Ladies and gentlemen, thank you for standing by, and welcome to NetScout’s Fourth Quarter and Fiscal Year End 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 fourth quarter conference call for the period ended March 31. Before we begin, let me remind you that during the course of this conference call, we will be providing you with 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 2015, acquisition integration success and new product releases.
It should be clearly understood that the projections on which we base our guidance and other forward-looking statements and our perception of the factors influencing those projections are highly likely to change over time. Although those projections and the factors influencing them will likely change, we will not necessarily inform you when they do.
Our company policy is to provide guidance only at certain points in the year such as during the quarterly earnings call. We do not plan to update that guidance otherwise. Actual results may differ materially from what we say today and no one should assume later in the quarter that the comments we make today are still valid.
For the further discussion of the risks and uncertainties that could cause our actual results to differ, see the specific risks and uncertainties discussed in NetScout’s Annual Report on Form 10-K for the year ended March 31, 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 review 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 fiscal year 2014. Our non-GAAP revenue for fiscal year 2014 was $397.2 million representing another year of mid teens revenue growth. Additionally our non-GAAP product revenue for fiscal year 2014 grew in the upper teens for the second consecutive year.
We achieved this revenue growth while also improving our operating margin and delivering 16% growth in our EPS. Jean will discuss our financial results in more detail later on the call. As we have consistently discussed over the last fiscal year our success in 2014 was a result of successful execution on three fronts.
Within our traditional enterprise customer base we have continued to create value with a product launch and successful traction of nGeniusONE which provides real-time operational intelligence and performance analytics in a service triage environment allowing dramatic reduction in meantime to the store for our NPM plus APM customers.
For the 2014 year our product revenue grew 11% in the enterprise sector. Secondly we continue to be successful in our service provider market driven by our success in LTE and voice-over-LTE deployment and capturing new services being deployed over these 4G networks. During fiscal year 2014 our product revenue growth in this vertical was 22%.
Thirdly in our complementary packet flow switch and product line we are successful in executing our strategy and gaining market share. The natural integration of packet flow switching technology with our packet flow instrumentation, our success this year is directly attributable to a journey we started more than two years ago in late 2011.
At that time NetScout was in an enviable position of being the undisputed leader in the NPM space. But our time the total addressable market of approximately $1 billion was not large enough to sustain the double-digit growth target that we’re aiming for.
In response we created a new strategic initiative internally the NetScout 3.0 to leverage our core competencies and to move into adjacent markets where we’ll succeed in providing expanded solutions to the market. After spending over 300 man years of engineering development we released our first major product last fall.
nGeniusONE targets the NPM plus APM marketplace. Our product is based on our unique Adaptive Session Intelligence or ASI technology which provides real-time performance analytics and operational intelligence. As I mentioned last quarter we were rewarded a USA patent for ASI in December 2013.
During this period we added functionality to nGeniusONE through in-house development as well as from acquired technology through five acquisitions. Our past growth all of which was organic was a result of our internal development to incorporate and desperate functionality and technology into a one single platform and launching nGeniusONE.
(They reward $0.01) for many things including that this is one of the kind of the product that is integrated into one product for all that was in application services with no software options.
As a result of our evolving strategy, differentiated technology and expanded product portfolio we have quadrupled our time to $4 billion in a little over two years. To show confidence in our expanded time our unique experience in this space and our ability to execute we’ve been providing and meeting full year guidance for the last two years.
In fiscal year 2012 we passed the $300 million revenue mark. In fiscal year 2013 we passed the $350 million mark. And in fiscal year 2014 that just ended we approached a $400 million mark. We’re continuing this trend today by issuing guidance with a new fiscal year 2015 which could allow us to exceed $450 million in revenue this year.
Our product revenue growth has been in the upper teens for the past few years file we have also generated operating margin expansion, strong cash flow and EPS growth.
As we start another fiscal year I continue to remain excited about our future growth prospects that are best described by our expanded vision and new vision statement which I’d like to read for you.
Enabled IT and service providers to realize maximum benefit with minimal risk from technology advances like IP conversions and Network Function Virtualization, SDN, Cloud, Mobility, Bring Your Own Device or BYOD, (RAB) and the evolving Internet by proactively managing the inherent complexity in a cost effective manner.
I believe our ASI technology which we’re developing support of this mission has a potential of not only expanding our leadership in the NPM plus APM space but can also be enable us for entering bringing us into the CyberSecurity and Big Data markets.
The common denominator is the unlimited richness of data (service) derived from IP traffic to our ASI technology which we call IP intelligence, the source of real-time operational business and cyber intelligence substantially expanding our available market.
We will discuss in more detail our evolving strategy and future product developments along with our expanded time at our upcoming Investor Day in May. I’d like to conclude my remarks this morning by thanking our customers for their continued loyalty in our company and to our employees for their hard work and dedication.
Fiscal year 2014 was an exciting year for us and our employee’s commitment and hard work and dedication helped us to win on many fronts. I’ll now turn the call over to Michael who will discuss our recent User Forum Meeting amongst other topics..
Thank you, Anil. We are fresh of the successful execution of our 2014 objectives and also fresh of for annual User Forum in April where the excitement was integrating. Our User Forum which we call Engage has a very important agenda.
We use it to communicate to our product direction, transfer knowledge regarding our functionality and unique user situation and to receive feedback from our customers. This year was also a special impactful since it was the first year where nGeniusONE product, the nGeniusONE product has been available in the marketplace.
Our attendance was up 25% from the prior year and we had many of our core customer colleagues attend and work in the APM area. We delivered nGeniusONE hands-on training and demonstrated or resolved challenging performance problems by using a real-time analytics and intelligence.
The main topic at the event was the acceptance among our customers of nGeniusONE quarters, 300 of our top customers have deployed nGeniusONE and started to leverage its new capability. We anticipate that the majority of our customer base will migrate to nGeniusONE over the next 12 months.
In the enterprise our solutions are increasingly application specific allowing deep insight into key widely used applications like Microsoft Exchange and Oracle.
In the service provider tracks of key messages were the completion of our service assurance portfolio with the addition of multi-generational voice capabilities and our continued investment in business intelligence and customer experience management capabilities.
At Engage we received a lot of positive feedback as well as great insights from our customers. Many customers know that they bought NetScout because we are the only product capable of solving that traditional NPM issues. And they were confident that we would have the same impact in the APM space.
Our customers face serious challenges surrounding competing trends including virtualization, cloud and mobility. During our User Forum we discussed and addressed the related challenges and how we can help them deal with these.
I know I speak for the company when I say that we were very pleased with the results and are looking forward to next year’s User Forum to continue the momentum that we have been building.
nGeniusONE which is built on our newly patented software ASI and our overall projection has helped to penetrate existing customers as well as increased our new logos. Our new customer business has increased 2.5 times fiscal year 2014 as compared to 2013.
I would like to take a few minutes to walk you to a few exciting customer wins that we’ve experienced this quarter. First let me mention the example of our gaining traction with the application themes and large enterprise accounts. Two of our wins in this quarter were with large retail chains with very similar issues.
Both retailers had traditionally managed their point-of-sale system in a reactionary way. The application owners were looking for faster, more effective ways to detect transaction errors and identify their likely cause. With our credit card service money (door) based on our specific ASI module that understands credit card transactions.
We were able to look inside the transactions in real-time and pull out success fail (error calls) of the credit card transaction and take appropriate action immediately. The second example (Renewal Account) is a large Asian service provider group with over 200 million subscribers in multiple companies.
This win is important to us because it expands our service provider opportunities in international markets as well as allowing us the opportunity to work with the dynamic and growing career. The core of this win was our demonstrated LTE leadership and unique dataset from customer experience management applications.
The opportunity arose when the provider initiated their LTE coverage and needed new monitoring solutions. Our success was specifically inched on superior scalability and producing high value data reliably or due to our ASI technology foundation as compared to the solution of incumbent and competing monitoring vendors.
There are multiple groups in the customer account looking to leverage our dataset for both customer experience management and business intelligence and the customer also plans to sell it to third parties for marketing and advertising purposes.
We view this win as a prototype for global opportunities as operators move to LTE and or establish strong leadership position in this area allows us to expand our footprint through these beachheads.
Finally another new customer logo demonstrates our ability to capture deals where our competed portfolio creates an important role in offering a single vendor solution. This large European service provider needed to monitor their new LTE and VoIP deployments in conjunction with their legacy voice deployment across multiple sites.
While we led with our proactive management approach based on scalable ASI technology our integrated multi-generational voice and data solution along with us to support for business intelligence and customer experience management, we’re critical in winning this strategic beachhead against our top competitors.
As a result of the win we’re well positioned for additional opportunities in other operating companies with this global provider in other countries. Finally let me mention that we received an award this past quarter for our superior customer service.
Omega is our leading customer survey firm that sponsored a NorthFace award for exemplary customer service. The award signifies that our customer support as described by various customers is superior. This is one of the attributes that helps us customer loyalty and brand loyalty.
With that let me turn it over to Jean to discuss our financial results in the quarter..
Thank you, Michael, and good morning everyone. This morning I will review the key metrics for our past fiscal year results and discuss our guidance for FY ‘15. To begin our financial discussion we will be starting with the third slide of our presentation which is accompanying our call and posted on our website.
As Cathy noted earlier my remarks this morning will be based on our non-GAAP results. Our accompanying slide presentation has the comparable GAAP results.
As we entered FY ‘14 we had a TAM of approximately $2 billion consisting of our traditional network performance management market and introductory spots for the packet flow switch market and our traditional service provider market.
I am pleased to say that our goal of expanding our solution enhance total addressable market for FY ‘14 was successful as we saw growth in our traditional markets as well as the successful entry into the APM space through our nGeniusONE product and continued market share gains in the packet flow switch market.
This success is demonstrated by our quarterly momentum of achieving another quarter of high teens product revenue growth combined with our second consecutive quarter of $100 million plus revenue. For our final fiscal quarter our non-GAAP product revenue was $70.4 million which is an increase of 18% over the same quarter in fiscal year 2013.
Our fourth quarter non-GAAP total revenue was $112.5 million which is an increase of 14% from the same quarter in fiscal year 2013. Within non-GAAP total revenue service revenue was $42.1 million which is an 8% increase from the same quarter in the prior year.
Our earnings per share for the fourth quarter were $0.48 which is a 12% increase from the same quarter and the prior year. Turning to Slide 4, we achieved our quarterly results while also continuing with our strong margins and executing within our long-term operating model.
On a non-GAAP basis our growth profit was $89.3 million representing a 79.4% margin. Non-GAAP income from operations was $31.4 million and our non-GAAP operating margin for the quarter was 27.9%. Non-GAAP net income was $20.2 million or $0.48 per diluted share, the non-GAAP net income margin was 18%.
Turning to Slide 5 which shows our full fiscal year results. Again our full year result represents our planned and successful launch of nGeniusONE and the resulting customer adoption as well as recognition of our continuing market leadership within the service provider market.
We achieved our full year results while delivering mid teens growth in profitability and increased cash flow and total liquidity. Our full fiscal year 2014 non-GAAP total revenue was $397.2 million which is an increase of 13% over fiscal year 2013.
Within non-GAAP total revenue non-GAAP product revenue was $234.3 million which is an increase of 18% over fiscal year 2013. Service revenue was $162.9 million on an non-GAAP basis which is a 6% increase from the prior year. Our fiscal year 2014 earnings per share were $1.53. This is an increase of 16% from fiscal year 2013.
And turning to Slide 6 which shows our fiscal year 2014 product revenue composition. The components of our $234.3 million of product revenue for fiscal year 2014 were as follows; service provider $98.1 million or 42% of product revenue, government $25.3 million, 11% of product revenue, general enterprise $110.9 million, 47% of product revenue.
This compares with the prior year’s product revenue components as follows, service provider $80.2 million or 41%, government $18.6 million or 9% and general enterprise $100 million or 50%. Slide 7 shows our full year product revenue growth rate by sector.
I am also pleased to announced that our sectors grew as anticipated with service provider exceeding 20% product revenue growth and enterprise exceeding 10% product revenue growth.
Our service provider product revenue was 22% higher than our prior year service provider product revenue, general enterprise grew 11% as we saw growth from our high-tech, healthcare and retail customers as well as our financial customers, government increased 36% while our federal government piece was flat on a year-over-year basis.
We saw growth during the last quarter within our international markets including Canada, Central America, Europe and Asia. Slide 8 shows our total revenue composition.
The composition of our $397.2 million of total revenue for fiscal year 2014 was as follows; service provider $146.7 million or 37% of total revenue, government $50.7 million or 13% of total revenue and general enterprise $199.8 million or 50% of total revenue.
This compares with the prior year’s total revenue components as follows; service provider $121.4 million or 35%, government $43.7 million or 12%, general enterprise $186.7 million or 53%. Turning to Slide 9 which shows our full fiscal year 2014’s total revenue growth by sector.
Our total revenues for the service provider sector grew 21% on a year-over-year basis, our general enterprise sector grew 7% and our total revenues for the government increased 16% year-over-year. Turning to Slide 10, this is a depiction of our full fiscal year GAAP revenue by geography.
For fiscal year 2014 the revenue net mix between domestic and international revenue of 76% and 24% was generally consistent with the recent historical averages with domestic accounts for approximately 75% of our revenue and international accounts for the remaining 25%.
Within our international sales the mix was 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 concludes highlights from our balance sheet. We continue to maintain strong liquidity.
At the end of fiscal 2014 we had invested cash, short-term marketable securities and long-term marketable securities of $218.8 million, combined with a current revolver capacity, our total liquidity exceed $465 million.
Our liquidity allows us to comfortably execute our capital deployment priority including product developments through both in-house developments as well as through acquired technology. We generated approximately $111 million of cash from operations for fiscal year 2014 while our capital expenditures remained minimal at about $13 million.
Our capital expenditures included development of internal products and improvements in infrastructure including our global facilities and internal system. Our year-to-date free cash flow is approximately $97 million surpassing last year’s free cash flow of $83 million.
Additionally in the quarter we reached our just 250,000 shares for $9.1 million for an annual proto of 1 million shares with $28.9 million. Accounts receivable net of allowances was $60.5 million down from $73.9 million at the end of fiscal year 2013.
Days sales outstanding were 47 days for the quarter compared to 68 days in the fourth quarter of fiscal year 2013. Inventories were $12.6 million; this is a $5 million increase from the fourth quarter of fiscal 2013 and represents continuing demand for new products as well as the larger revenue grade fees.
Additionally, our total deferred revenue was $133.9 million representing an $11 million increase from $121 million at the end of last year. Turning to our guidance for fiscal year ‘15, Slide 12 illustrates our guidance range for revenue and earnings per share.
For FY ‘15, as the world continues to move towards IP-based network and trends such as cloud and mobility, we identified opportunities in markets, where our core focus would leverage growth. As Anil mentioned, we targeted their end-markets including the APM markets by leveraging our ASI software.
For FY ‘15, we expect to continue to gain market share and we are confident about our strategic direction and business prospects. We have demonstrated that we can set and achieve ambitious operating goals and our fiscal year ‘15 guidance reflects this.
Our non-GAAP revenue guidance for fiscal year 2015 is $450 million to $465 million yielding a total revenue growth rate of 13% to 17%. The underpinning of our revenue growth continues to be a product revenue growth, which is expected to grow in the range of 18% to 23% for the full fiscal year.
Regarding revenue, we believe the FY ‘15 revenue skew will reflect the historical annual pattern prior to our nGeniusONE launch last summer. The first half of fiscal ‘15 revenue will represent about 45% of total revenues while the second half will represent about 55% of revenue.
We will continue to focus on profitability and cash flow by improving our margins and return. With the expiration of the Research and Development Tax Credit Legislation, our effective non-GAAP tax rate for the fiscal year ‘15 will be approximately 38%.
However, we will still guide to upper-teens growth in our EPS – to mid to upper-teens growth in our EPS. Our non-GAAP net income per share guidance for fiscal year 2015 is $1.74 to $1.81 yielding non-GAAP EPS growth of 14% to 18%.
Additionally, we anticipate continuing our strong cash flow generation in fiscal year ‘15 and has extended our current share repurchase program. Our current share repurchase program will allow us to repurchase up to an additional $100 million worth of our shares.
Before we conclude the financial portion of our remarks, I would like to inform you that we will be attending the Jefferies 2014 Global TMT Conference in Miami on May 7, the JPMorgan Conference in Boston on May 19, the B. Riley Conference in Santa Monica, May 20, and the D.A. Davidson Conference in New York City on May 28.
Additionally, as Anil mentioned earlier, we will be hosting our Investor Day in May, where we will discuss our product direction and total addressable market opportunities. That concludes our financial discussion this morning. Thank you for joining us and we look forward to taking your questions.
If there are any questions, you may take them now please..
(Operator Instructions) Your first question comes from the line of Eric Martinuzzi of Lake Street Capital. Your line is now open..
Thanks.
Congratulations on the quarter, I think probably more impressive though is the guidance for the coming fiscal year? As far as that guidance goes, you are really – you are talking about revenue acceleration here is it as simple as this, we expanded TAM and your guys ability to capture some of that market?.
Thanks Eric for the question. So, I think it’s expend the time and the ability to capture on the time to our new product with nGeniusONE. And as we talked about it, the nGeniusONE was sort of – has not seen full year of tractions and with the introduction in last fall.
And so yes, it is related to increased TAM because of (indiscernible) and APM and as well increase competitive presence on the NPM world, but it’s our ability to capture the market share based on the TAM is the reason for the confidence..
Okay. And then one other question if I might on the repurchase program, do you say these expanded $100 million I know as of the end of December I think you were down to like having in shares remaining.
Were there any repurchases in the March quarter or maybe to put it more simply what’s our current potential shares either in dollar or in units that we can repurchase?.
Sure. Hi Eric, this is Jean. So over the last few years our share repurchase program has basically been used to take out the dilution from employee stock based compensation plan. So to that end we have in fiscal year ‘14 purchased about 1 million shares at about $29 million for the year.
And we do that without being disruptive to the market, so we do it over the four quarters at about a pace of 250,000 shares per quarter. Through FY ‘15 we anticipate that we will continue to buy at this pace of about 250,000 shares per quarter and clearly the dollar amounts that we use will be dependent on the stock price..
Okay, thanks..
Your next question comes from the line of Kevin Liu of B. Riley & Company. Your line is now open..
Hi, good morning and let me add my congratulations as well.
With nGeniusONE you mentioned the traction you are seeing in terms of more APM use cases, I am just curious with the 300 or so clients that you have adopted so far what sort of expanded usage have you seen from them in terms of deploying in other parts of their network or focusing more so on APM type deals and would you expect a lot more focus on kind of new customer wins in the APM area this year?.
Well, I think I will see if Michael wants to add anything to this. So the first thing is that we are in the NPM plus APM space and it’s hard to breakdown the impact on APM by itself because one of the answer to it we have is on that plus sign and that we have best NPM plus APM through adding solutions.
So right now, I mean, lot of people are using it for both purposes. I don’t think a small portion is specifically bought it for APM. As to the new logos, we are very excited by the jump which Michael talked about two and a half times, but there is still going to be a smaller portion of the overall increase.
I think we treat new business meaning people – new business is not just new logos, but customer deploying our product in new areas, new deployments and for new usage. So, all of them we consider as sort of new business as a result of our new strategy. So I don’t know whether that covers.
Michael, do you have anything?.
Yes, maybe just in terms of the new kind of users we see an expansion towards less trained or less skilled and less expanded resources, so earlier in the problem management process have (indiscernible) as one definite tendency. The other one is security teams are using our nGeniusONE, because they are easy compared to previous generation.
And we are definitely seeing the application people using even if they are not funding it yet in most cases although we are seeing them funding it in an increasing proportion of cases, but even if they are not funding it they are using our information and that’s exactly as we intended..
And then just one question on service provider with respect to your fiscal ’15 guidance what’s kind of inferred in terms of the growth that you feel you can sustain there and then what sort of I guess visibility do you have into when some of the larger deals close obviously that will skew towards the back half and in fiscal ’14 would you expect much the same this year?.
Hi, Kevin, this is Jean. Still in service providers FY ‘15 clearly depending on in the guidance range, we still anticipate that service provider product revenue should grow at the 20% rate that it has grown over last year.
And that it probably is a function of when they purchase and as you know they have a 12/31 year end, so they tend to do more of a traditional budget flush in our third quarter. And then the fourth quarter also traditionally has been strong..
Great, thank you..
Your next question comes from the line of Scott Zeller of Needham & Company. Your line is now open..
Hi, good morning. Thanks. I wanted to ask about one of Michael’s comments in his prepared remarks. I think he had said that customer – new customer business that increased 2.5 times in the just completed year over the previous yea.
Could you offer some color on that, because I think historically NetScout had received most of its revenue from the installed base.
Could you just talk a bit about how much revenue is coming from new customers now as a total percentage of revenue?.
Yes, Scott, I will let Michael maybe provide more detail, but we don’t talk about – I just like I mentioned just to the – answer to the previous question is still very small compared to the growth coming from existing customers. But what we were saying is that, it was a substantial increase of a small number from last year.
And so I just wanted to mention that we still believe that lot of people extending our solution, existing customer extending our solutions from NPM to APM space will result in the instrumenting different parts of the network, for example, that reforms that has been just network edges is going to be the biggest traction point of nGeniusONE.
But having said that, we are very excited about these new logos, which Michael talked about, but as we wanted to mention that the big portion of the growth will still come from existing customers..
I just wanted to add that growth is primarily coming from the size of the new logo deals. And so that’s a significant fact. In other words, we are able with nGeniusONE to capture the deals of $0.5 million or bigger.
And the significant new kinds of budget, the APM project and in the service provider space as I mentioned we are leveraging on complete portfolio. So, these are new kinds of events. They are definitely prototypes of how we are going to be doing a logo portfolio..
Hi, Scott. This is Jean. Just wanted to add to it, we are clearly very excited. The sales force is very excited. We have been invigorating for them to also see the success of the company’s product going into new areas and solving problems that traditionally were solved with other competing vendors.
Some of these logos have just realized due to the trends of mobility and the cloud that being able to have the intelligence that our products provide is actually very mission-critical to them.
So, many of these new logos that Michael has talked about or some of our used cases is a reflection of our product technology, how will we provide the intelligence based on our 30 plus years of history and the realization that the business world is changing to cloud and mobility and remote users and that they really need to make sure that they can deliver their services, because it’s affecting their customers as well as their own internal productivity and returns on investment..
Okay.
And then did you have – I mean I have missed it, but did you happen to callout the contribution from packet flow switch?.
No, we usually think of that as a complementary product flow, sorry, complementary product line with our entire solution, so we never really have separated that number into anything. It has however done very well. We have gained market share and it has definitely lived up to our expectations for fiscal year ‘14..
I think one thing, Scott, just to mention and maybe we will talk more about it next month is that we are adding packet flow switch is not a market by itself in our opinion. It’s a means to an end and unlike that was the potential place.
So, when we look at that people are buying packet flow switch to support the instrumentation and make it more cost effective, which is where we have leadership both for NPM and APM.
So because of that reason when we give out the numbers for growth in service provider 20 plus and enterprise 10 plus, the packet flow switch is included in those numbers and that’s why we decide not to callout, because we don’t know whether the packet flow switch business is driven by our instrumentation or as to product, which is at least for us is in bulk of cases or standalone..
Okay.
And then lastly I don’t remember someone asked, Jean, but when you look at the DSO count, I mean it seems that this quarter was less back end loaded than the previous fiscal year end fourth quarter, you talk about the linearity of the quarter and the ease of close?.
Sure. The DSO is as you mentioned generally a function of the order stream, it generally more a function as well as the order stream and the shipments over a given quarter.
So, in cases, where the DSO is lower than usual it is generally just a function of orders coming in, in the first two months of the quarter in a more skewed way that than it has in previous quarters..
Okay, thank you..
You are welcome.
Your next question comes from the line of Aaron Schwartz of Jefferies. Your line is now open..
Good morning. Thank you. Jean, I think you mentioned earlier an expectation for roughly give or take roughly 20% service provider growth in ‘15, it seems that also implies maybe mid-teens to 20% growth for your enterprise segment, which would be an acceleration here.
And I know this is probably tied to everything you have spoken about with nGeniusONE on expanding your TAM and wallet share within the enterprise, but could you either walk through sort of what you are seeing in the pipeline on general enterprise for why you would see a reacceleration there? And then also somewhat related to that, the 300 customers or so that have already migrated to nGeniusONE, are those skewed to any particular vertical and what does the economics look like there through the migration? Do you see an acceleration in pricing or is there anything there that’s helping drive the product growth in ‘15 with the product cycle?.
I think the big thing is the best indication of the pipeline is that 300 people have migrated to nGeniusONE, but that has not necessarily translated into additional business. So, I call it our pipeline. People in order for them to use APM as a way to drive more business for us, they have to first make sure that they have deployed this new product.
Our creativity is it does still release this large fall. So, I think we have crossed the transition point. People are happy deploying it. And I think I look at that as actually a good indicator of the pipeline for next year.
Yes, deal sizes are increasing, because there was the instrument that bigger part of the – different part of the network now or different part of the infrastructure like server found, where article is deployed (indiscernible) we have voices deployed into enterprise.
So, all that is going to increase the deal sizes as Michael talked about, but it’s not increasing because we have increased list prices of our products, products that have basically roughly the same price as last year.
And also lastly I think what we talked about sometime later in the year, people will be talking about 100-gig and other opportunities and that would further increase deal sizes..
Just goes back on to in the old response time, you are correct, depending on where you put guidance at the low end of guidance, we would still believe that service provider would grow 20%. Clearly over the years, our strategy of penetration has worked in that area.
We are focusing on global providers as well as the ones that have made it successful in the past year. Government at this point we still think will be relatively flat and talking with the sales group we still don’t see that budgets have necessarily been pushed out to traditional schedule department.
So it does leaver general enterprise which as you noted would be growing close to 20% in product revenue. We are very excited about NPM plus APM space and the traction we have. And additionally this year we are making investments similar to what we did last year in the sales force.
So in the sales force hiring well over the last few years we had been putting them say two or three years ago into service providers to be able to capture market share. In 2014 and additionally in 2015 we are also attracting sales talent to be able to penetrate the enterprise in the APM space as well as on the global basis.
That – those are some of the factors that give us confidence that we should be able to achieve close to the 20% product revenue growth in the general enterprise..
Okay, that’s helpful.
Maybe a follow-up and Jean you kind of I guess maybe answered my question a little bit but I was going to ask you it seems like you are actually accelerating your sales and marketing spend a little bit if I try to back into your earnings guidance, it sounds like that you are indicating it’s going to be more flattish but whatever the reinvestment is here in ’15 you are saying it’s really a little bit more skewed to adding additional sales capacity within your enterprise strategy is that fair?.
Definitely as we have talked before we have a very scalable operating model and we do add sales people every year where we see market opportunity. So based on what we see in FY ’15 around the globe clearly more focus in the NPM plus APM market we do plan on adding headcount to the sales function.
We will be adding that in the first half of the year so clearly they become productive as productive as soon as possible and contribute to FY ’15..
Great, thank you very much..
You’re welcome..
Your next question comes from the line of Matt Robinson of Wunderlich & Securities. Your line is now open..
Alright, thanks for taking my question. And I will throw my congratulations in for those impressive results and outlook..
Thank you..
Anil, can you comment a little bit on the value prop for nGeniusONE and APM and where you’re seeing more traction to the scalability of doing APM on the network versus server based products or if it’s – it’s has more to do with just the pure efficacy of what your technology can provide? And then also I would like some indications on the timeframe for how to gig?.
So it’s just easier thing, 100 Gig in second half of this year, second half, it will not have any big, but it shows our leadership, but it’s not going to have a huge impact on the – in the number for this year, but sometimes too in the second half is when we’ll be releasing 100 Gig.
I think coming back to I hope I captured all your question but I think your main question is what’s the value prop for our APM solution.
What has happened is we believe that lot of the APM solutions were developed several years ago, six, seven years ago when Internet obviously was coming to the mainstream but we – the voice was not in the mainstream through IP conversions or Unified Communications was not there.
We had – virtualization was not there, Bring Your Own Device and so many things have happened over the last seven, eight years. That definition of what problems to be solved our APM has changed dramatically.
We had the tools that are still based on component based information like if my server is working fine, network is working fine and application is working fine and then everything will be fine and that’s not the case as we all know and they will all show green and customers are complaining.
So ASI technology looks at the bigger picture which says the interaction between these components and the complexity created by these new advances in technology, IT technology is actually a bigger source of issues in fact servers just don’t go down then, routers don’t go down and so there are brownouts of different types.
And ASI by listening to all the packet which are a fingerprint for what is going on between these elements will deliver the service whether they are in server farm and or on the edge of the network or remote site are able to capture that information but that information was not easily consumable by traditional tools until it was consolidated in the form of this ASI metadata which is almost like a real-time SQL database.
And that allows us to have this address this high-end problem or next-generation problem but in order to do that you have to instrument different part of the network which was not sort of needed because of the value proposition of NPM only in the past.
So that’s basically our value proposition is that we solve a new set of problems which nobody is solving but that does require them to invest in different parts of the infrastructure like server farms and call managers or in the service provider voice-over-LTE..
So this growth that you’re seeing is really share gain. And probably I asked the question is because there seems to be a lot of point competitors that have developed over the last couple of years and that’s been doing reasonably well. But you’re really talking about replacing some traditional competitors have...
No, I think we are not trying to replace them I mean obviously some – there will be some budget share gain.
What we’re trying to make is I’ll just give you simple example, if you want to use a server management tool to say what is wrong with that server is that if CPU is bad or are the CPU is over task or this system is over task or something like that. You first have to know which server to look at.
So our product can provide a service triage in this one and in many such cases and this being one of the very simple one where we can say we identify the root cause and the leading indicator.
And then somebody can use the traditional server management tool from CA or other places or a network management tool from physical works or things like that to look into more deeper and fix the problem. And so we provide the ultimate service triage also lot of the problems can be solved just through that.
If not then in order to fix the problem they’ll use the traditional tool. So we’re not necessarily replacing the traditional tool, we’re complementing them.
In fact we’re making them more useful and by solving the problem faster but in reality in the long-term yes it’s going to takeaway some budgets which is clearly the overinvestment in those – on those tools because of what we’re doing is a better way of doing it.
And lastly you mentioned about lot of the point competitors I think all the point competitors are trying to solve – that – provide a better solution using the old traditional approach. We’ve changed the complete approach.
So we don’t see any competition from the traditional prayer that the new player in this space, APM space any different than from the traditional player, in fact the incumbency issue with older – the bigger players than traditional legacy player is going to be a bigger issue than competing with current point tools, new (crop) of start-ups..
Right. Thanks a lot..
Yes..
Your next question comes from the line of Alex Kurtz of Sterne Agee. Your line is now open..
Yes, thanks for taking the questions guys.
Jean, can you just reiterate how the linear this year should play out, should it be similar to last year? And are there any maybe you talked about this briefly, but any large yield or comps that we should be aware of it factor into our model?.
So last year’s SKU was off slightly, it was closer to 43% as we discussed due to the launch of nGeniusONE becoming available at the beginning of July.
This year for FY ‘15 between the first and second half we think the linearity SKU will go – we will work back more to the historical space so it should be closer to 45% in the first half and resulting 55% in the second half.
Regarding the comps on a queue-over-queue basis for revenue I would tell you off of the top of my head without doing a study the abnormalities that we saw in 2013 where we had such a large Q2 service provider quarter due to the traditional lumpiness. I don’t think has existed in 2014.
So I think the quarterly pattern is probably more effective of what we would do in FY ‘15..
Great. And Anil in the service provider market with nGeniusONE here. Is there really explicit new used case on how these customers are deploying it. I know you spoke broadly about deploying it more places and being able to manage more the network.
But is there really some very specific examples you talk about where that’s really gotten you into a more revenue and sort of accelerated some deals?.
Well I think service enabler is a very big area which competition – if you maybe just go a little bit technically here if you look at the three kinds of traffic flowing over the service provider customer facing network or internal network to support the customer facing traffic.
And one is called the service enabler which is like how you setup the calls in the case of voice-over-LTE or DNS and various applications which sometimes people take for granted. Second is the control plan which is for your mobility and all those, and third is the user plan.
So majority of the competitors are doing very well on the control plan side and that’s where we had to compete with incumbents and control plan was a big thing in traditional legacy voice and all those.
So that market we had much more intense competition and we try to address that with our ASI technology but the user plan aspect which is where the explosion of traffic and VDU and all that stuff is going on.
And the service enabler part where how you setup video calls and voice calls and other things are the areas where ASI can really add a differentiated value.
So nGeniusONE highlights the service enabler part in a very big way and that’s why we got lot of the business last year and IMS, (Gore) and other kinds of enablers where this is no other way better way to do it than through ASI and nGeniusONE..
Alright. Thank you..
Your next question comes from the line of Mark Jordan of Noble Financial. Your line is now open..
Good morning everyone. First a question going back to your statement in the prepared remarks that you add resources of $465 million implying that you had obviously a lot of flexibility on the balance sheet.
A question if you’re looking at acquisitions moving forward, are there major technologies out there that you could be considered buying or do you see future products development and enhancement primarily being focused on internal development?.
Right now I think if you’re – there were –you’re talking about the liquidity of $465 million. So yes what we’re pointing out we’re always on the lookout for new technologies and things which can accelerate and even beyond the APM space maybe inside but another areas which we’ll be focusing on next year.
But we’re not – our guidance is not dependent on acquisitions this year. But if we do it, it will make things busier and we’re not really targeting any acquisitions like we did in the last two years where we bought five companies.
But things could happen and what Jean was saying was that we have ample cash and resources to make that happen even at those bigger sizes we needed to..
Mark, this is Jean. So I think as I’ve discussed before number one capital deployment strategy is the continued evolution and investment in our product. We’ve done over the past few years through in-house development as well as through the acquisitions, the acquired technology that Anil spoke about.
Our past acquisition strategy has been to buy companies that had very good technology that would integrate well with our products but for whatever reason they did not really have a customer basis time. So our strategy in the past with acquisitions has been to take their product technology to finish that technology to integrate it into a platform.
As you know we call it nGeniusONE was one of the characteristics being added to one product, one integrated product. As Anil said our guidance is dependent again on organic growth. Our growth over the last few years has been completely organic.
We do believe that the guidance for FY ‘15 450 to 465 also represents the organic growth and the investments that we’ve made in the products and the technologies over the last few years..
Back to the sales and marketing questions. In fiscal 2014 sales and marketing were up about 11%. Looking out into fiscal 2015 you’re talking about 18% to 23% product to revenue growth.
Can you sustain that type of growth rate on a continuation of sales and marketing growth in the 11% range or do you need to increase that to support say a very high teens product growth rate?.
What we’ve done – one of the things I’d like to stress, one of the things that’s very – that’s one of the hallmarks of NetScout is that we’re continuing our profitable and we deliver operating results because the operating model is very scalable.
However in FY ‘15 to be able to continue taking advantage of the opportunities that we see in our increased TAM we will be making investments in sales as well as marketing. And sales as I had mentioned earlier we do plan on adding headcount. We add headcount where we see specific opportunities.
The headcount in sales and related expense in growth would probably only be about 10% to 15% of that component in sales. Within the marketing arena we have as you’ve been listening to for the last two quarters we have an excellent opportunity to continue to capitalize on the differentiation of our company and our product.
So we do plan in FY ‘15 to invest in marketing to a degree not a substantial move the needle degree just to continue on messaging about how NetScout is unique in providing real-time actionable operational intelligence and analytics..
Thank you..
You’re welcome..
Your final question comes from the line of Joe Fadgen of Craig Hallum. Your line is now open..
Yes, hey guys. On here for Chad this morning. Thanks for fitting me in. Actually most of my questions have already been answered. But I guess digging into the enterprise space, I know you used to breakup like the financial services.
Can you tell me kind of a breakdown like what are you seeing in the financial services vertical specifically or any other verticals within general enterprise that did particularly well or maybe..
Excuse me operator I think you keep on coming in. So I’ll just repeat the call that Joe, the question that Joe had. He was curious as to the component of revenue within enterprise and whether we saw any how financials were doing since it’s a largest segment and whether we saw anything else that was interesting.
So I think over the year we have seen the financials continue to grow and again it’s still the domestic basis we talk, they’ve probably grown approaching double-digit growth in product revenue. It’s also is very exciting to us is that other vertical or other industries that makeup that vertical healthcare, high-tech and retail.
Some of these industries have also grown very well as a reflection of the nGeniusONE product as well as the approach that Anil was talking about earlier. Some of the used cases that we’ve used over the last couple of quarters were enterprise have – including in cloud for their customers we’ve been a part of that.
And retail the one we described today where people are starting to need better, faster information on how their stores are doing. We’ve been part of that also. So in the enterprise vertical we saw growth not only among financials but in some of those other healthcare, retail, high-tech that I had just mentioned..
I think that ASI is a universal framework for all applications and all verticals because all applications are used standard protocols and all those.
So that’s where I think bulk of the growth will be there whether it’s financial or healthcare, but there are some applications like for like the credit card monitoring or trading applications which apply to financials more so than other people.
And so yes there will be – so we’re working on both custom applications for each vertical as well as a large number of common applications whether is Exchange or Oracle, whether you’re a financial firm or a retail chain or pharmaceutical, you have big set of common applications.
So sometimes I look like – just like you can buy a server or Oracle from – or a Oracle database for all verticals just like by a router from Cisco for all verticals similar to that ASI is applicable to all APM, all verticals from both NPM plus APM point of view..
Okay. And then one more if I may. You’re certainly not the only company that’s kind of talked about APM, NPM kind of the market convergence, product convergence.
I mean are we still I mean would you say we’re still kind of in like the first inning of the APM, NPM market, are we a little bit further along, kind of what are your thoughts on that and kind of the industry, the potential there in general?.
I think our kind of product and approach is not yet in the mainstream and we’re trying to bring in the mainstream. But the need for solving the classes of – those classes of problem to expand the network and application people and call NPM and APM, many companies have been talking about and that’s in the mainstream.
So that’s a great story that the value proposition and the need for that market are in the mainstream yet we believe that before ASI there was that solutions were the right solutions or the best solutions for that market were not in the mainstream. And that’s why we’re hopeful of or excited about and confident about our success in the coming years..
Alright. That’s all from me. Thank you guys..
Thank you..
Okay. Thanks everyone and thanks for all your questions. And we’ll talk to you again in July..
This concludes today’s conference call. You may now disconnect..