Andrew M. Kramer - Vice President-Investor Relations Anil K. Singhal - Co-Founder, Chairman, President & Chief Executive Officer Michael Szabados - Chief Operating Officer Jean A. Bua - Chief Financial Officer & Senior Vice President.

Alex Kurtz - CRT Capital Group LLC Mark D. Kelleher - D. A. Davidson & Co. Eric Martinuzzi - Lake Street Capital Markets LLC Scott Zeller - Needham & Co. LLC Mark Sue - RBC Capital Markets LLC Chad Michael Bennett - Craig-Hallum Capital Group LLC.

Ladies and gentlemen, thank you for standing by, and welcome to the NetScout Second Quarter Fiscal Year 2016 Results Conference Call. As a reminder, this call is being recorded. Andrew Kramer, Vice President of Investor Relations, and his colleagues at NetScout are on the line with us today. I would now like to turn the call over to Andrew Kramer..

Thank you, operator, and good morning, everybody. Welcome to NetScout's fiscal year 2016 second quarter conference call for the period ended September 30, 2015.

Joining me on this morning's call are Anil Singhal, NetScout's Co-Founder, President and CEO; Michael Szabados, NetScout's Chief Operating Officer; and Jean Bua, NetScout's Executive Vice President and Chief Financial Officer. We've included a slide presentation of key financial data that accompanies the financial section of our prepared remarks.

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

You can advance the slides in the webcast viewer to follow along with our commentary, and we'll try to remember to call out the slide number we're referencing in our remarks. As you know, our Q2 results reflect the first quarter of combined operations since completing our acquisition of Danaher's Communications Business in mid-July.

In terms of our agenda for today's call, Anil Singhal will first provide an overview of the results and share his perspective on the opportunities and challenges that lie ahead. Our COO, Michael Szabados, will offer some insights on near-term integration activity and key drivers for customer adoption with a focus on the enterprise marketplace.

CFO, Jean Bua, will then provide additional detail on our second quarter financial performance, as well as discuss our guidance. Moving on to slide number three.

I would like to remind everybody listening that forward-looking statements on 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 historical statements, constitute forward-looking statements, which involve risks and uncertainties.

These include, without limitations, statements relating to our financial guidance, anticipated share repurchase, integration and product development plans and expenses, adoption of our products and solutions by customers, our ability to effectively compete for service provider opportunities, being well positioned to drive top line growth in the enterprise segment, the anticipated benefits of NetScout's acquisition of the Communications 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 slide presentation 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 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 call will be on a non-GAAP basis only.

Non-GAAP items are described and reconciled to the GAAP results in today's press release, and they are included at the end of the slide presentation that's made available online on our website. As Jean will note, the timing of the acquisition will skew period-to-period comparisons and the potential discussions related to growth rate.

If we do note a growth rate, we will strive to clarify the nature of the comparison. As detailed in our press release today, NetScout reported solid second quarter results, highlighted by a two-plus month contribution from the acquired businesses.

We've also made good progress in our efforts to advance the integration initiatives that are critical for driving the company's performance. At this point, I'll turn the call over now to Anil and then to my other colleagues to expand on these and other points. Anil, please go ahead..

Thank you, Andy. Good morning to everyone listening and thank you for joining us today. As Andy mentioned, our second quarter results reflected the two-plus month contribution of the acquired Danaher Communications Business. At a high level, our non-GAAP revenue of $281.1 million reflected good execution across our company.

In terms of profitability, we reported non-GAAP EPS of $0.47; thanks to the solid revenue performance in combination with prudent cost management and our share repurchase activity.

As we discussed with you previously, the acquisition helps accelerate our strategic progress, enabling us to double our total addressable market to over $8 billion, with a broad portfolio of market-leading products, extensive domain expertise, and stronger go-to-market capabilities that can help us address the dynamic requirements of a larger, more diverse and more global customer base.

With a compelling value proposition, better market access and substantially greater operational scale, we believe that the new NetScout is well-positioned to create substantial value for our stakeholders as we focus on driving solid revenue growth and expanding operating margins, cash flow, and earnings per share over the long term.

An important element of our strategy to help realize NetScout's full potential involves driving tighter integration, collaboration, and coordination within and across this asset base. NetScout has used this approach before with our other acquisitions, but it's quite different for how the acquired assets had been managed under their prior ownership.

For these reasons and due to the impact of various accounting considerations related to the closing of the transaction, comparisons with the prior-year period may not be representative and should be made with caution. Nevertheless, we'll try to highlight notable performance metrics and trends in our commentary when appropriate.

In our service provider segment, our performance was highlighted by good traction with customers deploying our nGeniusONE solutions, along with a successful execution of a significant and exciting project with one of our Tier 1 service provider customers.

This project, which involves achieving acceptance at dozens of different customer size, was completed on schedule; thanks to the diligence and hard work of our sales engineering and professional services teams.

Our success this quarter helps underscore the importance of our collective capabilities in helping the world's largest and most innovative service providers, seeking to differentiate their services on the overall quality, resiliency and stability of their network. NetScout's security business, Arbor Networks, is a new and important part of our story.

Arbor is recognized today as the market leader in helping both service provider and enterprises worldwide protect their networks from high-volume and application-specific distributed denial of service attacks.

During the quarter, Arbor continued to make progress, fortifying its relationship with major service providers, closing a number of six and seven-figure deals during the quarter.

Overall, approximately 61% of our total revenue came from our service provider customers, which is generally in line with our view on revenue by segment that we shared at our Investor Day event. With that said, given the large and lumpy nature of certain service provider projects, the mix is likely to vary considerably from quarter to quarter.

In our enterprise segment, we worked diligently to address near-term customer requirements. In terms of order trends, we have seen healthy demand remain in certain verticals such as government and high-tech. As Michael will highlight, we have been very pleased that a growing number of U.S.

government agencies and branches of the armed services have standardized on nGeniusONE as part of new infrastructure initiatives and technology refresh projects. This dynamic helped partially offset softness in other verticals such as financial services, as well as foreign exchange headwinds.

In terms of security, Arbor continued to gain traction in the enterprise, while taking important steps to further extend its market leadership by broadening its product portfolio. We have been pleased with the overall market reception following the acquisition.

While there are minimal levels of overlap between Fluke and NetScout in terms of the enterprise customer base, we did experience some disruption with certain enterprise sales and distribution channel.

We do not believe that these issues will impact our performance over the long term, and we have taken and will continue to take steps to not only address those issues, but to also leverage NetScout broad product portfolio and global sales footprint.

As we make further progress in refining our go-to-market approach and advancing some exciting development initiatives, we believe we'll be well-positioned to drive solid top line growth in the enterprise segment moving into the fiscal year 2017.

During the past two months, I've spent considerable time with many of our largest service provider customers around the world. There is a healthy level of enthusiasm from customers about how the new NetScout can support their efforts to achieve key business objectives by improving the way they manage and protect their infrastructures.

In particular, we've received positive feedback from customers about our efforts to offer an integrated solution that can support the best-in-class troubleshooting capabilities from TekComms, along with NetScout best-of-breed monitoring, and our development activities on this front are moving forward.

Nevertheless, our optimism is tempered by the fact that the service provider capital spending environment remains very fluid. And we are seeing certain service providers move cautiously to advance major new infrastructure projects in light of their broader capital spending and operational expense objectives.

Another product area where we have made initial progress is in our Packet Flow Switch, where we have brought together our own capabilities with the VSS Monitoring operation.

As some of you know, during the past three years, we have been very successful in selling our Packet Flow Switch as a complementary accessory to our broader network managing solution.

VSS allows us to compete much more effectively for service provider opportunities where legacy NetScout is not the primary incumbent, as well as in supporting security applications for enterprise customers.

We are taking steps to further integrate the development teams and refine our technology roadmaps and go-to-market plans as we focus on the platforms and capabilities required to bring the most value to our customers and prospects.

In summary, our progress, achievement and performance in the initial quarter of our combined operations reflect positively on the way we have brought our companies together. We have accomplished a lot in our very first quarter together, while remaining focused on addressing the needs of our customers.

We have unified our sales organization and other corporate functions. We have also rolled out our vision and plans to the senior team and the broader employee base, and we have begun to execute on those plans.

On the product front, we have taken important step to align our product portfolios and we have kicked off several exciting product integration initiatives, all of which will be critical to driving long-term adoption by customer and prospects.

While we have made good progress, we recognize that there is more work to be done in order to achieve our goal for this fiscal year and beyond. Looking ahead, we remain confident in our strategic direction, value proposition, and in our ability to execute on a wide range of opportunities in front of us.

Accordingly, we have left our non-GAAP revenue guidance for the fiscal year unchanged, while adjusting our non-GAAP earnings per share outlook to reflect the net effect of accretion resulting from our year-to-date stock purchase activity and the anticipated full-year interest expense.

I would like to conclude by noting that overall level of investor interest and support for our company has been very gratifying thus far. And finally, I want to be sure to thank the 3,100-plus individuals who are part of our new NetScout team for their hard work, focus, and good execution during the quarter.

With that said, I'll now turn the call over to Michael..

Thank you, Anil, and good morning, everyone. It was a very busy and productive quarter for NetScout from an operational perspective. We made tangible progress in smoothly transitioning over 2,000 Danaher employees to NetScout's payroll and benefits, while also establishing an interim IT and financial control infrastructure.

Because of the carve-out nature of the acquired entities, we are continuing to receive transitional services from Danaher in certain areas, pending the establishment of the corresponding functions at NetScout.

These transitional services agreements, which span certain facilities, select manufacturing, human resources, and information technology services, as well as the use of Fluke and Tektronix brands, are expected to conclude by the second quarter of fiscal 2017.

As we wind down these agreements, we expect to improve our expense base and streamline operations in a number of areas. For example, we plan to standardize our global sales organization on a common order management and sales CRM platform as we move into fiscal year 2017.

Our other near-term priorities include cross-training our sales teams on their expanded product and solution portfolios, transitioning reseller partners to NetScout, and developing demand-generation campaigns that can leverage our extended and expanded skills and capabilities brought in through the acquisition.

Our goal, whenever possible, will be to complete as much of this activity as possible during the next two quarters, in order to enter fiscal 2007 (sic) [2017] (14:14) with good sales and marketing momentum.

An early example of this was our announcement last week that we have aligned our go-to-market activities in the Middle East under the NetScout banner. In terms of progress with our customers, I'd like to call several wins to your attention.

These wins help underscore the unique value of NetScout's technology in helping its customers innovate with confidence in order to advance their technology projects and achieve key business and financial objectives. First, as Anil mentioned, we have won a number of significant deals within the government market.

Some of the largest Federal agencies and branches of the military in the United States continue to rely on NetScout's nGeniusONE platform to standardize the way they are managing their networks and broader IT infrastructures.

In particular, we are helping a major legal agency modernize their monitoring infrastructure as they've been challenged to support a broader range of public-facing applications and rising voice and video traffic.

This project encompasses deploying close to 200 InfiniStream appliances across their data centers and remote sites, enabling them to increase and assure service levels in their nationwide public-facing voice and video network.

With over $20 billion annually spent by companies around the world to build, maintain, and expand their Unified Communications or UC infrastructures, this is an area in which NetScout shines due to the scalability of our solutions in combination with a range of analytics that enables enterprises to effectively monitor data, voice and video over a converged IP infrastructure.

And thus, accurately measuring call quality and quickly and efficiently triaging UC performance issues.

During the second quarter, one of the world's largest and most innovative providers of personal technology decided to use our solutions in their key data centers to help them gain visibility into their call center and internal voice communications by deploying a combination of nGeniusONE, servers, our Unified Communications software and InfiniStream probes.

In the service provider marketplace, we are seeing leading mobile carriers offload their wireless traffic onto Wi-Fi infrastructures, while cable MSOs are seeking to further monetize the expansive Wi-Fi footprints that they have built out over the past several years.

We recently closed a multi-million dollar agreement to help one of these largest cable MSOs in the U.S. monitor its Wi-Fi network with the NetScout nGeniusONE platform. This customer determined that our solution was a superior alternative for monitoring this infrastructure and ensuring a high-quality user experience.

Previously, the customer used log file collection tools and found that this approach could not deliver the breadth and depth of performance data that would allow them to confidently manage this strategic asset.

We've continued to advance key product development activities that can enable us to address important customer requirements, particularly in growth-oriented market sectors. We believe that Wi-Fi is an attractive growth market for NetScout's technology in terms of how we can bring value to both service provider and enterprise customers.

Moving forward, we are looking to leverage the wireless network design and analysis capabilities we acquired with Fluke.

Fluke has continued to keep pace with the ongoing evolution of wireless standards as reflected in our announcement last week that some of Fluke's most popular portable network analysis and troubleshooting tools are now supporting the latest wireless standard.

Security is another growing market where we are much better positioned as a result of the acquisition. In particular, our Arbor Networks division has continued to take steps to extend its market leadership.

Earlier this month, Arbor announced a major product initiative to further expand the breadth and depth of its DDoS, or distributed denial-of-service capabilities.

By bringing enhanced and new offerings to the marketplace, including new on-premise and cloud capabilities that provide greater deployment flexibility along with new managed services, Arbor is extremely well-positioned to protect and extend its market leadership.

We are pleased with the market reception of NetScout following the completion of the acquisition. We continue to win mindshare with leading industry experts and top trade publications.

For example, Ovum, a top global technology research and advisory firm, published an executive update about the growing strength of Newfield Wireless, a unit within Tektronix Communications, that is focused on radio access network optimization.

Last month, Network World, the foremost provider of news and insight for network and IT executives, recognized NetScout as one of the world's top 25 most powerful enterprise networking companies. In closing, we have been pleased with our initial progress in uniting over 3,100 talented individuals.

As we move forward, we are focused on building our momentum with current and prospective customers in our service provider and enterprise segments. I look forward to sharing additional news about our success on these fronts with you the next quarter. That concludes my remarks at this point. I'll turn it to Jean for the financial review..

Thank you, Michael, and good morning, everyone. This morning, I will review our performance for the second quarter and then discuss our guidance for the upcoming fiscal year. As a reminder, our results this quarter reflect the two and one-half months' contribution of the acquired Danaher communication assets.

As expected, there were a number of acquisition-related items that impacted our GAAP results, so our convention will be to refer to our non-GAAP results unless otherwise noted.

On a related note and consistent with our comments earlier on the call, the timing and magnitude of the acquisition will impact comparisons with the prior-year periods and any other extrapolations of our second quarter results may not be representative. When possible, we will frame our results against prior periods on a pro forma basis.

To begin our financial discussion, we will be starting with slide number seven of our presentation, which is accompanying this call. As a reminder, the slides are posted on our website. For our second fiscal quarter, total non-GAAP revenue was $281.8 million.

As Anil noted, our revenue performance was driven by the completion of a large project for a Tier 1 service provider, along with efforts to address the near-term demands of our broader customer base. On a pro forma foreign exchange-neutral basis, the revenue growth would have been approximately 8%.

We were generally pleased with the overall level of demand in a number of our core product areas, most notably in security and within nGeniusONE. Product revenue was $181.5 million or 64% of total revenue with service revenue comprising the remainder.

This is generally in line with the information we shared at our Investor Day event earlier this summer. Gross profit was $212.4 million. Our gross margin percentage for the quarter was 75.4%, which reflects the overall product mix for the quarter. Operating income for the quarter was $67.4 million with a 23.9% operating income margin.

This reflects the overall top line performance of the business in combination with prudent expense management as we advanced our integration activities. For the second quarter, we reported net income of $43.6 million or $0.47 per diluted share. Our original estimate of the tax rate for the quarter was 45% to 47%.

However, the actual results reflect a tax rate of approximately 35%. The difference between the estimated tax rate and the actual tax rate resulted in $0.08 of earnings per share.

While we also repurchased shares this quarter, the reduction in the fully diluted share calculation was offset by the increased interest expense for the $250 million in debt. The net income margin was 15.5%. In terms of our first half non-GAAP performance, total revenue during this period was $382.6 million.

Product revenue for the first two quarters was $235.1 million with service revenue coming in at $147.5 million. For the first six months of fiscal year 2016, EPS was $0.86. Slide eight illustrates our second quarter and first half revenue performance for fiscal year 2016 by segment.

We've modified our customary year-to-date reporting to focus on the second quarter performance since this is the first quarterly reporting period of the combined business. Approximately, 61% of total quarterly revenue came from our service provider segment with the remainder coming from enterprise.

As Anil mentioned, the legacy TekComms business had a very strong quarter, completing a major project for a Tier 1 service provider that span dozens of sites. It is worth noting that this business returned to positive revenue growth following five consecutive declining quarters.

In terms of some color within the segment, on a pro forma basis, we generated robust revenue growth from service provider customers as the results at TekComms were complemented by a more modest increase in revenue within the legacy NetScout service provider customer base.

This growth was partially offset by a more modest revenue decline from enterprise customers due primarily to the timing of certain large enterprise orders last year, sluggish spending in certain vertical such as financial services, and headwinds related to changes in foreign exchange rates most notably within the euro, the Brazilian real, and to a lesser degree, the Japanese yen.

Let's turn to slide nine for a review of revenue by geography. For this slide, we'll focus on the quarterly revenue mix which was 75% domestic and 25% international. As previously mentioned, the large Tier 1 projects skewed the mix more in favor of the United States.

Within our international second quarter revenue, Europe represented 14% of revenue with 5% for Asia, and 6% for the rest of the world. In terms of other revenue detail, we had one customer that represented greater than 10% of revenue.

The majority of the revenue from this customer was associated with a large project we've referenced, although this customer did purchase products from multiple NetScout units during the quarter. (25:00-25:51).

Ladies and gentlemen, please stand by. We are experiencing technical difficulties and will be back momentarily. (25:55-28:37).

Ladies and gentlemen, please stand by. We are experiencing technical difficulties and will be back with you momentarily. Thank you. (28:44-30:17).

We are back in the main conference..

Thank you, operator. I appreciate everybody – for those of you who have dialed back in, we apologize for the technical issues that our call service provider has experienced. We're going to try to pick up as where we believe we left off. In the interest of time, we'll try to keep those comments as brief as we possibly can.

We recognize your time is important. I'm going to turn the call back to Jean Bua, who is in the midst of her financial review..

Hi, everyone. Why don't we just start at slide seven, which is the income statement for the quarter and for the year-to-date? And, rather than reliving the highlights of what we did, I'll just give you some of the pertinent points again. Our revenue on a non-GAAP basis – our total revenue on a non-GAAP basis was $281.8 million.

On a pro forma, foreign exchange-neutral basis, the revenue growth would have been approximately 8% for the quarter. Product revenue was $81.5 million or 64% of total revenue, and service revenue comprised the remainder. Gross profit was $212.4 million, and our margin for the quarter was 75.4%.

Operating income for the quarter was $67.4 million, with a 23.9% operating income (sic) [operating margin] (31:38). For the second quarter, we reported net income of $43.6 million, or $0.47 per diluted share. The original estimate of the tax rate for the quarter was 45% to 47%.

However, when we finished the actual tax provision, the actual results reflected a tax rate of approximately 35%. The difference between the estimated tax rate and the actual tax rate resulted in $0.08 of earnings per share.

While we also repurchased shares this quarter, the reduction in the fully diluted share calculation was offset by the increased interest expense related to the $250 million in debt that we drew down. If we turn to slide eight, this is our revenue composition.

Approximately 61% of total quarterly revenue came from our service provider segment, and the remainder came from enterprise. As Anil had mentioned, the legacy TekComms business had a very strong quarter, completing a major project for a Tier 1 service provider that span dozens of sites.

And it's worth noting that this business, this piece of our business, returned to positive revenue growth following five consecutive declining quarters.

In terms of color within the segments, on a pro forma basis, we generated robust revenue growth from service provider customers as the result that TekComms were complemented by a more modest increase in revenue within the legacy NetScout service provider customer base.

The growth was partially offset by a more modest revenue decline from enterprise customers. Slide nine is our revenue by geography. And for this slide, we'll focus on the quarterly revenue mix, which was 75% domestic and 25% international. As previously mentioned, the large Tier 1 project skewed the mix more in favor of the U.S.

Within our international second quarter revenue, Europe represented 14% of revenue, with 5% for Asia and 6% for the rest of the world. In terms of other revenue detail, we had one customer that represented greater than 10% of revenue.

The majority of the revenue from this customer was associated with a large project that we referenced, although this customer did purchase products from multiple NetScout units during the quarter. We expect purchasing from this customer will continue into future quarters, but it is expected to moderate from our second quarter levels.

No other customer represented more than 2% of revenue. Slide 10 details our balance sheet highlights and free cash flow.

We took steps during the quarter to strengthen the company's liquidity and increase its financial flexibility while also improving balance sheet efficiency by completing a new five-year $800 million senior secured revolving credit facility in conjunction with the closing of the transaction.

We drew down $250 million on this line during the quarter to support the combined company's initial post-acquisition working capital needs, as well as to execute on our share purchase plan. We ended the quarter with cash, short-term market securities and long-term marketable securities of $351.4 million.

This puts our total liquidity at just over $900 million. Our second quarter fiscal year 2016 free cash flow for the quarter was a use of $8 million. This reflects $2.3 million in cash used by operations plus $5.7 million in capital expenditures and the purchase of intangible assets.

Our free cash flow this quarter was affected by the timing of remittances from Danaher for certain accounts receivables collected under our transitional services agreement, and other reimbursable items totaling approximately $29 million. Adjusting for this amount, our free cash flow for the quarter would have been $21 million.

These remittances will be transferred in the next few weeks and will be included in our third quarter cash flows.

Also of note, within our cash flow this quarter was a one-time item involving the payment of $14.5 million for business development-related activities such as investment banking fees and other professional services related to the acquisition.

Accounts receivable net of allowances was $165.1 million and is up significantly from $82.2 million at the end of fiscal year 2015. This reflects the incremental receivable from the acquired businesses. Days sales outstanding was 50 days from the quarter versus a DSO of 43 days for the same period in the prior year.

Our total deferred revenue was $272.6 million. Generally, the trend line across the combined company's operations was consistent with our expectations entering the quarter.

As many of you may recall in conjunction with the recent Danaher transaction, the board authorized a 20 million share repurchase plan, and there is no stated timeframe for completion.

Our primary financial objective is to maximize total shareholder return, and we consistently evaluate our share repurchase activities as well as other value-creating vehicles such as M&A, strategic partnerships and dividends.

Our ongoing capital allocation policy incorporates detailed financial planning and analysis, and we consider multiple factors including operations, strategic business investments, prudent leverage, liquidity, free cash flow, cost of capital, market conditions and other metrics. Our target share repurchase strategy relies on three primary components.

The first component is compensation neutrality, which is oriented around repurchasing shares for employee compensation; a second component is opportunistic repurchases based on market, economics and other conditions; the third component is overall prudent financial management for any excess capital.

To that end, in the past three years, we have continuously repurchased shares representing the compensation neutrality portion. Additionally, in this past quarter, we repurchased 4.5 million shares for a total of $176 million. At this time, we are currently anticipating being active in the market during our third quarter.

We continue to reevaluate share repurchase opportunities and will provide more information on this topic as appropriate. Turning to our guidance for fiscal year 2016 on slide 11, as we outlined in today's press release, NetScout refined its fiscal year 2016 guidance that we originally issued at the end of July.

Our guidance today reflects updated estimates related to the anticipated impact of the company's share repurchase activity through the second quarter of fiscal year 2016, as well as the anticipated full-year interest expense as we seek to optimize our capital structure.

Focusing more specifically on our non-GAAP guidance for fiscal year 2016, our revenue guidance is unchanged and it ranges from $1.050 billion to $1.1 billion.

Our non-GAAP earnings per share guidance was adjusted to reflect the net effect of anticipated full-year 2016 interest expense of approximately $4.6 million and the company's incremental repurchase of nearly 4.5 million shares in the September quarter.

As a result, we now anticipate that non-GAAP net income per diluted share will be in the range of $1.82 to $1.97. Our fiscal year 2016 guidance does not include any additional share repurchase activity at this time.

As we stated last quarter, our guidance assumes the majority of the full-year revenue and EPS guidance will be generated in the second half of the fiscal year. More specifically, we currently anticipate that the third quarter will represent approximately 28% to 30% of the midpoint of our full-year revenue guidance range.

Based on this revenue outlook, we would expect that earnings per share for the third quarter would contribute about 20% to 22% of the midpoint of our full-year earnings per share guidance range.

In terms of more detailed modeling assumptions with regard to the tax rate, we anticipate a full-year effective tax rate in the range of approximately 35% to 37%.

As is our past practice, if additional events occur, such as the reinstatement of the R&D tax credit, we will note it in our EPS performance and factor that into EPS guidance on a go-forward basis accordingly.

Given our second quarter share repurchase activity, we now expect the average weighted diluted shares outstanding for fiscal year 2016 to be just north of 99 million shares for each of the next two quarters with the average weighted diluted shares for the year being 83 million.

Within our reconciliation of GAAP earnings to non-GAAP earnings, there are a couple of items worth noting. First, we incurred $14.5 million of business development and integration expenses, which represent investment banking fees, attorney fees and other professional fees associated with the closing of the transaction.

We currently anticipate that we will continue to incur certain integration expenses going forward. At this time, we estimate that these integration expenses will be less than $4 million per quarter for the next two quarters.

These integration expenses represent one-time incremental cost generally to outside professional firms related to transitioning from certain support agreements with Danaher. As additional plans develop over the course of this year and the next, we will update our GAAP guidance accordingly.

Secondly, the deal-related, post-combination services cost of $21.7 million represent the costs of several retention programs that were put in place by Danaher for certain of Danaher's former employees. These former employees were part of the transition plan to NetScout as a result of the transaction.

These programs require retention dates that span through the remainder of calendar year 2015, with one program continuing until the second quarter of the next fiscal year.

Although these costs are fully reimbursable to NetScout by Danaher, under GAAP guidance, they are required to be expensed given that they relate to a period after the close, hence, these expenses are considered compensation on the GAAP reporting requirements.

We anticipate that the additional milestones related to these programs will affect the next quarter by approximately $9 million, and they will impact the fourth quarter by approximately $3 million. That concludes my formal review of our financial results.

But before we transition to Q&A, I would like to thank all of our shareholders for their support since the closing of our acquisition and, especially, for helping to approve each proposal at our Annual Meeting last month by an overwhelmingly majority of the votes cast.

Finally, NetScout will continue to be proactive in messaging our strategy and explaining our execution. To that end, we will be presenting at the Mizuho and RBC Conferences in New York City during the week of November 8. And we will also attend the NASDAQ Investor Conference in London on December 2. So that concludes our prepared remarks this morning.

Thank you again for joining us, and we're now ready to answer questions..

Your first question comes from the line of Alex Kurtz from Sterne CRT (43:13). Your line is open..

Yeah. Thanks, guys, for taking the questions here. So, Anil, can you just give us a little bit of visibility into the service provider pipeline post-close? Some of your peers in networking space have had some challenges with the service provider spending outlook for the last couple of quarters.

So given you're reaffirming the guidance today, obviously, you're seeing something good about the post-close pipeline in that vertical. So that'd be my first question to you..

Yeah. Thanks, Alex. So when we look at that, as we mentioned that I've been traveling around the world and probably have met every single major provider, and most of whom are either Tektronix, TekComms or NetScout customers. So we see a lot of OpEx and CapEx challenges which could delay some of the spending.

But we think there is a strong reaction to – positive reaction to what we can do together as a company, as a solutions. And I think, because of that, we still feel that the guidance we have provided still – looks like in good shape. And we'll be cautiously watching this, as we have the end-of-year spending materializes in December.

So overall, we feel comfortable because we have the best solution, notwithstanding some of the internal challenges they are facing on the spending side..

Yeah. And just to add some color, Alex, because, clearly, it's a key vertical in our company. The service providers right now are very competitive amongst themselves. They are focusing on quality because they want to reduce churn. They are being very price competitive in their pricing.

They're also trying to determine how they're going to monetize their large LTE investments. A lot of the traffic that is going over their network is called over the top. So they don't necessarily get any monetization of those OTT services. They just generally get them through their data plans.

So what they're doing right now is focusing on customer retention, because churn is the worst thing that they hate. So they're really focusing on quality. And along that way, they're also looking at cost. So, as we've talked about before, we have a very competitive solution. It's high-quality and it's very cost-competitive.

What we're just seeing right now is that dynamic between quality and cost consciousness is making a slightly elongated purchasing cycle..

But, Jean, you stated discount (45:49).

I'm sorry, Alex. Go ahead..

But, Jean, you'd said the discount rate – yeah, the discount rate that you're using on that vertical, you feel comfortable with as far as, like....

Yes. We generally always have economics that we consistently maintain. We've talked in the past about how there are certain areas around the globe that are slightly more price-sensitive and have slightly more Ts & Cs that we're not comfortable with. But overall, we haven't changed our discounting or anything. We're still comfortable with that..

All right. Thanks, guys..

Thank you..

Thank you..

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

Great. Thanks for taking the question.

Just wondering if you could provide any more insight into that large deal with the Tier 1 service provider, just in terms of maybe what products that involved, was it the NetScout side, was it the Danaher side, and maybe tied that into how Tektronix is doing and how you view that? I know you commented that it's returning to growth, but maybe some more detail on that.

Thanks..

So this was, Mark, was mainly the big deal we were talking about is mainly coming from tech side of the house. And as we talked about earlier, it was sold earlier. And there were some acceptance clauses and all those. And those were all delivered.

And that's what the one we talked about in the last quarter also, that we are not sure whether we're going to close this quarter, but it happened, and it went very well. So it's mainly – I mean, in this provider, we do business on both sides, both from NetScout and TekComms. And both are going well. But this particular deal was about TekComms..

So how's Tektronix doing otherwise? (47:47)..

I think it's going as well as we – pardon, sorry. Go ahead, again..

No, I just – wondering if it's growing, what your expectations are for that now post-merger?.

Yeah. I think it's – well, I mean, all plans are as we expected and as reflected in our guidance. And a lot of people are anxiously waiting for the combined solution also. And we are making a lot of good progress. So overall, I think we have good retention of key people.

We have retention of customer and renewed interest in our solution, despite some of the spending challenges they're facing..

Okay. Thanks..

Thanks, Mark.

Why don't we go to the next question?.

Your next question comes from the line of Eric Martinuzzi from Lake Street Market (sic) [Lake Street Capital Markets] (48:35). Your line is open..

Thanks. Curious to know, just a clarification first and then a question. The change in the EPS guidance, the non-GAAP EPS guidance for the year, that's $1.80 low-end moving up to $1.82, so basically a $0.02 delta.

Is that entirely share count? Or does that capture some of the tax change as well?.

No, it's actually two components, Eric. It's about a $0.05 reduction for the – I'm sorry, $0.05 increase for the reduction in the outstanding share count, offset by about $0.03 in the – for incremental interest expense. And that gives you the $0.02 net delta for the year..

Okay. So there wasn't a tax element to it. It was just the....

No. No. No. The tax rate, what we had predicted before was that the annual tax rate would be still in the line around 35% to 37%. It was just the timing within quarters.

So, when you do a tax provision in this way, with certain transaction costs going through that is deductible and intangibles being pushed down to different jurisdictions, you could get, amongst the quarters, some kind of different timing differences.

So that's why we were anticipating a higher Q1 tax rate – I mean, sorry – a higher Q2 tax rate, which would have been offset by a lower Q3 tax rate. But it came out to be 35% for the quarter, so we anticipate that for the year, it would be 35% to 37%..

Got you.

And then the question just, of $100 million of non-GAAP service revenue that you guys did in the September quarter, what's the mix there between pro service versus maintenance?.

I would say that generally, professional services in the NetScout world was a very low percentage. In the TekComms world, it was a higher percentage. So while I don't think I have it off the top of my head, I really would probably tell you it was maybe 10% to 20% maximum professional services..

Thanks for taking my questions..

Sure..

Yeah..

Your next question comes from the line of Scott Zeller from Needham & Company. Your line is open..

Hi. Thank you and congratulations on a good start as a combined company..

Thank you..

The initial thoughts you'd shared with us, Jean and Anil, around cost synergies, if I recall, it was around 5% annualized.

Could you share with us what your latest thoughts are? Are you seeing opportunities for additional cost cuts? Or are you maintaining the original plan?.

I think it's basically on the hiring front and we think we have enough people. So some of that are head count savings; potentially, we could have hired this year are not needed, so some savings are coming from there. Rest of them are coming with the gross margin improvements, which we talked about.

And you'll see more towards the end of the year or next year as we have the combined solution. I think those areas are coming in line, maybe slightly better than what we thought earlier..

Okay. I thought I picked up a tone, maybe slightly cautious tone around Fluke.

Could you explain the prepared remarks and just sort of what the tone is around Fluke at this point and the prospects for it?.

So I think the – what we had done was we had focused on the initial integration of the sales force on day one for the TekComms side. Arbor business was sort of standalone. And so there was no confusion there. On the Fluke side, we basically delayed the integration and that created some confusion, and we lost a few people.

But overall, that's what we are saying, that there were some disruption in the business, but nothing significant, which will affect the guidance..

Okay. Thank you very much..

Yeah..

Thanks, Scott..

Your next question comes from the line of Mark Sue from RBC Capital Markets. Your line is open..

Thank you. Good morning.

Anil, for the combined entity, do you have a sense of what percentage of your business comes from carrier CapEx versus OpEx, recognizing that the change in requirements for the service provider as their complexity increases might conform more on the OpEx side?.

I think, no, we are not able to break that down because they are looking for deals, multi-year deals sometimes, so that they can capitalize it. So preference for the service provider is capitalized. But as we mentioned that roughly (53:26) 60% of the total business will come from service providers.

About 35% or so of both enterprise and service providers total business is going to be service and support, rest on product. And beyond that, it's very hard to separate out CapEx versus OpEx division for service providers or any customer..

Okay. Understand.

Anil, and likewise, if we look at the percentage of your business that comes in December from a carrier spending flush, is there a way to kind of think about what amount that typically the combined entity might get? And is that kind of factored into the near term?.

Yeah. I think we have already counted for that. As you know, these deals – the closing cycles are much longer, three months, four months. So that's all accounted for in the guidance we have provided. Year-end spending estimates and everything are all included in the guidance. And so everything is all included..

Operator, why don't we go to the next question?.

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

Good morning. Nice job, first quarter out of the gate on the combined company..

Yeah. Thank you..

Thank you, Chad..

Yeah. So I think this maybe following up on a previous question.

But can you give us a sense of how the acquired business did relative to your targets thus far; I know it's early, but just the targets you gave prior to closing the deal for the segments?.

So they were basically in line with our expectations. And I would say that their revenue contribution was in line with their component of the scale of the business..

Okay.

And then, Anil, could you speak to if you're seeing any penetration or competitive kind of bidding from – within the service provider segment from software players in the NFV or SDN landscape for network performance management, or anything of that nature?.

Yeah. So I mean, there is competition from lot of small vendors, some regional vendors internationally, we see more and more RFPs as a way to reduce the spending or to get the best deal. And as we mentioned earlier, we need to continue to deal with that.

But we still – we are ahead both in terms of software, NFV solution, as well as the traditional solution. So NetScout released a NFV-based solution over a year ago. So we are all ready for it. I think there could be little bit of disruption as people move more from appliance model to a software model.

But I think long term, it's going to be a blessing in disguise, because we'll have deeper penetration and better margins. So we think we have to manage this trend. We have tried to address that as part of our guidance and reiterating it. And I think we are very hopeful that all these will turn out to be positive trends for us..

Okay. Then last one from me, Anil, maybe for you also. Can you just talk about nGeniusONE traction kind of borrowing kind of the go-to-market with Fluke that happened this quarter, nGeniusONE traction in the enterprise and kind of how that uptake has progressed..

I think it's basically in line with what you saw in the previous quarter. I think we have not been – we are not targeting Fluke Net customer with nGeniusONE for another six months. So the impact of acquisition is not going to be reflected in nGeniusONE traction until maybe six to 12 months from now. And we have a big user group meeting in May.

And that's the time we'll be unveiling our plan for integrating the enterprise product lines. We have done some sales force integration, but most of that will be put in operation in six months..

Okay. Great. Thanks for taking my questions..

Thank you..

Thanks, Chad..

We have no further questions in the queue at this time..

Great. Well, I'd like to thank, everybody, for their persistence and understanding and dialing in twice for this call, for your time with us. And again, apologies on behalf of our telecommunication service provider for the technical issues. We will look to see you as we get out to various conferences, and of course, for our next quarter's call.

Thank you again for dialing in..

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