Netscout Systems Inc (NTCT) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to NetScout's fourth quarter results conference call. (Operator Instructions) As a reminder, this conference call is being recorded. Andrew Kramer, Vice President of Investor Relations, and his colleagues at NetScout are on the line with us today. I would now like to turn the call over to Andrew Kramer.

Thank you very much, Derek, and good morning everyone. Welcome to NetScout's fiscal 2015 fourth quarter and fiscal year end 2015 conference call for the period ended March 31, 2015. Joining me on this morning?s call are Anil Singhal, NetScout?s Co-Founder, President and CEO; Michael Szabados, NetScout?s Chief Operating Officer; and Jean Bua, NetScout?s Senior Vice President and Chief Financial Officer.

We have included a slide presentation of key financial data that accompanies the financial section of our prepared remarks. For those listeners who have dialed into the call this morning and would like to view this presentation, you can find it by going to our website at www.netscout.com/investors and then clicking on today's webcast. You can advance the slides in the webcast viewer to follow along with our commentary. We will try to remember to call out the slide number we are referencing in our remarks.

In terms of our agenda for today's call, Anil Singhal will first provide an update on our previously announced plans to acquire Danaher?s Communications business and then he'll share his perspective on our performance and the key drivers behind it. Our COO, Michael Szabados, will provide his perspective on Engage, our annual user form, and other timely marketing activities. CFO, Jean Bua, will then provide additional insight into the financial performance as well as review our guidance.

Before we begin with our prepared remarks, I'd like you direct your attention to Slide number 3. NetScout?s registration statement on Form S-4, preliminary proxy statement on Schedule 14-A, and other documents concerning the proposed acquisition have been filed with the Securities and Exchange Commission. Investors are urged to read the S-4 registration statement and proxy statement along with other relevant documents filed with the SEC when they become available, because they will contain important information. Security holders may obtain a free copy of the registration and proxy statement when it is available and other documents filed by NetScout with the SEC at the SEC?s website at www.sec.gov. The registration statement and proxy statement along with other documents may also be obtained for free by contacting me directly by telephone at 978-614-4000, by email at ir@netscout.com, or by mail at Investor Relations, NetScout Systems, 310 Littleton Road, Westford, MA 01886.

This communication is not a solicitation of a proxy from any security holder of NetScout. However, NetScout, Danaher, and certain of their representative -- respective, rather, directors and executive officers may be deemed to be participants in the solicitation of proxies from NetScout's stockholders in connection with the proposed transaction. Information about NetScout's directors and executive officers and their beneficial ownership of NetScout's common stock may be found in its preliminary proxy statements filed with the SEC on April 6, 2015. This document can be obtained free of charge from the SEC's Web site at www.sec.gov or on our own website at www.netscout.com. Again, you can also contact me directly.

Let's move on to Slide number 4. I would like to remind everybody listening that forward looking statements in this presentation are made pursuant to the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and other federal securities laws. Investors are cautioned that statements in this presentation, which are strictly not historical statements, constitute forward-looking statements, which involve risks and uncertainties. These include without limitation, our financial guidance and the anticipated timing, terms, or benefits of the proposed transaction involving NetScout's acquisition of the communications business lines of Danaher Corporation.

Actual results could differ materially from the forward-looking statements. Risks and uncertainties which could cause actual results to differ include, without limitation, risks and uncertainties associated with the timing and completion of the acquisition and many other risk factors outlined in today?s press release, NetScout?s registration statement on Form S-4 on file with the Securities and Exchange Commission, and NetScout?s annual report on Form 10-K for the fiscal year ended March 31, 2014, and NetScout?s quarterly reports on Form 10-Q for the quarters ended June 30, 2014, September 30, 2014, and December 31, 2014, all of which are on file with the Securities and Exchange Commission and available on our Web site.

NetScout assumes no obligation to update any forward-looking information contained in this communication or with respect to the announcements described herein.

Finally, I would like to remind you all that 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 and they are included at the end of this slide presentation that is made available online on our website. I would also like to note that growth rate discussions are based on a year-over-year basis unless otherwise noted.

As detailed in our press release today, NetScout reported an exceptional Q4 EPS performance, which reflects the scalability of our operating model, particularly as we near the end of our most recent five-year investment cycle. At the same time, we are looking ahead to the new fiscal year and advancing our acquisition of Danaher's Communications business to a successful conclusion. We'll plan to share some perspective into each of these areas. And with that said, I'll now turn the call over to Anil and then my other colleagues to expand on these and other points.

Anil, please go ahead.

Thank you, Andy. This is a very exciting time at NetScout. We once again delivered a strong financial performance in fiscal year 2015 and as you may be aware, we passed one of the major milestones towards completing our acquisition of Danaher's Communication business when we announced last week that the Department of Justice had unconditionally cleared the transaction. While I plan to spend some time talking about our overall performance and key trends in fiscal year 2015, I would like to first focus on our future as we start our new fiscal year 2016.

More specifically, I would like to discuss our continued belief in the strength of the combined Company and our plans to successfully complete this transformative transaction. We believe that the future for NetScout is very bright and we are pleased with the progress we have made to advance NetScout's strategy. We are focused on providing customers with best in class service and user experience (inaudible) solutions that maximize the return while minimizing the risk as they implement new or an increasingly complex technology and prospectus.

We believe that our plans to acquire Danaher's Communications business will help us accelerate our strategy execution by further strengthening our product portfolio and market reach to better capitalize on a range of attractive growth opportunities worldwide, made possible by the confluence of IP convergence.

I would like to provide a brief update on our progress on this front. We announced last week that we received clearance from the Department of Justice to proceed with the acquisition without conditions. We are very pleased to have achieved this important milestone. We have scheduled a special meeting of the stockholders on June 21 for stockholders of record as of May 1 to approve the issuance of 62.5 million shares in connection with the acquisition. We have received positive feedback from our shareholders over the past several months as we disclose more information through our filings, and met with them to further explain the merits of this transaction. We will remain proactive in this regard going forward with our current shareholders.

We also plan to meet with Danaher's stockholders and those institutions likely to be interested in NetScout following the transaction's completion. Our customers are also very supporting of this transaction as they share our belief that the combined company will be even better positioned to innovate and support the near and long-term needs. We are confident that this is the right strategic move at the right time for NetScout. We believe this transaction will be a tremendous value far in excess than what either Company could achieve on its own, based on benefit that include doubling our total addressable markets (inaudible) with a (inaudible) portfolio of best in class traffic, service (inaudible), security solutions, our TAM will double to over $8 billion.

Second, accelerating our strategy. By joining forces, we will gain faster entry into complementary, high growth markets such as cybersecurity and business intelligence analytics with proven market leading offerings. Next, stronger go to market capabilities, a broader product portfolio, and geographic footprint will enable us to reach a global and more diverse space of service provider and enterprise customer. And finally, a more compelling financial profile. We view this transaction as accretive to non-GAAP EPS in the very first year of -- first full year of combined operation. As we move past year one, we expect to realize additional operating synergies through greater scale. We believe that our expanded market reach and cost efficiencies will enable us to achieve solid, 10% plus compounded annual growth rate on a much larger revenue base of over $1.2 billion, with steadily improving operating profit margins in excess of 30% within the first five years of combined operations.

On a related note, in reporting their first quarter results last week, Danaher's management reiterated their view that the communication business will return to growth in 2015. Having passed the anti-trust (inaudible) and with the stockholder award now in sight, we'll be providing guidance for only the first quarter since it's increasingly likely that this will be the last quarter of results prior to the transaction's closing. Our guidance for the first quarter is relatively wide, which is primarily a reflection of the potential for some of our service provider customer to pause in spending more significantly with us until after the acquisition closes, as well as the macroeconomic headwinds related to foreign exchange that some of our international customers are experiencing.

While we haven't offered a formal forecast for the fiscal year 2016 at this time, we believe that the transaction will (inaudible) NetScout and NetScout's ability to continue growing at or near recent annual growth rates. Assuming the transaction is completed in early July, we plan to update our guidance for the combined company when we report first quarter 2016 results. Jean will discuss this in greater detail in a few moments.

Moving onto quarterly business review. At this point, I would like to highlight some of the key developments and drivers behind the Company's financial performance for fiscal year 2015. Overall, we made tangible progress in building our business as we innovated, successfully expanded our customer relationships worldwide, and delivered our third consecutive quarter of annual non-GAAP revenue growth in the low teens with even faster non-GAAP EPS growth. We reported full year revenue of $453.7 million, an increase of 14% from the prior year. This was within our original guidance range that we provided at the start of the year, but it was marginally lower than the more recent guidance range of $450 million to $455 million to $460 million that we provided at the beginning of the last quarter.

We believe that the revenue for this quarter was impacted by lower budget in the EMEA and Latin America regions due to the continued strength of the US dollar, which has become even more pronounced within the past six months. This is a unique development that we did not anticipate at the beginning of the quarter when we upgraded our guidance. The (inaudible) is clearly evident in our performances in Europe, where we finished the year with revenue growth of just 1% after being up 9% through the first nine months.

On the EPS front, however, we reported an EPS of $2.03, an increase of 33% from the prior year. Our fourth quarter revenue performance was highlighted by strong demand from our service provider customers. As Jean will say later, we exceeded our target of 20% revenue growth from service providers thanks to a strong fourth quarter. We maintained solid traction with our largest service provider customers as they use our solutions to optimize the performance of their IP based networks and gain more insights into the user experience across those networks. In particular, some of the largest service providers in North America and abroad are using our nGeniusONE platform as their primary service (inaudible) solution to build out their LTE network coverage and to roll out next generation services such as voiceover these IP networks.

Beyond our service provider, our nGeniusONE platform remains a strong growth driver. For example, nGeniusONE was an important contributor to our solid year-over-year growth with our government customer. In the enterprise, we saw some softness in our financial services sector as we saw many of our banking customer (inaudible) spending on regulatory compliance, cyber, and other (inaudible) related initiatives while continuing to remain focused on fast control. Nevertheless, we remain confident that our value proposition for large enterprises remains unique in its ability to deliver advanced network performance management, speed of packet analysis, and unprecedented service (inaudible) capabilities from a unified, integrated platform.

Adoption of nGeniusONE has progressed with virtually all of our largest enterprise customers, having completed their initial upgrades to nGeniusONE. Related to this, we experienced exceptionally strong renewal rate for maintenance and support services to the first quarter, which is evident in our (inaudible) revenue. We are pleased to reach another nGeniusONE milestone last quarter when we released our newest version of this platform, completing a nearly two-year migration of key features and functionality from its predecessor platforms. The feedback from our customer annual engaged user forum earlier this month on this release was extremely positive. As a result of all of these (inaudible), we believe we are poised to generate stronger revenue traction with our enterprise customer over the coming quarters.

As you may know, Engage is an important event for both our service providers and enterprise customers, and each year we share our development roadmap with them. Looking ahead, our plans for product innovation in fiscal year 2016 include bringing 100 gig capacity offerings to the market, delivering integrated support for a virtualization environment, and developing a new nGeniusONE module that will further automate key aspects of the service triage process for both service providers and enterprises. This represents an important timesaver for customer by allowing them to identify and resolve application and user experience issues more efficiently, while creating both capital and operational expense savings. We also previewed our new branding campaign at the same event, which was also received well by our customers. Michael will discuss more on the excitement generated at our annual user forum, Engage, as well as our rebranding campaign.

I would like to conclude by extending my thanks to the entire NetScout team for efforts in making fiscal year 2015 another successful year, but we are not dwelling on our achievement. Rather, we are looking ahead. There is a tremendous enthusiasm at NetScout to capitalize on the opportunities we see. We believe our Company is at the epicenter of many profound technology trends and (inaudible) to help solve these complex challenges for our customers will be further strengthened by the addition of the Danaher teams. Assuming our acquisition closes in July, we plan to host an analyst day event in early August where we'll offer additional insight into the combined company strategy, value proposition, growth opportunities, and financial profile.

With that, I would like to turn the call over to Michael.

Thank you, Anil. We continue to see our customers across our service provider, enterprise, and (inaudible) verticals drive significant return on the technology investments using NetScout solutions. Nowhere is this more evident that our biannual Engage user forum. Our most recent Engage event was held earlier this month in National Harbor, Maryland and it was the most successful one that we've staged today. The show (inaudible) nearly 500 attendees, which represented approximately 250 customer and partner organizations. Overall attendance was up 30% compared to last year, with strong representation across our three major verticals.

Customer feedback from the show was resoundingly enthusiastic and reflected broad adoption of the next generation workflows and solutions enabled by the nGeniusONE and ASI next generation technology platform we launched a little over a year ago. This in turn has opened the door for more innovation, greater efficiency, and increased value delivered to the business. One of the highlights from Engage were the keynotes from a senior leader at a leading multibillion-dollar provider of IT consulting and outsourcing services. Our solutions are critical to delivering robust, high performance, scalable, and resilient network and datacenter services to this customer, at the same time as we assist in reducing operating expenses and capital investments.

By providing this customer with a single pane of glass that offers visibility into and across dozens of their datacenters dispersed around the world, we are helping them reduce their meantime to information, preventing or quickly resolving problems if they arise. We are well positioned to expand our position with this vendor and others like it, as advanced over towards mobility, cloud computing, security, and big data accelerate. Engage is valuable to our customers because it helps them be more proficient and therefore more impactful to their business.

AT this event, our teams deliver technical presentations and our user community presents their own realized case studies. This year, there were close to 50 customer led sessions describing how NetScout's nGeniusONE and ASI technology enabled them to tackle complex challenges in innovative ways. For example, we had senior technologists from leading telecom and cable providers in the US, Canada, and Europe who delved deeper into LTE trends, comm quality issues, and monitoring in virtualized environments. In the enterprise (inaudible) customer, a healthcare solutions provider led a session on monitoring services in a (inaudible) network architecture, while another customer, a major credit card issuer, spoke about how they are using nGeniusONE to transition the network operation customer from playing defense to playing offense in ensuring their critical services.

As Anil also mentioned, we previewed our new branding platform to our customers at Engage. Our branding program positions NetScout as a provider of differentiated assurance solutions that (inaudible) our customers to serve as guardians of the connected world. This is our new tagline or slogan. We believe that our new branding, which is being unveiled publicly starting this week at [InterOp] and on our new website shortly will be instrumental in elevating our message above the noise of competitive -- of a competitive and highly fragmented marketplace.

The acquisition of Danaher's Communications business is a decided step in accelerating our penetration into a larger TAM and a new brand that will serve to expand our value proposition in support of this target market expansion. In addition, the brand and the increased investment in marketing will also help unite our expanded employee, customer, and [order] populations as we advance a wide range of integration activities at the close of the transaction.

NetScout has continued to leverage its position as an innovator and market leader. Recent coverage in publications like CIO and Networking Plus, along with our cover story featuring Anil for CIO Review is helping increase our (inaudible) capabilities, along with participation at major industry conferences. Last quarter, we showcased our capabilities at Mobile World Congress, the largest and most influential event for the mobile industry with over 93,000 attendees from 20 countries. This was an excellent forum for us to meet the senior level professionals at many of our major tier one and tier two service provider customers and prospects.

As I mentioned earlier, our teams have spent the past several days at InterOp, the leading independent technology conference for the world's IT community, and we look to leverage our participation later this quarter at the annual Cisco Live event in June.

That concludes my remarks. I?ll turn it over to Jean for the financial review.

Thank you Michael and good morning everyone. This morning, I will plan to review key fiscal year 2015 metrics for both the fourth quarter and full year, and then I will discuss our guidance for the upcoming fiscal year. As mentioned at the outset, we will be referencing non-GAAP metrics when appropriate and comparing all figures against the comparable prior year period unless otherwise noted.

To begin our financial discussion we will be starting with Slide number 8 of our presentation, which is accompanying our call and is posted on our website. For our fourth fiscal quarter, total revenue was $119.4 million, which is an increase of 6% from the same quarter in fiscal year 2014. Our product revenue was $74.1 million, which is a 5% increase over the same quarter in fiscal year 2014. As Anil mentioned, we experienced delays in (inaudible) with some of our international customers as they were impacted by the strengthening of the US dollar against the euro and certain Latin American currencies. Some of these orders have already been received in the first week of fiscal year 2016, while others remain under negotiation.

Service revenue was $45.3 million, which is a 8% increase. Additionally, for the fourth quarter we reported non-GAAP earnings per diluted share of $0.67, which is a 40% increase from the same quarter in the prior year. As we have driven innovation and benefited from the strategic investments we have made, including nGeniusONE, Unified Communication, and packetless widget, our scalable operating model has supported a strong earnings per share performance. We believe that this performance will be repeated over the next five-year period following our acquisition of the Danaher Communications business.

Turning to Slide 9, we again achieved our quarterly results while delivering exceptionally strong margins that far exceeded our long-term targets. Focusing on the non-GAAP metrics on the lower half of the slide, our gross profit was $97.3 million, representing an 81.5% gross margin. This compares against $89.3 million and a gross margin of 79.4%.

Income from operations was $42.7 million and our operating margin for the quarter was 35.8% versus $31.4 million and an operating margin of 27.9% one year ago. The fourth quarter's operating margin was favorably impacted by the timing and phasing of our go to market activities. Even excluding this benefit, the operating margin for the fourth quarter still exceeded our operating margin target of 30%. We have produced excellent margins and returns on the investments we have made at the outset of our most recent five-year strategic plan.

Net income was $27.9 million or $0.67 per diluted share, which grew 40% from last year. The net income margin was 23.4%, which is up from 18% one year ago. Slide 10 shows our performance for the full fiscal year. In terms of our non-GAAP metrics, total revenue during this period was $453.7 million, which is an increase of 14% over revenue of $397.2 million. Product revenue for fiscal year 2015 was $273.9 million, which represents an increase of 16%. Service revenue was $180.8 million, which is a 11% increase. While service revenue growth largely reflects our consistently loyal customer base, it could (inaudible) up this year a few percentage points due to an increase in revenue associated with our onsite engineering capabilities.

We reported fiscal year 2015 EPS of $2.03, a 33% increase. This is the third consecutive year of posting topline growth in the lower to mid-teens with EPS expansion well above that. Slide 11 highlights the margin expansion that NetScout delivered for the full year, primarily resulting from the combination of strong annual revenue growth, prudent investment, and a scalable infrastructure.

Focusing again on the non-GAAP metrics on the lower half of the slide, our gross profit was $364.3 million, representing an 80.3% gross margin. This compares against $317 million and a gross margin of 79.8%. Income from operations was $133.7 million, and our operating margin for the quarter was 29.5% versus $101 million, and an operating margin of 25.4% one year ago. This performance is above our long-term operating model target and was achieved a year earlier than our five-year plan anticipated. NetScout demonstrated notable strong operating leverage while continuing to direct investment to support people, products, and programs.

Net income was $84.3 million, or $2.03 per diluted share, which grew 31% from last year. The net income margin was 18.6% compared with 16.2% one year ago. Slide 12 provides detail on our annual product revenue composition in fiscal year 2015. As a reminder, the timing and magnitude of various projects by our customers can skew quarterly comparisons. That's why we have consistently focused our commentary on the trends on a year to date basis. The components of our $272.9 million of product revenue in fiscal year 2015 were as follows. General enterprise product revenue was $115.2 million, or 42% of total product revenue. Service providers' product revenue was $124.9 million, or 46% of total product revenue, and government product revenue was $32.8 million, or 12% of total product revenue.

Slide 13 illustrates our product revenue growth rate for fiscal year 2015 by vertical. Consistent with our earlier comments, our service provider product revenue growth of 27% exceeded our goal of 20% entering the year, thanks in large part to a very strong fourth quarter. This is complemented by strong product revenue growth of 30% in the government sector. For the past few years, we have been concentrating our efforts with our federal customers to transition them from a troubleshooting environment to proactive service assurance. However, budget sequestration, budget constraints, and consolidation programs have impacted sales over these past few years.

This year's growth reflects revenue traction from nGeniusONE and our service assurance solutions by domestic federal agencies. Many of the agencies that we work with our now rolling our nGeniusONE for worldwide visibility, to provide information to their senior leadership, to manage application performance, and to ensure a high quality user experience. Our growth in the general enterprise sector was 4%. Within our general enterprise vertical, the following sectors would stand out in fiscal year 2015; healthcare, utilities and energy, and manufacturing.

As we have discussed in the past, our growth in financial services reflected larger domestic institution, investing in individual, discrete projects such as mobile banking and unified communications, while our international customers in this vertical continue to restructure their operations and focus on financial policy.

During the fourth quarter, we saw many of our banking customers continue to prioritize spending on regulatory compliance, cyber, and other risk related initiatives while continuing to remain very focused on cost control.

Slide 14 shows our total revenue composition for fiscal year 2015. The composition of our $453.7 million of total revenue for the fiscal year 2015 was as follows. Our General Enterprise customers represented $209.6 million or 46% of total revenue. Service providers generated $182.9 million or 40% of total revenue, and government customers produced $61.2 million or 13% of total revenue.

Turning to Slide [5], this depicts our total revenue growth by sector in fiscal year 2015. Reflecting my earlier comments on product revenue, our total revenue for the general enterprise sector finished up 5% on a year-over-year basis, while service provider closed the year up by 25% overall. Total revenue in government grew by 21% for the year.

Turning now to Slide 16 for a review of our revenue by geographic region in fiscal year 2015. For the full year, the revenue mix was 77% domestic and 23% international, which is generally consistent with historical trends. However, we did experience a slight shift toward North America, reflecting our growth with North American service providers, combined with the foreign currency challenges in Europe. More specifically, we saw some of our customers in Europe and Latin America delay their purchasing in the face of macroeconomic headwinds associated with the US dollar strengthening against their domestic currency.

Within our international revenue, Europe represented 10% of revenue with 6% for Asia and 7% for the rest of the world. Slide 17 details our balance sheet highlights and free cash flow. We continue to maintain strong liquidity. At the end of the fourth quarter, we had invested cash, short-term marketable securities, and long-term marketable securities of $264.9 million. Combined with a current revolver capacity, our total liquidity is now in excess of $500 million.

Our fiscal year 2015 free cash flow was $94 million. This reflects $106.9 million in cash from operations less $13 million in capital expenditures and the purchase of intangible assets. While our free cash flow generation was strong in Q4, our performance for the year was down slightly against fiscal year 2014. The decrease is attributable to a higher accounts receivable balance this year as compared to the prior year-end, as a result of the higher renewal rates that Anil referenced earlier.

Further on this topic, accounts receivable net of allowances was $82.2 million, up about 35% from $60.5 million at the end of fiscal year 2014. Day sales outstanding were 61 days for the quarter, which is on par with DSOs last quarter, although it is higher than the 47 days we reported in the fourth quarter last year. Renewal orders received for the end of the quarter increased on a year-over-year basis by more than 40%, which contributed to the increase in this year's DSO level.

Inventories were $12.1 million. This is down by $500,000 since the end of fiscal year 2014. Our total deferred revenue was $150.4 million, which is up more than 12% against our prior year-end balance of $133.9 million. As Anil mentioned, we have continued to experience strong renewal rates on our service and support agreements.

Related to our share repurchase program, we repurchased a total of 500,000 shares in the fourth quarter at an average price of $40.03 per share, totaling $20 million for the year. I'm sorry, for the year we repurchased a total of one million shares in fiscal 2015 at an average price of $40.92 per share, totaling 40.9 million. These repurchases were made under our existing $100 million repurchase program, which still has approximately $69 million remaining on it.

Let's turn to our guidance for fiscal year 2016 on slide 18. As we previously announced, we now have unconditional clearance from the DOJ and we are advancing to the shareholder vote with our special meeting scheduled for June 25. In the anticipation of our shareholders approving the proposal to issue shares and all other conditions being satisfied, we believe that the transaction will be fully completed in July. As a result, we have elected to provide specific revenue and earnings per share guidance for NetScout as a standalone business for the first quarter only. While we won't offer specific targets for the full year at this time, we believe that the successful completion of the transaction will only strengthen our value proposition to our customers and the combined business's customers. This makes us comfortable that NetScout's revenue contribution in the combined company will be comparable to the levels noted in the fiscal year 2016 projections of our registration statement.

Our revenue guidance for the first quarter of fiscal year 2016 ranges from $95 million to $110 million. The $15 million range reflects two potential occurrences. First, some of our international customers may remain sensitive to the impact of foreign exchange rates, and second, some of our larger service provider customers may delay larger purchases given the technology possibilities of the combined company.

Our earnings per share guidance ranges from $0.25 to $0.38 per share, reflecting the wider revenue range. The top end of the range would reflect a 6% increase over the first quarter of last year. We expect the non-GAAP tax rate to be 37.5% to 38% for the first quarter. We continue to reach out to existing and prospective shareholders who both called and meeting.

Before concluding our prepared remarks, I'd like to share the investor conferences in which we are planning to participate over the next two months. We will participate in RBC's mobile and cloud networking investor day on June 7 in Boston. We will be presenting at the Sixth Annual B. Riley and Company Investor Conference in Los Angeles on May 13. We will present at JPMorgan's TMT Conference in Boston on May 18. On May 27, we will participate in DA Davidson's Technology Forum in New York City. The following week, on June 2, we will be in New York City again for the Stephens Spring Investment Conference and we will wrap up our conference participation for the quarter at an RBC event on June 10 in Boston.

We will also be augmenting these conferences with a proxy solicitation activity, we believe will result in shareholder approval of the proposal associated with our transaction. Just as important, we will be spending time with Danaher's major institutional holders and firms that are likely to have an interest in the new NetScout. As Anil mentioned, if we are successful closing the transaction in July, we are currently contemplating hosting an event for sales side analysts and investors in early August.

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

Operator, if you can begin the Q&A process please. Thank you.

(Operator Instructions) Your first question comes from the line of Mark Kelleher with DA Davidson.

Great. Thanks for taking the questions. Just on the operating leverage, that's pretty impressive for the quarter. Was there -- I think you mentioned some staging, product launches, or something in there. Just what's sustainable -- how much of that is sustainable as we go into Q1 and how much was kind of end of year affects?

So the operating margin was affected by, as we said in our comments, some just delays in our go to market activities. Right now, if you looked at what we would likely to be spending at $454 million, even a $5 million increase in that would only be about 1%. So the majority of the delays were less than 1% on the operating margin and the operating margin that we reported of 29.5% for the year really reflects the scalability of our business. Going forward, we have some activities in Q1 that are already planned for sales and marketing. And then as we had mentioned, we will look at the combined business and figure out what marketing levels and what sales activities and programs make sense in the combined entity to further excite and interest customers and potential customers in the new NetScout.

Okay, as just a follow-up to that comment about new products coming out, you mentioned there was -- there might be a pause -- you mentioned the consideration in your guidance that the might be a pause of your service provider customers as they anticipate these new offerings. Is that something you've gotten feedback from or is that just something you're thinking might happen?

First of all, there were two separate events that you're talking about. The new product is a new release of the nGeniusONE product in the (inaudible) that we announced last week and started shipping. And so that has nothing to do with the first. I think what Jean was talking about is we have some common customers and they are waiting for some integration (inaudible) roadmap between the -- in the service provider customer base before they might make other decisions. So this is very common in these kind of acquisitions. So we are not sure whether that's going to happen to share this information directly with us, but it's possible that some of it may push into the future quarters.

Anil has talked to many of our customers and they're very excited about the possibilities of getting the combined product of the strength that Danaher brings to their technology, mostly in the control plane, and the strength that NetScout brings to the customers in the user and data plane. So our customers, our large scalable, service provider customers will get the benefits of both combinations going forward. And they're probably looking at how best to integrate that into their network build, which is just gives us a note to mention that for our Q1 revenue guidance.

Okay, great. Thanks.

Your next question comes from the line of Scott Zeller with Needham.

Hi, good morning and thank you. And just building on Mark's question previously, is there or has there been commentary on when you plan to offer a combined single product set? I thought I remember hearing that they may be sold separately for some time going forward. Could you just clarify what the timeframe may be to actually combine the product sets?

So I think it's not a combined product. It's basically how the products work together. It will be about six to nine months from the day of the closing, we'll start seeing some of the things. They'll be some integration with (inaudible) running, some with (inaudible) and many other things we are discussing, some of which we don't have liberty to actually talk to the other side or to discuss at this time. But people are not necessarily waiting for the combined product. They want to know what the (inaudible) looks like. So they're not going to wait for too long to wait for the combined product. They just want to know what the next (inaudible) vision is. And that's just a hunch right now, Scott. We don't know whether -- we just want to be extra careful because these kind of interruptions happen when we acquired (inaudible) for example in the past.

And so that's why, but this is a short blip, we think and we -- so people are not necessarily waiting for the combined product. They are waiting for the combined vision and what we are going to do with the combined assets. Some of them are tech customers. Some of them are network customers.

And Jean and Anil, could you please comment on growth expectations for the combined entity, understanding that you're not offering guidance. But could you please comment on the recent proxy materials and your mention today of 10% long-term CAGR topline and what we see on the proxies, just to maybe set broad expectations for near term versus long-term.

So I think we, in the proxy, maybe this is maybe slightly different, maybe off by one or two points. But overall, we have talked about the in the proxy, starting with the $1.2 billion base and today, we mentioned that we are comfortable in that 10% range. But we aren't starting after the first full year. So we'll be sharing more details as we move along when we do the analyst day and when we announce our earnings in July. At that time, we can be much more clear about exactly how to answer your question.

Thank you very much.

Just as a refresh, in the projects that we put in, in the proxy on a five year projection base, we anticipate compounded annual revenue growth of 10% in the combined entities. And As Anil said, that will be on a $1.2 billion plus base. So by the time we complete the end of our five-year strategy period, we should be close to, if not a $2 billion revenue company. With that said, as you know, we have a lot of scale and we run a very prudent investment policies and conservative capital -- I'm sorry, conservative cost structure. To that end, we will continue to generate operating margins through leverage and we will increase earnings per share growth over that time period. The model right now calls for our operating targets to be in the 26% to greater than 30% range. And if you look at our last five-year history, we achieved our internal operating target of 27% a full year earlier than we had done -- that we had anticipated.

And then we've also, in this proxy, reflected on some tax strategies that we may be able to implement that will also further help the earnings per share growth and the cash flow.

Thank you.

Your next question comes from the line of Eric Martinuzzi with Lake Street Capital.

I'd like to ask about the FX impact, both for the quarter and the guide. I know in the past you've talked about you're selling a dollar denominated product. But was there a material impact in Q1, I mean just on the -- I know there was delays due to -- but just the FX impact in Q4 and then as well on the Q1 guide?

I think as you -- as Jean mentioned and maybe Jean has additional comments, it was a very marginal impact and more prominent in the last quarter, and especially after we gave it upgraded titles and so that put us slightly below the midpoint of the revised guidance. So I don't think it was a major (inaudible) but international business is not as big as some of the other companies who are seeing a bigger impact. So we are a very small impact, like Jean anything else you would like to --

Sure. Just for context, Eric, when you look at the fourth quarter calendar year and the first quarter calendar year of fiscal -- of FY -- I'm sorry of 2015, the three currencies that mainly impacted our customers were the euro, the peso, and the real in Brazil. The euro dropped at least 15% and 10% of that dropped in the last quarter, in our last fiscal quarter. The real dropped about 24% and close -- a little less than 20% of that happened in the last quarter. So the FX affect that we're talking about is what we had seen is these customers that operate in Europe or in Brazil have been facing these economic squeezes in their own capital structure and have decided to delay purchasing.

We saw a little bit of it in Q3 but in Q4, we really were impacted much more by it. By my calculations, if you'd looked at where the international percentage came out and where it would normally be at around 25%, it would probably be an impact just of an estimate of anywhere between $5 million to $15 million in our topline.

And so again, we do sell in US dollars 99% of it. So it is the fact that our customers experienced this. We also have operations in foreign currencies and we had about a $1 million hit to our operating cost, reflecting the strengthening of the US dollar also.

Okay, and then if I could one more. You did have strength in North America. Obviously, you've got a great footprint there and there's budget there, unimpacted by FX. Was this attributed more to a geographic rollout by your existing customers, or is this new product going into existing GOs?

Yes, it's mostly existing customers with capacity upgrades. So traffic rates are increasing dramatically every year and they needed to buy existing capacity of the existing deployment. There were some new deployment related to voiceover IP, so it's a combination of those two.

Okay, thank you.

Your next question comes from the line of Kevin Liu with B. Riley and Company.

Hey, good morning. Just wanted to ask about kind of your service provider expectations for the year. I know you guys aren't giving specific guidance right now, but just at a high level given the strength you saw in the fourth quarter and the conversations you might be having with customers now, curious as to whether you would have NetScout on a standalone basis to kind of continue that strong growth trajectory with service provider (inaudible) over the course of fiscal 2015?

Yes, we had talked about it, Kevin, in the past -- in the standalone (inaudible) as well as the contribution of NetScout in the combined company that Jean talked about. We continue to believe that contribution would be at the 20% or higher range as it has been for the last couple of years.

Okay, and so really kind of going back to Q4, it looked like enterprise was the higher that came in a little bit softer. I think you guys mentioned most of that was related to kind of foreign customers, but did you see any softness within North America and what's your expectation for kind of overall enterprise growth over the coming year?

Yes, the softness in enterprise was related to financial customers and their spending even in the US and it was not directly related to foreign exchange issues that Jean was talking about. That was mainly -- effected the large service provider customers. So the softness in the enterprise was more related to slower traction than we anticipated of nGeniusONE. And I just wanted to mention that in order for us to really sell nGeniusONE, that one is for people to upgrade to the new nGeniusONE software and then buy additional capacity and additional deployment. So that first part is mostly done now and that's why we are feeling much better about next year in the enterprise.

Got it. Thank you.

Next question, operator.

Your next question comes from the line of Chad Bennett with Craig-Hallum.

Good morning. Thanks for taking my questions. So I'm just trying to dig in a little bit into what I think you're trying to convey on the operating leverage side. You're clearly -- I mean you did phenomenal this quarter and for the year it was above expectations. And you talked about being ahead of your five-year target there. So should we think about operating margin kind of a base case looking out this year, excluding any benefit from Danaher of -- should 30% be kind of the base case going forward and then when we layer on the Danaher business, obviously you believe there's some operating leverage with scale there, and overlap, and so forth. So I'm just trying to read what you're trying to convey on the operating leverage side. It seems very bullish and it seems like we're kind of on another level here. Any comments there?

Sure Craig -- I'm sorry, sure, Chad. So we did 29.5% this year and as we had mentioned in previous quarters, we had transitioned our marketing efforts and our marketing staff in the summertime of last year. And they were ramping, and getting new -- and we also decided that we wanted to look at our marketing efforts and our activities and decide upon a campaign that truly captured the essence of NetScout and what its customers are doing for the interconnected world. And as such, some of our marketing efforts and spend were delayed. We're very excited about the marketing campaign going forward and we think probably on a combined basis, as well as a standalone basis, we would invest a little more heavily in marketing and some of the associated programs and activities that the sales force do also.

With that said, with 450 -- roughly $450 million of revenue, we could invest anywhere from $5 million to say $10 million more and still have operating leverage at the 27%, 28%. So I guess as we go forward and we delve more into the details that we have with the combined entity, we'll be able to give you a better viewpoint of the operating margin of the companies going forward.

Okay, but it's fair to say, which I think is fairly transparent in the proxy that the combined transaction you expect material operating leverage post the first year.

Yes, we do. We have always focused on operating leverage and earnings per share growth, and we will continue that perspective as we go forward after the Danaher transaction.

Okay, and then second question, probably for Anil. Anil, despite the kind of enterprise weakness in the quarter, can you talk about the traction you're seeing with nGeniusONE and kind of the penetration into the APM side of the market, if you will?

Yes, so Chad, so penetration is defined as maybe two, three aspects of that. I think the biggest one was as we shared with the -- all of you more than a year ago, the way we are bringing on the nGeniusONE and the ASI technology to market is a free upgrade to existing customers who are on our support contracts. It's sort of run like what you see in the APM or rest of the industry. And that has a benefit of increasing renewal rates. As Jean talked about, we continue to have very high renewal rates and revenue shown partly by (inaudible) revenue and customer loyalty, and attended that user forum.

But it does have the effect of delaying some of the spending on additional capacity. So we feel that we are almost done with all -- practically all customers, now upgraded to nGeniusONE. And now, we expect that we'll see traction on them buying additional products, deploying our products in more places as they are getting -- they already are getting a great experience from nGeniusONE on where it is deployed today.

Okay. All right. Thanks.

And just to add on, when you look at nGeniusONE and traction, and you look at some of the growth rates, as we talked about in our comments, government is also going to nGeniusONE. When you combine the growth in enterprise and government together, it is close to the 10% that we've been hoping that nGeniusONE would drive. The other enterprises that we had talked about, some of the other sectors under the enterprise category grew in double-digits as a result of nGeniusONE traction. And the only area that they are still in deployment phase and moving over is the financials. And as we had talked about, they have been very focused on government and regulation, and compliance in that area as well as cybersecurity.

So in this spending environment, hopefully with our acquisition we'll be able to see long-term traction in cybersecurity within the financials and enterprises going forward. And also, the financials as they move towards data consolidation, similar to what the government did, we'll see the value of nGeniusONE and be able to use that to provide visibility and information to senior leaderships, and manage applications, and also measure user experience.

Okay, got it. I appreciate the color. Thanks.

Thank you.

Operator, I think we have time for one more question.

Yes, sir. Your next question comes from the line of Jonathan Ruykhaver with Stephens.

Yes, good morning. It was discussed in the most recent proxy filing, the initial projections from both Danaher and NetScout for the Tektronix business has proven to be too high and I'm wondering, Anil, if you could just talk about the weakness in the Tektronix business in more detail. I believe there's last week, Danaher management, when they reported the March quarter commented about that but where it should accelerate, re-accelerate its growth in fiscal 2015. But maybe you could help us understand what has to happen for that business to grow again and what gives you the confidence that will happen.

Well, one thing is that we have a combination of incrementally of Tektronix accounts (inaudible) Tektronix and major accounts. And some integration ideas we have nGeniusONE. And relating the (inaudible) growth strategy on both the service provider, enterprise customers is that combination is what's going to make a difference and that's why we feel bullish about the prospects of the combined revenue despite some recent challenges they have had in the Tektronix business, which was also reported.

But the book to build ratio have been quite good. Things have been turning around and we are feeling quite good about better traction about even the standalone tech business, or Danaher Communications business in this calendar year 2015. And so far, none -- we have not seen any big surprises from the time when we decided to do this deal almost a year ago when we started talking to them. So we feel comfortable. It's not one thing, but a combination of things. Like I said, NetScout's strategy, ASI technology, Tektronix install base, and access to large accounts, and additional features in the area of [RAND] monitoring and business analytics is what is providing us this confidence that we'll continue to do better moving forward.

Okay, so obviously the longer term synergies around product integration is positive, but I think you're saying that you see the business getting better even without that happening because I don't think that product integration happens in 2015. It's probably 2016, correct?

Yes, that's right.

Yeah, hi Jonathan. This is Jean. Danaher is strategically moving into other areas. So this piece of their business was not as strategic to them. With our strategy and our vision, we know we can turn that around. And their slight decrease in revenue in their latest projections, their latest registration statement versus the project really is just a reflection of an order to one of their largest service providers that shipped a little later in the quarter and they delayed revenue recognition on it.

Okay, and they also disclosed that the operating profit margin for that -- for those assets in the March quarter declined simultaneous with the revenue declines. So you would expect those margins to get better as that business begins to grow at a more healthy rate?

Yes, and that revenue recognition delay that we talked about was -- had a very large operating profit margin on it. So that also impacted their operating profit. So it's just really a delay in the timing of revenue recognition from their -- from our projection to what they actually filed for their yearend statement.

Okay. And then last question I have is just, you've talked about 5% cost synergies coming out of cost of goods, but what about around OpEx synergies? It seems like there would be operational efficiencies across your go to market strategy in G&A. Is that an opportunity as well?

It is an opportunity and a little bit of those -- of the $45 million to $55 million in operating synergies will comes from the overhead cost structure. As we had talked about before, it's a very good time for these businesses to come together. There's very little product overlap and very little customer overlap. With that said, we will look at our go to market activities related to service provider and determine what we want to do going forward.

These are also operating companies. They don't come with any low hanging fruit like corporate overhead where there are redundant functions that you can just cut. So we look at it as the investment that we're making in FY 2016, in people and in infrastructure will probably carry us a long way through the next five year period. So we see that the investments are going to be made more up front and we won't need to add to them in the second, third, fourth, and fifth year to any material degree.

Right. Okay, good. Thank you.

Great, well I think that concludes our call for today, operator. I'd like to thank everybody for joining this morning. We know it's a busy morning for everyone. We look forward to connecting with you throughout the next couple of months at various conferences, through calls, through meetings, and certainly will keep you apprised of your performance when we announce Q1 in July. So thank you all very much.

Thank you for your participation in today's conference call. You may now disconnect.