Netscout Systems Inc (NTCT) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to NetScout's fourth-quarter and fiscal year 2016 results conference call. At this time, all parties are in a listen only-mode until the question-and-answer portion of the call. As a reminder, this call is being recorded. Andrew Kramer, Vice President of Investor Relations and his colleagues at NetScout are on the line with us today. (Operator Instructions). I would now like to turn the call over to Andrew Kramer to begin the Company's prepared remarks. Please go ahead.

Thanks, Keith and good morning, everyone. Welcome to NetScout's fiscal-year 2016 fourth-quarter and year-end conference call for the period ended March 31, 2016. 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 Executive Vice President and Chief Financial Officer.

We've included a slide presentation that accompanies our prepared remarks. For those listeners who've dialed into the call this morning and would like to view the slide presentation, you can find it by going to our website at www.NetScout.com/Investors and then clicking on today's webcast. 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 share his perspective on our fourth-quarter results and offer his perspective on our outlook for the upcoming year as it relates to the opportunities and challenges we believe lie ahead. Our COO, Michael Szabados, will offer some insights on our integration progress and recent wins that can help illustrate the opportunities that we are seeing in the marketplace. And Jean Bua, our CFO, will then provide greater detail and insight into our financial results and our guidance for fiscal year 2017.

Moving on to slide number 3, I'd like to remind everybody listening that forward-looking statements in this conference call 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 the statements in this conference call, which are not strictly historical facts, including without limitation the statements related to the financial guidance for NetScout and all of the other various product development, sales and marketing, expense management, integration and other initiatives planned for fiscal year 2017 and beyond constitute forward-looking statements, which involve risks and uncertainties. Actual results could differ materially from the forward-looking statements due to known and unknown risks, uncertainties, assumptions and other factors. Such factors are detailed on this slide and I strongly encourage you to review them.

For an even more detailed description of the risk factors associated with the Company, please refer to the Company's annual report on Form 10-K for the fiscal year ended March 31, 2015, and the Company's subsequent quarterly reports on Form 10-Q, all of which are on file with the Securities and Exchange Commission. NetScout assumes no obligation to update any forward-looking information contained in this communication or with respect to the announcements described herein.

Finally, I'd 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. This slide also provides information about the use of GAAP and non-GAAP measures, and we encourage you to review this in detail since non-GAAP measures are not intended to be a substitute for the equivalent GAAP metric. Non-GAAP items are described and reconciled to GAAP results in today's press release and they are included at the end of the presentation that is made available online on our website.

As Jean will note, the timing and magnitude of the acquisition of the Danaher Communications Business will skew period-to-period comparisons and potential discussions related to growth rates. Accordingly, we will be providing additional non-GAAP pro forma details to provide an apples-to-apples comparison between fiscal years 2015 and 2016 so that you can better understand recent performance trends, as well as provide further context for our fiscal year 2017 guidance.

Nevertheless, when we do note a growth rate, we will strive to clarify the nature of the comparison. There is an appendix at the end of the slide presentation that provides a reconciliation of the non-GAAP pro forma financials to trailing eight quarters of pro forma revenue along with other supplemental detail.

As we detailed in our press release today, NetScout reported fourth-quarter results that were at the high end of the revised forecast we offered in late January. While the revenue for the year was modestly lower than we had originally contemplated, we were successful in preserving our earnings performance. At the same time, as we move into the new fiscal year, we believe we are well-positioned to continue making progress on addressing the needs of our customers worldwide while generating improved profitability on relatively modest organic revenue expansion.

With that as a high-level background, I will now turn the call over to Anil to provide some further context and color on our performance and outlook. Anil, please go ahead.

Thank you, Andy. Good morning to everyone listening and thank you for joining us today. As Andy mentioned, I will first recap our results this quarter and full fiscal year together with recent highlights and accomplishments. I will then discuss our fiscal year 2017 strategy, as well as the dynamics that have shaped our fiscal year 2017 guidance. There are several slides that will accompany my comments, so let's begin on slide number 5.

For the fourth quarter of fiscal year 2016, we generated revenues of $308.7 million and diluted EPS of $0.44, both of which were at the high end of the updated guidance we shared with you in late January. For the year, we finished with revenue of approximately $1.025 billion, EPS of $1.91 per share and healthy free cash flow of over $100 million when adjusted for certain one-time payments related to the acquisition and other timing-related items.

We also deployed our capital thoughtfully, repurchasing over 10 million shares of our stock during the past fiscal year. As you know, the timing and magnitude of our acquisition of the Danaher Communications Business has skewed comparisons with NetScout results in the prior fiscal year. The table on the slide provides a pro forma comparison of key metrics for the full year for fiscal years 2015 and 2016 as if the acquisition had been completed on April 1, 2014. Jean will provide a more detailed of the pro forma performance later on the call. I would like to make several observations.

In terms of pro forma performance, we generated pro forma annual revenue growth of 2.5%. We generated solid pro forma growth in the service provider segment thanks in part to a very strong year at our Arbor cybersecurity division. In the enterprise, Arbor also generated high single digit growth and our nGeniusONE product grew in the low single digits. However, these results were more than offset by an expected decline in our enterprise business, primarily associated with transitional challenges with Fluke portfolio.

As you can see from the slide, on relatively modest organic revenue growth, we already improved the combined company's pro forma non-GAAP operating profitability from 18.8% to 31%. The improvement in profitability reflects our progress in driving operating synergies related to the acquisition and overall prudent cost control. We believe that profitability of our business will continue to strengthen in fiscal year 2017 with an additional 2 to 4 plus percentage point improvement in our pro forma operating profitability in the fiscal year 2017 on unanticipated relatively modest organic revenue growth. We also expect that this operating leverage will help us generate excellent free cash flow value in excess of what we delivered this past year.

We are moving to the next year in a very strong market position with no material change in the competitive landscape in terms of the end markets we target. We anticipate that our top line will strengthen despite the fluid service provider spending environment as are the investments in a range of exciting product development and go-to-market initiatives yield a new product cycle to support the next generation technology requirements of our customers. I will cover this in more detail shortly.

Moving on to slide number 6, about three years ago, we recognized that an increasingly connected world would create both challenges and opportunities in our marketplace, and we began making strategic investment to position us to drive over the long term. Our investments, both organic and through acquisition, were designed to help support and accelerate our customers' digital transformation initiatives.

NetScout technology leadership was built around leveraging IT-based intelligence to create smart data, and the acquisition of Danaher Communications Business and other technology assets provides us with Smart Analytics across multiple dimensions to further expand our value proposition in service assurance, cybersecurity and, later this year, in big data.

More specifically, the addition of Tektronix Communications brings a wealth of expertise in the area of subscriber troubleshooting, radio access network monitoring and customer experience management analytics. VSS complements our own network packet broker capabilities with a range of features and functionality so that we get traffic for security applications where NetScout had not yet focused development.

From a security perspective, Arbor brings proven market-leading capabilities to help service providers and enterprises to fortify and enhance their network security. The acquired portion of Fluke Networks brings analytics that help smaller and medium-size enterprises troubleshoot network and application issues with particular strength in non-wired infrastructure such as cloud and Wi-Fi environments.

As a result, we are now participating in a much larger total addressable market with proven market-leading products and next-gen analytics. We have established relationships with a large, more diverse and more global set of customers, over 4,000 worldwide and we have substantially greater operational scale to leverage our collective sales and engineering talent along with underlying ASI technology platforms to drive both our revenue and cost synergies.

Let's move to slide number 7. The value of Smart Analytics is amplified with the use of Smart Data that takes advantage of IP intelligence. We are opening ASI to a broad range of non-wired data sources, including server data, synthetic data and Wi-Fi networks, and we are making ASI data available to third-party applications and analytic engines. As a result, customers can get more value from their investment in our technology to help drive an even better ROI on their technology infrastructure investment and further reduce the risks related to downtime, poor user experiences and compromised security.

Supporting customers with their virtualization and cloud-based infrastructure initiatives is just one area where ASI tips the scales in our favor. Although industry experts believe that service providers and high-end enterprises are likely to move more cautiously with service assurance-related virtualization initiatives, NetScout ASI technology will play an important role in positioning us to win this technology turn and even potentially accelerate this transition for our customers as we have been able to do multiple times during the last two decades.

Our differentiators include proven software technology that has been deployed by enterprise customers during the past several years to help them monitor their virtual server environments. Our incumbency in the legacy network will ensure continuity and consistency in how service providers manage their hybrid physical and virtual environments.

As noted on this slide, our patented ASI technology is a green technology. It was designed from ground up to require the least amount of hardware while delivering scalable performance to deliver a superior total cost of ownership for cloud, SDN and virtualization environments. By bringing together best-in-class real-time monitoring with world renowned troubleshooting capability, we can help carriers reduce costs and improve service velocity by automating how they create, deliver and modify services and applications.

And we have the technical expertise, go-to-market strategy and financial foundation to help our customers move at whatever pace they are comfortable to introduce virtualization into their network. We are actively engaged in trials with a number of our service provider customers and others have already selected us to support their proof-of-concept projects. We recently held an investor webcast on this topic and our customer-facing marketing programs are ramping to drive further thought leadership and broad industry awareness of our capabilities in this area.

Slide number 8 helps showcase our ability to combine Smart Data with Smart Analytics. More specifically, we are making significant investment today to leverage our ASI technology to help integrate an extensive range of features, functionality and capability that currently reside across a variety of disparate legacy product platforms. While we will continue to support these legacy platforms, we believe this new product cycle, that will be kicked off this quarter and continue throughout the calendar year, will play an important role in reinvigorating top-line growth while helping us improve bottom-line leverage.

I would like to highlight a few areas where we expect customers will realize substantially greater value through the combination of next-generation instrumentation and superior analytics.

In the service provider market, we plan to unveil the Infinistream NG, for next generation, at our upcoming Engage user conference next week. This next-generation probing solution supports our nGeniusONE platform and the best-in-class subscriber troubleshooting analytics from Tektronix in 4G networks. This instrumentation is platform-agnostic, meaning that customers can deploy it as a traditional bundled appliance, license the software for a white-box server, or use it as embedded software in NFV and cloud environments. We plan to further enhance the offering with troubleshooting support for other network architectures and protocols by the middle of the calendar year. Because this platform relies on the NetScout architecture, we believe that it can play an important role in driving improved gross margins over the coming quarters as customer adoption accelerates.

In the big data area, the big data analytics arena for server providers, we are advancing a new big data solution for the second half of the calendar year that builds upon Tektronix's expertise with subscriber experience with substantially greater scalability that takes advantage of our rich ASI metadata.

In addition to our own analytic solution, we see potential partnership opportunities with other customer experience management vendors who are increasingly recognizing the value of the high-volume, real-time traffic data we collect. We also plan to deliver an equivalent big data analytics package for enterprises, complete with an ecosystem of technology partners available by the end of this calendar year.

In the enterprise market, we are focusing on integrating unique features and functionality from Fluke's offering and capabilities that make NetScout an even more strategic partner in helping enterprises manage their IT infrastructure and applications. For example, we plan to combine NetScout's robust packet level and NetFlow capability with Fluke's strength in analyzing machine data, as well as analyzing active, synthetic traffic and Wi-Fi traffic.

As a result, NetScout will be able to provide enterprises with a much more complete view into their wired, wireless, private cloud and public cloud infrastructures, as well as further enhance our enterprises triage application issues. By doing this, we can fortify and expand our share of our customers' budgets by accessing areas of spend that were previously not available to NetScout.

In the cybersecurity area three months ago, Arbor launched a new product, Spectrum, that extends its capabilities beyond DDoS by targeting a different network security challenge called advanced persistent threat. We have already closed a number of sales and are seeing the sales pipeline build. We see opportunity to further enhance this platform with richer ASI from NetScout's enterprise monitoring solutions.

In the packet flow switching or network packet broker area, we are seeing that the combination of the VSS packet broker platform with our own suite of packet flow switches has great potential. We recently announced the formal introduction of the industry's highest capacity packet flow switch, the 6010, and are seeing a good traction in the service provider market.

Clearly, there are a lot of exciting development initiatives now underway at NetScout. I would like to conclude my remarks on slide number 9 by reiterating my view into our outlook for the coming year. Simply stated, fiscal year 2017 represents an important year of transition for NetScout and we expect it to be another year of meaningful profit margin improvement on a relatively modest revenue growth.

We also expect that the combination of improved operating profitability and the greater working capital efficiency will support strong gains in free cash flow. We appreciate the support we have received in recent months from all of our shareholders, both those that are new to our story and those that have owned us when we were much smaller. Although our short-term revenue outlook for the business is not very robust, we believe that we are making the necessary investments in both our R&D and go-to-market programs, which we anticipate will begin to reaccelerate our top-line trajectory as we move into calendar year 2017.

Despite this, we expect to make notable progress this year toward our long-term target of 31% plus operating margin goal. Our team is very excited about the opportunities that lie ahead and we are committed to taking the steps that we believe will be necessary to deliver value over the long term for shareholders and other key stakeholders.

Finally, I would like to thank our employees around the globe who are staying focused and helping advance our mission during the year of tremendous change at our Company. That concludes my remarks and I will turn the call over to Michael at this point.

Thank you, Anil and good morning, everyone. Slide number 11 provides an overview of the areas I plan to cover. First, I'd like to update you on the integration efforts. Next, I will highlight some key customer wins that illustrate our ability to capitalize on some of the major technology trends that Anil noted in his commentary. I will close by commenting on our go-to-market plans for the coming fiscal year.

I'm pleased to report that we have met our key milestones for fiscal year 2016 on the integration front. Most importantly, we have successfully completed the work to wind down the operational transition services agreements with Danaher Corporation. From a systems perspective, we have brought all employees onto our corporate network and related IT system infrastructure and completely integrated the acquired portions of the Fluke Networks business into our enterprise system environment. We have started fiscal year 2017 with our service provider and enterprise salesforces using a consistent CRM and sales compensation platform.

From an HR perspective, we have moved into fiscal 2017 with normalized compensation practices under which all performance-related incentive bonus programs are now tied primarily to NetScout's overall results. We also successfully completed the manufacturing transition for both Fluke's systems and portable tools and are now poised to take advantage of supply chain synergies. Similarly, we have completely integrated our technical support organizations.

As we move forward, there is more integration work to do in fiscal 2017. One area where we expect to make progress this year is in aligning and integrating the NetScout and former Tektronix Communications business processes and IT systems, which we expect will result in operational synergies, as well as improved visibility in our combined businesses.

Coming to wins and use cases, while the acquisition and integration of Danaher Communications business has been a major undertaking, we have not lost sight of the customer and we have continued to build our position as a trusted partner to some of the world's largest and most innovative organizations.

In the service provider market, we have continued to drive expansion within some of our largest customers while also capturing new logos. One of the more recent new customer wins was in the Far East where the customer is now in the process of deploying the probing solutions from NetScout in combination with geo-analytics for the radio access network from Tektronix Communications. This is a great example of the value of providing an end-to-end solution from the RAN to the mobile core for our customers.

Anil commented earlier that NetScout has gained extensive experience in supporting enterprise virtualization projects with most of those deployments focusing on server virtualization where our solutions were used to provide visibility into the communications between the components of virtualized applications and services.

Our large enterprise customers are also starting to rearchitect their data centers with software-defined networks, or SDN, as the foundation. These customers are recognizing that NetScout can help these projects achieve their goals by providing them with greater visibility into this fragile, complex service delivery infrastructure.

During the quarter, we won a new six-figure deal to help a major US car manufacturer support a major initiative to modernize and consolidate their data center infrastructure while leveraging Cisco's SDN technology called application-centric infrastructure, or ACI.

NetScout's ability to provide timely, actionable intelligence into the performance of mission-critical business applications is fundamental for helping enterprises deliver a world-class online commerce experience. One of the largest online travel exchanges made a major investment in our nGeniusONE and related instrumentation to ensure minimal latency in quickly processing searches and delivering results to millions of customers daily. In fact, this customer has been relying on NetScout as its primary tool to maintain and improve their online business performance.

Regardless of whether a transaction occurs online or in retail stores, the world's largest credit card issuers are relying on NetScout to monitor their networks and ensure the performance of their new digital and mobile payment options. The rapid adoption of Apple Pay has been a driver in multiple deals where credit card firms purchased additional instrumentation to help monitor the performance of their transaction processing using Apple devices.

On the cybersecurity side of the business, the volume and complexity of attack campaigns on enterprises continues to rise. According to a recent market survey, 95% of chief security officers expect to be hit with an advanced attack campaign in the next 12 months, and although more than $75 billion was spent on security solutions over the last five years alone, security teams still lack the tools to prove and resolve advanced threats to the network.

In addition to protecting the network from high-volume and application-specific attacks, Arbor has expanded its portfolio to target advanced threats with the introduction of its Spectrum platform. One of the first customers for Spectrum was an IT agency for a large federal government in Europe that has been a long-standing Arbor customer for DDoS. With Spectrum, their large security team now has access to a tool that enables them to investigate threats with substantially greater efficiency and effectiveness.

Now about go-to-market. Before I conclude, I'd like to highlight the progress and plans surrounding our capabilities in this area. As we mentioned in earlier calls, we quickly integrated the salesforces targeting the service provider and enterprise markets. We have completed all of the necessary crosstraining activity to ensure the success of our direct salesforce. We have enabled cross-selling of products such as the VSS packet broker or packet flow switches where collaboration with the Tektronix Communications and Fluke Networks businesses had been fairly limited, and we are now focusing on the VSS sales specialists on targeted applications such as security where we have the features and functionality to provide customers with a compelling solution.

We have also invested in our global enterprise channel partner program with the launch of Connect360. This is a multi-tiered channel program, partner program, that unifies previously separate channel strategies across our enterprise network product lines, spanning service assurance solutions and portable network analysis and troubleshooting tools. It is focused on providing both global and regional partners with the resources, training and other pre- and post-sales support necessary to make NetScout -- to market NetScout's entire product portfolio.

We recently held our first combined Sales Kick Off event where over 1,000 sales, engineering, marketing, support and operations professionals from across our global organization. Next week, we are holding our Engage User Conference in Dallas, Texas. We expect over 700 CIOs, CSOs, senior level network operations, cybersecurity and line of business professionals from top service providers and MSOs, large enterprises and prominent government agencies, as well as NetScout resellers and channel partners. We believe that the combination of these events will enable us to hit the ground running in fiscal 2017.

As we move forward, we continue to invest in educating the market about the new NetScout brand, representing the largest collection of technical and sales resources dedicated to ensuring the performance and security of the world's digital business. Our message is resonating with customers and prospects, and we expect our efforts will help us both accelerate our sales cycles and expand our access to new segments of the market. That concludes my prepared remarks and I will turn it over to Jean.

Thank you, Michael and good morning, everyone. This morning, I will plan to review key fiscal year 2016 metrics for both the fourth quarter and full year and then I will discuss our guidance for the upcoming fiscal year. There are a number of acquisition-related items that impacted our GAAP results, so our convention will be to refer to our non-GAAP results unless otherwise noted.

On a related note and consistent with our comments earlier on the call, the timing and magnitude of the acquisition will impact comparisons with the prior-year period and any other extrapolations of our fourth-quarter and full-year results may not be representative. When possible, we will frame our results against prior periods on a pro forma basis. As noted earlier in the call, there is an appendix at the end of the slide presentation that provides a reconciliation of the non-GAAP pro forma financials, the trailing eight quarters of pro forma revenue, along with other supplemental detail.

To begin our financial discussion, we will be starting with slide number 13 of our presentation. I will briefly cover our fourth-quarter performance and focus more of my time on the full-year results on a pro forma basis.

On a year-over-year pro forma basis, revenue growth was 3.4% for the quarter. Our earnings per share for the quarter was $0.44, which includes the repurchase of approximately 4.9 million shares. Our operating margin for the fourth quarter was 22.4%.

Since our last quarter's call, many investors have inquired about the status of the four large deals that affected our outlook for the fourth quarter of fiscal year 2016. As an update, one of those deals has since closed and one is still into negotiation. The other two deals appear less likely to materialize in the near term based on the financial priorities of each customer.

The other details for our reported fourth and full-fiscal year operating performance are provided on this slide and in the interest of time, I would summarize them to say that they reflect positively on our ability to balance the funding of key development, go-to-market and integration activities with overall prudent expense management. We were pleased that our efforts to manage our cost structure enabled us to preserve our earnings performance at the high end of our revised earnings-per-share guidance range and at the midpoint of our original EPS guidance range.

With the year now completed, we thought it would be helpful to walk through the business in more detail and to discuss the performance on an easier, more comparable basis, which is to include the Danaher Communications business transaction as if it had been completed on April 1, 2014.

Let's turn to slide 14 for this review. Please note that a reconciliation of the annual pro forma results, along with the trailing 8 quarters of revenue, is available in the appendix of these slides and is available for downloading on our website.

For the full fiscal year, total pro forma revenue was approximately $1.199 billion, up 2.5% over the prior year. Service provider grew about 8% on a year-over-year basis while enterprise declined about 3%.

Within the service provider market, the combination of the acquired Tektronix Communications business and NetScout still grew in the mid-single digits despite the order delays that impacted the fourth quarter. Arbor's growth within service provider was in the upper teens. Pro forma enterprise revenue declined in the low single digits. Arbor continued to make progress in the enterprise market and grew revenue in the upper single digits, while nGeniusONE experienced a low single digit growth. However, these gains were more than offset by a decline in enterprise revenue from Fluke due to the transition of sales personnel and channel partners at the time of the acquisition.

Pro forma product revenue for fiscal year 2016 was $761.4 million, or 64% of total revenue, which was essentially flat with the prior period. Service revenue of $437.3 million represented 36% of total pro forma revenue and grew by 6.7%.

In terms of other key revenue trends, we've included the revenue by segment and revenue by geography detail in our appendix as well. The trends for the full year on both a reported and pro forma basis were largely consistent with recent quarters.

From a profitability perspective, we are making tangible progress in improving the profitability of the combined company. As many of you recall, our registration statement and other deal-related communications outline NetScout's goal for identifying, removing and beginning to realize run rate cost synergies of $45 million to $55 million during the first 12 months of combined operations. Thus far, we have already captured about half of these synergies. To date, the synergies we've gained have been heavily skewed toward operating costs, although, with the upcoming launch of Infinistream NG, we expect to start to realize gross margin synergies as this platform gains traction with service providers.

Pro forma gross margin in fiscal year 2016 was 75% versus 74.4% for the pro forma fiscal year 2015. The improved gross profit margin reflects the combination of the overall revenue mix and the initial steps we have taken since closing the transactions to optimize certain smaller product areas.

Pro forma operating margin in fiscal year 2016 was 21%, an improvement of 2.2 percentage points from 18.8% in fiscal year 2015. In addition to modestly higher revenue and improved gross margin, we benefited from steps to realign resources within our R&D functions and to integrate certain sales and marketing functions.

Slide 15 details our balance sheet highlights and free cash flow. These details are on a reported basis since the financial position reflects a particular point in time. We ended the quarter with cash, cash equivalents, short-term marketable securities and long-term marketable securities of $352.1 million, which declined sequentially by $24.1 million. We used approximately $49 million in cash and added an additional $50 million of debt from our senior secured revolving credit facility to fund our share repurchase activity in the quarter.

At the end of the fiscal year, we had $500 million of available credit on our existing facility, which leaves us with total liquidity of just over $850 million. As you can see from this slide, our current financial profile is generally in line with the key metrics we shared with you last quarter.

During the quarter, we took important steps to return capital to shareholders. NetScout repurchased nearly 4.9 million shares of common stock during the fourth fiscal quarter at an average price of $20.28 per share, totaling approximately $99 million in the aggregate. For fiscal year 2016, NetScout repurchased a total of 10.1 million shares of its common stock at an average price of $29.84 per share totaling approximately $302.8 million in the aggregate.

We move forward into fiscal year 2017, approximately halfway through our 20 million share repurchase plan that the Board authorized last year just prior to the completion of the acquisition. Our capital deployment priorities are to maintain financial capacity to further invest in our product development either through in-house development or through acquired technologies. We also currently seek to distribute excess cash flow to our shareholders through share repurchase, and we expect to be active on the share repurchase front in fiscal year 2017.

From a cash flow perspective, in fiscal year 2016, our free cash flow was $64.9 million. Although the adjusted free cash flow for 2016 would've been over $100 million, there were two notable items that impacted free cash flow in fiscal year 2016. First, there was approximately $24 million in one-time payments for business development and integration-related activities, including investment banking fees and other professional services directly in support of the transaction.

Second, the timing of remittances from Danaher for certain accounts receivables collected under our transitional service agreement also reduced our free cash flow by approximately $17 million. Our fourth-quarter fiscal-year 2016 free cash flow was $23.6 million.

In terms of a brief recap of other balance sheet highlights, accounts receivable net of allowances was $247.2 million, up nominally from the prior quarter. At the end of our fiscal year 2015, accounts receivable was $82.2 million. The increase in accounts receivable from the prior year reflects the incremental receivables from the acquired business. Days sales outstanding was 80 days for the quarter versus a DSO of 71 days for the prior quarter and 61 days at this time last year. The 61 days is not pro forma, but reflects legacy NetScout's DSO only. The increase reflects the timing of billings in the quarter and the overall mix of business in the quarter, particularly as it relates to certain service provider projects.

Let's move to slide 16 to review our guidance. As we outlined in today's press release, NetScout's non-GAAP guidance for fiscal year 2017 is as follows. We anticipate revenue between $1.2 billion and $1.250 billion. In terms of net income per diluted share, our guidance ranges from $1.85 to $2.10. This guidance assumes an operating margin of approximately 23% to approximately 25% and also assumes the average shares outstanding will be approximately 94 million. Hence, the current earnings-per-share guidance range for fiscal year 2017 does not yet reflect any share repurchases. As is our practice, we will update the earnings-per-share guidance range based on the share repurchase activity.

Overall revenue growth within guidance ranges from flat to about 4% growth. Looking at our revenue growth by areas of our total addressable market can better help you appreciate our revenue outlook. Our largest addressable market is service assurance, which may be referred to by some as network performance management. Since inception, this is where we have had tremendous success and where we are the market leader in operational intelligence and analytics. This is a relatively mature market where our pre-acquisition growth had outpaced the mid-single digit historical growth in this market.

The service provider market includes Tier-1 carriers, international non-Tier-1 carriers and cable companies. Within the Tier-1 carriers, we see certain Tier-1 service providers who are focused on quality and customer experience across their infrastructure, and we are helping them with our real-time operational intelligence and analytics from the RAN to their data centers. These customers continue to invest in improving the user experience on their network and benefit from NetScout's ability to scale, be cost-effective and be in real-time. Other Tier-1 service providers are managing near-term capital and operating spending pressures and are moving more deliberately with their spend.

International non-Tier 1 carriers are in various stages of the 4G lifecycle, from deployment through rolling out applications within the EMEA and Asia-Pac regions. We are excited about our partnership with a China-based OEM, as well as a recent large order from an EMEA carrier. Cable companies are increasingly seeing value in our solutions to help them deliver high-quality Wi-Fi service, improve how customers access content inside and outside the home and monitor key aspects of their voice and IP networks for their growing base of business customers. Within cable, we continue to see good growth, although this has represented a smaller area of spend compared with our Tier-1 customer base.

In the enterprise service assurance market, we believe that we will see overall growth in fiscal year 2017 as we leverage our proven product portfolio across a larger sales base, which includes the legacy NetScout salesforce, the now integrated Fluke salesforce and the enhanced channel partner program.

As Michael noted, we see opportunity to build further momentum in certain product areas such as packet flow switching where we can extend our penetration into the Fluke installed base of SMB customers. Additionally, we have new products that will focus on operational intelligence and analytics for custom applications, as well as products for further end-to-end visibility such as infrastructure performance management, or IPM.

Our second largest addressable market is cybersecurity. Arbor is the market leader in DDoS and has recently introduced a new advanced persistent threat product. We expect that cybersecurity will remain a growth area for NetScout in fiscal year 2017 as customers invest to predict their infrastructure against attacks that are increasing in size, scale and complexity.

Although the DDoS market is maturing and Arbor has a commanding market leadership position, we still believe that Arbor will grow alongside the market's forecasted growth rate in the low double digits. Arbor's entry into advanced persistent threat provides further upside for growth as adoption ramps and we build further momentum through product integration and tactical cross-selling initiatives. Part of our product strategy, as outlined by Anil, is to differentiate our advanced persistent threat offering through faster recognition of a threat by introducing network behavior into the analysis.

As Anil mentioned, we are also excited about our future growth potential in markets including big data, virtualization, the cloud and 5G. We are an operational intelligence and analytics company with product differentiation based on quality data, real-time agility, scalability and cost efficiency. Our value is in our patented software and our customers can use our product in any form factor that is best for them.

Based on this guidance, we currently estimate that product revenue performance will range from relatively flat to up modestly with service revenue anticipated to grow in the low single digits. In terms of the phasing of our revenue throughout the fiscal year, we currently anticipate our first-half revenue will be relatively flat on a pro forma basis. For the first quarter, we anticipate around 2% growth over the first quarter of last year on a combined business basis. We continue to analyze our pipeline for the second quarter. However, we face a difficult comparison due to the timing and magnitude of a large service provider project that was completed in the second quarter of last year.

We expect that our efforts to deliver new products, features and functionality during the course of calendar year 2016 will play an important role in helping us accelerate our revenue trajectory in the second half of the year in combination with the historical strength that we normally see in the second half of any given fiscal year.

To further amplify Anil's earlier comments in terms of our expected profitability, we plan to benefit the run rate savings from recent integration activity, and there is additional opportunity to drive further acquisition-related synergies such as generating a modest improvement in gross margin, normalizing sales compensation programs and realigning and/or consolidating certain go-to-market resources and certain facilities.

Additionally, we plan to remain disciplined in managing our overall cost structure, which includes keeping overall headcount relatively static and carefully managing other discretionary spending. At the same time, as Anil stated, we are funding the investments in research and development and our go-to-market initiatives in order to bring next-generation products to the marketplace while also supporting the ongoing needs of customers for our legacy offerings.

Given these dynamics, we expect that pro forma operating margins will range from approximately 23% at the low end of revenue guidance to 25% plus at the high end. This guidance represents significant improvement from the prior year on relatively modest organic growth.

While this year's free cash flow was impacted by some large, one-time items related to the acquisition, we do not expect our capital intensity to change materially and, accordingly, we expect that our reported free cash flow in fiscal year 2017 should be more than double from this year's reported free cash flow. More specifically, given the guidance range, we believe that fiscal year 2017 free cash flow should be between 85% to 95% of expected non-GAAP net income.

Additionally, we have finished the first phase of analyzing our tax structure and we believe that we will be able to reduce our tax rate by more than the originally estimated 2 percentage points. There is still work to do to enact and transition to a new tax structure, and this work will proceed through fiscal year 2017 with the initial benefits beginning to be realized during fiscal year 2018.

I'd like to quickly cover some other modeling assumptions for our earnings-per-share guidance. Based on $300 million in drawdowns on our credit facility, we expect interest expense of approximately $10 million in FY 2017 and a tax rate in the range of 34.5% to 35%.

During the first quarter of our new fiscal year, we always hold our annual sales meeting, as well as our annual user forum, Engage, as Michael discussed. As such, our costs related to these events impact our first-quarter profitability. We believe that our earnings for the first quarter of fiscal year 2017 will still show at least an upper teens percent increase over the pro forma diluted earnings per share of $0.21 in the first quarter of fiscal year 2016. The $0.21 pro forma earnings per share assumes a roughly 35% tax rate and 94 million shares outstanding.

That concludes my formal review of our financial results. Before we transition to Q&A, I'd like to thank our shareholders for their support and feedback during the past several months. NetScout remains committed to being proactive with helping our shareholders better appreciate all of the exciting areas of opportunity for NetScout.

As Anil noted, we held a webcast on virtualization last month that received very positive feedback from investors, and we hope to build on that with additional technology education-oriented webinars over the course of fiscal year 2017.

In terms of near-term activity, May and June is a very busy time for us in terms of conference participation. To that end, we will participate in nine investor conferences between May 12 and June 9 with participation at events held by firms that currently cover NetScout like Needham & Company, B. Riley & Company, DA Davidson, Craig-Hallum and Stephens & Company. This is augmented by our participation at the Jefferies, JPMorgan, Stifel & Company and Robert Baird investor conferences. If you are unable to attend any of these events live, most of them will be webcast, and you access those from our IR website.

That concludes our prepared remarks this morning. Thank you again for joining us and webre now ready to answer questions. Keith, you may now begin the Q&A session.

(Operator Instructions). Mark Kelleher, DA Davidson.

Great. Thanks for taking the questions. I wanted to focus on the modest revenue growth guidance. I know when we started looking at the Danaher deal several months ago, it looked like there would be more growth there. Can you just talk about some of the changes that have happened maybe in the macro or within your expectations that lead us to this modest growth, and what gives you confidence that, as we go further out, that that growth will be re-accelerated? And then as my follow-up, I would just connect that to Fluke and maybe you could give us a little more insight into the Fluke transitional issues. Thanks.

Thanks for your question. I will maybe give some color and then maybe Jean can add some comments to that. So I think the big change, as we talked about in the last quarter, as well as in this call, is the macro environment and the service provider Tier-1 spending climate. I think that's the only change. The other areas I think we are on track. There are some minor issues related to the transitional issues, like it's not really competitive or a demand issue on the Fluke side; it's that we had to transfer all the channel partners into the network contracts and especially in the tools business, which is mostly channel-driven. So those are the things which we were talking about there.

Moving forward for why there is a confidence of revenue accelerating toward the end of the year is that one of the big reasons to do this is to drive value for our customers with a combined technology solution. And as we mentioned in my portion that we delivered ASI in the form of Smart Data, but we didn't apply that to cyber or big data analytics, and as those things start showing up towards the end of the year, despite some of the challenges in service provider spending climate, I think we will be able to start seeing growth because that's a much bigger market in terms of the total addressable and total TAM we will be able to address.

Also some of the things in the Fluke Network area, which we are underpenetrated in the Wi-Fi monitoring space, so we think that most of the integrated solutions will be available towards the end of this year and that's where we see growth resuming in maybe the last quarter of this fiscal year and definitely in the next year.

Just to add to Anil's comments, in the service provider space, they are all focused on 4G, right and there are multiple phases in the rollout, in the lifecycle of a 4G network. Deployment was the early phase, then they roll out applications, including VoLTE and then they look at capacity or densification as the users start to use more and more of their handsets. Right now, they are probably anywhere, in the US Tier-1s, between rolling out the applications and capacity.

What we see in the service provider market is that certain carriers are very focused on quality. That capacity is -- the capacity that is being driven that requires them to enhance their network is voice and texting and video, those kinds of applications. Certain service providers are still very interested in operation intelligence and analytics surrounding those voice, text and video. And certain service providers have not placed as much emphasis on that and they were probably not looking at monitoring that area.

But as Anil said, we are very excited about the 5G network, the virtualization in other areas in service provider, and we still continue to see projects in some of the major Tier-1s, as well as around the globe as we pointed out that's related to operational intelligence in the 4G environment.

The Fluke transition, just to add a little bit more tactical to it, during the -- on a go-to-market during the transition, we lost potentially 20% of the headcount, people that decided they would go elsewhere. What we've done is we've rationalized the productline. We have trained the Fluke people and we are leveraging the existing NetScout, as well as the Fluke salesforce to be able to sell the products across there.

So we see penetration in the SMB market. We see the packet flow being able to go into the SMB market, as well as we have invested in our channel programs and we are coordinating them on a worldwide basis. So we are pretty excited about how we think the Fluke SMB market and the enterprise will go in 2017.

Matt Hedberg, RBC Capital Markets.

Thanks for taking my questions, guys. Anil, I was curious, as you look at the combined company and the changing network and application layers that you've talked about, what are the decision points customers face when they think about pure software versus maybe a hardware-based solution? How could that affect you guys maybe longer term both in terms of revenue growth and margin expansion?

I think short term it looks like a disruptive trend for somebody like us, but since we were not a hardware company to start with, people are choosing to buy (inaudible) software with appliance on hardware, which we got from other vendors or white-label boxes. To us, transition to software is very easy.

In the short term, I think we are going to see higher margins and we need to sell more copies to make up for the revenue and I think we will be able to drive the right balance with our technology and income into the [account].

So I think the software trend is a blessing in disguise. It forces us -- it reduces the cost (inaudible) [instrumentation] point for NetScout, which allows them to actually deploy it in a wider scale. And so the total revenue, even though the price per unit comes down because the unbundling of software and hardware, actually reduces the cost of ownership, which allows them to drive on a wider scale and compete with solutions, which are lower priced and lower value, which are not based on IT intelligence.

So I think the overall -- as we manage through these changes next year, like I said, I think we are going to see a big benefit from this disruptive trend and I think some of the investors rightly so think that this is a disruptive trend for us, but actually it's actually a very positive thing for us because it will allow us going into areas and markets which were not accessible before and we just have to make sure we manage this transition with our current top-end customers properly.

That's great and maybe just a quick follow-up.

I was just going to amplify that the [NPM] market, the service assurance market that we are in, traditionally it does grow in the low, mid-single digits. However, that's mostly focused around data center or NOC. But what Anil is talking about is that our software provides all the intelligence and in the multiple form factors we have, that includes a virtualized product. We can go further and deeper into people's networks that we could not go before due to cost effectiveness or just physical constraints.

Examples of this is clearly in the big data Internet of Things area where we can go on to the TV sets, the tabletops of Wi-Fi customers and consumers. We can go into household appliances. We can go into vehicles. So there's many more areas where we can deploy this software and be a much more positive impact on our margins.

Yes, I know you have a follow-up, but just want to mention that you all saw the recent Digital China OEM deal we announced. It was very hard to penetrate and compete with local vendors in China when prices, even though we have high-end technology, and if we were to OEM our current product in the current appliance form to somebody like this, there will be a margin hit. So being able to combine local hardware appliances from Digital China with our software allows us to announce this deal. And now I think we are more competitive in this marketplace and yet customers receive the best value for the price.

That's really helpful. Maybe just a quick one on Arbor. Obviously, the DDoS success has been well-documented. I'm curious for the new ATP functionality through Spectrum, who do you anticipate the primary competitors for that being?

So I think that's an interesting question and maybe a longer discussion, but when you look at that (inaudible) the whole world, there were hundreds of companies in that space, but we think that nobody is combining the real IP intelligence into ATP. If you look at a company like FireEye on one side and there are the endpoint-based solutions, but when nobody is driving the analytics based on not just signatures, but on behavior.

So we being instrumented in the service provider network through this (inaudible) sensor network which Arbor has, which sees more than 50% of the Internet traffic and NetScout presence in large banks and enterprise customers, which we call the ASA center network, provides a wealth of information, which is not accessible to any other vendor in the industry even though I would say there are 100 people who will say they do advanced persistent threat.

So the difference is there are companies who have, very smart companies, very good analytics, but not many of them or hardly any of them have the kind of Smart Data which we have. And I think that creates a smart [clear] analytics and that's going to be the differentiator. It has been only three months since they announced this product, and the [ASI] Smart Data is not integrated into that yet. That's going to happen towards the end of the year, and when these things happen, when we have a little more runway and we have this integration, I think it's going to create a very unique product in the market.

Just to add, I am a finance person, so I'm not clearly a technical wizard, but what I understand about cybersecurity is that there are sections every day and it takes companies a long time to even realize that they had an attack. Over 200 days. When we combine our analytics on network behavior along with the cybersecurity knowledge that Arbor provides, we will be able to tell those companies a lot faster that they have a threat in their network.

To me, the signature is like looking -- if you know there's a phone number in a phone book then you can do that, and there are a lot of companies that can probably find that threat. But if you can actually say the network is behaving weirdly and it's behaving weirdly in this point, go look at it, you can get to malware a lot faster. And that's what we think our product differentiation will be in advanced persistent threat.

Chad Bennett, Craig-Hallum.

Thanks for taking my questions. So Jean, you talked about being roughly halfway through the original synergy estimate that you guys gave on the deal. So can you give us an idea -- it sounds like based on your commentary that potentially there's more synergies than the original estimate. Maybe I am reading that wrong. But can you give me a sense, the latter half of the synergies sound like they should be more on the COGS line. Should we realize those mainly in this fiscal year? And then should we expect more synergies as we get into future years?

I would say that we are halfway through, and as I said on the call, maybe a little more than halfway through by the end of the first quarter. When we originally had put that guidance out, we thought we would get more through gross margin. So the upside is that we still will be -- since Infinistream NG is being released during FY 2017 and we will build the pipeline, we still have the synergy that we thought we would originally get from the Infinistream NG, and we will get that through FY 2017, but most impactfully through FY 2018.

The synergies that we've gotten so far have been through operating expenses and they've been -- we've been slightly pleasantly surprised at some of the areas that we've been able to readjust. So going forward, I think we would say that we are very prudent in our cost structure. If you look at the operating cost structure on a pro forma basis, we are definitely focused on improving, and I think we will get more synergies over the two years than the original $45 million to $55 million. That $45 million to $55 million was predominantly predicated on the combination of the products and our simplification of the businesses of Tektronix, in particular. And we will continue to look at that and continue to get operating synergies, as well as gross margin synergies as we continue to roll out our platforms.

Right now, our headcount is at the highest it is and our costs are at the highest it is because we are really running four different platforms within R&D, within sales and marketing and within the back office of traditional administrative infrastructure support. For FY 2017, we are consolidating a lot of those. We focused first on the TSA agreements with Danaher and we are moving through the rest of the organization.

So it sounds like there certainly is some upside over the next couple years to that original estimate?

Oh, definitely. As we had said before, that was just our estimate of the first year. We knew we'd be getting more synergies as we did a combination, but it was just hard for us to quantify.

Okay. And the 31% plus target on operating margins, not to get too far ahead considering you just gave 2017 guide, but do we believe that's a fiscal year 2019 type event, or any way to describe how far out that is?

I think when we had put that 31% out, we had a few assumptions in 2018, 2019 and 2020. We are still very confident in the 31% margin and what we had said is that that operating margin would start to ramp in 2018, 2019 and 2020. It required investment in R&D and sales and marketing in each of those years. That was a magnitude in each line item of about 10% on average. So as we go through FY 2017, we will fine-tune that, and as you said, when we get closer to FY 2018. So there's the possibility that we could get more before the end of 2020, and there's also a possibility that we could get to the 31% before 2020.

Alex Kurtz, Sterne Agee.

So Jean, glad you're committing to incremental cost synergies here in the short term. Anil, I think there was this feedback from the last earnings call, I think there's a little bit of confusion about what drove the downside in the March guidance. I just want to go back and revisit that because you initially, on the last call, talked about carrier CapEx weakness, but then, as we got into more detail, it really sounded like there was just four specific transactions that really impacted your guide for March. And now it sounds like two out of those four deals have closed.

So can you help us better understand whether you are seeing a global impact demand from the carrier space, or is it really specific to a couple of customers? Because I think after we all got more detail after last call, it really sounded like it was really specific to a couple customers and not your 150 service providers. Then I have a follow-up.

I think -- so overall, Alex, when we talked about those deals and we mentioned that a couple of them we don't know when and if they will close, I think there was a just general feeling about tightening spending, especially in US and Europe, which is where we are the biggest. So (inaudible) guidance and we are the biggest player in this industry by a wide margin, so it affects (inaudible). So I think that's what we are talking about.

We talked about those four deals, but overall you are seeing in the press that general CapEx and OpEx pressure and some of the customers in the (inaudible) deciding when they are going to roll out their NFV and the virtualized initiative. I think that's a general issue with everyone. It's [waiting], and yes, it affected our previous guidance that is directly related to those customers.

But I think moving forward, the reason we are very cautious about service provider spending is because of all the news which we are hearing. At the same time, we feel towards the end of the year we have so many other things coming which are going to [counter] that issue whether it's in cybersecurity or big data and I think we will be able to manage these challenges better than anyone else in our space.

Just to step back quickly, as everybody remembers, when we all came back from New Years, the market was just in turmoil. Sitting here now at the beginning of May, there is a little more stability in the outlook for the market. What we saw at the beginning of the year, as you had said, is four deals where all four of those companies, those Tier-1 providers, decided that they wanted to be cautious in their spending.

One of those Tier-1s has continued to spend and we closed one of those deals. The other Tier-1 was looking at an enterprise-wide license. They are still negotiating. We are in their administrative processes at this point. And as I said earlier on the call, there are certain carriers that I would either say are distressed and they are just continually looking at their CapEx and OpEx pressures. And they used to be good growth for us, so it makes it a difficult comparison.

And then finally, as I had mentioned on the call, the 4G wave, while they are in different phases around the globe, in the large Tier-1s that have a lot of spending, they are moving into an applicational capacity. Certain carriers whether they are distressed or whether they are not do not care as much about operational intelligence on things that are driving capacity like texting or video. And so that's really the dynamic that we see at a much more granular level across the service provider base.

Jean, the enterprise license deal that's moving into the administrative process, is that the SDN deal that you guys have been working on?

It is a software-only deal.

Not the SDN but, it's based on the software model.

Yes, it's a software -- just to be clear -- virtualization is a virtualized network. We have a software-only product and that is moving into a traditional network. So as I said earlier, we had many form factors that our customers can enjoy based on what suits them the best.

Eric Martinuzzi, Lake Street Capital.

One of the points you mentioned back in August after the transaction closed was really this was about a more capable product set being sold to the existing customers at both the Danaher install base, as well as the legacy NetScout base. What changes have you made to the FY 2017 comp plan to really penetrate that existing customer base?

Eric, as we mentioned, we on day one, like in August (inaudible), we combined the common salesforces. The first thing we did was we reduced the conflict or eliminated the conflict and quota conflict and things like that in joint account. Fortunately, we were not dominant, both sides were not dominant at the same -- not too many same account, so we have put a single regional manager or VP on top of it like for Europe and other places in a single account. We have joint quota and so that's one thing we have done.

Second is I have gone around to almost all the carriers and we have made a presentation to people and get our sales team excited about the combined product, which is actually coming out this quarter, which is (inaudible) and people are very excited about it. There have been some (inaudible) in terms of alignment that [Techcom] had a different structure than NetScout had, and now everything is aligned. We have a single salesforce system for forecasting.

So all these things is making it look like, from a sales point of view and a [conflict] point of view, is like a non-event, and that's one thing we feel we don't have to worry about, and despite so many changes and spending challenges in service provider, we have really not lost any key people.

And the other way you penetrate these accounts is with your household name partners. It's something that I know has been -- I don't even anticipate it's an FY 2017 event, but partnering with the big names in tech, the HPs, the IBMs, the Ciscos of the world. Any update there?

There is nothing to announce even though all these people -- as recently as this quarter, we had meetings with them at a very, very high level and I think something should happen in the fiscal year 2017. And one of the interesting things, there are many partnership opportunities. One of them, which is already happening like the Digital China thing, there are other places they want to use HP service. Some places, they will use Fujitsu service, like in Japan.

So that creates the opportunity for resellers and for us to sign a big reseller with Digital China was one of them in China, but they cover only China. And there is more incentive for them to bundle our software with the servers, which are local, and that makes it easy to fulfill deals at a lower price to the customer while our margins increase. So that's one type of partnership.

Other type of partnership is all these partners, whether it's Ericsson or Cisco or IBM and HP, they are all looking for data, as we are, especially the ASA data, which we have, and we are opening up our platform later this year for that to be consumed by them. And in order to produce that data, they will need our Infinistream appliances. It's the second area of partnership.

And third is, a long time ago -- I would say 10, 15 years ago -- we are very successful in (inaudible) of our software in Cisco switches, digital cable (inaudible), all those people and it was one of the very successful partnerships [direction]. This could happen in the [LFV] area also, but the partners could be Cisco, Ericcson and all those. I'm really excited about these -- everyone wants to partner with big players, but you need a way to do that also. Everyone wants to partner with big players, but diversity is not there, or the reason -- and win-win situation is not there. And I think that this acquisition and some of the things we have been investing recently, I think those possibilities are going to open up.

Next question, operator.

Matt Robison, Wunderlich Securities.

Thanks for the question, and taking the question and all the details you are providing. Jean, can you say when you think you'll be done with post-combination services and then a little color on cash flow with operating cash flow, CapEx and depreciation?

I'm sorry. What was the first part of the question?

When you think you'll be done with post-combination services expenses.

Oh, okay. So that is -- what that represents, the post-combination services, is the compensation -- is the compensation that Danaher put in to certain employees to retain them. The last payment -- and it's completely reimbursed to us. Under GAAP, however, it requires that you expense it. So the last payment is due in August of this year, so we should be done with the deal-related compensation probably in, what is that, our Q3 of fiscal year 2017. At the beginning of Q3, we should not have deal-related compensation.

When do you think you'll no longer require the services for Danaher for collection and the other things they are doing for you?

Right now, we -- what we did was we focused on getting off those transitional support agreements. And Danaher will no longer collect for us starting in the beginning of this fiscal year. So we've moved basically the order to quote to cash processes in-house, and we will be doing the collections ourselves going forward.

Scott Zeller, Needham & Company.

Good morning. Wanted to just refine the fiscal first-quarter guidance, if I may. I think you mentioned 2% year-on-year growth for the 1Q versus the pro forma number from last year's 1Q. And it seems that you are working off a base of roughly $268.2 million, just so everyone's on the same page?

Yes.

And looking for 2% growth off of that?

Yes, it's about 2% growth in the first quarter. As I said, in Q2 of last year, it was $288.5 million. That represented about 7% to 8% growth, and the downside to service providers is that it tends to be lumpy and we were talking last quarter about, in the Q2 quarter, about a $50 million plus project that was closing. So we are still analyzing our pipeline and looking at Q2 to be able to determine what we think that will be.

We heard color earlier in your prepared remarks about operating margin and the outlook for fiscal 2017, but we didn't really hear any specifics about gross. Could you tell us how you expect gross margin to trend through fiscal 2017?

To trend during the quarter?

Well, any color on fiscal 2017 gross margin. Let's leave it at that.

Sure. So in the gross margin that we ended with, it was about 75%. Depending on where you are in the guidance range, we should be able to get to at least half a percentage point to a percentage point better. And that is due to some of the work that we are doing in certain of the production areas.

As Michael had said, we've focused on the TSAs for Fluke. We've brought the manufacturing in-house. We would like to see gross margin improvement in there. And then as we introduced the Infinistream NG, which has a simpler approach than some of the former tech products, that should, as the pipeline ticks up for that, that should also improve gross margin percentage.

Kevin Liu, B. Riley & Co.

Good morning. The first question I had was just for the software-only deal that you are talking about on an enterprise licensing basis, can you just give us a sense for how the customer plans to deploy? For instance, are they going to be able to deploy at more points throughout the network the way you've talked about? And how do you try to go about determining pricing for that? Just curious if there's any sort of pricing pressure on a [per-pro] basis, or anything of that nature?

Yes, so my enterprise license, so it's not a Tier-1 carrier, but it's a very high-end customer of NetScout. So first of all, the enterprise license usually is a step number two. They have to feel good about deals. You have to be an incumbent, which luckily we are. Either us or Tech is incumbent in both accounts. And then they say, well, we want to deploy it companywide. So enterprise license by definition, there is a small charge per location, but it's an unlimited license. And it's usually a multi-year thing. That's the reason we are doing it. So it's a good thing for us that it basically locks in some revenue for the future years.

So that's what -- this allows them unlimited use of our technology in that -- with whatever conditions that (inaudible) a multicountry thing, then we may allow in one country versus all countries, but in general enterprise license means that even for probes, which you couldn't do before, we had enterprise license for nGeniusONE, those kind of things, but we couldn't do that for probe because it was (inaudible) appliance and we couldn't provide the unlimited license. Now we have the ability, so this is the one we see and we are talking about.

Got it. And a follow-up for Jean, if I can. On the deferred revenue line, that was up nicely on a sequential basis as well and I know that's a seasonal trend for you, but just wondering if there was anything outside of the normal seasonality that drove that upside.

No, nothing comes to mind that was outside the norm for the deferred revenue.

(Operator Instructions). It appears we have no further questions. I will return the program to our presenters for closing remarks.

Thank you, operator. And I'd like to thank everybody for their time and attention today. Appreciate all the questions. We will be available throughout the day. If people do have follow-up questions, you know how to get a hold of investor relations at NetScout. We look forward to staying in touch with you over the course of the quarter and look forward to seeing you in person at different conference events. Thank you all very much again for participating. We appreciate your time (inaudible).

And this does conclude today's program. Thanks for your participation. You may now disconnect and have a great day.