Netscout Systems Inc (NTCT) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to NetScout's Fourth Quarter and Fiscal Year End 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.

Good morning. Welcome, everyone. Welcome to NetScout's Fiscal 2014 Fourth Quarter Conference Call for the period ended March 31. Before we begin, let me remind you that during the course of this conference call we will be providing you with a discussion of the factors we currently anticipate may influence our results going forward. These statements include forward-looking statements made pursuant to the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934 and other federal securities laws. These forward-looking statements may involve judgment and individual judgments may vary.

Forward-looking statements include expressed or implied statements regarding future economic and market conditions, guidance for fiscal year 2015, 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 10K 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 the 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'm pleased to report that NetScout delivered a very strong performance in fiscal year 2014. Our non-GAAP revenue for fiscal year 2014 was $397.2 million amid a year of mid-teens revenue growth. Additionally, non-GAAP product revenue for fiscal year 2014 grew in the upper teens for the second consecutive year. We achieved this revenue growth by also improving our operating margins and delivering 16% growth in our EPS. Jean will discuss our financial results in more detail later on the call.

As we have consistently discussed over the last fiscal year, our success in 2014 was a result of successful execution on three fronts. Within our traditional enterprise customer base we have continued to create value with the product launch and successful traction of nGeniusONE which provides real-time operational intelligence and performance analytics in service delivery environment allowing dramatic reduction in meantime to restore for our NPM plus APM customers. For the 2014 year, our product revenue grew 11% in the enterprise sector.

Secondly, we continue to be successful in our service provider market driven by our successes in LP and Voice over IP deployment and capturing new services being deployed over these 4G networks. During fiscal year 2014, our product revenue growth in this vertical was 22%.

Thirdly, in our complementary Packet Flow Switch product line, we were successful in executing our strategy and gaining market share. The natural integration of Packet Flow Switch technology with our Packet Flow Switch instrumentation provided a unique opportunity and clear differentiation for our customer base.

Our success this year is directly attributable to the journey we started more than two years ago in late 2011. At that time, NetScout was in an enviable position of being the undisputed leader in the NPM space but our TAM, the total addressable market of approximately $1 billion was not large enough to sustain the double digit growth target that we were aiming for. In response, we created a new strategic initiative internally dubbed NetScout 3.0 to leverage our core competencies and to move into adjacent markets where we would succeed in providing expanded solutions to the market. After spending over 300 man years of engineering development, we delivered our first major product last fall. nGeniusONE targets the NPM plus APM marketplace. Our product is based on a unique adaptive session intelligence, or ASI technology which provides real-time performance analytics and operational intelligence. As I mentioned last quarter, we were awarded a US patent for ASI in December 2013.

During this period we added functionality to nGeniusONE through in-house development as well as from acquired technology through five acquisitions. Our past growth, all of which was organic, was a result of internal development to incorporate disparate functionality and technology into one single platform and launching nGeniusONE. The word ONE stand from many things, including that this is one of the kind of products that is integrated into one product for all network and application services with no software options. As it is under an evolving strategy, differentiated technology, and expanded product portfolio, we have quadrupled our TAM to $4 billion in a little over two years.

To show confidence in our expanded TAM, our unique experience in this space, and our ability to execute, we have been providing fiscal year guidance for the last two years. In fiscal year 2012, we passed the $300 million revenue mark. In fiscal year 2013, we passed the $350 million revenue mark. And in fiscal year 2014 that just ended, we approved the $400 million mark. We have continued this trend today by issuing guidance for the new fiscal year 2015 which would allow us to exceed $450 million in revenue this year.

Our product revenue growth has been in the upper teens for the past few years while we have also demonstrated operating margin expansion, strong cash flow, and EPS growth. As we start another fiscal year, I continue to remain excited about our future growth prospects that are best described by our expanded vision and new mission statement which I would like to read for you.

Enable IT and service providers to realize maximum benefit with minimal risk from technology advances like IP convergences and network function virtualization, SDM, cloud, mobility, Bring Your Own Device, or BYOD, web, and devolving internet by proactively managing the inherent complexity in a cost-effective manner. I believe our technology which we are developing in support of this mission has the potential of not only expanding our leadership in the NPM plus APM space but can also be an enabler for entering into the cyber security and big data markets. The common denominator is the ultimate richness of data sets derived from IP traffic to technology which we call IP intelligence, the source of real-time operational business and fiber intelligence, substantially expanding our available market. We will discuss in more detail our evolving strategy and future product development along with our expanded TAM at our upcoming investor day in May.

I'd like to conclude my remarks this morning by thanking our customers for their continued loyalty to our Company and to our employees for their hard work and dedication. Fiscal year '14 was an exciting year for us and our employees commitment and hard work and dedicated helped us to win on many fronts. I will now turn the call over to Michael who will discuss our recent user forum meeting amongst other topics.

Thank you, Anil. We are fresh off a successful execution of our 2014 objectives and also fresh off our annual user forum in early April where the excitement was invigorating.

Our user forum which we call Engage had a very important agenda. We used it to communicate our product selection, to transfer knowledge regarding our functionality and unique user situations and to receive feedback from our customers. This year was also a especially impactful since it was the first year where the nGeniusONE product has been available in the marketplace. Attendance was up 25% from the prior year and we had many of our core customer colleagues attend who work in the APM area. We delivered nGeniusONE hands on training and demonstrated how we solve challenging performance problems by using real-time analytics and intelligence.

The main topic at the event was the acceptance among our customers of nGeniusONE and these new workflows. In as little as two quarters, 300 of our top customers have deployed nGeniusONE and started to leverage its new capabilities. We anticipated the majority of our customer base will migrate to nGeniusONE over the next 12 months.

In enterprise, our solutions are increasingly application specific allowing deep insight into key, widely used applications like Microsoft Exchange and Oracle. In the service provider tracks, our key messages were the completion of our service portfolio with the addition of multigenerational voice capabilities and our continued investment in business intelligence and customer experience management capabilities.

At Engage we received a lot of positive feedback as well as great insights from our customers. Many customers noted that they bought NetScout because we are the only product capability of solving the traditional NPM issues and they were confidence that we would have the same impact in the APM space. Our customers face serious challenges surrounding competing trends including virtualization, cloud, and mobility. During our user forum we discussed and addressed the related challenges and how we can help them deal with these. I know I speak for the Company when I say that they were very pleased with the results and we are looking forward to next year's user forum to continue the momentum that we have been building.

nGeniusONE which is built on our newly patented software ASI and our overall projection has helped too penetrate existing customers as well as increase our new focus. Our new customer business has increased 2.5 times in fiscal year 2014 as compared to 2013. I would like to take a few minutes to walk you through a few exciting customer wins that we experienced this quarter.

First, let me mention the example of our gaining traction with the application teams in large enterprise accounts. Two of our wins in this quarter were with large retail chains with very similar issues. Most retailers have traditionally managed their point of sale system in a reactionary way. The application owners looking for faster, more effective ways to detect transaction errors and identify the likely cause. With our credit card service monitor, this is our specific ASI module that understands credit card transactions, we were able to look inside the transactions in real-time and pull out success-fail error codes of the credit card transactions and take appropriate action immediately.

The second example, a new account, is a large Asian service provider group with over 200 million subscribers in multiple countries. This win is important to us because it expands our service provider opportunities to international markets as well as allowing us the opportunity to work with a dynamic and growing carrier. At the core of this win was our demonstrated LT leadership and unique data set for customer experience management applications. The opportunity arose when the provider initiated their LTE coverage and needed new monitoring solutions. Our success was specifically hinged on superior scalability and reducing high value data reliably all due to our ASI technology foundation as compared to the solutions of the incumbent and competing monitoring lenders. The multiple hoops in the customer accounts, looking to another data set for both customer experience management and business intelligence and the customer also plans to sell it to third-parties for marketing and advertising purposes. We view this win as a prototype for growth opportunities as operators move to LTE and as our established strong leadership position in this area allows us to expand our footprint to these beachheads.

Finally, another new customer demonstrates our ability to capture deals where our competitive portfolio played an important role in offering a single vendor solution. This large European service provider needed to monitor a new LTE and VoIP deployments in conjunction with their legacy voice deployment across multiple sites. While we led with our product management approach based on scalability ASI technology, our integrated multigenerational voice and data solution along with our support for business intelligence and customer experience management were critical in winning this strategy beachhead against our competitors. As a result of the win we are well positioned for additional opportunities in other operating companies with this global provider in other countries.

Finally, let me mention that we received an award this past quarter for our superior customer service. Omega is a leading customer service firm that sponsored the NorthFace award for Exemplary Customer Service. The award signifies that our customer support as described by our very own customers is superior. This is one of the attributes that helps us -- customer loyalty and fan loyalty.

With that, let me turn it over to Jean to discuss our financial results in the quarter.

Thank you, Michael, and good morning, everyone. This morning I will review the key metrics for our past fiscal year results and discuss our guidance for FY15.

To begin our financial discussion, we will be started the third slide of our presentation which is accompanying our call and is posted on our website. 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.

As we entered FY14 we had a TAM of approximately $2 billion consisting of our traditional network performance management market and introductory products to the Packet Flow Switch market and our additional service provider market. I'm pleased to say that our goal of expanding our solutions and hence total addressable market for FY14 was successful as we saw growth in our traditional markets as well as a successful entry in the APM space through our nGeniusONE product and continued market share gains in the Packet Flow Switch market. This success is demonstrated by our quarterly momentum of achieving another quarter of high-teens product revenue growth combined with our second consecutive quarter of $100 million plus revenue.

For our final fiscal quarter, our non-GAAP product revenue was $70.4 million which is an increase of 18% over the same quarter in fiscal year '13. Our fourth quarter non-GAAP total revenue was $112.5 million which is an increase of 14% from the same quarter in fiscal year '13. Within non-GAAP total revenue, service revenue was $42.1 million which is an 8% increase from the same quarter in the prior year. Our earnings per share for the fourth quarter were $0.48 which is a 12% increase from the same quarter in the prior year.

Turning to slide four, we achieved our quarterly results while also continuing with strong margins and executing within a long-term operating model. On a non-GAAP basis, our gross profit was $89.3 million representing a 79.4% margin. Non-GAAP income from operations was $31.4 million and our non-GAAP operating margin for the quarter was 27.9%. Non-GAAP net income was $20.2 million or $0.48 per diluted share. The non-GAAP net income margin was 18%.

Turning to slide five which shows our full fiscal year results, again our fiscal year results represent a planned launch of nGeniusONE and the resulting customer adoption as well as recognition of our continuing market leadership within the service provider market. We achieved our full year results while delivering mid-teens growth in profitability and increased cash flow and total liquidity. Our full fiscal year '14 non-GAAP total revenue was $397.2 million which is an increase of 13% over fiscal year '13. Within non-GAAP total revenue, non-GAAP product revenue was $234.3 million which is an increase of 18% over fiscal year '13. Service revenue was $162.9 million on a non-GAAP basis which is a 6% from the prior year. Our fiscal year '14 earnings per share were $1.53. This is an increase of 16% from fiscal year '13.

And turning to slide six which shows our fiscal year '14 product revenue composition, the components of our $234.3 million of product revenue fiscal year '14 were as follows. Service provider, $98.1 million or 42% of product revenue, government $25.3 million, 11% of product revenue, general enterprise, $110.9 million, 47% of product revenue. This compares with the prior year's product revenue components as follows. Service provider, $80.2 million or 41%, government, $18.6 million, or 9%, and general enterprise, $100 million or 50%.

Slide seven shows us full year product revenue by sector. I'm also pleased to announce that our sectors grow as anticipated with service provider exceeding 20% product revenue growth and enterprise exceeding 10% product revenue growth. Our service provider product revenue was 22% higher than our prior year service provider product revenue. General enterprise grew 11% as we saw growth from our high tech, healthcare, and retail customers, as well as our financial customers. Government increased 36%. While our Federal government piece was flat on a year over year basis, we saw growth during the last quarter within our international markets including Canada, Central America, Europe, and Asia.

Slide eight shows our total revenue composition. The composition of our $397.2 million of total revenue for fiscal year '14 was as follows. Service provider, $146.7 million or 37% of total revenue, government, $50.7 million or 13% of total revenue, and general enterprise, $199.8 million or 50% of total revenue. This compares with the prior year's total revenue components as follows. Service provider, $121.4 million or 35%, government, $43.7 million or 12%, general enterprise, $186.7 million or 53%.

Turning to slide nine which shows us full fiscal year 2014 total revenue growth by sector, our total revenue for the service provider sector grew 21% on a year over year basis. Our general enterprise sector grew 7% and our total revenue for the government increased 16% year over year.

Turning to slide ten, this is a depiction of our full fiscal year GAAP revenue by geography. For fiscal year '14 the revenue mix between domestic and international revenue of 76% and 24% was generally consistent with our recent historical averages with 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 continued to maintain strong liquidity. At the end of fiscal 2014, we had invested cash, short-term marketable securities, and long-term marketable securities of $218.8 million combined with our current revolver capacity, our total liquidity exceeds $465 million. Our liquidity allows to comfortably execute our capital deployment priorities, including product development through both in-house development as well as through acquired technology. We generated approximately $111 million of cash from operations for fiscal year '14 while our capital expenditures remained minimal at about $13 million. Our capital expenditures included development of internal products and improvements in infrastructure including our global facilities and internal systems.

Our year to date free cash flow is approximately $97 million, surpassing last year's free cash flow of $83 million. Additionally in the quarter we repurchased 250,000 shares for $9.1 million for an annual total of one million shares for $28.9 million. Accounts receivable net of allowances was $60.5 million, down from $73.9 million at the end of fiscal year 2013. Day sales outstanding were 47 days for the quarter compared to (inaudible) for fiscal year '13.

Inventories were $12.6 million. This is a $5 million increase from the fourth quarter of fiscal 2013 and it represents continuing demand for new products as well as the larger revenue space. Additionally, a total deferred revenue with $133.9 million representing an $11 million increase from $121 million at the end of last year.

Turning to our guidance for fiscal year '15, slide 12 illustrates our guidance range from revenue and earnings per share. For FY15 as the world continues to move towards an IP-based network and trends such as cloud and mobility, we identified opportunities and markets where our core focus was leveraged growth. As Anil mentioned, we targeted certain markets including the APM market by leveraging our ASI software. For FY15 we expect to continue to gain market share and we are confident about our strategic direction and business prospects.

We have demonstrated that we can set and achieve ambitious operating goals and our fiscal year '15 guidance reflects this. Our non-GAAP revenue guidance for fiscal year 2015 is $450 million to $465 million, a total revenue growth rate of 13% to 17%. The underpinning of our revenue growth continues to be our product revenue growth which is expected to grow in the range of 18% to 23% for the full fiscal year.

Regarding revenue, we believe the FY15 revenue will reflect the historical annual pattern prior to our nGeniusONE launch last summer. The first half of fiscal '15 revenue will represent about 45% of total revenue while the second half will represent about 55% of revenue.

We will continue to focus on profitability and cash flow by improving our margins and returns. With the expiration of the research and development tax credit legislation, our effective non-GAAP tax rate for fiscal year '15 will be approximately 38%. However, we will still guide to upper teens growth in our TPS to mid to upper teens growth in our APS. Our non-GAAP net income per share guidance for fiscal year 2015 is $1.74 to $1.81 yielding non-GAAP EPS growth of 14% to 18%.

Additionally, we anticipate continuing our strong cash flow generation in fiscal '15 and have extended our current share repurchase program. Our current share repurchase program will allow us to repurchase up to an additional $100 million worth of our shares.

Before we conclude the financial portion of our remarks, I would like to inform you that we will be attending the Jefferies 2014 Global TMT Conference in Miami on May 7, the JPMorgan Conference in Boston on May 19, the B. Riley Conference in Santa Monica, May 20, and the DA Davidson Conference in New York City on May 28. Additionally, as Anil mentioned earlier, we will be hosting our investor day in May where we will discuss our product direction and total addressable market opportunities.

That concludes our financial discussion this morning. Thank you for joining us. And we look forward to taking your questions. If there are any questions, we will take them now.

(Operator Instructions) Eric Martinuzzi, Lake Street Capital.

Thanks. Congratulations on the quarter. I think probably more impressive though is the guidance for the coming fiscal year. As far as that guidance goes, you're really talking about a revenue acceleration here. Is it as simple as the expanded TAM and your guy's ability to capture some of that market?

Thank you, Eric, for the question. So, I think it's expanded TAM and our ability to capture on the TAM to our new product with nGeniusONE. As we talked about it, the nGeniusONE was sort of -- has not seen yet full traction in the production in last fall. Yes, it is related to increased TAM because of Packet Flow Switch and APM and as well increased competitive presence in the NPM world. But I believe our ability to capture the market share based on that TAM is the reason for that confidence.

Okay. One other question if I might. The repurchase program, you stated it expanded it by $100 million. I know as of the end of December you were down to like a (inaudible) shares remaining. Were there any repurchases in the March quarter? Or maybe to put it more simply, what's our current potential shares either in a dollar amount or units we could repurchase?

Sure. Hi, Eric. This is Jean. So, over the last few years our share repurchase program has basically been used to take out the dilution from employee stock-based compensation plans. So, to that end we have in fiscal year '14 purchased about a million shares at about $29 million for the year. And we do that without being disruptive to the market. We do it over the long quarters at about a pace of 250,000 shares per quarter. Through FY15 we anticipate that we will continue to buy at this pace of about 250,000 shares per quarter and clearly the dollar amount we use will be dependent on the stock price.

Okay. Thanks.

Kevin Liu, B. Riley & Co.

Good morning. Let me add my congratulations as well. With nGeniusONE you mentioned the traction you're seeing in terms of more APM use cases. I'm just curious with the 300 or so clients that you have that have adopted so far, what sort of expanded usage have you seen from them in terms of deploying in other parts of their network or focusing more on APM type deals. Would you expect a lot more focus on new customer wins in the APM area this year?

I think I'll see if Michael wants to add anything to this. First thing is that we are in the NPM plus APM space. It's hard to break down the impact on APM by itself because one of the emphasis we have is on the plus side, that we have the best NPM plus APM solution. So, right now a lot of people are using it for both purposes. I think a small portion specifically bought it for APM. As to the new offers, we're really excited by the job Michael talked about plenty of times. There is still going to be a smaller portion of the overall increase. I think we treat new business, meaning people -- new business is not just new logos but customers deploying our product in new areas, new deployments, and for new usage. All of that is thought of as new business as a result of new strategy. I don't know whether that covers it. Michael, is there anything -- ?

Yes. Just in terms of the new kinds of users, obviously an expansion towards less trained or less skilled and less expensive resources. So, earlier in the year in the problem management process, how that's come to light is one definite tendency. The other is security teams are using nGeniusONE because it's very easy compared with the previous generation. We're definitely seeing the application people using it, even if they're not funding it yet in most cases although we are seeing them funding it in an increasing proportion of cases. But even if they're not funding it, they're using it for implementation and that's exactly as we intended.

And then just one question on service provider with respect to your fiscal '15 guidance, what's kind of inferred in terms of the growth rate you feel you can sustain there? And what sort of I guess visibility do you have into when some of the larger deals close? Obviously that was skewed towards the back half and fiscal '14. Would you expect much the same out of this year?

Hi, Kevin. This is Jean. Still in service providers for FY15 clearly depending on in the guidance range we still anticipate that service providers part of revenue should grow at the 20% rate that is has grown over last year and that it probably is a function of when they purchase. As you know they have a 12-31 year end so they tend to do more of a traditional budget flush in our third quarter and then the fourth quarter also traditionally has been strong.

Great. Thank you.

Scott Zeller, Needham & Company.

I wanted to ask about one of Michael's comments in his prepared remarks. He said that new customer business had increased 2.5 times in the just completed year over the previous year. Could you offer some color on that? Because I think historically NetScout had received most of its revenue from the install base. Could you just talk a bit about how much revenue is coming from new customers now as a total percentage of revenue?

Yes. I'll let Michael provide maybe more detail but we don't talk about -- like I mentioned to the -- in the answer to the previous question, it's still very small compared to the growth coming from existing customers. But what we're saying is that it was potential increase off a small number from last year. So, I just wanted to mention that we still believe that a lot of people -- existing customer expanding of our solutions from NPM to APM space will result in installing different parts of the network for example server farmers, network edges. This will be the biggest traction point of nGeniusONE. But having said that, we're very excited about this new logo which Michael talked about. But I wanted to mention that a big portion of the growth will still come from existing customers.

I just wanted to add that the growth is primarily coming from the size of the new logo deals and so that's a significant factor. In other words we are able with nGeniusONE to capture deals of $0.5 million or bigger and significant new kinds of APM projects and in the service provider space, as I mentioned, we are leveraging our big portfolio. These are new kinds of wins. They are definitely prototypes of how we're going to be growing our logo portfolio.

Hi, Scott. This is Jean. Just to add, we're clearly very excited. The sales force is very excited. It's invigorating for them to also see the success of the Company's products going into new areas and solving problems that traditionally were solved with other competing vendors. Some of these vendors have just realized due to the trends of mobility and the cloud that being able to have the intelligence that our products provide is actually very mission critical to them. So, many of these new logos that Michael is talking about plus some of our use cases is a reflection of our product technology, how we provide the intelligence based on our 30 plus years of history and the realization that the business world is changing through cloud and mobility and remote users that they really need to make sure they can deliver their services as it's effecting their customers as well as their own internal productivity and returns on investment.

Did you happen to call out the contribution from Packet Flow Switch?

No. We usually think of that as a complementary product flow -- sorry, complementary product line with our entire solution so we never really have separated that number into anything. It has, however, done very well. We have gained market share and it has definitely lived up to our expectations for fiscal year '14.

I think one thing, Scott, just to mention and maybe we'll talk more about it next month, is that we I think Packet Flow Switch is not a market by itself -- it's a means to an end. And unlike some of the other potential players. So, when you look at that, people are buying Packet Flow Switch to support the instrumentation and make it more cost effective which is where we have leadership both with NPM and APM. Because of that reason, when we give out the number for service provider, 20 plus, and enterprise, 10 plus, the Packet Flow Switch is included in those numbers. That's why we decide not to call out because we don't know if the Packet Flow Switch business is driven by instrumentation or by the product which for us is the bulk of cases or stand alone.

Okay. And then lastly, I don't remember -- someone asked Jean. But when you look at the DSO count it seems this quarter was less backend loaded than the previous fiscal year and fourth quarter. Can you talk about the linearity of the quarter and ease of close?

Sure. The DSO, as you mentioned, is generally a function of the order stream, generally more a function of the order stream and shipments over a given quarter. So, in cases where the DSO is lower than usual, it is generally just a function of orders coming in in the first two months of the quarter in a more skewed way than it has in previous quarters.

Okay. Thank you.

You're welcome.

Aaron Schwartz, Jefferies.

Jean, I think you mentioned earlier an expectation for give or take roughly 20% service provider growth in '15. It seems that also implies maybe mid-teens to 20% growth for your enterprise segment which would be an acceleration here. I know this is probably tied to everything you've spoken about with nGeniusONE and expanding your TAM and wallet share within the enterprise but could you walk through what you're seeing in the pipeline on general enterprise for why you would see acceleration there and also somewhat related to that, the 300 customers or so that have already migrated to nGeniusONE, are those skewed to any particular vertical? What do the economics look like there through the migration? Do you see an acceleration in pricing? Is there anything there that's helping drive the product growth in '15 with the product cycle?

I think the big thing is the indication of the pipeline is that 300 people have migrated to nGeniusONE but that has not necessarily means it turned into additional business. I call it a robust pipeline. People in order for them to use APM as a way to drive more business for us, they have to first make sure they deploy this new product. I think we have past the transition point. People have been deploying it. I look at that as actually a good indicator of the pipeline for next year. The sizes are increased because the instrument is a bigger part of the -- different part of the network now or a bigger part of the infrastructure like server farms where Oracle is deployed with -- is deployed in the enterprise. All that is going to increase the deal sizes Michael talked about but it's not increasing the prices of our product. The product is the same price as last year. And last year I think we talked about the end of the year people were talking about other opportunities and that increased the deal sizes.

Just to tack onto Anil's response, you're correct. Depending on where you put guidance. At the low end of guidance we would still believe that service provider would grow 20%. Clearly over the years our strategy of penetration has worked in that area. We're focusing on global providers as well as the ones that have made us successful in the past year. Government at this point we think will still be relatively flat. In talked with the sales group we still don't see that budgets have necessarily been pushed down to traditional Federal departments. So, it does leave general enterprise which as you noted would be growing close to 20% in product revenue. We are very excited about our NPM plus APM space and the traction we have and additionally this year we are making investments similar to what we did last year in the sales force. So, in the sales force hiring over the last few years, we had been putting them say two or three years ago into service providers to be able to capture market share. In 2014, and additionally in 2015, we are also attracting sales talent to be able to penetrate the enterprise in the APM as well as on a global basis. Those are some of the factors that give us confidence that we should be able to achieve close to the 20% product revenue growth in the general enterprise.

Okay. That's helpful. Maybe a follow up and, Jean, you answered my question a little bit but I was going to ask you it seems like you're actually accelerating your sales and marketing spend a little bit if I try to back into your earnings guidance. It sounds like you're indicating it's going to be more flattish. But whatever the reinvestment is here in '15 you're saying it's really a little bit more skewed to adding additional sales capacity within your enterprise strategy. Is that fair?

Definitely. As we said before, we have a very scalable operating model and we do add sales people every year where we see market opportunity. So, based on what we see in FY15 around the globe, clearly more focused in the NPM plus APM market. We do plan on adding headcount to the sales function. We'll be adding that in the first half of the year. So, clearly they've become productive as soon as possible and contributing to FY15.

Great. Thank you very much.

You're welcome.

Matt Robison, Wunderlich Securities.

I'll throw my congratulations in for the impressive results and outlook. Anil, can you comment a little bit on the value prop for your nGeniusONE and APM and whether you're seeing more attraction to the scalability of doing APM on the network versus server-based products? Or if it has more to do with just the pure efficacy of what your technology can provide? I'd also like some indications on the timeframe for 100 gig?

100 gig is second half of this year. It will not have any big -- it shows our leadership but it's not going to have a huge impact in the number for this year. Sometime during the second half is when we'll be doing 100 gig. I think coming back -- I hope I captured all your questions but I think your main question is what's the value prop for our APM solution. What has happened is we believe a lot of the APM solutions were developed several years ago, six, seven years ago when internet obviously wasn't coming to the mainstream but VoIP was not in the mainstream, through IP conference or unified communications was not there. We had virtualization was not there, Bring Your Own Device.

So many things have happened that the definition of what problems are to be solved with APM has changed dramatically. The tool sets are still based on Company based information like if my server is working fine, the network is working fine, and the application is working fine, everything will be fine. That's not the case as we all know and customers are complaining. So, ASI technology looks at the bigger pictures which says the interaction between these companies and the complexity created by this new advance in IT technology is actually a bigger source of issues. In fact, servers don't just go down when the sun goes down.

There are brown outs of different types and ASI by listening to the packets which are the fingerprint for what is going on between these elements will deliver the service whether they're in a server farm or on the edge of the network or remote site, are able to capture that information but that information was not easily consumable by traditional tools until it was consolidated in the form of this ASI metadata which is almost like a real-time SQL database and that allows us to have this -- address this high end problem, next generation problems, but in order to do that you have to implement a different part of the network which was not thought needed because of the value proposition of NPM only in the past.

That's basically what our value proposition is, that we solve a new set of problems which nobody else is solving but it doesn't require them to invest in different parts of the infrastructure like server farms and call managers and in the server provider Voice over IP.

So, this growth that you're seeing is really share gain and probably I ask the question because there seems to be a lot of point competitors that have been developed over the past couple of years and are doing reasonably well. But you're really talking about replacing some of the traditional competitors that have --

We are not trying to replace them. Obviously there will be some market share gain. What we're trying to make is -- I'll give you a simple example. If you want to use a server management tool to say what is wrong with the server, the CPU is over tasked or something like that, you first have to know which server to look at. So, our one product can provide -- in many such cases, this being one of the really simple ones, we identify the root cause and the leading indicators and then we're going to use an additional server management tool from CA or other places or network management tool from Cisco or things like that to look into it more deeply and fix the problem. And so we provide our service industry also a lot of the problem can be solved just through that.

If not, to fix the problem they'll use a traditional tool. So, we're not necessarily replacing the traditional tool. We're complementing them. In fact, we're making them more useful and by solving the problem faster but in reality, in the long-term, yes, it's going to take away some budget which is clearly an over investment in those tools because of what we are doing is a better way of doing it. Lastly you mentioned about a lot of the point competitors. I think all the point competitors are trying to solve -- provide a better solution using the old traditional approach.

We have changed the complete approach. So, we don't see any competition from the traditional player, the new players in this space any different from the traditional player. In fact, the issue with all the bigger players and traditional legacy players is going to be a bigger issue than the current tools and new crop of start ups.

Thanks a lot.

Alex Kurtz, Sterne Agee.

Jean, could you just reiterate how the linear skew should play out? Should it be similar to last year? And are there any -- I guess you talked about this briefly but any large deal comps we should be aware of and sort of factor into our model?

So, last year skew was off slightly. It was closer to 43% due to the launch of nGeniusONE becoming available at the beginning of July. This year for FY15 between the first half and second half we think the linearity skew will revert back more to the historical pace. It should be closer to 45% in the first half and the resulting 55% in the second half. Regarding the comp on a Q over Q basis for revenue I would tell you off the top of my head without doing a study the abnormalities that we saw in 2013 where we had such a large Q2 service provider quarter due to traditional lumpiness, I don't think has existed in 2014. So, I think the quarterly pattern is probably more indicative of what we would do in FY15.

Anil, in the service provider market with nGeniusONE here, is there really explicit new use case on how these customers are deploying it? I know you spoke broadly about calling at more places and being able to manage more of the network but is there really any specific examples you could talk about where that's gotten you into more revenue and celebrated some deals?

The service provider is a very big area where if you are -- going just a little bit technical here, if you look at, there are three kinds of traffic flowing over the service provider customer-facing network or internal network to support the customer-facing traffic. One is called the service enabler which is like how you set up the calls in the case of VoIP and DMS and various applications which sometimes people take for granted. And secondly the control plan which is for the mobility and all that third is the user plan.

So, the majority of the competitors are doing very well on the control plan side and that will have to compete with incumbents and control plan was the big thing in traditional legacy voice. That market has much more intense competition. We tried to address that with a variety of technology but the user plan aspect which where the explosion of traffic and video and all that stuff is going on and the service enabler part where you set up video calls and voice calls and other things, are the areas where ASI can really add differentiated value.

So, nGeniusONE highlights the service enabler part in a very big way. That's why we got a lot of the business last year in the IMS core and other kinds of enablers where this is -- there is no other better way to do it than through ASI and nGeniusONE.

Thank you.

Mark Jordan, Noble Financial.

First, a question going back to your statement in the prepared remarks that you had resources of $465 million implying that you had obviously a lot of flexibility on the balance sheet. Question -- if you're looking at acquisitions moving forward, are there major technologies out there that you could consider buying or do you see future product development and enhancement primarily being focused on internal development?

Right now I think -- you're talking about the liquidity of $465 million. Yes. What we are pointing out, we're always on the look out for new technologies and things which can accelerate and even beyond the APM space, maybe in other areas that we will focus on next year. But we are not -- our guidance is not dependent on acquisitions this year. But if we do it it will make things easier and we are not really targeting any acquisitions like we did in the last two years where we bought five companies. But things could happen. What Jean was saying is that we have ample cash and resources to make that happen even at those bigger sizes if we needed to.

Mark, this is Jean. So, I think as I've discussed before, number one, capital deployment strategy is the continued evolution and investment in our products. We have done that over the past few years through in-house development as well as through the acquisitions, the acquired technology that Anil spoke about. Past acquisition strategy has been to buy companies that had very good technology that would integrate well with our product but for whatever reason they didn't have a customer base at this time.

So, our strategy in the past with acquisitions has been to take their product technology, to finish that technology and integrate it into a platform. As you know we call it nGeniusONE with one of the characteristics being that it's one product, one integrated product. As Anil said, our guidance is dependent again on organic growth. Our growth over the last few years has been almost completely organic. We do believe that the guidance for FY15 of $450 million to $465 million also represents the organic growth and the investment that we've made in the products and the technologies over the last few years.

Back to the sales and marketing questions, in fiscal '14, sales and marketing were up about 11%. Looking out into fiscal '15 you're talking about 18% to 23% product revenue growth. Can you sustain that type of growth rate on a continuation of sales and marketing growth in the 11% range or do you need to increase that to support a very high teens product growth rate?

What we've done, one of the things I like to stress, one of the things that's very -- that's one of the hallmarks of NetScout is that we're continuing to be profitable and we deliver operating results because our operating model is very scalable. However, in FY15, to be able to continue taking advantage of that opportunities that we see in our increased TAM, we will be making investments in sales as well as marketing. In sales, as I mentioned earlier, we do plan on adding headcount.

We add headcount where we see specific opportunities. The headcount in sales and related expense growth would probably only be about 10% to 15% of that component in sales. Within the marketing arena, we have, as you've been listening to for the last two quarters, we have an excellent opportunity to continue to capitalize on the differentiation of our Company and our product. We do plan in FY15 to invest in marketing to a degree, not a substantial move the need degree, just to continue our messaging about how NetScout is unique in providing real-time actionable operational intelligence and analytics.

Thank you.

You're welcome.

Joe Fadgen, Craig-Hallum.

Digging into the enterprise space --

Netscape.

I know you used to --

I'm on Netscape.

Financial services. Can you tell me kind of a break down? What are you seeing in the financial services vertical specifically or any other verticals within general enterprise that did particularly well or --

Am I?

Or maybe --

Excuse me, Operator. I think you keep on coming in. So, I'll just repeat the question that Joe had. He was curious as to the component of revenue within enterprise and whether we saw any -- how financials were doing since it's the larger segment and whether we saw anything else that was interesting?

I think over the year we've seen the financials continue to grow and again it's still the domestic base as we've talked. They've probably grown approaching double-digit growth in product revenue but also what's very exciting to us is other verticals, other industries that make up that vertical, healthcare, high tech, and retail, some of these industries have also grown very well as a reflection of the nGeniusONE product as well as the approach that Anil was talking about earlier. Some of the use cases we've used over the past couple of quarters where enterprises have been in cloud for their customers. We've been a part of that. In retail, the one we described today where people are starting to need better, faster information on how their stores are doing, we've been a part of that also. So, within the enterprise vertical, we saw growth, not only among financials but in some of those other healthcare, retail, high tech that I just mentioned.

ASI is a universal framework for all applications in all verticals. All applications use standard protocols and that's where I think most of the growth will be, whether it's financial or healthcare, but there are some applications like for the credit card monitoring or trading applications which apply to financial more so than other people and so we are working on both custom applications for each vertical as well as a large number of common applications whether it's an exchange or Oracle, whether you're financial or retail or pharmaceutical, you have a fixed set of common applications. Sometimes it may look like you can buy a server or Oracle database for all verticals, just like you can buy a router from Cisco for all verticals. Similar to that, ASI's applicable to all APM, all verticals, NPM plus APM.

Then one more if I may. You're certainly not the only Company that's talked about NPM and APM. It's how the market's convergence product, product convergence. Are we still -- would you say we're still in the first inning of the APM-NPM market? Are we a little bit further along? Kind of what are your thoughts on that and the industry, the potential there in general.

I think our kind of product and approach is not yet in the mainstream and we're trying to bring it into the mainstream but the need for solving both classes of problems with span the network and application people and call NPM and APM, many companies have been talking about the mainstream. That's a great story that the value proposition and the need for that market out in the mainstream, yet we believe that before ASI, the solutions -- the right solutions or the best solutions for that market were not in the mainstream. That's why we're hopeful and excited about and confident about the coming years.

Alright. That's all for me. Thank you, guys.

Thank you.

Alright. Thanks, everyone. And thanks for all your questions. And we'll talk to you again in July.

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