Good day, ladies and gentlemen. Thank you for standing by and welcome to NETSCOUT's Third Quarter Fiscal Year 2019 Results Conference Call. At this time, all parties are in a listen-only mode until the question-and-answer portion of the call. As a reminder, this call is being recorded.

Andrew Kramer, Vice President of Investor Relations and his colleagues at NETSCOUT are on the line with us today. [Operator Instructions] I would now like to turn the call over to Andrew Kramer to begin the company's prepared remarks. Please go ahead..

Thank you, Keith, and good morning, everyone. Welcome to NETSCOUT’s third-quarter fiscal year 2019 conference call for the period ended December 31, 2018. Joining me today are Anil Singhal, NETSCOUT’s President and CEO; Michael Szabados, NETSCOUT’s Chief Operating Officer; and Jean Bua, NETSCOUT’s Executive Vice President and Chief Financial Officer.

There is a slide presentation that accompanies our prepared remarks. You can advance the slides in the webcast viewer to follow our commentary. We will call out the slide number we are referencing in our remarks.

Both the slides and the prepared remarks can be accessed in multiple areas within the Investor Relations section of our website at www.netscout.com, including the IR landing page under “Financial Results,” the webcast itself and under “Financial Information” on the “Quarterly Results” page. Our agenda is as follows.

Anil Singhal will briefly review our third-quarter financial performance, highlight key trends and recent developments, and discuss our outlook for fiscal year 2019. Michael Szabados will briefly review recent customer wins that help highlight some of our near and longer-term growth drivers, as well as recap go-to-market highlights.

Jean Bua will then review our third-quarter results, key year-to-date performance trends and our fiscal-year 2019 guidance. Moving on to slide number 3. Today’s conference call will include forward-looking statements.

These statements may be prefaced by words such as “anticipate,” “believe,” and “expect” and will cover a range of topics that are not strictly historical facts such as our financial guidance, our market opportunities and market share, key business initiatives and future product plans along with their potential impact on our financial performance.

These forward-looking statements involve risks and uncertainties and actual results could differ materially from the forward-looking statements due to known and unknown risks, uncertainties, assumptions and other factors, which are described on this slide and in today’s financial results press release as well as in the company’s annual report on Form 10-K and subsequent quarterly reports on Form 10-Q on file with the SEC.

NETSCOUT assumes no obligation to update any forward-looking information contained in this communication or with respect to the announcements described herein. Let’s turn to slide number 4, which involves non-GAAP metrics.

While this 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.

The rationale for providing non-GAAP measures along with the limitations of relying solely on those measures is detailed on this slide and in today’s press release. These measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

Additionally, as a result of the HNT tools business, we will provide certain organic non-GAAP performance trends, which removes the HNT tools revenue for comparability purposes with the company’s quarterly and year-to-date fiscal year 2019 results.

Reconciliations of all non-GAAP metrics with the applicable GAAP measures are provided in the appendix of this slide presentation in today’s earnings press release and they are on our website. Overall, we delivered quarterly revenue and EPS at the upper end of our plans.

We also made important progress in lowering our costs without compromising the investments that we believe are fundamental for expanding our business. As we move into the final quarter of the year, we’ve refined our guidance and are focused on achieving these targets.

With that as a backdrop, I’ll now turn the call over to Anil for his prepared remarks.

Anil?.

Thank you, Andy. Good morning, everyone, and thank you for joining us. Let’s begin on slide number 6 with a brief recap of our third-quarter non-GAAP results. We generated third-quarter fiscal year 2019 revenue of $246.3 million and diluted EPS of $0.45, both of which were at the high end of our quarterly targets.

Our top-line results reflected good execution in both customer segments. Excluding last year’s contribution from the HNT tool business that was sold last quarter, our enterprise customer segment delivered solid organic expansion.

In our service provider customer segment, revenue has remained relatively soft, although our performance this quarter was highlighted by record revenue from our calibration services that are being used by tier one North American mobile operators to design their 5G radio access networks, a project to help one of our international customers monitor the 4G network that they are building, and sequentially stronger DDoS spending.

Just as important, we have begun to realize the savings from our cost-reduction initiatives that were implemented earlier in the year. Total operating costs were down 7% for the year-to-date period due in part to the divestiture of the HNT tool business and headcount reduction.

We advanced our restructuring activities during the quarter by combining our engineering teams, consolidating our facilities in Massachusetts, and reducing our headcount. Although market conditions remain challenging, the multiple headwinds that have affected our top line are continuing to recede and we made important progress across multiple fronts.

As a result, we believe that we are well positioned to achieve our financial targets in fiscal year 2019. Let’s turn to slide number 7 for additional thoughts on key developments that help underpin our near-term and long-term ambitions.

In our service provider customer segment, our ongoing commitment to innovate and address both the nearer-term and longer-term requirements of mobile, fixed line and cable operators worldwide leaves us well-positioned to navigate a fluid capital spending environment.

In North America, we continue to support large tier one operators with our calibration capabilities that are used to help design next-generation 5G radio access networks.

We enjoyed a record quarter in this product area, which is not only helping us offset ongoing capital spending pressure related to existing 4G networks, but it’s also providing us with insight into how our customers plan to build out their next-generation architectures.

In emerging markets, NETSCOUT’s software-only solution and market-leading features and functionality are helping larger regional carriers deliver high-quality services as they build out our 4G networks. Just as critical, we are seeing continued adoption of our nGenius Business Analytics that help carriers better understand subscriber behavior.

Michael will highlight the largest deal to date that we’ve closed for this software. As we move forward, we continue to pursue and support 5G and NFV-related lab trials and proof-of-concepts.

While we do not expect material spending on 5G-related monitoring over the next few quarters, we believe that these capabilities will position us to benefit as carriers expand their monitoring capacities in their core 4G mobile networks to handle initial 5G traffic volumes.

In DDoS, carrier spending improved sequentially and was flat on a year-over-year basis as these customers begin to gradually absorb excess capacity and spend on our newest offerings.

The newest release of our Sightline platform and Threat Mitigation System provides service providers with greater visibility and clarity into their network operations, enhanced anomaly detection, and improved automation for DDoS protection.

Within our enterprise customer segment, we delivered a solid quarter of organic growth in our service assurance product area while our enterprise DDoS product area was largely unchanged.

In enterprise service assurance, we continue to differentiate ourselves in the market through the scalability, rich feature set and ability of our nGenius suite of solutions to provide large enterprises with consistent visibility into network and application performance across traditional data center and hybrid cloud environments.

The investments we have made over the past two years to expand our nGenius product portfolio with cloud-based versions of our solution, along with a robust, active, synthetic test offering was fundamental to closing a number of large six and seven-figure deals during the third quarter with existing customers who are expanding their engagement with NETSCOUT as well as new accounts.

Additionally, we won several large enterprise deals that involve the software-only version of our ISNG platform. Michael will share some additional perspective on this quarter’s enterprise success. In terms of security, we made progress on our efforts to expand beyond DDoS.

We took an important step in our security product strategy in late October when we introduced the Arbor Edge Defense platform, or AED.

This solution not only helps enterprises protect against incoming DDoS attacks with proven, market-leading capabilities, but it also offers the functionality of a threat intelligence gateway, which serves as the last line of defense against outgoing threats that indicate compromised communications.

In addition, we continue to invest in further expanding our enterprise security capabilities over the coming quarters. For example, we are working through the final phases of how we package and price a wide range of packet forensics that we plan to market as a new product called CyberInvestigator at our upcoming Engage user forum in April.

We also expect to unveil our advanced threat analytics in the second half of this calendar year. I will spend more time detailing our go-to-market plans for our new security offerings on next quarter’s conference call. Let’s turn to slide number 8 for an update on our outlook and final thoughts.

As you know, the past several years following our acquisition of Danaher’s Communications business have been challenging, particularly due to difficult market conditions in the telecom sector.

During this time, however, we are able to double down on our commitment to the marketplace as we integrated this acquisition, and reshaped and broadened our offerings into a software-centric, feature-rich portfolio of smart data solutions, while also divesting non-core product lines.

Looking ahead, based on the opportunity we see over the next two months, we expect to generate revenue growth of around 4% in the final quarter of fiscal year 2019, which implies notably higher organic expansion. Accordingly, we plan to finish the year with annual revenue of around $925 million, which is at the low end of our November guidance range.

Our anticipated fourth-quarter revenue growth is predicated on sustaining our enterprise momentum and by driving stronger results in service provider service assurance.

Our optimism for better service provider revenue is in part due on achieving acceptance on several moderate-sized projects where we have already shipped and deployed our solutions, and by helping other mobile operators and cable customers get their calendar year 2019 projects off to a healthy start.

With that said, we believe that it will be difficult to exceed the low end of our annual revenue targets due to ongoing capital spending pressure in the service provider market, uncertainty within the federal government after the recent shutdown, which we believe could affect the timing and magnitude of near-term spending by various agencies, and the relatively modest near-term contributions we are expecting from our newest enterprise security initiatives.

We anticipate a strong fourth-quarter EPS performance due to the combination of top line growth, better gross margins driven by product mix, savings from our prior restructuring activities and ongoing diligence in managing costs, including carefully managing the timing of new hires.

As a result, we expect to deliver fiscal-year 2019 EPS in the range of $1.30 to $1.35, which is within the range of our original guidance when we began the year. In closing, we have executed reasonably well through the first three quarters of the year and we are now looking forward to putting a successful close on fiscal-year 2019.

The tenacity and commitment of our team have helped propel us forward. We appreciate their efforts and move forward with confidence that we will rise to the challenges that lie ahead. That concludes my commentary and I’ll now turn the call over to Michael..

Thank you, Anil. And good morning, everyone. Slide number 10 outlines the areas I will cover.

In terms of customer wins, in the service provider market, Anil highlighted growing service provider adoption of our nGenius Business Analytics, or nBA, which allows our carrier customers to extract more value from our smart data at a granular, subscriber level and augment it with other non-network data sets such as subscribers, device, geolocation and application information.

As price competition in North America has intensified, domestic service providers are increasingly focused on subscriber retention, and we believe that our nBA capabilities can help carriers on this front.

For example, we closed our largest nBA sale to date this past quarter with a large tier-one operator who plans to leverage its substantial investment in our technology by deploying our nBA analytics as part of a broader initiative to deliver timely, insightful and increasingly personalized customer care.

This mid-seven figure deal also represents an important step in what we expect will be a multi-phased approach by this customer to leverage our next-generation software over the coming years, particularly as they look to advance their 5G and related NFV initiatives.

On the 5G front, our model calibration team has also been actively working with this customer to help evolve the design of its radio access network for 5G.

As the race among tier-one carriers to commercialize 5G begins to heat up, we plan to showcase our 5G service assurance capabilities at the upcoming Mobile World Congress conference in Barcelona next month.

In the enterprise, Anil relayed that we are seeing a growing number of large deals which include multiple product offerings beyond our traditional ISNG and nGeniusONE offerings.

In fact, in the third quarter, we closed more than 30 deals over $500,000 and more than 85% of them included products like vSTREAM, vSCOUT, nGeniusPULSE and our nGenius packet broker offerings in addition to our traditional ISNG and NG1 offerings.

Both new and existing customers are recognizing that only NETSCOUT has the scalability and analytical horsepower to provide them with consistent visibility into their network and application workloads across conventional data centers, private clouds and public clouds from leaders like AWS and Microsoft Azure.

We are also starting to see that our ability to deliver a software-only solution can help us win enterprise business when an appliance-based deployment would be otherwise cost prohibitive.

For example, we won a two-plus-million dollar deal with a large technology company to help provide it with visibility into their market-leading unified communications and collaboration solution that is used to provide hundreds of thousands of simultaneous, real-time streaming video and audio sessions.

After evaluating other competitor platforms, this customer selected NETSCOUT due to the scalability of our solution, our proven range of UCC – or unified communication and collaboration – capabilities and our ability to use a software-only approach to fit much more economically inside of its budget.

As a result, this customer can proactively monitor overall service quality, and quickly identify a wide range of technical issues such as video and audio jitter, latency degradation, one-way audio, frozen screens and many other problems that ultimately impact the customer experience.

This initial order enables them to monitor all UCC-related customer traffic moving into and out of their two primary data centers, and we see additional opportunities moving forward to extend visibility within those data centers and out to other smaller facilities. On the security front, we executed relatively well during the third quarter.

We launched the Arbor Edge Defense solution, or AED, as Anil mentioned, in late October and it is off to a good start. This product leverages our proven DDoS technology and adds comprehensive threat intelligence gateway functionality to further enhance our value proposition.

In addition to dozens of our carrier customers who are reselling AED into their installed enterprise customer bases, our direct enterprise sales organization is also selling AED alongside our traditional service assurance solutions.

We have built a solid direct sales pipeline in a relatively short order, highlighted by our third-quarter win at a regional US utility company for a combined AED-Arbor Cloud solution that is valued at close to $1 million.

This energy provider was dealing with a steady stream of disruptive, high-volume DDoS attacks that not only impeded its ability to conduct business with clients, but also impacted its plans to migrate applications to the public cloud.

The customer was looking to increase network availability by improving its perimeter protection without impacting the overall efficiency of its firewalls and other network intrusion detection and protection devices.

AED and the Arbor Cloud were selected due to their proven DDoS protection, global scrubbing centers and new outbound detection capabilities.

We believe that the coming quarters will be important for further expanding our business into the security market, and we’ll be at the annual RSA security show in early March to help customers and prospects better understand how our solutions can help protect against an ever-expanding range of security threats.

Finally, we recently launched a new global marketing campaign called “Visibility without Borders” to help build broader awareness of NETSCOUT among C-suite executives and new buyers within the IT organization.

This theme can be leveraged across all key areas of our business – for enterprises grappling with digital transformation, for carriers seeking to transform the customer experience with 5G and network function virtualization, and for businesses looking to protect the new edge and their connected world.

We have reallocated marketing dollars to support a nationwide advertising campaign in both traditional business and trade media, along with new media alternatives.

The “Visibility without Borders” theme has also been integrated into our website and social media programs, and it will help support our presence at major events like the industry trade shows I mentioned earlier, as well as our annual sales kick-off conference and Engage user forum that will be held next quarter. That concludes my prepared remarks.

And at this point, I will turn the call over to Jean..

Thank you, Michael. And good morning, everyone. This morning, I will review key third-quarter and year-to-date fiscal year 2019 metrics, along with our updated guidance. As a reminder, this review focuses on our non-GAAP results. And unless otherwise stated, all reconciliations with our GAAP results appear in the presentation appendix.

In addition, due to the sale of the HNT tools business in mid-September, I will highlight certain revenue trends on an organic non-GAAP basis, which removes HNT tools revenue for the applicable period referenced. Regardless, I will be sure to note the nature of any such comparisons.

Slide number 12 details our results for the third quarter and first nine months of fiscal year 2019. Focusing on the quarterly performance, we reported revenue of $246.3 million, which was at the higher end of our plans.

Third-quarter revenue declined 9% on a year-over-year basis, with the divestiture of the HNT tools business representing 4 percentage points of that decline. The remaining 5 percentage points of decline is due to a 13% decline in service provider, offset by a 4% increase in enterprise. The impact of ASC 606 was immaterial to the quarter.

On a comparable organic basis that excludes the HNT tools business, product revenue declined 3% with service revenue down 8%. Our third-quarter fiscal year 2019 gross margin was 75.6%, or an almost 5 percentage point decrease from the same quarter last year.

The third-quarter fiscal year 2018’s gross margin includes a $6 million reversal of incentive compensation, which represented 2 percentage points of the year-over-year change. The remaining 3 percentage point decrease related to lower overall volume as well as higher costs related to initial 5G calibration projects.

Operating expenses were relatively unchanged from the prior year as the benefits from a lower overall headcount were offset by increased incentive compensation. We reported an operating profit margin of 21.4% with diluted earnings per share of $0.45, which was at the high end of our plans entering the quarter.

I’d like to share a quick update on our restructuring activity that began last quarter. We ended the third quarter with 2,590 employees, which is a 7% decrease since the end of September and a 16% reduction from last year at this time.

In fiscal year 2019, we saved $4 million in the third quarter and expect to save $6 million in the fourth quarter for a total of $10 million for the fiscal year 2019. In fiscal year 2020, we anticipate saving about $14 million more, so that on an annual run rate basis, the total savings will be about $24 million.

Restructuring payments related to these programs were $2 million in the second quarter of this fiscal year, about $13 million in the third quarter, and we anticipate an additional payment of approximately $3 million in the fourth quarter for total restructuring payments of around $18 million in fiscal year 2019.

These payments are reflected in our free cash flow results. There are no restructuring payments associated with these programs anticipated in fiscal year 2020. Turning to slide number 13, I’d like to review key revenue trends.

Revenue in the service provider customer segment for the first nine months has declined approximately 17% with relatively similar percentage-change declines in both service assurance and security. In the enterprise segment, the year-to-date revenue declined 4% due to the sale of the HNT tools business.

On an organic basis, enterprise revenue was flat for the first nine months of the year. In terms of other year-to-date revenue trends, approximately 51% of total revenue was generated from the enterprise customer segment with the remaining from service provider.

In terms of revenue by geography, which was calculated on a GAAP basis, revenue in the US decreased by 8%, with a 13% decline in international markets. International customers represented 39% of GAAP revenue versus 40% last year. We had one 10% revenue customer in the third quarter. For the year-to-date, there were no 10% revenue customers.

Slide 14 details our balance sheet highlights and free cash flow. We ended the quarter with cash, cash equivalents, short-term marketable securities and long-term marketable securities of $475.8 million, which is an increase of $23.7 million since the end of September.

We generated free cash flow of $29.4 million, which includes paying restructuring-related severance of about $13 million. We continue to anticipate healthy free cash flow conversion for the full year of at least 100% of non-GAAP net income, excluding the headcount restructuring payments that I referenced earlier.

To briefly recap other balance sheet highlights, accounts receivable net were $247.7 million, up by $34.3 million from the end of March. DSOs increased to 91 days versus 78 days at the end of fiscal year 2018 and 82 days at the same time last year. The increase primarily reflected an increase in multi-year renewals and the timing of renewals.

I’d like to provide a brief update on our use of capital. As we move forward, we anticipate being active in the market by repurchasing around $60 million of our common stock, assuming normal market conditions and subject to daily trading volumes and price considerations.

We also plan to use excess cash to repay $50 million that has been drawn down on our revolving line of credit. We anticipate that these actions will not have a significant effect on our net leverage.

Moving to slide 15 for guidance, which we’ve updated to reflect the company’s results to date, the benefits associated with the recent restructuring actions, ongoing expense management initiatives and fourth-quarter fiscal year 2019 revenue plans. I will focus my review on our non-GAAP guidance.

As Anil stated earlier, we are currently targeting fiscal-year 2019 revenue of around $925 million, which would be the lower end of our prior range. This would imply fourth-quarter revenue right around the third-quarter level. Other key assumptions around our fiscal-year 2019 operating model have been updated and are outlined on this slide.

We currently anticipate full-year gross margins in the 76% range, which implies healthier fourth-quarter gross margins resulting from a more favorable product mix. We currently anticipate full-year operating costs in the range of $535 million to $540 million (sic) [$545 million].

Our tax rate assumption is unchanged from the prior quarter and we’ve refined our anticipated interest expense and average weighted shares outstanding. As a result, we now expect diluted EPS between $1.30 and $1.35. This implies fourth-quarter earnings per share in the range of $0.59 to $0.64 cents.

That concludes my formal review of our financial results. Before we transition to Q&A, I’d likely to quickly note that our IR outreach over the next couple of months includes meeting with current and prospective institutional shareholders on the West Coast, Southwest and Midwest.

In addition, we’ll hold investor briefing sessions at Mobile World Congress in Barcelona, Spain at the end of February. I’ll now turn the call over to the operator to start Q&A..

[Operator Instructions]. We’ll take our first question from Matt Hedberg with RBC Capital Markets. Please go ahead..

Hey, guys. Thanks for taking my questions. Congrats on the quarter. It was particularly good to see the organic growth in the enterprise business. Hopefully, that momentum can carry over into next year. And, I guess, I don't know, Jean, you haven't guided to fiscal 2020.

But I'm wondering if you could maybe outline some of the important variables that could position yourself for organic growth rate.

I know you had commented on potentially challenging market conditions, but just wondering if you could help us with some of the high-level variables?.

Sure. I guess, the first I would look at it, one of the drivers that we think is very exciting for us is the security market.

As we outlined in our prepared remarks, we have – or we will have, by the second half of this calendar year, a complete suite of security offerings that we think are unique to the market where we have the ability to combine our DDoS technology where we see so much percentage of the Internet traffic around the world, as well as the analytical and forensic capabilities that NETSCOUT has to understand what happened quickly in an attack, as well as the algorithms that are built-in, so that you can see anomalous behavior quicker than many other products out on the market.

So, we're very excited as we continue to move forward with that product strategy.

Additionally, as you noted, in the enterprise market, the transition to digital to digital transformation and the transition to the cloud, we've had some successes in our last couple of quarters, and so we’re very optimistic about enterprise continuing and our ability to help our customers move towards that.

And in service provider, we continue to keep market share, if not gain it, in certain areas. And with the software-only application, the version that we have now, we’re able to go and penetrate existing customers in a more meaningful way.

As Michael noted in the script, we have analytics that is helping one of the largest major tier ones with some of their programs for customer service. So, we continue to be hopeful about the service provider business and their capital spending as they get closer to 5G. .

Maybe I’ll just want to add one more thing in addition to all the positive Jean is talking about, Matt, is that I think there have been pockets of growth in other areas this current year, which we talked about last time as a transition year going into the fiscal year 2020. But some of those things were offsetted by a drag on the other areas.

We talked about the capital spending in service provider Fluke Networks business, which we are winding down, beyond just the tools business. So, one of the positive effect of next year is our positives, which Jean talked about, will start making a bigger impact because there will be very little drag, if any, which we saw this year..

That’s helpful. And then, maybe just a quick follow-up, I think – I don't know, Jean, you may have called out last quarter, there were three $10 million service provider deals. You weren't sure on the timing. I wonder if you can give us an update on if any of those closed in Q3 and if any of those are implied in the Q4 outlook? Thank you..

Sure. I would say, at this point, that two out of the three were able to convert to revenue recognition. And so, the third one is still in our forecast for the fourth quarter..

Got it. Thanks, guys..

And we’ll take our next question from Alex Kurtz with KeyBanc Capital Markets. Please go ahead..

Yeah. Thanks. Maybe if you can just go back to the prepared remarks and, Anil, just flesh out a little bit what you thought changed in the pipeline around service provider from prior quarter to this morning and how you're providing an outlook at the lower end of the range.

Just want to make sure we have a full understanding of what's changed in the last 90 days..

I think the only real change, I think we talked about some of the deals which were on the – maybe the upside, whether it’s in the federal or other areas, that could have pushed the guidance to the higher end or to the middle of the range. But there is no big change in terms of the environment from last time.

Are you referring to the fact that why we have expectation at lower end of the guidance?.

Yeah. I just want to make sure that there is any additional points you want to call out or nuances, I guess – one of these $10 million deals can be part of that discussion.

But I'm just trying to understand, beyond just the volatility in the service provider, is there anything else that we should be really paying attention to into your Q4 here?.

I think overall pipeline looks good and we have potential upside, but we’re not counting on that because sometimes the sales cycles are longer and sometimes the acceptance period are there. So, I think, overall, I don’t think there is any material change from last quarter in terms of the pipeline..

And just on the software adoption, can you just give an update on what you think that percentage could be within the service provider segment over the next couple of years? I know you've given some kind of high-level goals, but has that changed at all and what’s your current thinking there?.

So, I think when we provide guidance for next year, I think we were going to highlight some of those things. But over the next two years, we expect service provider software contributions over 50%. And I think we are currently at 20% or 30%. Maybe 20% of the total business and it could be over 50% in the next couple of years, aggregate.

So, that means the service provider content portion could be even higher than 50%..

So, you think 50% in aggregate over the next couple of years and, obviously, it would be well over 70% for service provider.

Is that fair?.

That’s right. .

Okay. All right. Thank you. .

Yeah..

Our next question comes from Chad Bennett with Craig-Hallum. Please go ahead..

Great. Thanks for taking my questions. So, maybe just follow-up on Alex's last question, just make sure I kind of understand where we are today.

So, maybe, Jean, where do we exit the year in terms of software-only revenue from an overall product revenue standpoint? And then, specifically on service provider, if you have kind of a rough range there?.

I would say, service provider first, right now, we’re probably at around 30-ish-percent. So, given the way the forecast looks right now for Q4, that percentage might increase. So, maybe we'll get to a third for service provider.

The last quarter – or the last couple of quarters, we have been seeing some software-only deals happen in the enterprise, but it's still pretty immaterial.

So, I would say maybe close to a third on product revenue, with maybe a point or two more for enterprise is probably where I would think the exit rate of software-only on product revenue could end up..

Okay, great. Thank you. And then, I wanted to dig in a little deeper. Maybe it's for Michael.

On the nBA win that you spoke about with, I believe, a large tier one domestically here, can you give me a sense of kind of what they were doing previously or that analytic functionality, if you actually displaced another third-party solution, or if this was just kind of a greenfield functionality that they adopted with your nBA solution?.

Anil?.

So, I think, Chad, what is happening in the market is service provider has something called a network personalization initiative. For top customers, corporate customers, they want to track KPI at the subscriber level. So, they had all the data to drive that, but they were not using it, at least our solution.

They were feeding this information through their own data lake and doing their own analytics. But there was no turnkey products taking advantage of this ASI data we had. So, that’s what they did.

And I think that’s going to be a good thing for all the service providers in the market because, if they have to go to some other vendors to do this personalization initiative, they have to re-instrument their network, which is 80%, 90% of the cost. Even though it was a multimillion dollar deal, it was a fraction of the cost of the total investment.

And so, the advantage we have is that we can leverage a lot of the data, smart data we already have created in the environment, which can be used for network personalization, maybe later in security analytics. So, a lot of the hard work of instrumenting was done. And that’s why we’re able to take advantage of it.

So, there was no competitive displacement. They were using internal tools to feed our data or using some other data set and now they are able to pair our smart data with our smart analytics..

That's a great point on re-instrumenting the network. Great. Thanks for taking my questions, guys..

We’ll take our next question from James Fish with Piper Jaffray. Please go ahead..

Hey, guys. Good quarter. Can you guys just provide an update on the competitiveness of the market in both the service provider and enterprise businesses? And on the enterprise side, what you're seeing from kind of the network switching guys? I know we talked about last quarter.

And then, was there any effect on demand related to the networking tariffs or macro this quarter?.

Okay, maybe I’ll come back and clarify the second part of the question. But our competitive issues in the past, last three years or before that, was all related to regional vendors and lower pricing from competition.

And we have taken care of that by moving to the software model and we are very highly competitive in those areas as well, as we transition to the software model. As to – maybe you’re alluding to competition from NAMs moving forward, and in the 5G or NFV space, and that’s where the Visibility Without Border point is very important.

People cannot use vendors for isolated domains like 5G or NFV because almost everyone will have a hybrid environment for next 10 years.

So, Visibility Without Border says you can count on a single pane of glass, single vendor, single KPI and data set, and you don’t have to worry about how you are moving from one area to another, like I talk about they have to change their wheels of their car while self-driving. And all the tires are not going to be in one segment.

So, Visibility Without Border says that, if you are using us for 4G, you should be using us for 5G as well as NFF. And this applies to enterprise also. And that’s the story. So, that’s a story we are telling our top customers.

And they say, as long as you’re making technical – continue to make investments in 5G, we will be the preferred vendor in those areas also. There will be always some competition from NAMs, Cisco, Huawei, Ericcsons of this world, but that has been part of our business. It’s built into our numbers for the last 25 years.

So, ideally, I’m not very concerned about the competition from NAMs or low-end vendors.

And I think second part of your question, was it about the China tariffs?.

Any impact on demand related to sort of macro issues as well as any component issues increasing in price for you guys or not?.

Yeah, nothing significant. I know that some of our – the way we used to sell some of our hardware products – it has a higher tariff in China. But with the move to the software, our retailers can navigate that differently..

Got it. And just one more from me.

What’s the potential uplift you guys might have from cross-selling, getting more deals like what we heard in the prepared remarks around the 30 deals this quarter above $500,000? Essentially, how that compared to this point last year?.

I don’t know the exact numbers. But there is a significant uplift in terms of compound deals where we are selling a complete solution. And also, among them, a number of new logos. So, I would say that, qualitatively, it’s a much different picture.

And in terms of looking forward, I think that the strength of the agent solution, active pulse solution, active synthetic test solution provide a solution set that can consolidate other vendors out of the picture. And the combination of that with software solution that makes our price more competitive creates a fundamentally better environment.

So, I don’t have the quantitative, but qualitatively it’s much, much stronger..

I think you can also link it to Visibility Without Border on the enterprise. So, think of vSTREAM is an extension of ISNG in the cloud. Think of nGeniusPULSE for SaaS application in the cloud, like Azure and AWS or people buying software-as-a-service. So, it’s all part of this big story, which Michael talked about.

Earlier I mentioned about that – impact of that on the 4G and 5G world. And similar effect is going to be there on the enterprise with the cloud..

Thanks, guys..

Yes..

[Operator Instructions]. And we’ll go next to Eric Martinuzzi with Lake Street Capital. Please go ahead. Your line is open..

Thanks. I wanted to revisit the Q4/full-year outlook here and just get a little bit better sense of the granularity around the revision to the low end of the prior range. So, the prior range was $925 million and $960 million for the non-GAAP revenue and now we are at $925 million.

So, that’s about $18 million decline midpoint, old versus the current $925 million. You talked about – Anil, in your remarks, you talked about ongoing CapEx issue with service provider, federal government shutdown and then modest – I think it was something to do with the enterprise security initiative.

Just if we stack rank those or talk about that roughly $18 million delta on a full-year basis, is this pretty much 80/20, 80% the CapEx environment, with service provider being a little bit more challenging than we thought 90 days ago? Or is it a third, a third, a third? I just want to get a better level of understanding..

Maybe Jean may have additional comments. But, overall, I think we provided a range on the best and sort of the worst case in the guidance last time. So, it was not necessarily exactly in the middle. But, yes, some of the deals in the service provider is just taking longer time. Acceptance takes long time. There are effect for – of the federal government.

There are multi-million-dollar deals which could be in Q4 or Q1. So, we just wanted to be – feel comfortable with whatever guidance we are providing. And on the EPS side, we are still able to maintain the midpoint or higher than the midpoint despite this because we had some improvement on the cost side, as Jean talked about..

Okay. The calibration capability, you highlighted that. I don't recall that being a big focus of the business historically. Can you, first of all, explain what that is? And then, maybe dive into the impact it has on the gross margins. .

So, it has been not a big focus because whenever a new technology comes, that focus increases. So, because of 5G towers and all those, the calibration business has sort of become a slightly bigger portion. But it’s still a small portion of the total business. It’s less than 5% of the total business. But in the past it has been even smaller.

But when 4G came along, we saw a similar uplift, except that some of the uplift was seen by Danaher because we had not yet acquired the company. So, that’s what we are seeing. What calibration allows you to do is –on the radio access side is to reposition the towers and strategic locations, give you information about where to place them.

So, we have a RAN solution, radio access solution, which has a calibration piece and a performance piece. So, this is the starting point. So, we see some of the business coming in the early stages in the 5G calibration and radio access side because that’s the area which is affected the most initially on 5G. Later on, core will be affected.

So, while it has an uptick, the reason it has lower gross margin is because it requires a lot of overhead in terms of people climbing towers, driving vans, and doing some readings and surveying the landscape. And so, that’s the reason. And I think, over next year, I think we will see some more opportunities like that.

And after that, it will slow down..

Okay. And then, lastly from me, you’ve been talking about the security offering. Obviously, you’re going to be, I assume, previewing a little bit in March at the RSA security show. Just curious to know, as far as your go-to-market strategy there, that market does not lack for competitors.

There are some, let’s say, calcified relationships in the channel, amongst the people you will be trying to take share from. That, in some cases – even if the product is received well by the market, it can, in some cases, delay adoption as people maybe run – maybe do some pilots for a quarter or two before they ramp up spending on NETSCOUT offering.

But, really, more from a channel mindshare, are you going to have programs in place to accelerate that process?.

Yeah. I think these are all good points. And, yes, there will be some bigger go-to-market challenge than our traditional business. But, initially, we’re trying to market this into existing accounts and expecting our network operations people to give us introductions to security departments.

And I have been to at least 10 companies in US, some of the big customers of NETSCOUT in the financial world who are very interested in this. And one of their biggest interest coming from the fact that we are using the same ISNG for providing security views and service assurance view. That’s not true about any other offering.

We are the only service assurance vendor using packet data or wired data and using – doing security also. Or we will be the first vendor. That’s not true of anybody serious in the market. Maybe there are one or two smaller players. And I think that’s going to be the difference and it will sort of make up for some of the go-to-market challenges.

We are not counting on channels to really drive the deal sizes or new customer wins, at least in the next year. .

I’d like to add, if I may, that we see a trend of networking and security teams getting combined on the same person or getting pulled together closer on the IT operations. And so, that’s one of the encouraging signs that we’ll leverage our network position into security..

Understand. Thank you for taking my questions..

Thank you..

And it does appear that we have no further questions. I’ll return the floor to our presenters for closing remarks..

Great. I’d like to thank everybody for joining us this morning for today’s call. Look forward to talking with you in the next couple of months. I think it's early May for our next quarterly update. And if you do have questions, feel free to get in touch with investor relations. Thank you very much..

And this will conclude today's program. Thanks for your participation. You may now disconnect..