Andrew Kramer - Vice President of Investor Relations Anil Singhal - President and CEO Michael Szabados - Chief Operating Officer Jean Bua - Senior Vice President and CFO.
Alex Kurtz - Sterne AGG Scott Zeller - Needham Mark Kelleher - DA Davidson Eric Martinuzzi - Lake Street Capital Chad Bennett - Craig Hallum Kevin Liu - B Riley and Company Jonathan Ruykhaver - Stephens.
Ladies and gentlemen, thank you for standing by. And welcome to NetScout's First Quarter Fiscal Year 2016 Results Conference Call. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded.
Andrew Kramer, Vice President of Investor Relations and his colleagues at NetScout are on line with us today. I would now like to turn the call over to Andrew Kramer..
Anil Singhal, NetScout’s Co-Founder, President and CEO; Michael Szabados, NetScout’s Chief Operating Officer; and Jean Bua, NetScout’s Senior Vice President And Chief Financial Officer. We have included the slide presentation of key financial data that accompanies the financial section of our prepared remarks.
For those listeners who have dialed into the call this morning and would like to view this slide presentation, you can find it by going to our website at www.netscout.com/investors and then clicking on today’s webcast. You can advance the slides in the webcast viewer to follow along with our commentary.
We will try to remember to call out the slide number we are referencing in our remarks.
In terms of our agenda for today’s call, Anil Singhal will first provide an overview of our first quarter results and share his perspective on our business going forward and the opportunities we see now that our acquisition Danaher’s Communications business has been completed.
Our COO, Michael Szabados will offer some insights on customer success stories and key drivers for customer adoption. CFO, Jean Bua will then provides additional detail on our first quarter financial performance as well as discusses our guidance. Moving on to Slide 3.
I would like to remind everybody listening that forward-looking statements in this presentation are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and other federal securities laws.
Investors are cautioned that statements in this presentation, which are not strictly historical facts, constitute forward-looking statements which involve risks and uncertainties.
These include without limitation, our financial guidance, anticipated share repurchase, product development plans, adoption by customers, the anticipated benefits of NetScout's acquisition of the communication business lines of Danaher Corporation and the performance of the combined company.
Actual results could differ materially from the forward-looking statements.
Risks and uncertainties which could cause actual results to differ include, without limitation, the other risk factors outlined in today’s press release and NetScout's annual report on Form 10-K for the fiscal year ended March 31, 2015 which is on file with the Securities and Exchange Commission and is available on our website.
NetScout assumes no obligation to update any forward-looking information contained in this press release or with respect to the announcements described herein.
Finally, I would like to remind you all that while the slide presentation includes both GAAP and Non-GAAP results, unless otherwise stated, financial information discussed on today’s conference call will be on a non-GAAP basis only.
Non-GAAP items are described and reconciled to today’s press release and they are included at the end of the slide presentation that is made available online on our website. I would also like to note that growth rate discussions are based on a year- over-year basis unless otherwise noted.
As detailed in our press release today, NetScout reported first quarter results that were within the range of guidance we offer in late April. More importantly two weeks ago we achieved a major strategic milestone when we successfully completed our acquisition of Danaher’s Communications Business.
As Anil will detail this transaction accelerate NetScout's strategic progress and position the company for long-term success. Jean will offer further details on our outlook for the remainder of the fiscal year. And with that said, I will now turn the call over to Anil and then my other colleagues to expand on these and other points.
Anil, please go ahead..
Thank you. Andy. The past several quarters and more certainly the past several weeks have been very energizing for NetScout with the completion of the transformative acquisition of Danaher’s Communications Business.
At the same time, our team stayed focus on addressing our customers' needs which enabled us to report a solid first quarter performance in line with the guidance we have provided. Our results this quarter were marked by revenue in excess of $100 million and solid non-GAAP profitability.
While I'll provide some perspective into our first quarter result in the later, I'll spend the majority of my time outlining our perspective on the transaction and why we are positive that this transaction will help us via significant value over the long term for our all key stakeholders.
Before I do that, I wanted to make sure I expressed our thanks to all of our shareholders for the tremendous support we received at the special meeting last month when approximately 98% of those voting voted in favor of the primary proposal related to the transaction.
On a related note, also want to welcome our new shareholders who are invested more recently in NetScout either by tendering their ownership o Danaher stock or in purchasing of our stock in the week leading up to or following the completion of the acquisition.
This transaction has the potential to significantly accelerate the strategic plan that we put in place several years ago to further expand our business and extend our reach into complimentary market.
By extending our leadership position in the Broader Service Assurance in Cyber Security Market, we'll move forward with a clear focus on fulfilling the responsibility associated with our new tagline and mission called - Guardians of the Connected Word.
More than two decades ago, NetScout pioneered the network traffic-based approach for 7x24 continuous monitoring of the end-user experience, as a unique technique to reduce the many tangible risks associated with downtime and poor service quality.
In today’s increasingly connected world the expectation in every facet of our personal and professional lives is that we can access all of our applications, at any time and over a wide range of devices from PCs and laptops to cell phones and tablets. That is why the IT infrastructure must be always on.
As a result, we believe the relevance of our technology and our approach is more prominent than ever before. All of the businesses that we are acquiring believe that the best source of data to solve problems is the traffic flowing over the network as it is indicative of actual communication.
We all believe in the power of a traffic-based instrumentation approach and are actively selling analytics solutions in markets that extend beyond the traditional service assurance space where NetScout has been an innovator and market leader.
These solutions span WiFi monitoring, business intelligence via customer experience management, radio access network optimization, and cyber security. As a result, we have more than doubled our total addressable market to over $8 billion.
The range of solutions, talent and resources in the combined company will create tremendous platform synergies as well as notable cross-selling opportunities. We also expect to benefit from greater scale and a more strategic position within a larger and more global customer base in both the Service Provider and Enterprise segments of our business.
We believe that these dynamics will, in turn, further enhance our ability to capitalize on this bigger TAM, produce impressive operating margin leverage and drive even more superior returns for our shareholders in the coming years.
To realize our potential and deliver on our vision, we plan to stay focused on meeting our customers’ dynamic needs from a development, sales and marketing, and support perspective.
Our strategic direction is clear; we believe we are in a unique position to enable our customers to realize the power of traffic-based instrumentation to address their service assurance and cyber security requirements.
Having spent time at several major offices of the acquired companies shortly after closing the transaction, we were pleased to see that our new colleagues share our sense of excitement and enthusiasm about NetScout’s future.
The teams responsible for bringing our company together have focused their initial efforts on the day 1 readiness required to continue meeting our customers’ requirements, smoothly transition over 2,000 employees into our company and support our financial reporting activities.
We have organized the company around multiple business units, while consolidating a bulk of the sales organizations under the leadership of our senior VP of worldwide sales. All of the Business Unit Leaders and the Sales Leader will report directly to me.
From a development perspective, the engineering teams will continue to advance the roadmaps for their respective business units. At the same time, we see attractive opportunities to deliver unique value to our customers by integrating some of the technologies from multiple business units.
Our teams have already been meeting to advance this development initiative and we plan to bring some of these offerings to the marketplace later this year. While it is only two weeks into operating as a combined company, we have hit the ground running.
We have many meetings lined up with our largest and most strategic accounts in order to walk them through our roadmaps and better understand how those roadmaps can align to their near-term and longer-term project requirements. We currently see a number of significant opportunities ahead.
However, our visibility into the precise timing of some of these projects remains somewhat limited, especially given the timing of the acquisition. Related to this, we plan to carefully manage the cost structure of our business as we advance our integration activities.
Moving on to NetScout’s first-quarter performance, we continued to execute and stayed focus on addressing our customers’ requirements. We reported first quarter revenue of $100.7 million, which is a decline of 7% from the same period one year ago. This was within the guidance range that we provided, as we lapped a particularly strong quarter.
As a reminder, last year’s first quarter revenue benefited from the activity of one of NetScout’s tier-one service provider customers who has a purchasing pattern of placing one large order to support deployment plans that span multiple quarters.
During the first quarter, we also remained disciplined with respect to the expense, even as we continued to direct prudent investment into major development and sales initiatives, including the acceleration of certain marketing activities to support our branding and broader go-to-market campaigns, including our annual Engage user conference in April.
As a result, we reported non-GAAP EPS of $0.33 per diluted share, down 8% from the year ago quarter. We were generally pleased with demand levels in the quarter from our service provider customers.
We’ve continued to see our service providers customers in key markets around the world turn to NetScout to support the build out and expansion of their 4G/LTE networks, and deliver high-value services such as voice over LTE calling. Just as important, the drivers behind these infrastructure investments remain robust.
For our enterprise and government customers, we experienced good growth as these customers continue to select nGeniusONE as their solution platform. Jean will provide some additional detail in a few moments.
We believe that we are well positioned to drive improved performance in these markets as we leverage the initial adoption of nGeniusONE that’s occurred since its launch two years ago.
We expect to bring our new features and functionality to the marketplace over the coming months, including 100-gig capacity and new modules to further automate the service triage process, as well as deliver integrated support and innovative go-to-market programs for customers advancing virtualization initiatives.
Additionally, we will go-to-market with a broader range of offerings via the Fluke capabilities and the Arbor cyber security platform. We’ll be developing and implementing those cross-selling campaigns as we move into the second half of the year.
I’d like to conclude by thanking the more than 3,000-strong individuals who are part of the NetScout team for the efforts to date. I am confident that we have the people, products, partners and programs in place to make fiscal year 2016 very successful and those efforts will set the stage for further improvement over the longer term.
As many of you know, we are planning to be in New York next week where we will ring the opening bell at NASDAQ and host an Investor Day event. At the Investor Day, we will plan to provide additional insight into the combined company’s strategy, value proposition, growth opportunities and financial profile.
I look forward to seeing you at this event or having you listen to it through the webcast. With that said, I will now turn the call over to Michael..
Thank you, Anil. It is a very exciting time for NetScout. Having spent considerable time with the teams from NetScout, Tektronix Communications, Arbor Networks, VSS Monitoring and Fluke Networks since closing the acquisition, we see great enthusiasm for what we can accomplish together.
The opportunity in front of our Company is a significant one and we move forward with a value proposition that we believe will be uniquely compelling to hundreds of service providers and more than 10,000 enterprise customers around the world.
I’d like to review a couple of recent success stories for NetScout as they should be helpful to you as you think about our potential to leverage the combined capabilities of our post-acquisition company across a larger, more diverse and more global customer base.
Last month, we announced that Open Mobile, a leading network operator offering a complete range of Internet and mobile cellular services exclusively in Puerto Rico, selected NetScout to ensure service delivery and provide operational intelligence support for its wireless network.
Although the incumbent vendor competed aggressively to win this business, NetScout was chosen based on the strength of our proven workflows that offered deeper insight into their LTE network. NetScout’s solution includes our nGeniusONE management system, InfiniStream Appliances and Packet Flow Switches for traffic aggregation and distribution.
We see potential to deliver further value in the future to this customer, as we will have a broader range of capabilities and offerings that can help us extend our footprint within this and other accounts.
One win I’d highlight in the financial services vertical is a leading diversified insurance and financial services provider with a nationwide footprint. This firm has rolled out NetScout’s nGeniusONE to assure the connectivity and quality of the firm’s unified communications infrastructure as well as support a new data center build out.
The workflows of nGeniusONE continue to distinguish and differentiate NetScout, providing this customer with timely, high-value insight into key performance indicators that can help them to quickly identify and triage the root causes of issues impacting the network and Unified Communication service applications.
Within our government customers, I’d like to spotlight a couple of wins as I think they are illustrative of the ways that we will continue to grow and bring value to public sector customers. During the first quarter, we secured a multi-million dollar deployment with a major arm of the U.S. military.
This customer was experiencing major issues associated with its packet transmission across its network, creating frequent network disruptions that required considerable time and resources to identify and remediate.
They selected nGeniusONE due to the real-time agility of our ASI technology that can enable them to use our nGeniusONE dashboards to help them quickly isolate and identify issues impacting performance.
Having already deployed NetScout as a troubleshooting and reporting platform in its major non-classified sites, this deployment also extends our reach into across classified and secondary sites.
Just as important, they are planning to instrument server farms within their broader IT infrastructure in order to benefit from the service triage capabilities of nGeniusONE. Turning toward the initial nGeniusONE adoption, we continue to see the follow-on benefits from the product’s launch.
As we have migrated various features and functionality from predecessor platforms, a process that we completed this past spring, we have seen customers begin broadening their use of nGeniusONE.
Last quarter, a large defense agency commenced a multi-million dollar transition from our legacy Performance Manager software and older generation probes to the nGeniusONE-InfiniStream solution that also will support continuous monitoring of select applications and provide better insight into their global enterprise infrastructure.
The nGeniusONE dashboard will be used by multiple departments spanning engineering, operations and security, helping them to rapidly identify and resolve issues that affect overall productivity and effectiveness while improving the reporting that is provided to their executive management.
We are optimistic about our ability to drive strong performance in the enterprise.
NetScout’s capabilities will be complemented by the acquired Fluke set of offerings, which range from portable network analysis and troubleshooting tools to network and application performance management solutions for mid-tier enterprise customers and industrial-grade WiFi monitoring solutions that help customers design, analyze and protect their wireless infrastructure.
Our enterprise opportunities with our packet flow switch will be further enhanced with the addition of the VSS Monitoring solutions. In addition, the Arbor team brings unparalleled expertise in the cyber security market as a leader in DDOS identification and mitigation solutions.
As Arbor looks to expand further into the enterprise market, we look forward to collaborating with them in terms of both cross-selling and product development. NetScout has a tremendous opportunity ahead as we bring together the different businesses and leverage what we believe will be a very powerful platform.
In becoming a more strategic partner to a wider range of customers worldwide, we will look to drive greater market awareness of this different ways that we can help customers thrive in the connected world.
Looking ahead, there is a wide range of events around the globe that our teams will be participating in to promote our capabilities to both current and prospective customers in our service provider and enterprise segments. That concludes my remarks at this point; I’ll turn it over to Jean for the financial review..
Thank you, Michael. And good morning everyone. This morning, I will plan to review key metrics for the first quarter, and then I will discuss our guidance for the upcoming fiscal year.
As mentioned at the outset, we will be referencing non-GAAP metrics when appropriate, and comparing all figures against the comparable prior year period unless otherwise noted. To begin our financial discussion, we will be starting with Slide no 7 of our presentation which is accompanying this call. As a reminder, it is posted on our website.
For our first fiscal quarter, total revenue was $100.7 million which is a decline of 7% from the same quarter in fiscal year 2015.
The decline was led by a 17% decrease in product revenue as the result of an exceptionally strong first quarter of the prior year, which was led by one of our large Tier-1 service provider customers who purchased in the comparable quarter of last year in order to support one of their large multi-quarter deployments.
Service revenue was $47.1 million and represented an 8% increase over the prior year’s quarter. Gross profit was $80.7 million. Our gross margin percentage for the quarter was 80.1% which is relatively in line with the gross margin percentage of the prior year’s quarter.
Operating income for the quarter was $21.9 million with a 21.8% operating income margin. Due to the higher product revenue experienced in last year’s quarter, the comparable period’s operating margin last year was 23.4%. For the first quarter, we reported net income of $13.7 million, or $0.33 per diluted share.
The net income margin was 13.6% as compared to the prior year’s quarter of 14.1% Slide 8 provides detail on our product revenue composition for the first quarter.
As we move forward under the combined businesses, we are consolidating the Enterprise and Government vertical since the government vertical will no longer be as material to understanding the revenue performance of the business.
The components of our $53.6 million of Product Revenue in the first quarter of fiscal year 2016 were in line with our historical composition where Service Provider was 40% and Enterprise was 60%. Slide 9 illustrates our product revenue growth rates for fiscal year 2016 by vertical.
The Enterprise vertical grew 42% primarily as a result of significant growth coming from the government sector.
As Michael noted, multiple agencies have selected nGeniusONE as their platform to optimize the performance of their networks and the broader IT infrastructure as they transition from a troubleshooting environment to proactive service assurance. We also experienced growth in our high tech, manufacturing and entertainment sectors.
The financial services industry was down slightly for the quarter. Our service provider product revenue declined by a little less than half from the year ago quarter.
As we’ve noted, last year’s first quarter saw a spike in demand by certain service provider customers with one North American carrier in particular who placed a substantial order to support deployment of our products over a multi-quarter period.
Additionally, we also moved quickly to meet the fast turnaround demands of another service provider late in the quarter. Slide 10 shows our total revenue composition for the first quarter of fiscal year 2016. The composition of our $100.7 million of total revenue for the first quarter was as follows.
Our Enterprise customers represented $64.2 million, or 64% of total revenue and Service Providers generated $36.5 million, or 36% of total revenue.
Going forward, we expect that the revenue mix in future quarters will be oriented toward service provider customers since Tektronix Communications was nearly 100% service provider and the majority of revenue at Arbor Networks also came from this vertical.
We expect that service provider will be approximately 60% of total quarterly revenue, depending on the timing and magnitude of certain projects. Turning to Slide 11. This depicts our total revenue growth by sector for the first quarter.
Total revenue for enterprise grew 24% with strong performances within the government, high tech, and manufacturing and entertainment sectors as I previously mentioned. This progress was offset by the decline in total revenue in our service provider vertical.
Let’s turn to Slide 12 for a review of our revenue by geographic region in the first quarter of fiscal year 2016. The quarterly revenue mix was 78% domestic and 22% international. As Anil mentioned, we expect that the international piece of our business will expand to approximately one third of our revenue coming from outside of North America.
Within our international revenue, Europe represented 13% of revenue with 3% for Asia and 6% for the rest of the world. Europe’s growth rate is the result of demand from a tier-one service provider in this region. Slide 13 details our balance sheet highlights and free cash flow. We continued to maintain strong liquidity through the first quarter.
At the end of June, we had invested cash, short term marketable securities and long-term marketable securities of $267.5 million. As you know, we put a new, 5-year $800 million senior secured revolving credit facility in place with the closing of the transaction.
This replaces our previous $250 million facility, and can be drawn to support the general working capital requirements consistent with operating a larger company as well as to repurchase common stock under the Company’s new 20 million share common stock repurchase plan.
The combination of our current cash position plus the credit facility provides us with nearly $1.1 billion of total liquidity. Our first quarter fiscal year 2016 free cash flow was $5.8 million. This reflects $9.3 million in cash flow from operations less $3.5 million in capital expenditures and the purchase of intangible assets.
The decrease is attributable to the lower net income combined with changes in working capital, most notably the payment of variable incentive compensation earned throughout fiscal year 2015 and professional fees associated with the transaction.
Accounts receivable net of allowances was $58.5 million, down from $82.2 million at the end of fiscal year 2015. Days sales outstanding were 51 days for the quarter, which was a decline of 10 days from the DSO level last quarter, although it is higher than the exceptionally low mark of 26 days we reported in the first quarter of last year.
Inventories were $12.7 million dollars. This is up by 600 thousand dollars since the March year end. Our total deferred revenue was $136.1 million, which declined by $14.3 million against the year-end fiscal 2015 balance.
This decline is consistent with the historical pattern we’ve seen with lower levels of renewals in the first half of our fiscal year. Related to our share repurchase program, we repurchased a total of 67,752 shares in the first quarter, at an average price of $41.12 per share, totaling approximately $2.8 million.
These repurchases were made under our previous $100 million repurchase program. When the Danaher’s tender offer began, we were precluded from transacting in our own shares and ceased buying in the open market.
Upon the completion of the transaction, we replaced the $100 million share repurchase program and increased the program with our current 20 million share repurchase plan. Additionally, we created a 10b5-1 plan in order to begin repurchasing shares after the transaction closed on July 14th.
We have been active in the market in the days following the transaction’s completion with open market purchases under this 10b5-1 plan. We expect our repurchasing activity to continue via the 10b5-1 plan as we move through the second fiscal quarter. Let’s turn to our guidance for fiscal year 2016 on Slide14.
With the acquisition of Danaher’s Communications Business now complete, we are in a position to offer guidance for the balance of fiscal year 2016. Our non-GAAP revenue guidance for fiscal year 2016 ranges from $1,050 million to $1.1 billion. Our non-GAAP earnings per share guidance range from $1.80 to $1.95.
With the close of the acquisition, the complexity of our business and financial activities has increased. As such, on a go forward basis, we will discuss our performance in light of certain items including foreign currency exchange rates, outstanding share count, and debt levels.
Additionally, there are a few moving pieces as we integrate the operations over the coming quarters. These include existing transitional support agreements with Danaher, transfer of certain businesses in foreign jurisdictions, and duplicative costs associated with staffing as we transition from these support agreements.
As such, we will note any one-time effects in our performance. Consistent with explaining our performance, we would also like to shape the upcoming quarter and the activity associated with it. As such, I would like to provide some thoughts on how we view our second quarter performance.
At this time, we believe that the second quarter revenue will contribute between roughly 25% to 27% of the full year revenue guidance range. We are in the execution phase of a significant and exciting project with one of our Tier-1 service providers.
While we are in the end stages of executing this project with our customer, the recording of the associated revenue is predicated on receiving documentation from the customer acknowledging the project’s completion. We currently anticipate that this documentation will be obtained close to the end of September.
The recording revenue for this deal is greater than $50 million. If the documentation comes in October then our revenue percentage would be in the range of 20% to 22% of the guidance range. And our third quarter revenue however would be higher.
Earnings per share for the second quarter should contribute about 16% to 18% of our full year earnings per share guidance range. With regard to the tax rate for our second quarter, we anticipate a tax rate in the 45% to 47% range.
This is due to the expensing of certain deal-related costs such as professional fees that are not deductible for tax purposes. We anticipate that the overall tax rate will modulate however for the remainder of the year and will range from 36% to 38% for the entire fiscal year 2016.
The higher tax rate is due to the expiration of the research and development tax credit which expired at the end of calendar year 2014 and the deal related costs.
As is our past practice, if and when the R&D tax credit is reinstated, we will note it in our earnings per share performance and adjust our go-forward earnings per share guidance ranges accordingly.
Looking ahead into fiscal year 2017, we believe we are on the path toward achieving our goals for the first full year of operations and positioning the Company for continued revenue growth and expanding operating margins, cash flow and earnings per share.
The closing of our acquisition of the Danaher's Communications Business opens a new chapter for NetScout. Our market capitalization has increased from about $1.6 billion to almost $4 billion, and as such we transitioned from the S&P 600 small cap index to the S&P 400 mid cap index.
Consistent with the tone and tenor of Anil’s commentary, we are very excited about NetScout’s future and see substantial opportunity to create significant shareholder value over the long term.
I would also like to thank our shareholders for supporting this transaction and the tender offer, and welcome continuing dialogue with both our existing and new shareholders. We are looking forward to hosting our Investor Day next Tuesday, August 4th where we will share more color on our performance as we execute our current five-year strategy.
As a reminder before I wrap up our prepared remarks, in addition to our Investor Day, we plan to participate at several investor conferences over the next two months, namely we will be presenting at the Needham & Company’s Interconnect Conference on August 5 in New York.
We will be participating at the Oppenheimer & Company Technology, Internet & Communications Conference on August 12 in Boston. In September, we will be at the Credit Suisse Small & Mid-Cap Conference on September 16 in New York followed by the Deutsche Bank Technology Conference on September 17 in Las Vegas.
That concludes our prepared remarks this morning. Thank you for joining us and we look forward to taking your questions..
Operator, we are now ready for the Q&A..
[Operator Instructions] And your first question comes from the line of Alex Kurtz, Sterne AGG.
Yes, thanks guys for taking the couple of questions. And congratulations on completing the deal. First on Jean on this $50 million deal that you are talking about in September. How does that factor in Q, how you view the guidance for the year and also the accretion that you guys talked about when you announced the deal.
Then I have a couple of follow ups..
Sure. So factoring into the deal, so the deal has only been awarded. It was rewarded to Tektronix and they are in the final stages of execution where what is required to just be able to report the revenue is the documentation and acceptance from our customer. We anticipate that, that will definitely happen before the end of this fiscal year.
And so it is in embedded in our $1.05 billion to $1.1 billion revenue range. We currently anticipate since the project is on path for its completion in the quarter that it should happen in this quarter. But I just want to caution because we don't give our guidance on quarterly basis.
But the timing of that might switch into Q3 depending on when the customer prepares and sends our documentation. So it definitely it is just more of timing issue between Q2 and Q3 but it should happen in this fiscal quarter. Regarding accretion, as we've said a year ago, we believe we are on the path for accretion.
We said it would be accretive in the first full year which is the three quarters of FY16 that is remaining and the first quarter of FY17 and high end of our EPS guidance ranges, we are confident that we will still be able to achieve our goal of the deal being accretive in the first 12 months of operation. .
Okay and then just a couple of quick follow ups on the 20 million buyback, how much you know all discussion about aggressively you can use that in the first year.
What is the actual fact on that? How much of that 20 million shares can you buyback in the first 12 months and what's the plan?.
So the 20 million shares are represents about 20% of the outstanding shares. And we have an agreement that we would not buyback more 20 million shares over the first two years. Within those two years there is nothing that really precludes timing of that other than just looking prudently at your cash flow and your capital structure.
We put a 10b5-1 in place before the beginning of the quite period for our second quarter. And under an open market purchase plan which is what we decided made the most sense because as we've discussed in the past, after this RNT transactions there is generally a large amount of volume which everyone saw in the month of July.
So we put 10b5-1 plan in place to be able to take advantage of buying, generally you can buy and line with say 10%-15% of the average of the trading volumes over like a four week period. So we have doing that and we plan to do that for the continuing period going forward.
So we've been happy so far with the stock price, the way the stock has reacted from the transaction and the tender and the shareholder vote. And we've been active in buying in the market at this point. .
Just last question. If you look at the last filing here on Danaher’s comp business that was put out I think last week, it showed a pretty weak June quarter and I can imagine a lot that is from just the deal and sort of pausing some spending in demand.
So can you just help us explain the reacceleration of your assumptions of Tektronix and Danaher’s comp business from that filing from Danaher from the June quarter into the September quarter?.
So, Alex, so first thing is from a business point of view we talked about last time that book-to-bill ratio remains higher than one and actually there is a good backlog and one of the deals we just talked about is also the reason for this to be weaker last quarter.
So I won't -- we are not concerned about what happen last quarter at Danaher partly because there have been a lot of uncertainty also, so I think overall we feel confident about the guidance we've provided and I don't think this number is a reflection of not believing in that..
They seem good order flow and they also are going to start from a comparison perspective lacking some of the softer quarter within the Tektronix business. Fluke and Arbor have continue to grow as they historically which have been in the low to mid single digit to mid teen respectively.
When we did our guidance we did a very detailed operational review business by business and looked at all of their opportunities. So at this point we believe that they should be a grower. We understand that projects that they have in their pipeline and the projects that they are working on.
So at this point we are comfortable with our guidance range of $1.05 billion to $1.1 billion for fiscal year 2016..
Your next question comes from the line of Scott Zeller, Needham..
Hi, good morning. Thank you. I just wanted to ask Jean about your guidance just to be clear you mentioned there are two scenarios for the fiscal second quarter at 25% to 27% of annual and 20% to 22% of annual but then I heard you say also that you are not guiding specifically or granularly to the fiscal second quarter.
So could you help us with that?.
Sure. There is a lot of moving pieces to this business right. And I think it is also why we always provide annual guidance. I think it's just helpful to share with our -- with the investment community how we see each coming quarter given all of the integration pieces.
So the guidance right now that -- I am sorry -- the color that I gave for Q2 assumes that the larger transaction that we've been talking about with Tektronix definitely occurs in this quarter. And I am just explaining that should the documentation for recording the revenue which is into the third quarter.
The second quarter revenue would be impacted by that and the third quarter revenue would have a pickup. If that should happen, I imagine we will be and we don't see there is a communication from the customer will be coming in.
I would imagine that we would update our guidance or at least discuss it accordingly more towards the end of October beginning of September..
I think one other thing, Scott, to mention is at the VSS they were smaller business standalone, we've talked about the lumpiness of service provider and that percentage is going to increase now as Jean mentioned from 40% to 60%.
And specially we have these two weeks after the closing and so all these factors are creating that a little bit of uncertainty with Jean talked about. And that's one of the reasons we prefer to give -- look at the performance of the company on yearly basis and we've been doing that for last three years and meeting the guidance. .
Okay. So if I understand then there is no official guidance for fiscal second quarter just color and you have only annual guidance. .
Yes. We have only annual guidance but we are more than happy to provide color in each of these calls for the upcoming quarter given the complexity and the integration of the businesses. .
Given the changes, well the combination of business now, can you update us on what your thought are around the seasonal pattern for revenues now because in the past we've seen a seasonal pattern where the second half of the fiscal year is materially higher for NetScout, so could you -- as we look at the two together should we see more of a steady or up the right or can you just offer your thoughts on the balance between the first and second half of the year please..
I think Jean can be give more specific but I see the pattern very similar. I think second half will be better than the first half. But maybe Jean you can comment and maybe more specific..
Sure. I would say that the third quarter, the fiscal year third quarter is probably going to be one of the stronger quarters when our fourth quarter also being strong. So the skew will still be there with the first half is a little less in revenue and second half is greater.
I don't want to be definitive at this point because we don't have four full quarters yet to look at and the business will be ramping. But at this time I would still tell you it is probably still going to be slightly backend loaded and consistent with the NetScout revenue pattern..
The next question comes from the line of Mark Kelleher, DA Davidson..
Great, thanks for taking the question and congrats on the deal closing as well. I want to talk about the sales integration between the two.
I know you only been together for two weeks but particularly in the service provider, are the Tektronix sales people and NetScout people still independent or still address customers independently or is there some interaction going on there?.
No. The sales force has been completely integrated and so there are not two people calling the same account, we have a joint sales presentation. We have integration plan for the combined personality for later this year. So that was one of the areas where we had to do it on day one.
And as I mentioned that we have consolidated all the sales, bulk of the sales under single leader that we chose, VP of worldwide sales of NetScout before John Downing. But even at the next level, next couple of levels we have done similar things as far as Tektronix and so everything has been fully integrated.
I would say 95% to 98% of those procedures have been made and well accepted. .
Your next question comes from the line of Eric Martinuzzi, Lake Street Capital Market. .
Just I keep seeing on the Q1 just reported the legacy NetScout business, you did come in within your guided range on the top line there but it was in the lower half.
Just curious to know what the -- what puts you there as opposed to maybe the upper half?.
So as we discussed last -- on the earnings call last quarter, Eric, the range was pretty wide due to FX headwinds as well as the potential for service providers who want to understand the roadmap after the transaction closed. It is a difficult quarter to have been able to compare against anyway.
Last quarter was probably our largest Q1 in at least five years. And we were happy with that last year.
So this quarter I would it was just timing of FX headwinds even though we still -- even though the EURO has stabilized, there are still some of our customers in Europe who still are experiencing economic strain due to that as well as just as Anil said he has been on the road talking with a lot of our customers especially tier one about the combination and they would like to be able to understand the roadmap and the design going forward as they begin their purchasing cycles.
.
And has their purchasing cycle been impacted -- is there a potential risk of freeze as people want to see maybe merged product to comes out in six months as opposed to the one that's available now?.
No. I don't think so Eric, there will be like timing issue as we talked about one of the deal, got a different reason this quarter but there could be some more questions. This is a like vacation time, holiday time in Europe but we are going on the road again in September.
And I think that time everyone will be very clear that there is no real advantage to wait. In fact there might be an advantage from a pricing point of view to do it sooner than wait till the end of the year. .
And your next question comes from the line of Chad Bennett. Craig Hallum..
Yes. Good morning. Just a couple of questions for me.
Can you Jean can you give us a sense of with the combined company now what D&A depreciation and amortization will be and what's stock comp will be at least looking forward 12 months roughly?.
Looking forward 12 months..
Yes. Just kind of annually I guess I should say..
I would say that share based compensation is probably going to be in line with what it was for NetScout given on the increased scale of the business. Meaning that we still don't anticipate that we are going to be giving out more shares to employees than we have in the past. Generally we have given out about 2% and 2.5%.
So I would just look at the share based compensation as commensurate with the scale increase of the business. For depreciation and amortization, we are still finalizing our purchase accounting. And we still we have to be able to fair value some of the intangible and stuff.
So I really would say I get back to you on that question probably in a couple of weeks when we finished the opening balance sheet procedures. .
Okay, fair enough. And then I believe when we were talking about the deal we talked about at least initially preclose synergy $50 million-ish in think in synergies for the combined business.
I guess I assume -- can you tell us how much of that is implied in the EPS guidance that you gave and I assume some or maybe all of it is and kind of how tha stages in throughout the year. .
Well I think basically we talked about so that number is part of the guidance, is included it and it is going to be realized more towards the second half of the fiscal year.
And you can think of them partly as some cost savings and second is some gross market synergy by moving some other products to the next got gross margin -- rather than maybe Tektronix margin level as well as -- so that's how the $50 million of synergy are made of that and like I said we will see it more towards the third and fourth quarter and that made into the EPS guidance..
As well as the first quarter of fiscal year 2017..
Yes..
And your next question comes from the line of Kevin Liu, B Riley and Company..
Hi, good morning.
First off just in terms of the European talk that contributed within Q1 and can you talk about whether that was a new customer or whether it was an existing one? And how do you expect your penetration of that customer to expand over time?.
Yes. It was a nice customer and I think the penetration we hope moving forward is going to be -- we hope it better because Tektronix business was much stronger internationally and we think that those people will be very interested looking at the joint company and the best of breed functionality.
And having said that, we still need to present a roadmap and we did interaction to them. But we see longer term and basically it sound dim or maybe even some positive to act this fiscal year, we see the European business will be more positive than before. .
Got it.
And just since day one of the close of the transaction, have you noticed anything changing in terms of deals that were already in the respective company pipeline and in another words first maybe your service platter touch might you have seen those deal sizes either extend or perhaps they longed as decisions need to be made around the kind of the future direction of the products..
I think there was -- it was not clear when the date the close is going to happen in July. Yes, that impacted some of the businesses slightly but I don't see any big change in terms of people specifically waiting for the deal.
They just -- that's where I think there was uncertainty in the Q1 for last year for us as well as Tektronix and some of it, maybe they are little bit in the Q2 also. But I don't see that continuing beyond that. .
Your next question comes from the line of Jonathan Ruykhaver, Stephens. .
Yes, good morning. I am wondering Anil if you can talk a bit about your strategy around the enterprise segment.
I think in the segment there is underperformance to some extent and how do you see the Fluke Networks' business impacting that opportunity?.
I see I mean this is a maybe longer discussion but a short answer for this is we see two main synergies. One is that we going into the mid market segment with Fluke Networks tools and their solutions. And which is the area we have not focused on and it is more channels friendly and there are other businesses international.
We have to look stronger so I see enterprise business growing in those areas on the high end side; I see lot of synergy between a combined security and service assurance product. We typically placed in the similar point in the network and you can think of DDOS as short of service assurance also.
So I think lot of the financials who have been spending lot more money in compliance and security, we now can go back to them with a different message and then sell a higher level functionality. So those are the two big synergies we see over the next year or so..
Is that a product integration opportunity you see between NG as one in Arbor or is it more just cross sell that you think you can focus on to be more effective in financial services with Arbor..
Yes, both. We see both because we have a much larger enterprise sales force than Arbor and they have bigger force on service provider side.
So we have great relationship to sell the security solution through some kind of overlay model or otherwise and second are like I said when we have more integrated solutions like taking our ASI technology and feeding into some advanced persistent threat solution. And aligning with existing roadmap of Arbor that could create additional synergy.
But that will be maybe beyond this calendar year. .
And I'll turn it back over to management for closing remarks. .
Well, thank you very much, Melisa. And thank you everybody for joining us on this morning's call. As a reminder, there is a replay that will be available for the next week or so. Obviously there will be webcast archived on our website as well. Look forward to seeing folks at our Investor Day next week in New York.
And we understand that there is likely to be additional follow up questions. Folks are welcome to engage with us. We look forward to the dialogue. And we look forward to reporting back to you in October when we announced our Q2 results. Thank you very much..
Thank you for joining today's conference call. You may now disconnect your line..