly, there's been some acquisitions in this space. I don't know do the Now Factory that well, I do know that IBM bought them and they do something in service assurance. I do know Empirix a little bit better, and I know that Thoma Bravo bought them. I'd like to hear your comments on those acquisitions, and what do you think it means for this space?

First of all, all these are good endorsements of interest in this space. But in particular, Thoma Bravo has been accumulating a lot of assets, and I'm sure they have some strategy in mind in the management area and this is one of those many ones.

The Now Factory one is a small one in the CEM space, which is customer experience management and we'll be having our own strategy announced next year and I think despite the fact that some of these acquisitions have happened, we still have opportunities to partner with the same people.

Also we are very familiar with most of the acquisitions that we just happen on the last couple of years elsewhere outside of NetScout, and either have passed on them, or they didn't really fit our profile, so we are on top of this and overall I feel this was a good thing for the industry and NetScout.

Thank you.

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

I know you made a handful of comments on nGeniusONE, but I did want to flesh that out a little bit. I know historically you don't price for additional modules, et cetera, I think you disclosed that on the call, but can you walk through why you are seeing I guess larger deal flow? I believe you said that. are you just seeing more budget that was with traditionally allocated to APM come into the solution, or what exactly is driving the larger deal flow related to nGeniusONE?

Okay, as we said, we are happy with the impact of a larger deal -- for it is not huge right now but it is a much bigger positive trend versus last year in the NPM space. The deal size are decreasing because people are having very good test in the amount about our strategy for upgrades. So we are not charging for nGeniusONE upgrades for anybody who was on the maintenance and that is pushing them into using some of the monies from other projects, or which they were thinking about earlier in the NPM or maybe even APM space, and flowing that back into instrumenting a different part of the network, which they were not considering earlier.

Second thing is packet flow switch, which has really no role in life without being used, the data being sent to a device like NetScout, and other products, and packet flow products in the markets, that is getting added to all these deals is because multiple reasons. One is, I think we have one of the best competitive products in the market, but also as I mentioned, the goodwill generated in the networking standard NPM customer base is adding to those, either slightly shorter deal cycles, or slightly bigger deals. The APM impact, there is a lot of interest in that, but any real impact on the revenue is going to be started seeing, starting in January, as we mentioned during the call.

Okay. And a second question if I could. I appreciate the color and realize that service provider had a very difficult comp in the first half here, but I think you said you do expect some larger deals to come in, in the second half, and that gives you comfort in the full year outlook. Are those with existing customers where you have some visibility to the timing of deployment, or maybe could you walk through the timing of those coming in and the second half and your visibility towards those deals? Thank you.

I think it is good, the timing is very hard to exactly predict, but there will be some good numbers in the third quarter and the rest in the fourth quarter. But they are all with existing customers. We have been doing a lot of business, and we have done a lot of business in the last year.

It just so happened some of that big business with a couple of large providers happened in the first half, and that's going to happen in a second half. So the point we are making is that we were able to keep the first half of the service provider revenue almost flat, despite that we didn't use the numbers from the big deals we had last year and that's why we said that we are expecting a good second half, because some of the big deals which happened last year in the first half will probably happen in the second half. But it is very hard to predict right now Q3 versus Q4. We are trying to get as much end of year budget as possible.

Great, thanks, Anil.

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

Anil, just to follow-up on the last question. You have 100 customers, I think you said in your script, testing nGeniusONE. What could that mean for the fiscal 2014, well more importantly fiscal 2013 growth rates? Is there some kind of incremental opportunity that this could drive, as far as product growth, maybe above what you've seen in the last couple of years?

Yes, that's what we are hoping for, but I guess we will have to just wait for the guidance for next year to provide you with in more detail, but certainly as we shared last year, we have increased the size of our market by nGeniusONE, and we have increased our -- we have solidified our footprint in the NPM space with nGeniusONE goodwill, and we are seeing the market opportunity beyond NPM to APM also. So all that means that we should see a lot of progress next year, but it is still some time before we will be able to share those things with you.

Is there a percentage of growth in your overall addressable market, have you thought about that, as far as how many extra dollars our what kind of growth in your TAM it's created?

You mean you are talking about APM now?

For just nGeniusONE the.

No, I think it is only two months of release, so we did see subjective impact and a little bit of objective, as you can see the enterprise growth in the first half was quite good. Part of it is PFS, and part of it is nGenius goodwill. The third impact, which is on APM will be a more longer term, and will be the bigger one, but that will be next calendar year.

And then a good question for Jean. Obviously strong operating margin execution, and again I would imagine, mostly driven by the revenue upside. On a go-forward basis versus your target model, what would be a set of circumstances that you would need to revise the target model up, when you go into fiscal 2015? What is the set of factors that would need to be in place for you to think about that at the Board level?

As I think we've discussed in the past, FY 2014 is a transitional year for us as we launch the new products that we've spent the last couple of months developing. So we are going to go through FY 2014 and keep the current long-term operating margin.

What would have to happen in FY 2015 is, we will have to see how the revenue grows, as you mentioned. We have a very stable infrastructure. We don't really need to add that much cost to it, where we would be adding cost and keeping the margins in line with what they currently are would be in the R&D area, to make sure that we continued to stay on the cutting edge of technology, and deliver the products that our customers want.

Also in sales and marketing, mostly in the sales area, as we mentioned, we have a tenured well-trained geographically-dispersed sales force. The places where we would potentially add people and then hence keep the operating margin targets within what we have now, would be in any of the geographic areas where we see customer demand. As we've mentioned in the past, service provider, we continue to gain international customers, and any other kind of new product rollouts where we would require product specialists.

But again, the infrastructure that is needed for us to grow is pretty much already stable, and is implemented in the current operating margins. We would just be looking at whether we will continue with R&D development and those related costs, and how much expansion is required in the sales force. At the end of FY 2014, we will have a better insight into the pipeline, and will determine whether we need to change the operating margin to a higher level, for FY 2015 and forward.

All right, thank you very much.

Your next question comes from Mark Kelleher with D.A. Davidson. Your line is now open.

Congrats on a great quarter. Wanted to ask a couple things. The APM capabilities that are now in nGeniusONE, do you think that will be a stronger uptake on the carrier side, or on the enterprise side?

The initially it will be -- nGeniusONE is a multipronged benefit product, and so specifically when we talk about APM, we are talking about enterprise opportunities. But similar application monitoring capabilities will be helpful to the service provider, but that's just not -- people don't call it APM. It is a similar feature, but when we are talking about the word APM, we are traditionally talking about enterprise.

All right. And on the service provider side, where are you seeing the growth? Is it testing for 3G networks? Is it 4G networks that have gone in, that you need testing? Is international? Where are you seeing the push right now in the carrier market?

First of all, the first half, as you know, was similar to last year. If you're asking where we see the potential in the second half and next calendar year, it's continued expansion of 4G, we are releasing in the next month of our voice product, and also there are new things come into the market with initial rollout of 40G and 100G, the very high-speed stuff.

And so, we either already have a product or will have a product in this timeframe. So it is just basically basic expansion on 4G that is radio access monitoring 3G, and it is across the board, but most of them are existing customers, because we have over 150 providers as our customers.

Okay. And on the packet flow switch side, is there any way you can size that as how meaningful that is to your business right now, a few percentage of revenue?

No, we decided not to separate it out, because it will be -- it will give you maybe you the wrong impression because we are the only Company really in the enterprise space who had bought the pro product, as well as the packet flow switch product, so they help each other in terms of the sale. And also qualifying one or the other separately I don't think will do justice to our strategy.

Do sell the packet flow switch separately, independently, without connecting it to anything else?

Yes, we do because they are multiple application of packet flow switch. So yes, we have sold through for different use cases, but it is mostly going to existing customers.

Okay. Great. Thanks.

Your next question comes from Matt Robison with Wunderlich, your line is now open.

Congrats on the results. I was hoping you could give me a little more perspective on what's integrated into some of the acquisitions into the November service provider release, and maybe some -- what other kind of salient elements are coming with that product, versus what you've been offering to service providers up until no?

Yes, there is basically -- our product line is instrumentation and so we had to prove for the data space 3G 4G, and we have this nGeniusONE application, or PM and SDM which was a previous version of nGeniusONE. So that's what we used to sell, and then in addition we used to sell a call tracing product called Subscriber Intelligence.

So with voice, we are creating a new probe. Basically the same probe with different software, and it is based on -- partially based on the Accanto acquisition. There are two kinds of probes, one for voice over IP and one for traditional SS7, so those are the new products, and then there's a corresponding call trace product for troubleshooting, so those are the new things -- completely new things, and that stuff is all deployed in the standard product.

How much does diameter signaling impact your product features?

That is already -- that's been deleted a long time ago, and yes, it's a multi-million dollar impact, but it is just one of the many things.

And has this November release already been in beta for a while?

Yes, we had early versions of this, we call it EFD in a few places.

So these big service provider deals that are in motion for you, are they dependent upon this November release, and to what degree are they dependent upon it?

The revenue, small prediction. The big impact of this will be next year.

So is the critical path item for closing those service provider deals are basically just budgeting timing for your customers? Is that the way we shall look at it?

Yes. And some new features, we have already released in the last few months in existing products.

How do you see the pace of the service providers, domestic versus overseas, and in particularly for VoLTE?

It is hard to say, but it's [some page weiss], and at some point next year, it will be same. It is a similar fact, so if people are using, the customer is using 4G data, for us, whether it's international or local, there will be a percentage of those people who will be using the voice over LTE product also from us.

Sorry, we should think in terms of the domestic market first?

Because it is a bigger portion of our revenue, and not because it is voice or something else, it is just because we have -- I mean, we have more American business overall, both in enterprise and service provider.

You see VoLTE as a market share catalyst for you?

It is new for everyone, so yes, we continue to increase the market share, we had no revenue five or six years ago in this area, and we closed $100 million or close to that last year. So yes, there is market share gain for every single thing we do, whether it is 4G, 3G data, some things we are doing in application recognition, voice over LT and support for higher speeds like 100 gig. So it is a constant changing thing, but with new opportunities every six months.

Thank you very much.

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

Jean, I was wondering if you could talk about the guidance range. We are halfway through the year, and yet the range is still the same. Can you just talk about why you kept the range the same? Is it assumptions around when some of the large deals will land? Talk about the range.

Sure. So I usually talk about it at the midpoint of guidance, and in the past I have talked about it as the low point versus the midpoint and higher. In the past, what we've said to get to $385 million, and that's where, in the first half of year, we are differently executing well towards that range.

We needed our NPM platform to continue to sell well, along with the packet flow switch. The packet flow switch is selling to our expectations. We've also really completed the second quarter, where the federal government has done their traditional budget flush. To get to the low end of the range, we had said that we would need federal to remain flat, and government to remain flat, where it is at this point.

So getting towards billowing of the guidance at this point, we feel comfortable with that. Getting toward the midpoint or higher, as we've said we would need the nGeniusONE new product launch to get better traction than we had originally anticipated, or we would need in the second half of the year for the federal government, now that it has come back from shutdown mode, at least for the next quarter or so, to continue to spend funds.

As we have said over the last year or two, we have tremendous demand for our product, with many new uses in the federal government, and we still have and had in Q2, a lot of demand in the quarter for our product uses, it just goes back to whether the government will continue to spend money in the second half of the year. So, at this point, we've chosen to leave the range as $385 million to $400 million.

We see the potential for upside in service provider to get to the 20% growth, plus we do see potential still for nGeniusONE to have better traction, but we would still need at least one more quarter to decide whether we think that will impact the range to any significant degree. So clearly at the end of Q3, as we have better visibility into Q4, we will adjust the range at that point, if need be.

Q3 of this year, we have -- we're going to pass our first $100 million quarter, which is a very exciting time for the Company. We probably would pass it based on our estimates to the lower end of $100 million, so $100 million to somewhere maybe slightly north of that with a lot of the uptick, as Anil said, from nGeniusONE, and some of the traction beginning from the new product launch in our Q4.

Thank you or the explanation, that was great. Anil, on the packet flow switch, what's the impact on adoption of probes? Is it a Halo effect, or is it more cannibalistic? How did those two parts of the product portfolio work with each other?

I think so far, people have thought it could be -- it could impact negatively, but so far it has been positive, because their people are not reducing their cost on existing -- this is making the solution cost-effective enough to put in places they had thought they would not do it before. So I think so far, we are seeing a positive impact on the probe revenue, neutral to positive, and long-term it could have some negative impact, but that will be more than made up, because of the better competitive solution we have and being deployed in more places, now that we have -- are going to be asking our customers to deploy for the APM reason, not just for NPM reason.

Got it. I wanted to gauge your traction -- you made some improvements with the product portfolio. What's the initial traction on penetrating new account, either with nGeniusONE, or is it APM specific? Is that something more of a calendar 2014 event, or what's the traction with the new product?

I think the first thing is that we are a very mature Company with 2,000 customers. So driving deeper penetration into those accounts is much more effective and much more useful for both customer and NetScout. So yes, we have some new customers, some really big wins in financial, first time, but investment is going to come from existing customers.

And unlike other people's business, our business is out of the fiscal in the sense that you have new deployment within existing customers. And new places, new data centers so we call that new business. That's how we comp the sales calls.

So some time it is different than a traditional software Company. We are software Company, but different in this sense, so we look at opportunity in existing customers in new projects whether it's new projects because of new data centers, or new networks and now new APM, and maybe next year because of cyber, all those reasons are a really big opportunity, and a bulk of the growth is going to come from there.

Got it. And Jean, my last question. Do you have the data on depreciated amortization, as well as CapEx and headcount?

Sure. You wanted for the quarter or for year to date?

For the quarter.

For the quarter, depreciation and amortization was about $5 million. Headcount is at about 1,013 people. What was the third part?

CapEx.

CapEx for the quarter was about $4 million.

All right, thank you for taking my questions.

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

Just a couple questions on the packet flow switch offering. First one is in terms of selling to your existing base, can you give us a sense as to how many of these deals are standalone packet flow switch deals, versus bundled with your probes? Then what sort of on rates are you seeing against some of the more established players, like [Grumman and UE] when you're going into these deals?

I think we are winning quite a few of them. I think we are not separating, we are not looking at PFS standalone, and together we don't track that, because sometimes in the first month, they will buy back a flow switch, and the second month they will buy the probe. So they were bought together, really, so it's very hard to keep track of those things, and because overall the customer a good feeling about natural integration within our two products.

In terms of the bill, I think our growth rate is higher probably then anyone, including Grumman. Obviously the absolute number is lower, because we just started a year ago. A year and a half ago.

And then also one quick one on service provider for me. Since your business in the second half isn't all that dependent on some of your newer solutions can you just talk about where all that growth is going to be coming from? It seems like to get your 20% target you need to a significant bump up on the product side so you are just seeing more instrumentation throughout the networks? Are you successfully moving into other areas of the network like RAN? Just wanted as much color as possible there.

A big portion is 3G and 4G G expansion, but we are moving to RAN area and we talked about why it will have some impact. And then there are projects in the 40 gig and 100 gig area, you can call it expansion, but it is really even higher speed environment. And Jean just mentioned that we have increase of our customers, of our sales people in the cable MSO segment also, so some of it is going to come from there.

Great. Thank you.

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

So should we assume by your deal size commentary that when you actually did give some color on deal sizes every quarter, that seven-figure deals and six-figure deals are up meaningfully from where they were when you gave that data?

We are not providing it right now, I think most important is the number of $100,000 deals. It is not just one or two big seven-figure deals, it is the reason for saying increased deal sizes it is more $100,000 -- a number of $100,000 deals is going to become more of the norm than the exception, because you want one packet flow switch and one probe, that's it, you will be exceeding that number.

So the deal size commentary, that probably answers my next question, isn't a function of larger nGeniusONE or infinite stream deals, whatever you want to call it, it is a function of a monitoring product and a packet flow switch product, right? If that's increasing deal sizes?

Or more infinite streams in one big deal.

Chad, this is Jean, the deal sizes are relatively comparable to Q2, clearly because it's a bigger business at this point versus last year. We're having a slightly more deals in the $1 million range, and slightly more deals, as Anil mentioned in the $100,000. Right now why we are seeing deal sizes increase is that the approach we are taking with nGeniusONE, the convergence of NPM and APM, and how we are the only vendor can really do that to a very proactive and quick response.

We've change the workflow such that within three clicks, these people can get to the root of their problem as a team, and solve their customer or their end-user issues much faster. That roadmap and demoing that product has given them confidence to continue to want to instrument the network with our product, and to some degree, we have won new customers because of that, and we've also shortened the sales cycle because the competition cannot compare at this point.

Okay. So the financial services customer that you highlighted in the call, can you comment who you displaced there?

We don't really go into who the competitors are that we displaced there, that was a quicker sell when they saw our product. Michael can probably give you a lot more detail about the environment, and what we sold, and how we won in there.

But it is a big APM player, other than that

I don't want to say who exactly it was. It was one of the leaders of the space and it is a marquee win for us, because we won with all the combination of our strength including nGeniusONE, and having Packet Flow Switch, and being able to address APM needs such as monitoring transaction flow. But as far as, one of the big ones.

So in the 100-plus customers that you indicate that -- I don't know if they bought, demoed, trying nGeniusONE, at this point, what applications, is there any consistency or any trend behind the applications that they are trying out or demoing, using your APM solution?

Yes. We are starting to see a pattern in web-based applications, Citrix, also a set of applications that used to be monitoring before, but now we are monitoring with in more detail customer applications and just to your first conjecture there, all of these customers have deployed, whether deployed in the full production or partial or in the lab, that may be different, but all of them are deployed, so it is not just trialing, this is all being used.

Also just one technical thing to mention is the way we have done the product is traditionally when you do a new release, you have to have the infrastructure in order to try the product, and you have to pay for it, so in our case, that portion, there's no charge for it. Plus they can deploy they can use both the older and the new side-by-side, so that allows them to quickly test it out. Otherwise it takes a long time for big customers who have hundreds of probes to overnight moved to the next generation and so that's what we mean by shorter deployment times.

Okay. So a little bit confused on the nGeniusONE 100-plus cust. So the product did contribute meaningful revenue in the quarter, and definition of meaningful is different, but millions of dollars in the quarter, or it did not?

As we talked about last time in Q1 we had a service provider win that bought nGeniusONE and we shifted in this quarter. And we had a few other customers that also had bought early in Q1 that we shifted this quarter, and then a few that also had bought in Q2 that were shipped or will ship in subsequent quarters. At this point to be able to pull apart nGeniusONE and everything else, as Anil talked about, we don't really look at product families. However nGeniusONE this quarter probably contributed in the range of maybe, on a standalone, maybe 1%. It is really the trajectory, the roadmap, the approach, and the convergence of NPM and APM that is driving our customers to see the value in our products.

Perfect. That's great detail. Last one for me. I didn't see say backlog number. I assume we did not report one, because it is not material in your mind?

The backlog number I think over time, we discussed it extensively. The backlog number is still consistent with where it was at year-end, when we were reported it. It's still low, when you look at the midpoint or higher of guidance, probably a little less than 10%. So we are still comfortable in our guidance, and the backlog is just a function of customers ordering and when they need their shipment.

Okay. Thanks for taking my questions.

We have no further questions at this time. Let me turn the call back to our presenters.

Thank you, everyone and for staying on, we saw more than 50 people despite the small glitch we had. And so sorry for the confusion, but I think we were able to answer most of your questions. And we will speak to again in three months.

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