Cathy Taylor - Director, Investor Relations Anil Singhal - President and Chief Executive Officer Michael Szabados - Chief Operating Officer Jean Bua - SVP, Chief Financial Officer.

Scott Zeller - Needham & Company Eric Martinuzzi - Lake Street Aaron Schwartz - Jefferies Mark Kelleher - D.A. Davidson Matt Robinson - Wunderlich Alex Kurtz - Sterne Agee Kevin Liu - B. Riley & Company.

Ladies and gentleman, thank you for standing by, and welcome to NetScout’s Third Quarter of Fiscal Year 2014 Operating Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at that time.

As a reminder, this conference call is being recorded. With us today is NetScout’s President and CEO, Mr. Anil Singhal. He is accompanied by NetScout’s Chief Operating Officer, Mr. Michael Szabados, and NetScout’s Chief Financial Officer, Ms. Jean Bua. At this time, I will turn the call over to Ms.

Cathy Taylor, NetScout’s Director of Investor Relations to provide the opening remarks. Ms. Taylor, please proceed..

Thank you and good morning everyone. Welcome to NetScout’s fiscal 2014 third quarter conference call for the period ended December 31. Before we begin, let me remind you that during the course of this conference call, we will be providing you with the discussion of the factors that we currently anticipate may influence our results going forward.

These statements include forward-looking statements made pursuant to the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934 and other federal securities laws. These forward-looking statements may involve judgment and individual judgments may vary.

Forward-looking statements include expressed or implied statements regarding future economic and market conditions, guidance for fiscal year 2014, acquisition integration success and new product releases.

It should be clearly understood that the projections on which we base our guidance and other forward-looking statements and our perception of the factors influencing those projections are highly likely to change over time. Although those projections and the factors influencing them will likely change, we will not necessarily inform you when they do.

Our company policy is to provide guidance only at certain points in the year such as during the quarterly earnings call. We do not plan to update that guidance otherwise. Actual results may differ materially from what we say today and no one should assume later in the quarter that the comments we make today are still valid.

For the further discussion of the risks and uncertainties that could cause our actual results to differ, see the specific risks and uncertainties discussed in NetScout’s Annual Report on Form 10-K for the year ended March 31, 2013 on file with the Securities and Exchange Commission.

We have included on today’s webcast a slide presentation that provides a summary of key financial data that accompanies the financial section of today’s discussion.

For those listeners who have dialed into the call this morning and would like to view the slide presentation, you can find it by going to our website at www.netscout.com/investors and then clicking on today’s webcast.

While the slide presentation includes both GAAP and non-GAAP results, unless otherwise stated, financial information discussed on today’s conference call will be on a non-GAAP basis only. Non-GAAP items are described and reconciled to GAAP results in today’s press release.

I would also point out that the growth rate discussions are based on a year-over-year basis unless otherwise noted. This concludes the introductory remarks. I would now like to turn the call over to Anil Singhal, our Chief Executive Officer..

Thank you, Cathy. I am pleased to report that NetScout delivered a very strong performance in our third quarter of fiscal year 2014. We also achieved a new milestone in that we crossed $100 million mark for quarterly revenues. Non-GAAP revenue for the quarter was $110.6 million, which is up 20% over the same quarter a year ago.

The year-over-year product revenue growth was even higher at 30%. Non-GAAP earnings per share, was $0.50, up 39% over last year. As I outlined in my remarks last quarter, we were confident about our second half performance due to three main reasons.

First, the successful launch of our new nGeniusONE product; two, growing business from service providers; and three, increasing traction of our Packet Flow Switch product line.

Successful execution on all three fronts contributed to our third quarter performance and has provided a strong foundation for the second half revenue implicit in our annual revenue guidance which we will be reiterating today.

The creation of value for customers has served us well over the company’s history and is a driving force for our new product innovation.

We have been executing well towards our first goal of nGeniusONE product introduction, which is continuing to create and expand our value to our traditional enterprise customer base deploying NPM or Network Performance Management.

The second and broader goal of nGeniusONE is to expand its opportunity into the APM space, which will be more impactful in the upcoming quarter. For the first three quarters our product revenue has grown 17% in the enterprise sector.

Secondly as we discussed last quarter we saw a large customer demand for our solutions in our service provider line of business. I am happy to note that our product revenue growth rate for the first three quarters in service provider is almost 20% on a year-over-year basis.

We continued to be successful in our LTE deployment and in capturing new services being defined over the 4G networks. Lastly in our complimentary Packet Flow Switch product line, we continue to experience competitiveness. Our Packet Flow Switch business has grown in accordance with our expectations during this fiscal year.

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

This would mean delivering a back to back $100 million plus revenue quarter. We anticipate our product revenue growth to be in the mid to upper teens. As we have been doing for the last two years our current plan is to provide full year guidance once again for our upcoming fiscal year 2015 on our next – next call in April.

I would like to take this opportunity to reinforce our continued confidence in the future of NetScout. About two years ago as we entered the third decade of our business as a product company we embarked on a broad new initiative internally dubbed NetScout 3.0 to position the company for higher growth.

We backed up this initiative by setting aggressive goals as indicated by the full year guidance we have been providing to the investment community for the last couple of years. We made five technology acquisitions during this time that allowed us to enter new markets like Packet Flow Switch and voice monitoring.

More importantly after spending 200 man years of engineering efforts we released our next generation product called nGeniusONE to the market about four months ago, as you are aware these strategic investments already having a positive impacts on our financial results and business growth.

Michael will provide more details on our success so far in his discussion. Finally I would like to share some important news about our differentiated ASI or meaning Adaptive Session Intelligence technology that is the force behind nGeniusONE. Last quarter NetScout was officially awarded the ASI patent.

In the short-term ASI will allow us to expand our market reach from NPM to APM. But it is designed in the long run to offer unique solutions in the fiber security and big data analytics segment as well.

In addition, ASI has been purpose-built to handle future scalability needs of our customers, driven by 100G voice and data conversions LTE video, BYOD for Bring-Your-Own-Device, customers facing websites of large enterprises, virtualization as well as cloud deployment.

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

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

The product and the vision of NPM plus APM have already added to our revenues by convincing many of our installed customers to increase their NetScout instrumentation investment based on the greater value delivered through the nGeniusONE software.

Our plan is to maximize adoption based on full backward compatibility and allow our champions to leverage new functions such as APM and train new users at their own pace. In the service provider sector we continue to expand both the average deal size and our customer base.

Additionally our VoLTE solution is gaining traction within those service providers, who are beginning to roll this new service out over their 4G networks.

We believe that our service provider opportunity continues to be robust due the future consumer adoption of 4G handsets as well as future services that the service providers will deploy on their networks.

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

A key recent win points the way to our growing opportunity in the cloud-based IT outsourcing segment of the market. Traditionally, the players in this area, including our large market leading customers have been very cost sensitive and they are able to manage their shared data center services on a reactive basis with [buoyant] [ph] tools.

However, the growing complexity and scale of their customer’s applications sometimes causing outages lasting days and affecting billion dollars customer’s business has demanded a new approach.

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

We run the business because of our unique advantage in scalability and the ability to manage many clients securely from the same system also called multi-tenanting, and the completeness of our solution including our integrated Packet Flow Switch products.

The example shows how our combined enterprise and communication service provider experience all based on our ASI technology position us uniquely to take - take on this market segment. Thus far this year - this customer has already invested $8 million to $10 million with us on this solution.

Another example I want to share with you demonstrates how the cumulative power of the many technology components we have integrated as Anil mentioned. Albeit on our patented ASI foundation brings us entry into new opportunities with new teams and new applications.

In this instance our market leading insurance company started a major initiative to implement Unified Communications to increase the effectiveness and productivity of their 1000s of agents in the United States.

They went with a traditional solution and expected to assure service quality using the data provided by the UC equipment and Splunk for analytics. In the course of their deployment they realized they needed a different approach as the call quality problems comprise customer intimacy and threaten customer retention.

After evaluating multiple UC management solutions they decided that NetScout because we could hand over scale of their nationwide network, we could expertly monitor and analyze both the call connection and the human experience in due time and because our engineers want user interface enable them to effectively collaborate across multiple teams in preventing and solving quality problems.

This being illustrates our NetScout’s approach based on high value ASI derived data and straightforward presentation effective and less costly that alternatives solely relying on smart analytics. Before I finish let me share with you something Anil was too modest to mention.

This past quarter, we received the special award from TiE, The Indus Entrepreneurs, which is a globe of non-profit trade group dedicated to fostering entrepreneurship.

The TiE-Boston’s Lifetime Achievement Award was presented to Anil for his lasting impact on the entrepreneurial community in Boston and for embodying the best of leadership and entrepreneurial traits.

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

service provider, $89.2 million, 35% of total revenue; government, $32.2 million, 13% of total revenue; and general enterprise, $131.7 million, 52% of total revenue. Turning to Slide 9, which shows our total revenue growth by sector.

Our total revenue for the service provider sector grew 18% on a year-over-year basis driven by our continuing project wins. Our general enterprise sector grew 10% and total revenue for the government increased 5% year-over-year. Turning to Slide 10, this is a depiction of our year-to-date GAAP revenue by geography.

For year-to-date third quarter of fiscal year ‘14, the revenue mix between domestic and international revenue of 76% and 24% was generally consistent with our recent historical averages, where domestic accounts were approximately 75% of our revenue and international account for the remaining 25%.

Within our international sales, the mix is generally consistent with prior results. Europe delivered 12% of our international sales, while Asia delivered 5% and the rest of the world delivered the remaining 7%. Slide 11 includes highlights from our balance sheet. We continue to maintain strong liquidity.

At the end of the third quarter of fiscal 2014, we have invested cash, short-term marketable securities and long-term marketable securities of $182.2 million. For the first nine months of fiscal year ‘14, we generated approximately $61 million of cash from operations.

Our capital expenditures were about $9 million, which includes investment in our internal systems and building improvements in our international R&D facilities. Our year-to-date free cash flow is approximately $52 million.

Additionally in the quarter, we repurchased 275,000 shares for $8 million for a year-to-date total of 750,000 shares for $19.8 million. Accounts receivable, net of allowances, was $74.3 million, up from $73.9 million at the end of fiscal year 2013.

Day sales outstanding were 61 days for the quarter compared to 68 days for the fourth quarter of fiscal year ‘13 and was unchanged from the third quarter of last year, which was also 61 days. Inventories were $11.1 million. This is a $3.5 million increase from the fourth quarter of fiscal 2013.

Additionally, our total deferred revenue was $124.3 million. This is up from $121 million for the fourth quarter of last year. This increase is in line with our historical pattern for Q3 as this quarter historically exceeds higher level for renewals. Deferred revenue is up 10% from the Q3 fiscal 2013 ending balance.

Turning to our guidance for fiscal year ‘14, Slide 12 illustrates our guidance range for revenue and earnings per share. With one quarter remaining in this fiscal year, we are tightening our guidance for fiscal year ‘14 for both revenue and earnings per share.

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

Our non-GAAP net income per share guidance for fiscal year 2014 is $1.48 to $1.50 yielding non-GAAP EPS growth of 12% to 14%. We continue to project that our effective non-GAAP tax rate for the fiscal year ‘14 will be approximately 37%. Consistent with past practice, we have used the statutory tax rate of 38% to tax effect the non-GAAP adjustments.

Before we conclude the financial portion of our remarks, I would like to inform you that we will be attending the UBS Small and Mid-Cap Conference on February 11 in Boston. That concludes our financial discussion this morning. Thank you for joining us and we look forward to taking your quick questions. We will now take any questions..

(Operator Instructions) Your first question comes from the line of Scott Zeller with Needham & Company..

Yes, hi good morning. I wanted to ask about the general enterprise contribution specifically around financial services.

Could you give us some color on how that’s been trending over the past few quarters?.

Well, we find Scott that it is the definition of financial services which included insurance companies and all those. It’s sort of becoming ambiguous in terms of what our solution does and especially nGeniusONE when it looks in the APM space, the requirements are very similar.

So we have not been reporting separate numbers for financials, but overall, it has been doing well. It is within the range and it is impacting the enterprise growth rate, but we are not reporting separately financials anymore..

So just to add to Anil’s color, the pattern that we generally have seen over the last year or so was that the domestic institutions as Anil had mentioned, are the ones that continue to be contributing to the financial growth. We have had a few wins internationally. A few quarters ago, we won new banks down in Latin America.

And in Asia, in one of the Asian countries, we have a bank that has been buying, but the general trend of domestic purchasing driving the financial sector is what still is driving our growth in that area..

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

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

We have like – Mike gave the cloud monitoring example. We have NEMs. We have pharmaceuticals. So there are lot of big companies who have very similar requirement, they have customer-facing websites. So, that’s the reason it’s I think that the enterprise business overall, almost like lot of companies are behaving like financials.

And that’s the reason we decided to not separate it out. So enterprise business will be driven by these – at least these two things in the short-term and then our UC solution, voice solution is coming through the forefront and that will be the third area.

And interestingly, every enterprise customer of reasonable size is needing all three of them and that will be driving the growth..

Thank you..

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

Thanks for taking the question and congratulations on the $100 million quarterly revenue milestone. That’s long ways from years and years ago. The question is about I view this December quarter is somewhat lumpy. I know you don’t give quarterly guidance, but I certainly wasn’t looking for roughly $18 million sequential step up.

Was there an area of outperformance among the three sectors, government, enterprise, carrier versus your own internal plans or was this kind of what you guys were expecting?.

In general, it was in line with what we are expecting. We have been striving for 20% product revenue growth in service providers, which we just about achieved this quarter. Government still is relatively flat sometimes the large percentages don’t really hide the magnitude of the actual dollar increase.

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

Okay, that’s helpful.

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

I think it’s more volume of the unit. We have really not changed the ASP and the volume is higher in 4G deployment and I think Tier 1 providers even more so, all those are contributing to the higher averages, but ASP is not going up..

Thanks for taking my questions..

Sure..

Thank you..

Your next question comes from the line of Aaron Schwartz with Jefferies..

Good morning. Thank you very much. I just had a question on the guidance. It does imply product revenue being down sequentially. And I just wanted to sort of understand that because that is sort of atypical for you in Q4.

Did I hear you correctly in the last question that there was some, I don’t want to say pull forward, but you had some larger service provider deals closed in December that you initially thought were in the March quarter and that sort of explains maybe the dynamic quarter-to-quarter or is this just very conservative outlook for the year given only one quarter left or I guess more broadly what would lead you to see product revenue be down sequentially? Would you have to see deal push out or maybe you could just sort of help us walk through that dynamic? Thanks..

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

Our product growth is primarily driven by product business as we are going faster than before. And for all those reasons that we have been giving yearly guidance. And so, we don’t look at our performance, we look at more year-to-date comparison from previous year and that’s what Jean talked about.

Having said that, at the high end of the guidance, we are talking about another $100 million, $110 million quarter, so, this is – I mean, I think it’s just not fair to compare with the last quarter, I mean what we have to look at is we had first time in the history of the company, $100 million quarter.

We beat it by $10 million and we’ll have to repeat that performance to meet that high end of the guidance. So, I think it’s not conservative. It’s in line with our guidance from day one..

Okay.

And if I could ask a follow-up question, obviously the revenue outperformance here in the quarter contributed to the margin upside, but it’s a broader question that I have is you have a very efficient organization at this point and to expand with APM and as you have more focus maybe within the enterprise, can you talk about your need to further reinvest within the sales and marketing line? They just given the revenue growth here you have been very efficient with sales and marketing even if we look at the accrued compensation, it’s been a very efficient model.

And I guess the broader question is we start to build out our models for ‘15 and ‘16 is, are you under-investing a little bit given the larger APM TAM in the enterprise? Thanks..

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

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

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

So based on our relationships and based on our approach, which is teamwork among the network people who have been our conditional end user and then the application people we feel that team approach leveraging the existing sales force and adding and supplementing to it, where we meet with specialists, maybe those people who are a little more versatile in APM language, should be able to drive our growth in the next upcoming years.

So we don’t think we are spending on massive investment. We generally invest in sales where we have – where we need geography expansion, where in certain areas of the world one or two or four sales people and their engineers are not enough.

We will divide up the territory that way, or when we do introduce a new product, any kind of a product specialist that is needed, but generally we don’t need massive amounts of infrastructure to achieve our revenue growth..

Understood, thank you very much..

You’re welcome..

Your next question comes from the line of Mark Kelleher with D.A. Davidson..

Great, thanks for taking the question. Let me add my congratulations for the strong quarter..

Yes, sir.

I wanted to talk about the nGeniusONE product you said you’ve got some good early reception of that.

Is that reception stronger on the service provider side or the enterprise side?.

It’s $5 million on the enterprise side. On the service provider side, we have the customers deploying it, but the – I think the real service provider update is going to be over the course of next year. The real impact of nGeniusONE is in moving the enterprise used cases shifting them expanding them from just NPM or APM.

And that’s where we put most of our emphasis..

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

So right and that’s right, that’s what you’re going to say which we commit to the point that the introduction of nGeniusONE didn’t necessarily contribute to the strength on the service provider side in the quarter, correct?.

I would say that’s correct..

Sure. If you want to set back the functionality in broad terms that service provider uses today is the functionality that we would like our enterprise customers to use, the pro activity, the helping the business understand their metrics better, providing valuable business information.

So to the degree that they have been using those functions we are really trying to generate that in the enterprise. So service provider is a growth is a continuous function of 4G, the LTE rollout, the new service which is VoLTE that they are rolling out over these networks and then also our customer expansion as we go around the globe in that area..

Yes, would it be fair to say nGeniusONE is still a small percentage of your revenue?.

Yes, we don’t, because it’s a replacement for the VM plus SDM product. So it’s hard to measure in those terms, yes. But nGeniusONE is – has a indirect impact on the instrumentation sales and what Jean is saying is that has not impacted the service provider. If you know the market size for service provider is already big.

nGeniusONE is not going to increase the market size, but it will improve competitiveness. On the enterprise side it actually increases the market size by taking in some NPM to NPM plus APM, so that’s why longer than bigger impact on the enterprise at least for the next year or so..

Okay.

So I was just – I was going to switch topics there on to the service revenue does that accelerate or eventually over time with the product growth or does that continue along the kind of high single digit growth rate?.

That service revenue growth probably will continue along the high single digits, it’s historically been 8% to 9% on a year-over-year basis. As we talked about I think when we gave guidance about a year ago we had done some end of life programs for some very old probes that some customers were still using.

So in the end of life, it impacts our service revenue. And the increase that we are anticipating on our year-over-year basis for service revenue this year is 6%, its 2% to 3% lower than its grown, it’s grown traditionally, so we do expect that to ramp back up to the 8% to 9% amount that it’s currently been or it’s been for the past few years..

Okay, great. Thanks..

You’re welcome..

Your next question comes from the line of Matt Robinson with Wunderlich..

Hello..

Hi Matt.

How are you?.

Hey, great. Couple of questions on – maybe a little bit more color on the industry factors but to be honest the strong sequential rebound in the service provider if you could give a little – give us a little bit of perspective on regions and new service offerings that might be behind that.

And I have got a couple of other follow-ups?.

First of all, I don’t want to get rebound because we have this lumpiness and one big deal, $10 million deal can make a big difference in percentages. So I think there was some concern in that because of the first half growth in service provider but we knew about our pipeline and we are confident of the growth.

So I think it’s we are adding – continue to add more and more things in the areas, the VoLTE area as Jean talked about, I think they are more increasing 3G to 4G transitions. Our voice product is coming into line. We have a more complete solution.

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

About the regional perspective?.

I think it’s still higher I mean U.S. Tier 1 provider is still the highest percentage, but I mean that’s still on our competitors and even infrastructure vendors and there is no big change in the regional distribution in the service provider from the dust..

Anil, well I got you.

Can you give us a little bit of indication that we should look forward for getting higher wire speed progress such as 100 gigabit probe?.

Well we want to talk about it in the next quarter our roadmap for 100-gig, but 40-gig is already there today in the form of a packet flow switch.

So if you have a 40-gig link you can put our packet flow switch which converts into four 10-gigs and that solution is being deployed in few places, but most people are transitioning to 100-gig and lot of the sort of (vibrant) areas, lot of the physical components are not readily available and especially for people like us unless you do a completely custom design.

But we will be talking about at the April Meeting as well as our User Forum in April, our short term plans for 100-gig or multiple 10-gigs which is like eight times 10-gig.

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

What should we expect to see the lumpiness in the current quarter?.

What do you mean there is only one quarter left..

Right, the current quarter, the March quarter?.

Where do we expect to see the lumpiness..

Yeah, I mean you have the positive lumpiness from the service providers in the December quarter, what is your visibility in the case of areas of lumpiness will be positive or negative in the - for the March quarter?.

All right. So let me step back. So for the March quarter our guidance would imply about 107 to we see this quarter 110. We still believe that service provider will be a 20% growth so we still believe at the end of Q4 we will be close to 20%.

If we achieve in service provider, if we achieve the revenue guidance that we have out there based on the visibility in our pipeline I think we will have hit on the two of the components that were in the revenue guidance, implicit in the revenue guidance to get it to the midpoint or higher which is a service provider growth of 20%, the enterprise growth of 10%.

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

We have excellent relationships with the civilian organization as well as in the Department of Defense.

So over the next few quarters, three quarters since Q2 would be – Q2 would be their budget flush, we would hope that they could rationalize through their budget and find out what kind of projects they would be able to do and then hopefully the government will also start to rebound and grow on all the cylinders that we would like to tell..

Jean, it sounds like you are talking percentages in terms of product revenue and dollars in terms of overall revenue in the context of your guidance.

I think your total revenue for service providers grew heck of a lot faster than that in the third quarter?.

Sure. And I think what I think would now this time say is we give you in guidance because our customers are doing projects and we are never sure what will - anything will happen. The service provider growth of 20% at the end of this quarter while it was huge 60% is just an indication that we still believe it’s a 20% growth.

As I’m sure you are very aware the first half of last year we had some large deals in the first half and that was what was making the first half of this year a difficult comp, that’s what the concern was as to whether we would still be a 20% growth in service provider.

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

Jean, what was the nine months depreciation and what percent - give a little color on the headcount change and what can we expect to do with headcount in the quarter?.

Depreciation for the nine months was $9 million and the headcount from Q2 to Q3 is - it’s actually gone down just a little bit, it’s gone down maybe 1%. So we are about at a 1000 employees..

Do you expect to keep it flat going forward?.

These were fluctuations at about a 1% variance per year, per quarter at this point. That was going to our headcount planning now we will decide where we want to put a new rental sales people.

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

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

Thank you..

(Operator Instructions) Your next question comes from the line of Alex Kurtz with Sterne Agee..

Yes, thanks for taking the question and congrats again on the $100 million mark, so great job, Anil.

So looking at the implied guidance here for the year that’s showing no operating margin expansion, Jean, is this just an output of your conservatism on what you think you can do for revenue in the March quarter and sort of the flow through the model? And if not, fiscal ‘14 should turn out to be a big year of OpEx investment for future growth? And then I have another question after that..

Okay. So FY ‘14 the guidance so far is 12% to 14% revenue growth. So we will have EPS leverage, net income leverage. In the quarter, the guidance implies 9% to 12% revenue growth with EPS growth as you noticed 0% to 5%.

What happens in our last quarter if the first quarter of the calendar year, all of the payroll related taxes kick in and for us that is getting close to about $0.03 per share. So if you were going to normalize on that $0.03 per share, our leverage would be there for the fourth quarter..

Okay. I guess I am just talking about operating margins on a fiscal over fiscal basis, right. And there is going to be basically flat on that year-over-year.

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

Yes. At the midpoint of guidance, our operating margin will be close to 25.5%. And at the end of last year, it ended at the low 25%.

So we will see some operating margin increase, where we have been making investments as you pointed out was the acquisitions that closed in the prior year, the voice technology that we bought from an Italian company as well as the ONPATH acquisition. The voice product will be released it’s being released soon and should start to generate income.

And that was also just been making investments in nGeniusONE from those acquisitions, because we have been in a huge development effort with nGeniusONE. So as nGeniusONE and the voice product and the revenue continues to grow got R&D line item coming more in line and the operating margin should continue to improve..

And just lot of things right, Jean, just last question here, I mean, stocks reacting well in pre-market trading here and I know there is a lot of enthusiasm given the $110 million print you just put out? Do you want to outline as we put our models together back to Aaron’s original question about fiscal ‘15, I know you are going to give full guidance after the March quarter, but is this a good point to sort of speak to the consensus growth rate of around 11% for next year and sort of how you think about that relative to what you are to likely to pose for fiscal ‘14?.

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

We are just not ready to share that information right now, but we are hoping to provide full year guidance like we did so. Will we negotiate? We will not. Our preference will be to provide full year guidance rather than quarterly guidance..

Okay, alright, thanks guys..

Thank you..

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

Hi, good morning and congratulations as well.

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

I think that the BFS number is built it into the enterprise and service provider growth rate. I mean, that we don’t break out the numbers, but the growth rate is – was very high compared to 30%, but that was the first year. We started from the very low number to a very high number.

So, we don’t look at the growth rate this year, which was I mean much higher than anybody else in the market, including the leaders at the smaller number.

So we think that we can grow at the rate of the other competitors in the next year, but our deals have lot of synergy between the monitoring and instrumentation what this BFS and that’s why we don’t look at the growth rate individually, they drive each other..

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

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

Well, I think other people, I think maybe I don’t know whether you are referring to the comment which Michael was talking about, that was a different comment and we have not really partnered with Splunk or anyone, but we are open to partnering with other people, but there is – our strategy is different, the whole focus on big data analytics is on the quality of analytics and they don’t – people don’t really give what is the quality of data, which leads to scalability and other challenges.

So we have the best data. We are doing part of them and that is already inside our device. So we have a two-stage analytic architecture, which is quite different and then what other Splunk and other people are used to.

With Splunk and IBM and other players, they are relying on data which is already there and we are relaying on data which has been crafted for certain needs like (indiscernible) and all those stuff. If that allows us to partner with people like IBM and others, then we’ll do that.

We have to see whether what is their intention of consuming more high-quality data because – that’s because high-quality data doesn’t mean people want to invest in that.

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

Great. Thanks for taking the questions..

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

Thank you and we’ll see again in about three months..

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