Netscout Systems Inc (NTCT) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to NetScout's first quarter of fiscal year 2015 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 and to provide the opening remarks. Ms. Taylor, please proceed.

Thank you and good morning, everyone. Welcome to NetScout's fiscal 2015 first-quarter conference call for the period into June 30.

Before we begin, let me remind you that during the course of this conference call, we will be providing you with a discussion of the factors that we currently anticipate may influence our results going forward. These statements include forward-looking statements made pursuant to the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934 and other federal securities laws. These forward-looking statements may involve judgment and individual judgments may vary.

Forward-looking statements include (technical difficulty) [expect] 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 10-K for the year ended March 31, 2014 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 in to 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 will now turn the call over to Anil Singhal, our Chief Executive Officer.

Thank you, Cathy. Continuing our revenue growth performance over the past two fiscal years, NetScout delivered a strong beginning into our 2015 fiscal year. Revenue for the quarter was $107.9 million and EPS was $0.36. Our growth for the quarter was 32% overall for revenue with product revenue growing at 50%. Our EPS growth was 71%. Jean will discuss our financial results in more detail later on in the call.

Our revenue growth this quarter was dominated by our Service Provider vertical. As we have mentioned over the past few years, our Service Provider vertical is driven by our customers' projects and hence the revenue can be lumpy. Our revenue guidance of $450 million to $465 million includes about 20% Service Provider product revenue growth for the year. So it appears that the trends for the fiscal year 2015 could be similar to fiscal year 2013, where we saw strong Service Provider growth in the first half of the year with the subsequent overall year revenue growth in line with our 20% growth estimate.

Our revenue projections for the full fiscal year therefore remains the same and in line with the information we shared with you last quarter. As a reminder, those projections included full-year revenue guidance of $450 million to $465 million. Net quoted at (inaudible) computing trends that our customers are facing today including IP conversions; network function virtualization on NFP; software defined networks of SDNs; data center virtualization; outward mobility; and bring your own device by BYOB combined with web and [evolving] Internet.

Our 30 years of expertise and patented product solutions have created a unified product [large form] that provides operational intelligence and performance analytics that enable our customers to assure application and service delivery along with a user experience across the networks of today.

Our nGeniusONE platform is powered by patented AFA software and our technology is expanding over used cases into [frigid] areas including APM, diver security and big data.

Our Service Provider customers continue to focus on their 4G/LTE network rollout and new LTE enabled services. As an Ericsson Mobility Report from last month noted, at this point in their evolution, their LT subscriber base is less than 5% or less than 300 million of worldwide mobile subscribers. This number is expected to grow to 28% or 2.6 billion mobile subscriptions by 2019.

NetScout has proven our solutions is scalable and effective with many of the Service Provider technology leaders and we anticipate that this vertical will continue to drive growth for us over the next five years.

Within our enterprise vertical, our largest industry which is financial service has continued to show strong growth. Our enterprise vertical is made up of many industries, which illustrate the broad use cases that are available to NetScout. The remaining industries in the enterprise vertical produced a strong growth base diluted from financial services resulting in flat product revenue growth for the quarter. We believe that our enterprise product revenue growth for the quarter is a result of timing of orders and shipments.

Within our traditional enterprise customer base, we have continued to create value with a product launch and successful traction of nGeniusONE. NGeniusONE provides real-time (technical difficulty) intelligence and performance analytics, addressing the network and application performance management or NPM and APM convergence strengths.

During the last quarter, I was personally involved in delivering an extensive seminar CDs, educating and training our customers on the unique benefits of our (technical difficulty) (inaudible) technology and nGeniusONE solution. This effort spanned 10 major cities in North America over a 10 week period. These seminars presented us with a unique opportunity to interact with over 100 customers in a private setting and to collect -- allowed us to collect their valuable feedback.

As a result, we now have an even deeper understanding of what our customer experiences with the convergence of NPM and APM over the past year since nGeniusONE was launched.

This trend has many (technical difficulty) industry, but a lot of opportunity for us. The brand is still developing and the customers and companies are finding their way. Our strategy within that enterprise has been to penetrate our customer base with a two-stage approach.

First is the deployment of nGeniusONE and capturing mind share. As we have discussed, our core customer base has deployed nGeniusONE into their operations. By showing nGeniusONE in action with this web flow and functionality, our customers have gained acceptance of our technology and direction.

Secondly, we would just base revenue growth as the customers migrate their existing information to nGeniusONE and expand installations into their additional application performance management operations. We have learned that the performance managing market is ready for a technology transition. But large-scale deployments will take longer time as customers have to deal with their legacy solutions and politics and begin the operation to power up our next generation offering.

As discussed at our investor day in May, our targets were fiscal 2015 execution in the converging NPM plus APM market is (inaudible). (inaudible) how NetScout is automating the IT war room will substantially improve both our customer business continuity and their IT productivity. The average large enterprise customer has a large number of management tools and still spends days and sometimes weeks determining what and where the issues are. The majority of time is spent determining where the problem is, while only a fraction of the spend -- time is spent fixing the problem.

NGeniusONE automates what we will call analysis process with a wide and grand visibility provided by ASI combined with the service [fee as] workflows and nGeniusONE. They will believe that there is no other product in the marketplace that has this technology, speed, and the scalability.

In conclusion, our continued market leadership and strong financial performance reflects our consistent innovation with high-value solutions that are typical to enabling your customers to meet their objectives in a timely and cost-effective manner.

The high quality of our data analytics lets them cut through increasing complexity to give them the real-time impression (inaudible) they need to make our insightful and timely decisions about network applications, services, and user performance. We have good (inaudible) strategy and our results reflect market acceptance of solutions and value proposition. We have demonstrated that we can set and achieve ambitious operating growth.

As we discussed at our investor day in May, we are very excited about our market positioning and growth prospects. We are continuing to expand our total addressable market by adding functionality to our SI software and nGeniusONE platform. As we capture more types of data and add richer analytics capabilities, our value proposition as strategically important to our customers will increase further. Our vision and strategy is clear and we are excited about our growth prospects in fiscal year 2015.

I would like to conclude by thanking our employees. Their commitment and hard work is enabling us to win and maintaining the support of our customers. Now I will turn the call over to Michael.

Thank you, Anil. As we have discussed our go to market strategy for nGeniusONE (inaudible) for nGeniusONE product in the enterprise vertical is a customer (inaudible) strategy. We are leveraging our loyal customer base and reaching further into their IT operations to better assist them in solving their problems through our operational intelligence and performance analytics.

As Anil mentioned, the first greatest use of nGeniusONE is service triage. By [importing] issues in real-time, our solutions have the value proposition of [TEM] industry improving IT productivity in meantime to restore as well as being able to pro activity spot issues before the user experience is impacted.

In adding value in the application and data center segments, we are positioning our product as complementary to other performance measurement tools, filling the gaps that exist and understanding the interactions among the hardware and software resources while executing IT services.

Our core customers have responded well to nGeniusONE, and most of them have deployed it in portions of their IT operations while they continue using their pre-existing NetScout installations in other portions of their networks. We are enabling this migration through our support offerings of training and services as well as through a technology transition program, as our customers refresh their installations in order to accommodate the increasing functionality and scale of nGeniusONE.

This creates a good base for us to do follow-on sales over the upcoming months. In parallel, we continue to develop nGeniusONE and its ability to gather intelligence on applications. At this point, nGeniusONE can analyze approximately 300 applications. Some of these applications like DNS are technical and not only to IT operations gurus. Other targeted applications are more widely recognized and include Oracle, Xchange, and Citrix.

During this quarter, our expansion into NPM plus APM was exemplified by our win at a large healthcare organization, which is an existing NPM customer. We were able to demonstrate to the stakeholders of a new electronic medical record application that nGeniusONE is the right answer to providing service assurance for this mission-critical application.

In addition to our core competency in NPM plus APM, we continue to target adjacent fields such as unified communications, legacy circuit-switched technology and cybersecurity. For example, this quarter in a continuing series of unified communications successes, we want the business to manage the performance of a global large-scale Microsoft Lync voice video deployment. Our customer is a global energy company and is one of the largest companies in the world. Again, a testament to the scale and functionality of our solutions.

In leveraging our expanding voice monitoring solution portfolio, we won a new tier 2 (inaudible) Service Provider customer in Latin America based on our combined packet switch and circuit-switched monitoring capabilities. Inventing winning this deal, we prevailed over established leading vendors in the circuit space to voice space.

As discussed at investor day, we plan on continuing efforts to develop our Cybersecurity strategy including forensic and regulatory compliance and addressing some of the more sophisticated cyber tracks. As a testimonial to the power of our ASI technology and data set in areas outside the traditional performance management, leveraging our Cybersecurity knowledge and partnering ability with our technologies and vendors, we were able to win a large US intelligence agency deleveraging ASI in cyber threat defense.

In summary, our continued execution efforts will be a combination of driving our core platform deeper and capturing hedges and opportunities opened by our product and technology acquisitions and integrated solutions selling to existing and new customers.

With that let me turn it over to Jean for the quarter's financial.

Thank you, Michael, and good morning everyone. This morning I will review the key metrics for our Q1 fiscal year 2015 results and discuss our guidance for fiscal year 2015.

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

For our first fiscal quarter, our product revenue was $64.4 million, which is an increase of 50% over the same quarter in fiscal year 2014. Our first-quarter total revenue was $107.9 million, which is an increase of 32% from the same quarter in fiscal year 2014. Within total revenue, service revenue was $43.5 million, which is a 12% increase from the same quarter in the prior year.

Our earnings per share for the first quarter was $0.36 which is a 71% increase from the same quarter in the prior year.

Turning to slide 4, we achieved our quarterly results while delivering strong margins. Our gross profit was $86.5 million, representing an 80.2% margin. Income from operations was $25.3 million and our operating margin for the quarter was 23.4%. Net income was $15.2 million or $0.36 per diluted share. The net income margin was 14.1%.

Turning to slide 5, which shows our fiscal year 2015 product revenue composition, the components of our $64.4 million of product revenue for Q1 fiscal year 2015 were as follows: Service Provider, $41.9 million or 65% of product revenue; government, $2.5 million or 4% of product revenue; general enterprise, $20 million, or 31% of product revenue.

The product revenue composition for this quarter was more heavily weighted toward our Service Provider vertical.

As Anil mentioned, our large tier 1 domestic providers continued to focus on their 4G/LTE network rollout and new LTE-enabled services. As such, the Service Provider sales cycle can be lumpy and can have very fast turnaround time requirements. A full fiscal year 2015 annual composition percentages will more than likely be in line with our historical composition percentages.

Slide 6 shows our Q1 product revenue growth rate by sector. Given the lumpiness of the Service Provider vertical combined with some fast turnaround time requirements, the Service Provider vertical grew by greater than 100% this quarter. As mentioned previously, we believe that our Service Provider growth rate will moderate over the upcoming quarters and normalize at about a 20% product revenue growth rate for the year.

Our enterprise revenue growth was flat in comparison to the prior year's quarter. We saw strong growth in financials which is the largest industry within this vertical. However, as Anil mentioned, the other industries reduced this growth percentage. The flat enterprise growth rate is a result of timing of order and shipments and the enterprise vertical is expected to grow on an annual basis. Due to the size of security win that Michael mentioned earlier, the government vertical grew by 18%.

Slide 7 shows our total revenue composition for Q1. The composition of our $107.9 million of total revenue for Q1 of fiscal year 2015 was as follows: Service Provider, $56 million or 52% of total revenue; government, $9.1 million or 8% of total revenue; general enterprise, $42.8 million, 40% of total revenue.

Turning to slide 8 which shows our Q1 fiscal year 2015 total revenue growth by sector, reflecting the results of product revenue discussed earlier, our total revenue for the Service Provider sector grew 77% on a year-over-year basis. Enterprise grew 1% and government grew 13%.

Turning to slide 9, this is a depiction of a full fiscal year GAAP revenue by geography. For the first quarter of fiscal year 2015, the revenue mix was 80% domestic and 20% international. These results differ slightly from our recent historical averages due to the predominance this quarter of domestic service provider revenue.

Within our international sales, Europe delivered 8% of our international sales while Asia delivered 6% and the rest of the world delivered the remaining 6%.

Slide 10 includes highlights from our balance sheet and we continue to maintain strong liquidity. At the end of Q1 fiscal 2015, we had invested cash, short-term marketable securities and long-term marketable securities of $234.4 million. Combined with our current revolver capacity, our total liquidity exceeds $480 million. Financially, we are well-positioned to execute on our product and go-to-market strategy.

Our first-quarter fiscal year 2015 free cash flow generation was $26.3 million. Additionally in the quarter, we repurchased 250,000 shares for $9.7 million. Accounts receivable net of allowances were $33 million, down from $60.5 million at the end of fiscal year 2014. Days sales outstanding were 26 days for the quarter, compared to 47 days for the fourth quarter of fiscal year 2014. Inventories were $11 million. This is a $1.6 million decrease from the fourth quarter of fiscal 2014.

Additionally, our total deferred revenue was $124.7 million representing a $9.2 million decrease from $133.9 million at the end of last year. This decrease is in line with our historical pattern as we see lower levels of renewals in the first half of the fiscal year.

Turning to our guidance for fiscal year 2015, slide 11 illustrates our guidance range for revenue and earnings per share. We are reiterating our guidance for fiscal year 2015 for both revenue and earnings per share. Our GAAP and non-GAAP revenue guidance for fiscal year 2015 is $450 million to $465 million, yielding a total revenue growth rate of 13% to 17%.

The driver of our revenue growth continues to be our product revenue, which is expected to grow in the range of 18% to 23% for the full fiscal year. Regarding revenue, we believe that this quarter's results, which were heavily weighted towards the Service Provider vertical, will alter the revenue SKU between the first-half and second-half revenue slightly.

At the midpoint of guidance and believing that each of our remaining quarters will be a minimum of $100 million in revenue, the first-half revenue SKU will likely be more close to 46% rather than our historical 45% revenue SKU.

Earnings per share guidance range for fiscal year 2015 is $1.74 to $1.81, yielding an EPS growth rate range of 14% to 18%. With the expiration of their research and development tax credit legislation, our effective non-GAAP tax rate for fiscal year 2015 will be approximately 38%. We will continue to focus on profitability and cash flow by improving our margins and returns during fiscal year 2015. Hence, we are reiterating our EPS range for fiscal year.

Before we conclude the financial portion of our remarks, I would like to inform you that we will be attending the following investor conferences in New York City. The Needham conference on August 5th, and the Credit Suisse conference on September 16th.

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

Kyle, you can begin the line for the questions now, please.

(Operator Instructions). Eric Martinuzzi, Lake Street Capital.

Congratulations on a terrific start to the year. That 50% product growth is a real eye-popping number. Curious to know, you talked about the guidance, this more of a skew this 46 to 54. That would still represent down sequentially for Q2 which would be slightly below where the Street is. Is that what your intent was with the commentary?

Yes, we saw -- as you know, as we noted very heavy service provider requirements this quarter. And we believe the growth rate for next year -- over next year -- over last year's quarter will still yield us very good growth rates. But there is the potential that we would be more in the 100, 102 line for Q2. (multiple speakers) Q2.

Yes. Okay. As far as 10% customers, did you have any? If so how many in the quarter?

Yes. We had two revenue 10% customers.

All right. Then the -- I think the one that caught my eye setting aside Service Provider, the lack of growth on the product side for the enterprise. And you touched on it a little bit, but there seems to be some pockets of success here. You talked about the electronic health record example or the unified communications example. But still, all in, we are kind of flat on product and plus 1% on total rev for enterprise.

What gets that off dead center? Is it about people getting comfortable with that new product and then pulling the trigger on their own CapEx or is there something else that needs to happen?

I think, as you know, as our business I mean our business has significantly grown in a year and a half. Last year or last couple of years as you saw in the last slide. And as we become bigger and bigger, it will be hard to look at the quarterly trend as interesting metrics.

So I think it is just a side effect of the timing of orders. And as we mentioned, our yearly estimate shows the same trend as last year in terms of product revenue portions, and enterprise with the Service Provider, and various metrics we report on.

Okay, so that will pick up. All right, thanks for taking my question.

Matt Robison, Wunderlich.

Congratulations on execution in the first quarter. Can you maybe elaborate a little bit on the visibility in the general enterprise and then what your -- as well as the nondomestic side of the Service Provider? And then, Jean, if you could provide CapEx and depreciation that would be great.

Sure. Why don't I do the easier question first, which is the CapEx piece? So, CapEx this quarter was $1.9 million. Depreciation and amortization combined were $4.7 million.

I think overall the visibility is quite good and we are not sure that we admittedly have -- I mean overall the visibility is quite good in both domestic sector and international sector. We don't break out under Service Provider there when you buy international. So I don't know whether that answers your question, what you are looking for.

Not really.

So, just to reiterate what Anil is saying. As you know as we talked about in the past, the Service Provider innovators that are moving toward the -- that are on the IT network that are 4G/LTE, those countries are the US. And then they are some of the pockets in Asia. And as Michael has mentioned before, we have a good customer base in the Asia Pac countries.

Europe is still a little bit at a standstill due to the way they initially rolled out their 3G and some of the economics. We still have wins in those customers -- in those areas and we still have a pipeline in those areas. However, the material revenue amounts are not generated from the international countries yet, because they are not quite moving into 4G/LTE as fast as the US is.

How is it -- how has the pipeline developed for the integration you've done with the Accanto technology?

I think it is very good. In fact, Michael talked about a win in the circuit-switched area and lag in America I think there is a big multi rollout coming up in the US as well as in Europe, which we will see some good deals towards the end of the year. And that includes that Accanto technology.

So, as we mentioned last year, the integration from all five companies we acquired in last two years is all complete and generating revenue.

Has the packet flow switch business -- has the tone of that business changed at all?

No it -- I think it was -- it did very well last year, and we think we are going to do good as well this year.

Okay. Thanks.

Kevin Liu, B. Riley & Co.

Good morning. First question with respect to the government pipeline, wondering if you could talk about how that has grown versus last year. And then, whether you would expect closed rates at least in the seasonally strong September quarter to be improved versus in the past couple of years where it has been a bit weaker?

Yes, I was just there in that region last weekend. Pipeline is back in there last year and we expect to do better than last year. But, again, it is still last-minute things can change and very, very quickly. So we are hoping to run a better year in federal this year. That means better quarter -- better Q2 quarter which is end of fiscal year, fiscal year for federal. So, yes, pipeline looks good and when people are really excited, and positive we are hoping for a good year in federal.

Okay. Then a follow-on in terms of the enterprise growth here. Maybe if you could talk a little bit more about what you are seeing within sales cycles during the quarter. Did they progress the way you expected them to? Was there any sense that deals have gotten either more complex or elongated especially as you guys move towards maybe some newer areas of companies, networks and applications?

Yes, I think that is a good question because I [think] our internal sales cycle in terms of acceptance and upgrading to newer solutions, the new solution are quite short, but sales cycle for getting projects from other departments and going into APM area while there is a lot of positive, why it is coming up is slightly longer. And that is what we were talking about that it is going to take a little longer to penetrate the APM market. But the bridge to the APM market (inaudible) NPM plus, which is but I talked about. So that borrowed one is going very well. We saw the three acquisitions in part two and so we will see more traction in that area in the later part of the year and next year.

Got it. Thank you and congrats on a good quarter.

Scott Zeller, Needham & Company.

Good morning. This is [Elizabeth Cawley] for Scott Zeller. You mentioned the nGeniusONE product is getting mind share. Can you tell us exactly how much of the customer base is currently using it?

I think it is -- I mean, we don't -- basically it is over 200 customers have deployed or maybe more. Michael is saying maybe even more. There were 250 or more customers have deployed nGeniusONE.

But I wanted to caution you saying that doesn't mean everyone is generating new revenue. So, like I said in my script that plus part was for them to migrate to the new solution which is a free upgrade to our customers and then they deploy nGeniusONE and ASI in more places and so the second part is slower, is longer sale cycle. It is happening in a fewer number of customers than the large number who have moved to nGeniusONE.

So, this -- we are in this business for a long time and this was (technical difficulty) into a new product in the last 20 years I have seen. So we are really excited about so many customers migrating to nGeniusONE so far.

Thank you. My second question is around Riverbed and Gigamon, their negative pre-announcements for the quarter. Can you offer us any color on spending trends specifically in the APM portion of your business? And can you also give us an idea of, roughly, what portion of your revenue overlaps with the issue companies?

Well, we have large (technical difficulty) in the past and, but our strategy in this area is, I think, it is not fair to compare what we do in those areas with those -- even though we are in the same (technical difficulty) compete for budget. We see a packet flow switch is market-driven by the packet flow probe which is where we are the leader.

So we see a lot of our sales involve both those things. And the challenge in the packet flow standalone market has been the driver for packet flow switch has been done by other people, not Gigamon where in our case there is a lot of complementary nature. So we have done some very interesting things to fully deliver on the value proposition of packet flow switch. Because we play in both areas.

And so, and obviously we also have challenges like other people, but our challenges are very different than, for example, Gigamon challenges. Also, when we have to look at Riverbed, and Enesco, the biggest difference is this is 100% of our business. We have focus. We have doing this for 20 years and we just invested 400 man years and five technologies. We acquired five technology companies in the last three years. I think that is (inaudible) industry including Riverbed or anyone.

So those are the two big reasons why we are so different from these other companies and so I don't look at their success or failures as a [datic] reflection on what is going to happen to NetScout.

Okay, that's helpful.

Mark Kelleher, D.A. Davidson.

Let me add my congratulations as well. I was wondering if we could take a look more at the Service Provider part of the market? Very strong in the quarter. Was there -- what was driving those Service providers to put that to pull the trigger on that CapEx in that quarter? Very unusual seasonally and maybe you could tell us where you think we are in the 4G/LTE rollout.

I think like we mentioned both in my portion and Jean's portion, the LTE rollout is the main reason that is going to be combined with voiceover in the rollouts later this year. And so we are participating in those projects, gaining mind share and hopefully that will drive business in the second half in those areas. But LTE is the main reason in the domestic providers why we are seeing that traction.

As to what unusual thing happened in this quarter, we already mentioned its lumpiness and it is not unlike what happened two years ago in fiscal year 2013. We had a very strong first half and then we didn't have as strong a second half, but the total results were still 30% growth, 20% less growth in that fiscal year for Service Provider in two years ago.

The past year, it was the reverse trend and results were the same. So, we have got a mixture of that trend going on and we still think our earlier estimates are 20% less (inaudible) Service Provider for the entire year. And looking at it more every year, yearly guidance is a more important way to look at our LTE marketing -- market trend and the growth rate.

How far along would you say the US domestic, the Service Providers are in deploying LTE? Are they 50% along? Are they 20% along in deploying?

I think that is not very clear because it's -- there is a replacement LTE and there is the extension. So I think those percentage numbers are not very clear, but they are quite long. And in LTE area, but they are just starting out on voiceover LTE. So that is a big opportunity which is we see in this year and not just LTE, but voiceover LTE, 4G. 4G voice, which is where our acquisition of Psytechnics and Accanto, the two voice companies we bought two years ago. So that is all the work we have done in ASI, is going to be very helpful.

Okay. And on the packet flow switch side, just to revisit that for a second. How -- what --? How much of your strategy is to sell the packet flow switch outside of NetScout environments? And how much is right now sold outside of NetScout environments? To not connect to the nGeniusONE to the NetScout tool?

Well, about primary customer basis still the existing NPM customer base. But even when we sell outside the environment, they still buy the InfiniStream and ASI. So there is a very small fraction of customers who just buy packet flow switch by itself. That doesn't mean all the packet flow switch customers are existing customers of NetScout.

Okay, thanks.

Alex Kurtz, Sterne, Agee.

Thanks for taking the question. Jean, I want to revisit your assumptions on enterprise for the year. So this 20% growth rate for Service Provider, that is a -- as I understand it that is a new number that you provided to us today, this morning. I guess there's some real acceleration assumptions you have in the model for enterprise and government in the second half.

What am I missing here about that pipeline and as Eric maybe asked, this nGeniusONE pipeline that is going to convert in the second half that is going to be able to get you to the midpoint of guidance on in those verticals?

So, in Service Provider, we are frequently asked -- and I think we have probably reiterated it on calls in the past what the growth rates are. So the 20%, about approximately 20% product revenue growth rate is something that we have experienced in the past. Actually higher than that, starting three or four years ago. And we still consider that the 20% about will be good in 2015 fiscal year.

We are still confident about hitting our guidance range for revenue. The product mix is something that we actually really don't guide toward with the exception that people frequently want to ask us about the growth in Service Provider.

With that said, when you start backing into the numbers, the enterprise -- as we said before -- has to grow in product revenue mid to upper teens. And as Anil had talked about, we do have installations of nGeniusONE. We have increasing pipeline visibility into how they will buy and how they will migrate over towards that. And the pipeline that we see for the upcoming quarter and the pipeline that we see sitting here today for the rest of the year would imply that we will expense growth in enterprise over the full year of 2015.

And as Anil has also mentioned a few times on the call today, our quarters are driven by what our customers are doing and the projects that they are doing. Hence, everyone is very familiar with the lumpiness in Service Provider. That also exists to an extent in enterprise where you saw, this quarter, financials had pretty strong growth and some of the other industries were still were not executing on their projects yet.

So overall, we are confident we will hit our guidance range and the visibility and our strategy for selling nGeniusONE into the enterprise vertical will help with the enterprise vertical growing on a year-over-year basis.

And what about government? Is there assumption of maybe a couple points of growth year over year in that vertical?

Yes. As you know, government has been -- I think it was flat last year basically. The federal government completely flat last year. So you can see high-growth rates, but not necessarily large dollars because of the product revenue, the lower installed base.

As Anil mentioned in talking to our salespeople this quarter and looking at the pipeline, again, we continue to have a lot of demand from our users. Some of them have received some budgets. Some of them still have not received budgets to buy yet at the end of September. And there is always the concern that the budgets that have been sent down to these departments could be reappropriated.

So while -- so sitting here today, while we see a good pipeline and maybe a good growth rate, it is still not huge dollars that we would be talking about. Not hugely material dollars in Q2.

And just to wrap up, last question, I appreciate it. With that said about government, to grow mid-teens for enterprise, it is a combination of growth in nGeniusONE and share gains and maybe slightly better macro. Is that how you think about your enterprise vertical?

Yes. We noted a few people this quarter talking about the macroeconomy and how Q2 of the calendar year was not as strong as past. And we did see a little bit of slippage, but we would not tell you that the enterprise slipped holistically this quarter. We did have good growth in financials in some of the other industries that are planning projects, just haven't executed on them yet in this quarter.

All right. Thanks, Jean.

Chad Bennett, Craig-Hallum.

Good morning. Thanks for taking my questions. Probably a couple of quick questions for Jean. Jean, backlog at the end of the March quarter, I believe, was according to your filing roughly $37 million which was pretty decent in my mind. Can you touch on, at least directionally, tell us where backlog is today, or at the end of the June quarter?

So, backlog, as you know, is a requirement in the 10-K and we really don't discuss it on a quarterly basis. It is not a -- because as far as we think about it, it is not really a material number. The -- and it kind of diminishes the expert and all the hard work it is to continually just do the same amount of revenue that we did last year. So even the backlog that was reported is really not a guarantee of future success. And it still takes us a lot of strategy and hard work.

With that said, that backlog did shift this quarter and we anticipate that we still will hit our guidance to $450 million to $465 million of revenue for fiscal year 2015.

Okay. Then, do you expect -- based on the guidance that you gave or reiterated for the year and in light of the Service Provider performance this quarter. Do you expect any 10% customers for the remainder of the year in any quarter?

That is a very good question, Chad.

Well, I think we expect for the whole year, but not -- we can't say whether we see 10% customers in every quarter.

Yes. I was thinking it through and the product revenue amounts that we would have to achieve at the -- as you know, the Service Providers are the ones that tend to produce the larger deals. And if I look at the product revenue over the coming quarters, at the midpoint of guidance of what we would see, as Anil said, I would agree there is always the potential that we get one or two 10% customers for the year.

And there is the potential that there could be a 10% in any given quarter, but no guarantees.

Okay. Maybe, I think everybody is poking around the enterprise growth in nGeniusONE and one that really kicks in. I guess the strength you saw in the financial services vertical this quarter, was it refresh of spend and more InfiniStream product going out the door? Or did nGeniusONE boost that? Did you see traction in the financial services vertical for nGeniusONE and seasonal growth from that?

I think all of them and there are a couple of new logos also. So we are also -- we have -- I mean the combination of all of those things. And this time financial services were hired, but that is just the timing of the order as we said. I think overall we look at our trends in the overall enterprise and have stopped reporting based on financial. That was just a comment that this quarter the enterprise business was dominated by financials.

Okay. And then, last one for me, you mentioned two things that are driving Service Provider growth, revenue growth. One, obviously, the continued rollouts of LTE, the network. But also enhanced services on top of the network. I guess, two questions within this. How far along do you think you are on the voiceover LTE opportunity domestically? And how much have you monetized, I guess I'd ask. And secondly, what is the next opportunity from an enhanced services standpoint besides voiceover LTE that you think will be an opportunity for you guys? And then I am done. Thanks.

That is also a [royalty] voiceover LTE, we just call royalty. It is very early stage. We have not monetized much in that area. But there are two other areas beyond royalty which are out this year and maybe later, year one is the business intelligence. We just have -- we are going to focus in later year -- later in the year. We talked about it at the investor day.

And another is for NFE transmit virtualization. And that is creating a lot of disruption for both infra -- all infrastructure player and there's some big initiatives out there where people are going to deploy deeper into their data center these technologies that are requiring virtualization. So we have some interesting things in those areas also. So those are the -- I would say the three things. Plus continuing trend on LTE which is substantially penetrated but still there is a lot of scope. And especially there is scope on international as well as in North America.

Okay. Thank you much.

Mark Jordan, Noble Financial.

Good morning, everyone. Question first on DSOs. First quarter or level of 26 days was really very, very good. Question is, what causes significant decline from fourth-quarter level? And what would you view as a more normalized rate for you?

The DSO is a function of -- in the past, we have talked of the linearity of the quarter, when the items are shipped. And as we talked earlier on the call and a couple of questions ago, the backlog that we reported and the 10-K we did ship in the beginning month of the quarter. With average 30-day collection terms, it is collected and that is what we have the lower 26-day DSO this time.

The other function of the DSO going to the second part of your question. On average we would probably just tell you maybe around 45 days is a normal DSO. However, I would caution that when the renewal bookings come in and these are the renewals of our maintenance stream, our annual multiyear support, they can dramatically also affect the DSO because you rec -- you have a receivable at the end of the quarter, but with no offsetting revenue.

So, basically if you looked at the trend of our DSO over the quarter, you would notice that it is more an indication of the month of the quarter that we are in and the renewal bookings pattern and how the shipments flowed that quarter.

Okay. You mentioned earlier in the -- your presentations that in the Service Provider area you had orders that required very quick response which was I guess why revenues were higher that you would have alluded to on previous earnings call. Could you talk a little bit about just mechanics of how quick is the response time on the Service Provider business, and so, what is the duration of that from notification to delivery versus normal business?

I think the span could be as early as 30 days and maybe average or slightly on the higher side could be a quarter. So I think that is the way I would look at it. I mean, we don't have to ship something like tomorrow when we get the order today. But what Jean was talking about is it is lower than our standard timeframe. And so I would say 30 days -- is, Jean, will be something like that?

Yes. We usually have pretty good visibility into the service provider pipeline due to the way we do the salesforce coverage and our leadership in that market. We understand all of the projects that are going on around the globe. So we usually have insight into lead times. And overall, a lot of these lead times are pretty long if they are rolling out their projects and they are doing labs and things like that.

Sometimes at the end of quarters or the end of certain months, they will have additional spend that they will need to spend. And this quarter is what we saw where they had the requirements to be able to use some of their capital on a quarterly basis and they would go to vendors who can provide them very quick turnaround in shipping that CapEx.

Thank you very much.

There are no further questions at this time.

Okay. Thank you for all your questions. We will see you again next quarter.

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