Ladies and gentlemen, thank you for standing by, and welcome to NetScout's First Quarter Fiscal Year 2020 Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Anthony Piazza, Vice President of Finance, and his colleagues at NetScout are on the line with us today.

[Operator Instructions] I would now like to turn the call over to Anthony Piazza to begin the company's prepared remarks. Please go ahead, sir..

Thank you, operator, and good morning, everyone. Welcome to NetScout's first quarter fiscal year 2020 conference call for the period ended June 30, 2019. 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's a slide presentation that accompanies our prepared remarks. You can advance the slides in the webcast viewer to follow our commentary.

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. 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 on file with the Securities and Exchange Commission.

NetScout assumes no obligation to update any forward-looking information contained in this communication or with respect to 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 the 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 sale of the HNT tools business, we will provide certain organic non-GAAP performance trends, which remove HNT tools revenue for comparability purposes.

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 also on our website. I will now turn the call over to Anil for his prepared remarks.

Anil?.

Thank you, Tony. Good morning, everyone, and thank you for joining us. Let's begin on Slide number 6 with a brief recap of our quarterly non-GAAP results.

Our first quarter revenue of $186.1 million was approximately $10 million lower than we anticipated, as we continue to see constrained spending and elongated purchase cycles in our service provider segment.

Despite the short -- revenue shortfall, we delivered first quarter diluted earnings per share of $0.07, which was in line with our expectations, as we continue to closely manage our cost structure. Let's move to Slide 7 for some further perspective on this and the trends we see in our business.

Overall, our service provider segment revenue decreased 3% compared to the first quarter of last year. We continue to see elongated purchase cycles within some of the major North American service providers as they move toward their 5G service offerings.

We are excited to see increased activity related to 5G network this past quarter as we work with some of our customers on their 5G initiatives. I'm also happy to report that we received an eight-figure order at the beginning of the second quarter related to radio frequency propagation modeling use case.

This project is scheduled to be completed by the end of this calendar year and convert to revenue in the second half of the fiscal year. Additionally, Michael will highlight one large order we recognized as revenue in the first quarter related to a domestic 5G monitoring deal.

Within our international service provider segment, we completed the implementation and received customer approval for the large international service provider order that we had discussed over the past few quarters. This service provider operates a national LTE network that covers a significant geography.

They chose us to monitor their 4G network as they disrupted their local markets and became a market leader in wireless services. We continue to see 4G-related offerings throughout EMEA, Latin America, and emerging Asia Pacific countries. These offerings include services such as Voice over LTE.

Turning to our enterprise segment; revenue was down about 7% on an organic basis after three quarters of consecutive organic growth. The decline was largely driven by disruption in our international enterprise sales force from the sales reorganization we announced at the beginning of our fiscal year as discussed on last quarter's earnings call.

We have reviewed the issues and have made improvements in this geography. Based on our understanding of the competitive landscape within the certain international geographies, we believe we have good opportunities for growth during the remainder of the fiscal year.

Included in both our service provider and enterprise segments are our security offerings. Our overall DDoS security revenue grew modestly this quarter in the low single digits. This growth was primarily attributable to our international service provider customers.

Within the enterprise segment, we continue to provide DDoS capabilities for a major corporation as they continue to build on their cloud provider platform.

Further, in our security product line, we just announced the availability of Arbor Threat Analytics or ATA, which we will showcase next week at the annual Black Hat cybersecurity show in Las Vegas.

This is our network-based threat detection and response platform, which combines NetScout's unique visibility into both the Internet and enterprise networks with our proven packet monitoring technology to speed detection and response in today's challenging threat landscape. We anticipate that this will be a key differentiator of our offering.

This new offering will be particularly valuable to current customers who have instrumentation already in place for network and application performance management, which can now also serve cybersecurity use cases.

At the show, we'll introduce Cyber Threat Horizon, a real-time human-readable threat intelligence service aimed at enterprise and ISPs looking to make better decisions faster when faced with threats and attacks.

This service provides a real-time view of attack activity in a given geo or vertical segment and affords the responder a valuable context for response decisions. Now let's move to Slide 8 to review our outlook.

Despite our revenue performance in the first quarter, we remain excited about the opportunities we are seeing and our ability to capitalize on them. Accordingly, we are reiterating our guidance provided on our May 2019 earnings call. Our fiscal year 2020 -- for fiscal year 2020, our revenue target range continues to be $895 million to $915 million.

Our revenue represents a range of less than 1% growth to approximately 2.5% growth on an organic basis compared with fiscal year 2019. We are committed to continue to closely manage and review our cost structure as the year progresses to deliver our diluted EPS target within our guidance range of $1.40 to $1.45.

I look forward to sharing our continued progress with you over the remainder of the year. I will now turn the call over to Michael at this point..

Thank you, Anil, and good morning, everyone. Slide 10 outlines the areas I will cover. In the area of customer wins. In the service provider segment, 5G continues to build momentum.

In addition to the cadence of radio frequency propagation modeling deals we have been winning over the past two years, this past quarter, we won a large, high seven-figure 5G core monitoring project at a tier one U.S. carrier.

With our solutions, this carrier can have end-to-end network visibility of their 4G and 5G networks from the core to the RAN or radio access network. This win, against one of the incumbent network equipment manufacturers, demonstrates the value of our solutions and our ability to further assist our customers as they evolve.

It further demonstrates the completeness of our offering for 5G and our potential for future 5G opportunities. In the enterprise segment, we continue to attract new logos with our leading network performance monitoring capabilities.

Our newest generation products have the capability of supporting speeds of up to 100 gigabits per second network segments. Additionally, our commercial off-the-shelf offering has been enticing to our enterprise customers. One example is a first quarter win from a leading German automobile manufacturer, which is a new logo for us.

This automobile manufacturer purchased our solution in order to run their network at 100 gigabits and be able to deploy our products in their software-only or COTS form. This was a low six-figure order for us and demonstrates our ability to attract new logos. In the security space, we won a mid-7-figure DDoS deal at a large U.S.

internet service provider or an ISP. This ISP, for whom we are the DDoS provider, completed an acquisition of a company that used a competitor's solution. The ISP wanted to standardize on a single solution, single vendor, as well as choose a product that could offer their large customer base DDoS protection services.

This ISP's customers face a rapidly shifting threat landscape, and they wanted to provide a scalable and robust offering that can manage these threats. Accordingly, they selected our solution and intend to replace the incumbent solution with an all NetScout deployment.

In the DDoS arena, in general, we continue to leverage our core product strengths and differentiation of scalability and robustness of the Arbor Sightline and TMS portfolio. This differentiation includes our superior threat intelligence given our access to over a third of the world's Internet traffic. Talking about go-to-market highlights.

In the cloud area, following our partnering with Microsoft on Azure VTAP offering earlier this year, we participated in Amazon's AWS VPC traffic monitoring launch at their reinforce event in Boston in June and are working with them on ongoing field trials and road map collaboration.

The significance of these new capabilities is that cloud traffic can now be made available for monitoring and analysis without having to deploy agents inside the workloads, thereby, expanding alternatives to extend visibility to the cloud. Additionally, to meet requirements from our large U.S.

government agency customers, we are planning to expand our existing public cloud offerings to Azure Gov and AWS Gov Cloud, with target availabilities in the early fall. In terms of future events, finally, in our second quarter, we plan to exhibit at VMWorld and the Black Hat cybersecurity show.

At VMWorld, we will demonstrate our integration with VMWare's new NSX-T and VeloCloud SDN platforms or SD WAN platforms -- software-defined wide-area network platforms, extending IT team's visibility to workloads running in the software-defined data center and SD WAN environments.

At the Black Hat show, as Anil mentioned, we will showcase our Arbor Threat Analytics and Cyber Threat Horizon products that we highlighted earlier. That concludes my remarks, and I will turn the call over to Jean..

Thank you, Michael, and good morning, everyone. I will review key first quarter metrics, along with our guidance. As a reminder, this review focuses on our non-GAAP results, unless otherwise stated, and 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 of 2018, 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 note the nature of any such comparisons.

Slide number 12 details our results for the first quarter of fiscal year 2020. Focusing on the quarterly performance, we reported revenue of $186.1 million. First quarter revenue declined by 10% on a year-over-year basis and 5% on an organic basis, excluding the HNT tools business.

Our first quarter fiscal year 2020 gross margin was 74.9%, relatively flat compared to the same quarter last year. Quarterly operating expenses were down by 13% from the prior year due primarily to lower personnel-related costs resulting from reduced headcount. We reported an operating profit margin of 6.5% with diluted earnings per share of $0.07.

Turning to Slide 13; I'd like to review key revenue trends for the first quarter. In the service provider customer segment, revenue declined by 3%, with service assurance down 9% and DDoS security up 12%. In the enterprise segment, revenue declined 16%, partly due to the sale of the HNT tools business.

On an organic basis, enterprise revenue declined 7%. In terms of revenue by geography, as a reminder, this is calculated on a GAAP basis and includes revenue from the HNT tools business. International revenue increased by 1% due to both of our service assurance and DDoS product offerings for service providers within Europe and the rest of the world.

The U.S. experienced a 16% revenue decline, which was partially attributable to the disposition of the HNT tools business. We estimate that the U.S. declined about 11% on an organic basis on moderated spending by U.S. service providers. International customers represented 42% of GAAP revenue versus 38% last quarter.

We had no customers who represented 10% or more of revenue in the quarter. Slide 14 details our balance sheet highlights and free cash flow.

We ended the quarter with GAAP cash, cash equivalents, short-term marketable securities and long-term marketable securities of $443.2 million, which is a decrease of $43.8 million since the end of the fourth quarter. We generated free cash flow of $46.2 million for the quarter. Last quarter, our board approved a $50 million share repurchase tranche.

We repurchased $33.2 million of our common stock before the end of June, with the remaining $16.8 million repurchased in July. In total, we repurchased 1,946,418 shares of our common stock at an average price of $25.69 per share.

In addition to our share repurchase, we also repaid $50 million of debt, and at the end of the first fiscal quarter, we had $5 million outstanding on our $1 billion revolving credit facility. To briefly recap other GAAP balance sheet highlights, accounts receivable net was $160.0 million, down by $75.3 million since the end of March.

DSOs were 73 days versus 88 days at the end of the fiscal year 2019 and 69 days at the same time last year. The increase in the DSOs from the first quarter of this year compared with the first quarter of the prior year reflects the higher component of receivables from renewal bookings this quarter.

Finally, I would like to mention that effective April 1, 2019, NetScout adopted the new Lease Accounting Standards Codification Topic 842 or ASC 842. We adopted it under the modified retrospective method and, as a result, did not adjust comparative periods or modify disclosures in those comparative periods.

The adoption of ASC 842 resulted in the recognition of operating lease Right of Use or ROU assets of approximately $68.2 million, operating lease liabilities of approximately $83.2 million and the elimination of deferred rent of approximately $15 million.

Operating leases are included in the operating lease ROU assets and lease liabilities on our balance sheet. The adoption of ASC 842 did not have a material impact on our consolidated statement of operations, consolidated statement of stockholders' equity, consolidated statement of comprehensive income/loss or consolidated statement of cash flows.

The new standard had no material impact on liquidity and had no impact on our debt-covenant compliance under our current debt agreements. I'd like to provide a brief update on our use of capital.

As discussed in the past, we plan to retain up to $300 million in cash on our balance sheet for both working capital purposes and in consideration of overseas cash. In the near term, we plan to allocate $50 million for stock repurchases and an additional $50 million for the repayment of debt.

Accordingly, we anticipate continuing to be active in the market, depending on market conditions and subject to daily trading volumes and price considerations. Let's move to Slide 15 for guidance. I will focus my review on our non-GAAP guidance.

As a reminder, we sold the HNT tools business in September 2018, and it contributed $18 million to last year's revenue before the sale was completed. Accordingly, the impact of the divestiture should be taken into consideration when comparing fiscal years 2019 and 2020, especially for the first two quarters of both years.

Consistent with Anil's comments earlier, we continue to target fiscal year 2020 revenue in the range of $895 million to $915 million, which implies low single-digit organic growth.

In terms of the other key fiscal year 2020 operating model assumptions outlined on this slide, we currently anticipate further gross margin improvement as we drive adoption of our software solutions.

Our plan currently calls for relatively flat operating costs compared with last year as we absorb annual merit adjustments and critical personnel replacements. We expect our non-GAAP tax rate to be at the end -- at the lower end of our initial range of 23% to 25%.

We began implementation of a tax structure that should allow us to maintain a similar non-GAAP tax rate to last year. Assuming 78.2 million shares outstanding, we are expecting to deliver earnings growth with a diluted EPS between $1.40 and $1.45. I'd also like to offer some additional color on the second quarter.

As a reminder, last year's second quarter revenue of $224 million included $7.6 million from the disposal of the HNT tools business. As we assess the timing of opportunities in front of us, we currently anticipate revenue in the range of $205 million to $215 million.

We are planning for modest gross-margin improvement in the second quarter with operating expenses in the range of 7% to 8% lower than the same quarter 1 year ago. Diluted EPS for the second quarter is expected to range from $0.25 to $0.27. That concludes my formal review of our financial results.

Before we transition to Q&A, I'd like to quickly note that our upcoming IR conference participation is listed on Slide 16. Thank you. And I'll now turn the call over to Tony to start Q&A..

Operator, if you could start the Q&A process?.

[Operator Instructions] We'll take our first question from Matt Hedberg with RBC Capital Markets. Please go ahead. Your line is open..

Thanks. Good morning, everybody. So I want to start, Anil. When we sort of think about the start of this year versus last year, it kind of seems kind of similar, kind of challenging Q1, but you're maintaining the full-year guidance.

It seems to me like, listening to your prepared remarks, that there are more positives this year that give you confidence in the full-year numbers.

You outlined some of them on the call, but maybe could you sort of rank some of the things? Obviously, the eight-figure deal is encouraging, and it seems like that's going to be a second-half revenue catalyst. But maybe could you just sort of outline sort of what you're most excited about as you sort of think about the back half of this year..

So I think, Matt, I will just talk about incremental gains, which were not possible last year. Obviously, this big deal, eight-figure deal we announced, which contributed to orders but not to revenue in the first half.

But there are a few things which are completely new, one is our security direction, this new ATA product, which was announced in April, and we should see some revenue intake from them in the second half, and we are doing a lot of POCs. We're going to be talking about at it at Black Hat conference.

Second is, we also are having something called Visibility-as-a-Service where some of our products can be consumed as a service, and some of our customers have challenges in having enough talent to operate our product. This allows them to outsource that to our company, not only increases the revenue but increases the speed of deployment.

And third is, while we saw some disruption in the sales force in U.S. as a combination of the Arbor and NetScout sales forces, I think there are good cross-sell opportunities in the second half as a result of that..

That's helpful. And then maybe just one other thing that I think could be an opportunity here, and you talked a little bit about in your prior remarks about the reorganized international sales force. I'm curious how that might set you guys up for better international enterprise results.

And I think you alluded to, you don't think necessarily it's competitive there.

Maybe just review sort of additional thoughts on the competitive angle on the enterprise side internationally, specifically?.

So -- and on -- I think competitive challenges actually reduced because a lot of our direct competitors, both in the service provider and enterprise segment, are sort of exiting the market. One of them recently announced that. But this also creates a challenge of market development.

But I think the biggest cross-sell opportunity is that security market is much more mature in terms of spending worldwide, and now 4G spending is increasing in other areas. So those two factors are new, one as a result of our combined sales force, other is 4G is maturing.

As a result of that, we have better prospects of growing our international business, and while, at the same time, direct competition is decreasing. There continue to be indirect competition from NEMs, confusion in the marketplace because of digital transformation, NFV and virtualization. But overall, net effect is less competition..

Great. Thanks, guys..

Sure..

Thank you. And next, we'll move to Eric Martinuzzi with Lake Street Capital. Please go ahead. Your line is open..

I wanted to focus on the color given around the Q2 outlook. I think, Jean, you said that there is roughly $7 million from the HNT, the handheld networking tools, from fiscal '19. So that would imply about down 3% on the revenue for fiscal -- for Q2 of 2020.

I'm wondering, decline, is it -- is the explanation for that decline the same thing that we just heard about Q1 as far as weak service provider or is there any recovery in service provider anticipated in Q2? And then if you could comment also on the enterprise impact for Q2..

So the range obviously represents what the salespeople have given us as a forecast, and the components in there were -- the range of $10 million would assume that some of the deals that we were working on that we talked about in the script, which are 5G-related, would come in. There is anticipation that a few of those will actually come in.

And then in the enterprise, the sales force disruption internationally that Anil talked about and the competitive landscape, we see that the international sales -- international enterprise sales force should start to pick up in some of their deals. That would probably explain the range in Q2..

Okay. And I would echo the previous caller's sense of deja vu here where we've got a back half-loaded year that you guys -- you seemed to have the confidence to reiterate the full year, but just based on Q1 and Q2, it definitely -- I think I've got about a 44% revenue front half, 56% back half, which obviously makes for a riskier profile.

But the color that you gave, I think, around the eight-figure order that you got at the beginning of Q2, I think that helps alleviate.

I wanted to dive into that order and just wonder, is there potential incremental business with other tier one carriers like this? Is there a potential for other business at that same carrier, eight-figure orders? I know those are hard to come by, but that's -- you're at a scale now where we almost need to have those types of deals..

Let me just come back to that your -- first, your deja vu comment. I mean, you're right. I think that's the perception or may have been a reality in the past. In the past, we were counting on second-half uptick on spending, purely on the spending -- continuation of spending in the service provider.

This year, we are counting on converting at this revenue, which, by the way, was a $20 million-plus deal. It's eight figures, but it was $20 million plus, and we are counting on that. Plus we are counting on new solutions in the security space. So the dynamic is much different than in the past. So what was the question again about -- your -- yes.

So calibration business, so this was the upside. Not all of it was the upside. So overall business in 5G calibration will be higher than we estimated at the beginning of the year, but it's not a huge number. We are talking about $20 million versus $30 million in the business. So except that more of that came in the first half and it was a bigger number.

So why we expect? We expect some 5G business in the calibration area. It is not a huge upside. Most of the upside has come in. And we'll get some more 5G orders, but that was already in the plans..

And then as far as other tier one carriers, these types of eight-figure orders, are you well-positioned? Do you have pipeline width?.

Yes. No, I don't think there'll be eight-figure orders, but together, it will be eight figure across multiple, and we'll also have to see what -- consolidation happening in the market with the approval of T-Mobile and Sprint merger, what are the pros and cons for us.

And -- so I think we are -- this year, we are going to deliver higher number in the 5G calibration because of this big order as we've -- versus the forecast we had six months ago. But that's all included in here. We don't hear -- I mean, it could be seven figures, but not eight figures..

And then a housekeeping item. Jean, you commented on the expectation for share count that underlies the roof of the reiterated full-year non-GAAP EPS of $1.40 to $1.45. We have that at 78.2.

Can you give some clarity -- given the repurchases that took place in July, some clarity on the share count for just Q2?.

For Q2, it's 78.2. The share repurchases are pretty minimal. And when we execute in the market in the next tranche that we do, we always update the share count at that time. So we'll update it again at the end of Q3. So right now, we're looking at about 78.2 for Q2, and for the full fiscal year, probably about 78.2 to 78.3..

Thank you..

You're welcome..

Thank you. And next, we'll move to Alex Kurtz with KeyBanc Capital Markets. Please go ahead. Your line is open..

Thanks. This is Steve Anders [ph] on for Alex. I just wanted to ask about the -- what's going on in the cloud business and the joint go-to-market strategy with Azure and AWS and just kind of what's going on in that vertical..

Yes. So these are partnerships where with Microsoft, we only have partnership where Microsoft sales teams are compensated on deals that involve NetScout products.

And in both cases, we have technology partnerships, and that means that we are partnered -- we are certified with our products, but not only our products, we are also working with them on their projects such as this VTAP project where we are actually advising them on network monitoring strategies and requirements.

So it's a multi-level, multi-component partnership, a number of accounts we are working together with them, and that's basically [indiscernible]..

I think maybe one thing to add to what Michael was saying in his -- is that even bigger than the partnership is the architectural cloud to use our product is going to benefit our growth and penetration into that segment.

There is a way we get access to packets in the non-cloud environment, and that was changed in the cloud area, which was creating more challenges of deployment of our technology in the cloud.

With this VTAP initiative, which initially started by Microsoft and now being emulated by AWS, one of the barriers for deploying our technology -- one of the big barriers is eliminated or going to be eliminated. So that's a good sign of -- our deployment in cloud will now look similar to the deployment in non-cloud.

And as an incumbent, when people want to move their assets to the cloud, our current customers, then they'll have easier time extending our technology to the cloud. So that I see is the biggest thing.

Yes, partnership is helping, but this appreciation of our way of doing monitoring through this initiative, which are enabled by our partnership, is I think the biggest -- one of the biggest changes..

And do you guys have any early proof points about how that's resonating within enterprises at this point?.

Yes, we have -- I mean, our vSTREAM products, as well as our native deployment, I think we have a lot of good proof points. We have derived some business, but not anything big. And like I said, this was one of the potential barriers. And as it comes in the mainstream, I think we will see maybe wider deployment.

But we have -- I mean, many customers, and then double digits, who are deploying our technology in the cloud or cloud-related products..

And almost every single data center-related deal, networking deal, involves the necessity of having this solution as part of the portfolio. So it's a necessary component. It's an enabler, even in deals that today are really mapping just to….

So I think, yes, that's a very important point [ph] Michael made, just to add to that is that, in terms of revenue content, it's very small in a given deal, but it's a necessary component, and that completes the solution. So it could be 5% of the dollar value, but without having that, it would be more difficult to get the remaining 95%..

Okay, great. That's helpful. Thanks for taking the questions..

Thank you. And next, we'll move to Chad Bennett with Craig-Hallum. Please go ahead. Your line is open..

Great. Thanks for taking my questions. So I just have a few questions around the high seven-figure 5G core monitoring win that you guys got in the quarter. First, great to see some 5G activity finally releasing. So first question would be, Jean, when do you expect timing-wise to recognize revenue on that deal? I don't know if it's second half on that.

Secondly, you mentioned -- I think Michael mentioned in his remarks that it was one versus an incumbent at this U.S. tier one. I guess, would that assume that incumbent was doing the 4G core monitoring for this tier one? So any color there would be great.

And then maybe from a pipeline perspective, are we confident now that kind of 5G core monitoring wins -- or, sorry, monitoring activity is kind of really picking up and we'll consistently hear about this stuff for the remainder of the year? Thanks..

So let me see if I can cover all this. So first thing is, it was an eight-figure deal. There was….

Let me just interrupt Anil for a second. I'm sorry to do that. It's Jean. So I'll answer the simple or one of your questions. So there were two 5G-related deals. One was in the quarter, which is what Michael spoke about, and we took revenue on that in Q1.

The other deal that is $20 million or more is the deal that we received in July, and we anticipate that that will be completed -- the project will be completed by the end of this calendar year. So it is more likely to be a Q3 with a potential of a Q2 revenue recognition item. So I'm sorry..

With a potential of Q4 -- Q4 versus -- so I think the only thing to add to that is that, to the size, which Jean clarified, is that the competition was not in the 5G monitoring area because, there, we are doing quite well, but the deals are not at -- I mean, the business and maturity is not at the level to win that, even though we did get one 5G monitoring deal.

What Michael was talking about was competition from network equipment manufacturer. During the calibration area, we really don't have direct competitors other than in the calibration area of RAN optimization in that area. But a lot of time, certain NEMs and equipment manufacturers are competing.

And there are small players here and there, but in the -- and that's what -- and maybe, Michael, you want to add to that?.

Yes. In fact, it was a NEM, network equipment manufacturer, and they were doing some parts of the monitoring at the packet level, but we also were present. So they weren't the incumbent exclusively at LTE. Nevertheless, they were the main competition and they are incumbent in other parts of the overall monitoring [indiscernible]..

Yes. So I just wanted to make sure, we may have people -- may have confused you. The $20 million deal was in the calibration area, and there's a different kind of competition there, but it's much less opportunity in terms of number of -- amount of dollars, but yet there, we had a bigger upside than we thought.

And then on the other 5G monitoring side, we also had a competition from a network equipment manufacturer and we won against that..

Great, thanks for the color. And then maybe an update on where you're at today as a percentage of product revenue coming from software-only and maybe your expectation for exiting this year from that standpoint..

Sure. So software-only in the quarter, let me just find it, for service assurance was about -- product revenue service assurance -- service provider was about 30% in Q1, which compare to about 28-ish percent in Q1 of last year. For the full year, it was around 30%.

And so I would believe that given the composition of the service provider revenue where it seems quite dominated in international, that we probably will see hopefully a higher percentage than 30% in FY '20..

Got it. All right. Thank you..

Thank you. And next, we'll move to James Fish with Piper Jaffray. Please go ahead. Your line is open..

Thanks for the questions here. I guess, first, you guys did call out service provider has the weakness in the quarter, but looking what you disclosed, it was actually enterprise that I think surprised a bunch of us, given it was down 7% organically.

I guess, first, what are you seeing from a macro perspective with enterprise on-prem spending? And second, maybe could you just double click into exactly what happened with the sales reorg and why that caused disruption more than you guys thought?.

So I think the -- Jean will add some more color to that and -- but we will go over what's happening in the service provider segment.

And, yes, there was some disruption, but I wanted to mention that some of the excitement about enterprise business is coming from the security products, cross-selling as well as ATA product and that's we're -- it just -- it will be a slow uptick. Yet, we had some negative impact from sales force reorganization.

We have to map that balance to sales force systems and saw some disruption. But I think it's largely behind us or definitely all the trailing part of that will be behind us by the end of the quarter. That's what's happened in the enterprise. There is no competitive issue. There is no big spending issue on that.

And I think the spending, we don't see a big spending issue in the enterprise. I think we just need to focus on the right thing with the combined sales force and we talked about two big areas of growth, cross-selling opportunities and which is enabled by the combination and the security products we have just announced..

If I may add to that, there are competing dynamics as always. The fundamental uptick and growth driver is coming from the disruption. So you implied in your question that there is enough on-prem spending whether it's moving to the cloud.

What's really happening is all core customer base, which is a very large enterprises, are slower to move than the rest of the market and they are much more concerned about the risks and that's exactly what we are addressing here in our service assurance solution.

So as these opportunities get matured, this is going to be a major driver of growth in addition to the security components. The negative is the disruption that was caused. So there is a strategic growth driver here, very important..

And then I would echo what Matt Hedberg said earlier of there seems like another's kind of back half set up that looks pretty challenging outside of 5G spending picking back up, which I think we're just hearing that everything is getting delayed more so to 2020 in terms of core network spending.

So I guess kind of two-part question here is, how much visibility do you have at this point, Jean, quarter-to-quarter understanding that you now have this large deal in the pipeline, and what make -- what are you guys doing to make it better as it seems like each quarter, it's kind of a miss and another miss on the top line? And then Jean, another one for you is, just product gross margins got significantly worse and yet we're going through the software transition, is it competition having a greater impact on the business than you thought or is it kind of pricing concessions or is it just the calibration exposure?.

Let me just mention before Jean adds, I think you talked about -- you reiterated what Matt asked the question, not the answer I gave. And the answer is that we feel that first half versus first half of last year is impacted by some delayed deals and some of that could have been made up by this big deal if we had recognized the revenue.

And so that's why the second half will be more back-end loaded even versus last year and that's the answer to that. Jean answered the question that it will be recognized in the third or fourth quarter.

The second thing is, we talked about the last year spend, there last year back half loading, we are really counting on the issues related to the customers; we are counting on spending to resume. But this year, we are counting on our new product intakes in new areas like security, we are just slow to uptake, but is within our control.

So those are the dynamics, which are playing out, and we will remain to be seemed as we come into the second half, we see that what challenges are much lower than last year in terms of second half business being higher than the first half. Yes, the potential for opportunities is higher because of the new product introductions..

And Jean, on the gross margins on the product side?.

Sure. The gross margin, I think, the product revenue -- I'm sorry, the product gross margin is about 73% in Q1. It was about -- so it's like 3 percentage points lower than Q1 of the prior year. Most of that is just volume associated then with also some product mix. So it's pretty straightforward in there..

Got it. Thanks..

You're welcome..

Thank you. And next, we'll move to Kevin Liu with K. Liu and Company. Please go ahead. Your line is open..

Hi, good morning. Just want to dig further into the enterprise sales group as well, especially internationally; you cited some competitive dynamics that you think will drive improvement in the back half of the year.

What sort of visibility do you have into that? Is that reflected in the pipeline already or is it just kind of an assumption that the market will kind of come your way with the exit of a competitor?.

Well, I think the -- we talked about our color and the guidance, and that's a reflection of the forecast, the ability we have and it's not just a guess. It's based on how we do forecasting and analysis.

So we feel good about that situation because one of the negatives of small disruption in international enterprise is winding down and some of the initiatives we have put in place and security and other areas are starting to take off and/or certainly will take off in the second half. Yet, the competitive environment is not getting any worse for us.

So that creates an environment where we feel confident about the guidance we have provided. Also I want to mention there have been lot of questions on the call about quarterly, the way our business works, we have large deals. I think looking at all the stats on a quarterly basis, it makes it sometime confusing.

And I think when we have more data first half and full year, I think some of these are margins and other things will start making sense..

And then just one follow-up on the security side.

It sounds like with some of the cross-selling efforts you have in place and the new products that you would expect that to improve over the course of the year, do you see the security business getting back to kind of a double-digit growth profile and what sort of expectations you have built in for this year for newer solutions like the Arbor Cloud analytics?.

Well, we talked about $10 million to $20 million impact this year from the new product introduction and cross-selling and you can look at that as the difference between the low end and the high end of the guidance..

Okay. Thank you for taking my questions..

Sure..

Thank you. And at this time, we have no further questions. I'd like to turn the call back to Mr. Piazza for any closing remarks..

Thank you, operator. This concludes our remarks. We look forward to seeing many of you at the upcoming conferences. Thank you for joining us today and enjoy the rest of the day..

Thank you. This does conclude today's conference. You may disconnect and have a great day..