Netscout Systems Inc (NTCT) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to NetScout's third quarter of fiscal year 2014 operating results conference call. (Operator Instructions). 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 2014 third-quarter conference call for the period ended December 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 the Securities Exchange Act of 1934 and other federal securities laws.

These forward-looking statements may involve judgment and individual judgments may vary. Forward-looking statements include expressed or implied statements regarding future economic and market conditions, guidance for fiscal year 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 the growth rate discussions are based on a 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 very strong performance in our third quarter of fiscal year 2014. We also achieved a new milestone in that we had crossed the $100 million mark for quarterly revenue.

Non-GAAP revenue for the quarter was $110.6 million which is up 20% over the same quarter a year ago. The year-over-year product revenue growth was even higher at 30%. Non-GAAP earnings-per-share was $0.50, up 39% over last year.

As I outlined in my remarks last quarter, we were confident about our second-half performance due to three main reasons. First, the successful launch of our new nGeniusONE product; two, our growing business from service providers; and three, increasing traction of our technical switch product line. Successful execution on all three fronts contributed to our third-quarter performance and has provided a strong foundation for the second-half revenue included in our annual revenue guidance, which we'll be reiterating today.

The creation of value for customers has served us well over the Company's history and is the driving force for our new product innovation. We have been executing well toward our full scale of the nGeniusONE product introduction which is continuing to create and expand our value to our traditional enterprise customer base deploying NPM, or network performance management. The second and broader goal of nGeniusONE is to expand this opportunity into the APM space, which will be more impactful in the upcoming quarters.

For the first three quarters our product revenue has grown 17% in the enterprise sector. Secondly, as we discussed last quarter, we saw a large customer demand for our solutions in our service provider line of business.

I am happy to note that our product revenue growth rate for the first three quarters in service provider is almost 20% on a year-over-year basis. We continue to be successful in our LD deployment and in capturing new services being defined over the 4G network.

Lastly, in our complementary Packet Flow Switch product line, we continue to experience competitive wins. Our Packet Flow Switch business has grown in accordance with our expectations during the fiscal year.

As we enter the fourth quarter we continue to see strong customer demand and we are confident of achieving our growth target we shared with you nine months ago. With one quarter remaining in our fiscal year we are tightening our revenue guidance to $392 million to $395 million and our EPS guidance to $1.48 to $1.50. This would mean delivering a back-to-back $100 million-plus revenue quarter.

We anticipate our product revenue growth to be in the mid to upper teens. As we have been doing for the last two years our current plan is to provide full-year guidance once again for our upcoming fiscal year 2015 on our next call in April.

I would like to take this opportunity to reinforce our continued confidence in the future of NetScout. About two years ago as we entered the third decade of our business as a product company, we embarked on a brand-new initiative internally dubbed NetScout 3.0, to position the Company for higher growth. We backed up this initiative by setting aggressive goals as indicated by the full-year guidance we have been providing with the investment community for the last couple of years.

We made five technology acquisitions during this time that allowed us to enter new markets like Packet Flow Switch and device monitoring. More importantly, after spending 200-man years of engineering effort we released our next generation product called nGeniusONE to the market about four months ago.

As you are aware these strategic investments are already having a positive impact on our financial measures and business growth. Michael will provide more details on our success so far in his discussion.

Finally, I would like to share some important news about our differentiated ASI, or meaning Adaptive Session Intelligent technology. That is the force behind nGeniusONE.

Last quarter NetScout was officially awarded the ASI patent. In the short-term, ASI will allow us to expand our market reach from NPM to APM, but it is designed in the long run to offer unique solutions in the cyber security and big data analytics segment as well. In addition, ASI has been purpose built to handle future scalability needs of our customers driven by 100 G voice and data conversion, LD video, BYOD, for bring your own device, customer facing websites of large enterprises, virtualization, as well as cloud deployment.

Going forward is ASI and nGeniusONE drive our future growth and competitive wins we will share further details on the underlying customer use cases and the unique ways we are addressing them to do ASI. I would now turn the call over to Michael who will talk in more detail about the nGeniusONE rollout as well as our continued market leadership.

Thank you, Anil. Our new product, nGeniusONE, is off to a strong start both in our installed base and in winning new customers. As of today, our large and growing proportion of our top installed customers as well as many new ones are running the new product and are actively transitioning into production.

The product and the vision of NPM plus APM have already added to our revenue cycle convincing of our installed customers to increase their NetScout instrumentation investment, give them the greater value delivered through the nGeniusONE software. Our plan is to maximize adoption based on full backward compatibility and allow our champions to leverage new functions such as APM and train new users at their own pace.

In the service provider sector we continue to expand both the average deal size and our customer base. Additionally, our VoLTE solution is gaining traction within those service providers who are beginning to roll this new service out over their 4G networks. We believe that our service provider opportunity continues to be robust due to the future consumer adoption of 4G handsets as well as future services that the service providers will deploy from their networks.

As Anil just discussed, our ASI technology service is an important underpinning of NetScout's future product direction and new areas of market growth for NetScout. I would like to illustrate through a couple of examples how ASI differentiates us in our marketplace.

A key recent win points the way to our growing opportunity in the cloud space IT outsourcing segment of the market. Additionally, the players in this area, including our large market leading customers, have been very cost sensitive and we're able to manage their shared data center services on a reactive basis with buoyant tools; however, the growing complexity and scale of the customers applications sometimes causing outages lasting days and impacting $1 billion customers business, has demanded a new approach.

Our customers decided to seize the opportunity and lead with service quality as a key part of their growth strategy and implement an end-to-end service assurance solution as their customers continue to move to their business through the cloud. They selected NetScout after evaluating other benefits from other competitors.

We won the business because of our unique advantage in scalability and the ability to manage many clients secularly from the same system, also called multi-tenanting, and the completeness of our solution including our integrated Packet Flow Switch products. The example shows how our combined enterprise and communication service provider experience all based on our ASI technology position us uniquely to take on this market segment.

Thus far this year this customer has already invested $8 million to $10 million on this solution.

Another example I want to share with you demonstrates how the cumulative power of the many technology components we have integrated, as Anil mentioned, all built on our patented ASI foundation, gives us entry into new opportunities with new teams and new applications. In this instance, a market leading insurance company started a major initiative to implement unified communications to increase the effectiveness and productivity of their thousands of agents in the United States. They invented a traditional solution and expected it to assure service quality using the data provided by their UC equipment and strong analytics.

In the course of the deployment they realized they needed a different approach as the call quality problems compromised customer intimacy and threatened customer retention. After evaluating multiple use and management solutions they decided on NetScout because it could handle the scale of the nationwide network, it could expertly monitor and analyze both the call connections and the human experience in real time, and because our nGeniusONE user interface enabled them to effectively collaborate across multiple teams in preventing and solving quality problems. This then illustrates how NetScout's approach based on high-value ASI derived data and straightforward presentation is more effective and less costly than alternatives solely relying on Smart analytics.

Before I finish, let me share with you something Anil was too modest to mention. This past quarter he received a special award from TiE, The Indus Entrepreneurs, which is a global nonprofit trade group dedicated to fostering entrepreneurship. The TiE-Boston's Lifetime Achievement Award was presented to Anil for his lasting impact on the entrepreneurial community in Boston and for imparting the best of leadership and entrepreneurial traits.

TiE-Boston highlighted his contribution to creating and defining the network-oriented monitoring industry and creating a durable culture that stays at the forefront of this industry across technology cycles and markets. I will now turn the call over to Jean for the detailed financial result 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 slides presentation has the comparable GAAP results.

To begin our financial discussion we'll be starting with the third slide of our presentation, which is accompanying our call and is posted on our website. At our last call I mentioned anticipating our first $100 million-plus revenue quarter occurring in Q3 fiscal year 2014. I am pleased to say that our third-quarter total revenue was $110.6 million, which is an increase of 20% from the same quarter in fiscal year 2013.

Within total revenues product revenues was $68.6 million, which is an increase of 30% over the same quarter in fiscal year 2013. Service revenue was $42 million, which is a 7% increase from the same quarter in the prior year.

The growth in Q3 was driven by the continued success of our service provider strategy and the launch of nGeniusONE in the enterprise market. Additionally, as Michael discussed earlier, we have the right solutions and the right approach facilitating faster customer wins in a few instances this quarter. Our earnings per share for the third quarter were $0.50, which is a 39% increase from the same quarter the prior year.

Turning to slide 4, the business continues to operate within our long-term operating model. Our gross profit was $88.1 million representing a 79.7% margin.

Income from operations was $32.9 million and our operating margin for the quarter was 29.8%. Net income was $21 million, or $0.50 per diluted share. The net income margin was 19%.

Turning to slide 5, which shows our year-to-date results, our year-to-date third-quarter total revenue was $284.7 million, which is an increase of 12% over fiscal year 2013. Within total revenues product revenue was $163.9 million, which is an increase of 18% over fiscal year 2013.

Service revenue was $120.8 million, which is a 6% increase from the prior year. Our Q3 year-to-date earnings-per-share were $1.05. This is an increase of 17% from fiscal year 2013.

And turning to slide 6, which shows our year-to-date product revenue composition, total revenue through Q3 was $284.7 million of which product revenue was $163.9 million, an increase of $24.8 million, or 18%. The component of our product revenue year to date were as follows.

Service providers $69.7 million or 42% of product revenue; government $15.7 million, or 10% of product revenue; and general enterprise $78.5 million, or 48% of product revenue. This compares to the FY13 year-to-date product revenue components as follows -- service provider $58.7 million, or 42% of product revenue; government $13.2 million, 10% of product revenue; general enterprise $67.2 million, 48% of product revenue.

Slide 7 shows our year-to-date product revenue growth rate by sector. Our service provider product revenue was 19% by year service provider product revenue driven in large part by our domestic service provider customers.

General enterprise grew 17% as we saw growth from our high-tech and financial customers. Government increased 19%.

Slide 8 shows our total revenue composition. The composition of our year-to-date total revenue for fiscal year 2014 was as follows.

Service provider, $105.5 million, 37% of total revenue; government $34 million, 12% of total revenue; and general enterprise, $145.3 million, 51% of total revenue. This compares with the prior year total revenue component as follows -- service provider $89.2 million, 35% of total revenues; government $32.2 million, 13% of total revenue; and general enterprise $431.7 million, 52% of total revenue.

Moving to slide 9, which shows our total revenue growth by sector. Our total revenue for the service provider sector grew 18% on a year-over-year basis driven by our continuing project wins. Our general enterprise sector grew 10% and total revenue for the government increased 5% year-over-year.

Turning to slide 10, this is a depiction of our year-to-date GAAP revenue by geography. For year-to-date third quarter of fiscal year 2014, the revenue mix between domestic and international revenue of 76% and 24% 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 5% and the rest of the world delivered the remaining 7%.

Slide 11 includes highlights from our balance sheet. We continue to maintain strong liquidity.

At the end of the third quarter of fiscal 2014, we have invested cash, short-term marketable security and long-term marketable security of $182.2 million. For the first nine months of fiscal year 2014 we generated approximately $61 million of cash from operations.

Our capital expenditures were about $9 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 $52 million. Additionally in the quarter, we repurchased 275,000 shares for $8 million for a year-to-date total of 750,000 shares or $19.8 million.

Accounts Receivable net of allowances was $74.3 million up from $73.9 million at the end of fiscal year 2013. Days sales outstanding were 61 days for the quarter compared to 68 days for the fourth quarter of fiscal year 2013 and was unchanged from the third quarter of last year, which was also 61 days.

Inventory was $11.1 million. This is a $3.5 million increase from the fourth quarter of fiscal 2013.

Additionally, our total deferred revenue was $124.3 million. This is up from $121 million for the fourth quarter of last year.

This increase is in line with our historical pattern for Q3 as this quarter historically sees higher levels for renewals. Deferred revenue is up 10% from the Q3 fiscal 2013 ending balance.

Turning to our guidance for fiscal year 2014, slide 12 illustrates our guidance range for revenue and earnings per share. With one quarter remaining in this fiscal year, we are tightening our guidance for fiscal year 2014 for both revenue and earnings per share.

Our non-GAAP revenue guidance for fiscal year 2014 is $392 million to $395 million yielding a total revenue growth rate of 11% to 12%. The underpinning of our revenue growth continues to be our product revenue, which is expected to grow in the range of 16% to 17% for the full fiscal year.

Our non-GAAP net income per share guidance for fiscal year 2014 is $1.48 to $1.50, yielding non-GAAP EPS growth of 12% to 14%. We continue to project that our effective non-GAAP tax rate for the 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 that we will be attending the UBS Small and Mid-cap Conference on February 11 in Boston. The concludes our financial discussion this morning. Thank you for joining us.

And we look forward to taking your quick questions. Chriselle, we will now take any questions.

(Operator Instructions). Scott Zeller, Needham & Co.

Wanted to ask about the general enterprise contributions specifically around financial services. Could you give us some color on how that's been trending over the past few quarters?

Well, we find, Scott, that the definition of financial services, which included insurance companies and all those, is sort of becoming ambiguous in terms of what our solution does and especially nGeniusONE when it looks in the APM space. The requirements are very similar, so we have not been supporting separate numbers for our financials.

But overall it has been doing well and it is within the range. It is impacting our enterprise growth rate but we are not reporting separately financials anymore.

Just to add to Anil's color, the pattern that we generally have seen over the last year or so is that the domestic institutions, as Anil had mentioned, are the ones that continue to be contributing to the financial growth. We have had a few wins internationally.

A few quarters ago we won a new bank down in Latin America. And in Asia in one of the Asian countries we have a bank that has been buying. But the general trend of domestic purchasing driving the financial sector is what still is driving our growth in that area.

I guess just to follow-up, Jean and Anil, for general enterprise how should we think about what is the catalyst in that bucket of revenue? Some people would assume it's financials, but should we think that perhaps the different vertical that's improving or accelerating within that larger bucket?

I think if you looked at the two big initiatives we have launched over the last year or so beyond what is coming from acquisitions is Packet Flow Switch having more impact on the enterprise and then moving from NPM to APM going after other competitive budgets. And I think both are impactful everywhere we have like Michael gave, the cloud monitoring example.

We have [NEMS]; we have [filipticals]. So there are a lot of big companies who are very similar requirements, they have customer-facing websites.

So that's the reason I think that they want the enterprise business overall, almost like a lot of companies are behaving like (inaudible). And that's the reason we decided to not separate it out.

So enterprise business will be driven by at least these two things in the short term and then our UC solution, VoIP solution is coming to the forefront and that will be the target area. And, interestingly, every enterprise customer of reasonable size is meeting all three of them and that will be driving the growth.

Thank you.

Eric Martinuzzi, Lake Street.

Congratulations on the $100 million quarterly revenue milestone, that's a long ways from years and years ago. The question is about, I viewed the December quarter as somewhat lumpy.

I know you don't give quarterly guidance, but I certainly wasn't looking for roughly $18 million sequential step up. Was there an area of outperformance among the three sectors, government, enterprise, carrier versus your own internal plans, or with this kind of what you guys were expecting?

In general it was in line with what we were expecting. We have been striving for 20% product revenue growth and service providers, which we just about achieved this quarter.

Government still is relatively flat. Sometimes the large percentages don't really hide the magnitude of the actual dollar increase.

As Michael had mentioned on one of the examples, we had a competitive environment that we thought might take longer than it did to win. But due to the solutions that we had and the, again, the beauty of our product, the customer decided that they would purchase faster and bought in Q3.

Okay. That's helpful.

And in the service provider deal size is being up. Is this more around higher ASPs for the solutions customers are buying, or is this more about the volume of units that you're shipping into that segment?

I think it's more volume of the unit. We are really not change the ASP.

And the volume is higher in 4G deployment and I think Tier 1 providers even more so. Although that's according to the higher averages but ASP is not one of them.

Thanks for taking my questions.

Aaron Schwartz, Jefferies.

Just had a question on the guidance. It does imply product revenue being down sequentially and I just wanted to sort of understand that because that is sort of atypical for you in a Q4.

Did I hear you correctly in the last question that there was some, I don't want to say pull forward, but you had some larger service provider deals close in December that you initially thought were in the March quarter and that sort of explains maybe the dynamic quarter to quarter? Or is this just a very conservative outlook for the year given only one quarter left?

Or I guess more broadly, what would lead you to see product revenue be down sequentially? Would you have to see deal push out or maybe you could just sort of help us walk through that dynamic? Thanks.

I'll let Jean talk about the pull through and you're just talking about one deal, but the reason we give yearly guidance is to because deals are lumpy. We are doing a lot of business with large providers, $8 million to $10 million, shifting from one to second quarter can make a difference.

Our product growth is primarily driven by product business as we are growing faster than before. For all of those reasons we have been giving yearly guidance.

And so we don't look at our performance, we look at more year-to-date comparisons from previous years and that's what Jean talked about. Having said that, at the high end of the guidance we are talking about another $100 million, $110 million quarter so this it's just not fair to compare to the last quarter.

What we are to guess is we had first time in the history of the Company, $100 million quarter. We beat it by $10 million. And we have to repeat that performance and meet the high end of the guidance.

So I think it's not conservative. It's in line with our guidance from day one.

Okay. If I could ask a follow-up question, obviously the revenue outperformance here in the quarter contributed to the margin upside, but I guess a broader question that I have is you have a very efficient organization at this point and as you expand with APM and as you have more focus maybe within the enterprise can you talk about your need to further reinvest within the sales and marketing line?

Just given the revenue growth here you've been very efficient with sales and marketing even if we look at the accrued compensation it's been a very efficient model. And I guess a broader question is we start to build out our models for 2015 and 2016, is are you under investing a little bit given the larger APM TAM in the enterprise? Thanks.

Well, first of all we are going to talk about investment during the guidance for next year. At that time we'll set the margins and we'll answer some of these questions in more detail.

So we are planning on expanding on sales, but how much and what percentage we'll be spending additionally on sales and marketing we'll talk about at the next meeting and just as the call in April. But we are hoping that margins will still be good because we hope to continue to grow at the rate we have.

Hi, Adam, this is Jean. Just as a follow-up to Anil's question, the strategy for the rollout of nGeniusONE is one of customer penetration, and as you know we service the vast majority of the Fortune 500s, so we have a wealth and a plethora of end users within those customers to which we will be selling.

So based on our relationships and based on our approach, which is teamwork among the network people who have been our traditional end user, and then the application people, we feel that team approach leveraging the existing sales force and adding and supplementing to it where we meet with specialists, maybe those people who are a little more versatile in APM language, should be able to drive our growth in the next upcoming years. So I don't think we're planning on massive investment.

We generally invest in sales where we have, where we need geography expansion, where in certain areas of the world one or two or four salespeople and their engineers are not enough. We will divide up the territory that way.

Or when we do introduce a new product any kind of a product specialist that is needed. But generally we don't need massive amounts of infrastructure to achieve our revenue growth.

Understood. Thank you very much.

Mark Kelleher, D.A. Davidson.

Congratulations, very strong quarter. Wanted to talk about the nGeniusONE product.

You said you've got some good early reception on that. Is that reception stronger on the service provider side or the enterprise side?

It's primarily on the enterprise side. On the service provider side we have customers deploying it but I think the real service provider update is going to be over the quarter of next year.

The real impact of nGeniusONE is in moving the enterprise use cases, shifting them, expanding them from just NPM to APM. And that's where we have put most of our emphasis.

And also just to add to what Michael is saying is that service provider ramping usually take six months to nine months with brand-new releases. So everyone has the different nGeniusONE in the lab and over the next three, four months they'll be putting it into production.

So, right. And that's what I thought you were going to say, which leads me to the point that the introduction of nGeniusONE didn't necessarily contribute to the strength on the service provider side in the quarter, correct?

I would say that's correct.

That's true. If you want to step back, the functionality in broad terms that service provider uses today is the functionality that we would like our enterprise customers to use.

The proactivity, the helping the business understand their metrics better, providing valuable business information. So to the degree that they have been using those functions we're really trying to generate that into the enterprise.

So service provider is a growth, is a continued function of 4G, the LTE rollout, the new service which is VoLTE that they're rolling out over these networks. And then also our customer expansion as we go around the globe in that area.

Would it be fair to say nGgeniusONE is still a small percentage of your revenue?

Yes. We don't -- because it's the replacement for the PM plus NPM product, it's hard to measure in those terms. But nGeniusONE has an indirect impact on the instrumentation sales and what Jean is saying is that has not impacted the service provider at all.

If you know the market size where service providers already paid, nGeniusONE is not going to increase the market size but will improve our competitiveness.

On the enterprise side it actually increases the market size by taking it from an NPM to NPM plus APM. That's why it's not going to have a bigger impact on the enterprise at least for the next year or so.

Okay. I was going to switch topics there onto the service revenue. Does that accelerate, or eventually over time with the product growth, or does that continue along the high single-digit growth rate?

That service revenue growth probably will continue along the high single digits. It's historically been 8% to 9% on a year-over-year basis.

As we talked about I think when we gave guidance about a year ago, we had done some end-of-life programs for some very old probes that some customers were still using. So when we end-of-life that it impacts our service revenue and the increase that we're anticipating on our year-over-year basis for service revenue this year is 6%, about 2% to 3% lower than it's grown traditionally.

So we do expect that to ramp back up to the 8% to 9% amount that it's currently been, that it's been for the past few years.

Okay, great. Thanks.

Matt Robinson, Wunderlich.

Couple questions on -- maybe a little bit more color on the industry factors behind the strong sequential rebound in the service provider if you could give us a little bit of perspective on regions and new service offerings that might be behind that. And I've got a couple other follow-ups.

First of all, I won't call it a rebound because we have this lumpiness and one big deal, $10 million deal can make a big difference impacting digits. So I think there is some concern in that because of the first half growth in service provider that we knew about our pipeline and in concern of the growth.

I think we are adding continue to drive more and more things the areas, the multi areas as Jean talked about. I think they are more being increasing the 3G to 4G transition.

Our device product is coming into line. We are a more complete solution.

And I think that is what is driving the growth and I think as we continue to do that plus we'll have some additional halo factor improvement because of nGeniusONE next year.

How about the regional perspective?

I think it's still higher. The US Tier 1 provider is still the highest one but competitors and even infrastructure they're no big change in the regional distribution in the service provider from the past.

Can you give us a little bit of an indication what we should look for getting higher wire speed probes such as 100 Gigabit probe?

We'll have to talk about it in the next quarter of a roadmap to 100 Gig, but 40 Gig is already there today in the form of the Packet Flow Switch. So if you have a 40 Gig link, you can put our Packet Flow Switch which converts into four 10 Gigs. And that solution is being deployed in a few places but most people are transitioning to 100 Gig.

A lot of the sort of fiber (inaudible) a lot of the physical components are not readily available and especially for people like us unless you do a completely custom design. But we were talking about at the April meeting as well as our user forum in April, our shortened plans for 100 Gig or multiple 10 Gigs, which is like 8 times 10 Gig.

So yes that will increase the ASP but again it will be a much smaller portion of the total revenue next year regardless of when we release it because not many links will go to 100 Gig.

Where should we expect to see the lumpiness in the current quarter?

There's only one quarter left.

Right, the current quarter, the March quarter.

Where do we expect to see the lumpiness?

Yes. You had some positive lumpiness from the service providers in the December quarter, where should we -- where does your visibility indicate the areas of lumpiness will be positive or negative for the March quarter?

All right, so let me step back. So for the March quarter our guidance would imply that $107 million to a repeat of this quarter, $110 million. We still believe that service provider will be a 20% grower, so we still believe at the end of Q4 we will be close to 20%. If we achieve, in service provider, if we achieve the revenue guidance that we have out there based on the visibility in our pipeline, I think we will have hit on two of the components that were in the revenue guidance and puts it in the revenue guidance to get us to the midpoint or higher, which is a service provider growth of 20%, the enterprise growth of 10%.

And then government we still believe, even though it's up slightly this quarter, we're talking about small, a couple of millions of dollars, what we see in the forecast in the pipeline is still that government will be flat year-over-year. If the budget was approved, it has not been pushed down to any of the departments that we work with.

We have excellent relationships with the civilian organizations as well as the Department of Defense. So over the next few quarters, three quarters since Q2 will be, our Q2 will be their budget flush, we would hope that they could rationalize through their budget and find out what kind of projects they'll be able to do and hopefully the government will also start to rebound and grow on all the cylinders that we would like it to.

Gee, it sounds like you're talking percentages in terms of product revenue and dollars in terms of overall revenue? In the context of your guidance. I think your total revenue for service providers grew a heckuva lot faster than that in the third quarter.

Sure. And I think what Anil is trying to say is we give year end guidance because our customers are doing projects and we're never sure what quarter anything will happen.

The service provider growth of 20% at the end of this quarter, while it was huge, 60%, is just an indication that we still believe it's a 20% grower. As I'm sure you're very aware, the first half of last year we had some large deals in the first half and that was what was making the first half of this year a difficult call. That's what the concern was as to whether we would still be a 20% grower in service provider.

But I still believe we still basically have to do a same comparable quarter in Q4 to be able to achieve the 20% growth in quarter revenue, in product revenue dollars for service provider.

Jean, what was the nine months depreciation? And give a little color on the headcount change and what it can expect to do a headcount in the third quarter.

Depreciation for the nine months was $9 million and the headcount from Q2 to Q3 it's actually gone down just a little bit. It's gone down maybe 1%, so we're at about 1,000 employees.

Do expect to keep it flat going forward?

Talking about fluctuations at about a 1% variance per year, per quarter at this point. We're going through our headcount planning now we will decide where we want to put any new incremental sales people.

And we'll also look at all of the interest maturated people to make sure that we can continue the scalability that we've achieved and being able to pump out the volumes that we've been pumping. So I don't anticipate that we'll have huge headcount adjustments or huge headcount increases going forward.

Thanks, everyone for according me so much time on the call.

Alex Kurtz, Sterne, Agee.

Congrats again on the $100 million mark. So, great job, Anil.

Looking at the implied guidance here for the year, it's showing no operating margin expansion, Jean. Is this just a output of your conservatism on what you think you can do for revenue in the March quarter and sort of the flow through of the model?

And if not, will fiscal 2014 just turn out to be a big year of OpEx investment for future growth? And then I have another question after that.

Okay. So, FY14, the guidance supplies 12% to 14% revenue growth, so we will have EPS leverage, net income leverage. In the quarter the guidance implies 9% to 12% revenue growth of EPS growth, as you notice there with a 5%.

What happens in our last quarter is the first quarter of the calendar year. All of the payroll-related taxes kick in.

And for us that is getting close to about $0.03 per share. So if you were going to normalize on that $0.03 per share, our leverage would be there for the fourth quarter.

Okay, I guess I'm just talking about operating margins on a fiscal, over fiscal basis. There is going to be basically flat on that year-over-year.

So on an annual basis, not looking at quarters, how should we think about that? Was this just a big year of certain kind of R&D in sales and marketing pushes and that was sort of a premeditated decision going into the year?

Yes, at the midpoint of guidance our operating margin will be close to 25.5 and at the end of last year it ended at the low 25. So we will see some operating margin increase.

Where we have been making investments, as you pointed out, was the acquisitions that closed in the prior year. The VoIP technology that we bought from an Italian company as well as the ONPATH acquisition.

The VoIP the product will be released, or is being released soon and should start to generate income. And then we've also just been making investments in engineers from those acquisitions, which because we've been in a huge development effort with nGeniusONE, so as nGeniusONE and the VoIP products and the revenue continues to grow, that R&D line item will come in more in line and the operating margin should continue to improve.

And just let things ride Jean, just last question here, stocks reacting well in premarket trading here. And I know there's a lot of enthusiasm given the $110 million price you just put out.

Do you want to outline, as we put our models together, back to Aaron's original question, about fiscal 2015, I know you're going to give full guidance after the March quarter, but is this a good point to sort of speak to the consensus growth rate of around 11% for next year, and sort of how you think about that relative to what you are likely to post for fiscal 2014?

I think that's, maybe Jean will have more to say, but I think we don't want you to change the model twice. So I think we should just wait for the April quarter because we are doing our own analysis, we are looking at the impact of new products, nGeniusONE traction, holding our sales team, there are a lot of meetings going on quarter setting.

We're just not ready to share that information right now. That we are hoping to provide full-year guidance like we did, so we will be in good shape. We will not, we have a preference, we will provide full-year guidance rather than quarterly guidance.

Okay. All right, thanks, guys.

Kevin Liu, B. Riley & Company.

Congratulations, as well. First question, just on the Packet Flow Switch opportunity, I know it's still early days for you guys in terms of having your full-fledged solution on the market, but as we look at possible growth rates over the next couple of years here, do you guys benchmark yourself against some of the leaders in the space like a Gigamon more than Anue and think about kind of a 30%-plus growth rate there, or is there something different in terms of your go-to-market strategy where we should be a bit more conservative on that front?

I think that the BFS number is a big dividend to the enterprise and service provider growth rate. And we don't break out the numbers but our growth rate is very high compared to 30%.

But back in the first year, it started from a very low number to a very high number. So we don't look at the growth rate this year, which was much higher than anybody else in the market including the leader at a smaller number.

We think that we can grow at the rate of the other competitors in the next year. But our [deals] have a lot of seniority between the monitoring and instrumentation with this BFS. And that's why we don't look at a growth rate individually, they drive each other.

Got it. When you guys mention the one large deal that included some integration with Splunk and some analytics capabilities. I think a year or two ago you guys had talked about wanting to embed more of those analytics capabilities within your own product.

As you look at, first on the customer demand side, are you seeing a lot of customers want to embed analytics? And then two, just in terms of your technology roadmap, do you feel it's sufficient for you guys to continue partnering with others, or would you like to have those analytics capabilities in-house?

I think other people -- I think maybe you're referring to the comment where Michael was talking about, that was different comment and we have not really partnered with Splunk or anyone. But we are open to partnering with other people but our package is different.

The whole focus on big data analytics is on the quality of analytics. And people don't really care what is the quality of data, which leads to scalability and other challenges.

So we have the best data. We are doing passed part of the analytics already inside of our device.

So we have exclusive analytic architecture which is quite different than what other Splunk and other people are used to. With Splunk and IBM and other players, they are relying on data which is already there and we are relying on data which has been crafted for certain needs like [Sniffer].

So if that allows us to partner with people like IBM and others, then we will do that. We have to see what is their intention of consuming more high-quality data because just because you have high-quality data doesn't mean people want to invest in that.

So it's a very different model and when we roll out our own big data analytics product then we'll talk more about this architecture. But ASI does provide the foundation for a new generation of big data analytics solution, which is quite different than the approach that is being used today.

Great. Thanks for taking my questions.

At this time, presenters, there are no further questions.

Thank you, and we will see you again in about three months.

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