Ladies and gentlemen, thank you for standing by and welcome to NETSCOUT's Second Quarter Fiscal Year 2020 Results Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. Tony Piazza, Vice President of Corporate 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 Tony Piazza to begin the company's prepared remarks. Please go ahead..

Thank you, Operator, and good morning everyone. Welcome to NETSCOUT's Second Quarter Fiscal Year 2020 Conference Call for the period ended September 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 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 for the year ended March 31, 2019, and subsequent Quarterly Reports on Form 10-Q 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 the announcements described herein. Let's turn to Slide 4, which will involve 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 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 6 with a brief recap of our quarterly non-GAAP results. From a financial perspective, we delivered solid second-quarter fiscal year 2020 performance with both revenue and earnings per share exceeding the high end of our expectations for the quarter.

Revenue for the quarter was $216.5 million, with corresponding earnings per share of $0.28. The quarter benefited from a large cable service provider order which was delayed from last quarter, as well as strong government spending as previously approved projects were funded this quarter.

From a strategic perspective, we continue to advance our product initiatives at a steady pace and have made great progress on our go-to-market initiatives, including our sales force integration that started at the beginning of our fiscal year. Let's move to Slide 7, for some further perspective on this as we review business highlights.

In our Service Provider segment, as noted earlier, this quarter we completed a deal with a large U.S. cable operator that had been in negotiations for several quarters. This customer is expanding its Mobile Virtual Network Operator, or MVNO, space where they are concentrating on optimizing their subscribers' experience.

I'm happy to report that the customer expanded the scope and using a broad offering of our integrated platform to assist in achieving their objectives. This expanded scope resulted in a larger deal size than originally proposed. Michael will elaborate further on this transaction in his remarks.

As we mentioned on our last earnings call, during the second quarter, we received an 8-figure order from one of our tier 1 domestic mobile service providers for radio frequency propagation modeling as this customer prepares for 5G.

Subsequent to the initial order, the customer placed an incremental order which increased the size and scope of the project.

We are working on the propagation modeling and expect that a significant portion of the projects along with the associated revenue recognition should be completed in our fourth fiscal quarter, which enhances our visibility for the quarter as well as the second half of our fiscal year.

We are pleased to see carriers begin to prepare for 5G, and we continue to engage with our customers on this front.

While we continue to believe that this is a longer term opportunity and driver of growth that will benefit our business in numerous ways, especially as edge computing becomes more mainstream, we are beginning to see some leading carriers accelerate their 5G initiatives.

Within our international service provider geographies, we continue to see 4G-LTE related opportunities throughout EMEA, Latin America and emerging Asia-Pac countries as they advance their networks. Turning to our Enterprise segment.

As we have said before, we have a large pipeline of user-approved orders within our Federal Government business that has been waiting for funding. During this quarter, we benefited from the release of funds for some of our pipeline.

Although some of these orders were completed during our second quarter, we had a few other orders that will be completed in our third fiscal quarter. Michael will elaborate on these deals in his remarks. Overall, within the Enterprise segment, our customers continue to advance their digital transformation and security initiatives.

Given that our customer operates some of the most complex networks in the world, the evaluation and implementation of these newer technologies takes time, and we anticipate these orders to be uneven throughout the quarters.

However, we expect the pattern to level out over time as these projects mature, and believe we should benefit from this during the second half of the fiscal year and beyond. Now let's move to Slide 8 to review our outlook. We remain excited about the opportunities we are seeing and our ability to capitalize on them.

Given the solid performance in the quarter, the view of our pipeline and the deals in-house related to the Federal Government and the radio frequency propagation modeling projects that should benefit the second half of the fiscal year, we are reaffirming our original revenue guidance range of $895 million to $915 million and increasing our earnings per share guidance range to $1.45 to $1.50, due to our capital structure management.

The original range was $1.40 to $1.45. I look forward to sharing our progress with you as the year continues. 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 Service Provider segment, as Anil mentioned, we won an 8-figure deal with a leading U.S. cable company as they advance their strategy to expand into the MVNO, Mobile Virtual Network Operator space.

Our customer's objective is to use a superior customer experience as their key differentiator. In order to help ensure service quality and availability of their WiFi and Mobile Video services, they are deploying solutions from both our service assurance and DDoS security portfolios to assist in ensuring an optimal customer experience.

This deal is the initial phase of our company-wide instrumentation initiative and includes our core ISNG and nG1 platform, our nBA Customer Experience Analytics software, our nPulse Synthetic testing platform, and our flagship Sightline and TMS products from the Arbor security portfolio.

In the Enterprise segment, we had multiple 7- to low 8-figure deals from the Federal Government. The common theme in these deals is the indispensable role we play in assuring the performance and availability of large-scale, mission-critical systems.

In the largest of these transactions, we are part of a first phase of a new initiative to ensure end-to-end visibility, continuous monitoring and remediation in conjunction with the orchestration of mandated security solutions in a hybrid cloud environment, initially involving AWS GovCloud services.

In this deal, we leveraged our entire service assurance arsenal of offerings, including active and passive monitoring and monitoring switches, predominantly in software and virtual form factors.

In another case, we displaced the incumbent due to our strong reputation and track record with the government based on our successes with our superior service assurance technology and our extensive knowledge of their requirements and internal operations.

Finally, in the third deal, we leveraged our platform strength, combined with our superior agility to customize a solution to meet a uniquely strict monitoring accuracy requirement in a mission-critical application, which helped to refresh our own incumbent solution after many years of dependable service.

From a go-to-market perspective, we continue to successfully expand our partnerships. I'm going to cite two examples. With AWS, we recently completed the first deployment of our vStream and vnGeniusONE products by a large government agency in AWS GovCloud.

Our capabilities now include both agent-based deployment inside the workload and separate VPC deployment in combination with AWS traffic-monitoring. This illustrates the importance of NETSCOUT's visibility in assuring the performance of applications migrating to AWS GovCloud.

It also highlights the benefits of our advanced technology partnership between AWS and NETSCOUT in terms of delivering to market well-architected and fully interoperable solutions.

We will further demonstrate these capabilities of assuring performance and security of applications in hybrid cloud environments at the upcoming AWS re:Invent conference in Las Vegas.

Finally, with VMware, earlier in second quarter, we announced the availability of our vSTREAM NSX Edition for VMware NSX-T, extending our leading visibility and troubleshooting analytics platform to be deployed natively and invisibly to the workload, in the virtual infrastructure for the data center and cloud for deep visibility and consistent security.

That concludes my prepared remarks, and I will now turn the call over to Jean..

Thank you, Michael, and good morning everyone. I will review key second quarter and first half fiscal year 2020 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 from the applicable period referenced. Regardless, I will note the nature of any such comparisons.

Slide 12 details our results for the second quarter and first half of fiscal year 2020. Focusing on the quarterly performance, we reported revenue of $216.5 million, which slightly exceeded the high end of our color for the quarter, as Anil outlined in his remarks.

Second quarter revenue declined by around 3% on a year-over-year basis but was flat on an organic basis after excluding approximately $8 million associated with the HNT tools business. Our second-quarter fiscal year 2020 gross margin was 76.6%, up over 1/2 of a percentage point over the same quarter last year.

Quarterly operating expenses were down over 2% from the prior year, primarily due to lower personnel-related costs resulting from reduced headcount. We reported an operating profit margin of 14.6% with diluted earnings per share of $0.28. Turning to Slide 13, I'd like to review key revenue trends for the first half of the year.

For the first 6 months of fiscal year 2020, the Service Provider Customer segment revenue grew approximately 2% and the Enterprise segment declined approximately 6% after removing the revenue impact of the HNT tools business that was divested last year.

Approximately 52% of total revenue was generated from the Service Provider segment, with the remainder from the Enterprise. Revenue by geography was relatively consistent with the first half of the prior year. There were no customers in the quarter or the first half of the year that represented 10% or more of revenue.

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 $307.8 million, which is a decrease of $135.4 million since the end of the first quarter. Free cash flow used in the quarter was $6.8 million.

During the quarter, we repurchased approximately 2.9 million shares of our common stock at a cost of $66.8 million or an average price of $23.34 per share. In the first half of this fiscal year, we returned approximately $100 million or over 2/3 of our anticipated free cash flow for the fiscal year, back to our shareholders.

We anticipate continuing to be active in the market, depending on market conditions and subject to daily trading volumes and price considerations. In addition to our share repurchases, we also repaid $50 million of debt during the second quarter, and we now have $450 million outstanding on our $1 billion revolving credit facility.

To briefly recap other balance sheet highlights, accounts receivable net was $202.3 million, up by $42.2 million since the end of June. DSOs were 79 days versus 88 days at the end of fiscal year 2019, and 73 days at the same time last year.

The increase in the DSOs in the second quarter of this year compared with the second quarter of the prior year is primarily attributable to the timing of a payment from one large customer that had paid subsequent to the end of the quarter. Normalizing for this, the DSO was relatively flat this quarter as compared with the same quarter last year.

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 prior to the completion of the sale.

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 remarks, we continue to target fiscal year 2020 revenue in the range of $895 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 gross margin to be relatively flat compared to last year, as improvements from adoption of our software solutions are offset by the increased radio frequency propagation modeling activities where the initial phases have a higher associated cost.

Our plan currently calls for lower operating costs compared with last year as we benefit from a reduction in personnel-related costs primarily attributable to lower head count, partially offset by increases in annual merit adjustments. We expect our non-GAAP tax rate to be in the range of 22% to 24%.

Assuming 76.7 million shares outstanding, we anticipate delivering mid- to upper single-digit earnings growth with diluted earnings per share increasing to a range of $1.45 to $1.50, due to our capital structure management. The original range was $1.40 to $1.45. I'd also like to offer some additional color on the third quarter.

As a reminder, last year's third quarter revenue of $246.3 million was not impacted by the sale of the HNT tools business as the sale was completed in the second quarter of last year. As we assess the timing of opportunities in front of us, we currently anticipate revenue in the range of $245 million to $255 million.

Diluted earnings per share for the third quarter is expected to range from $0.57 to $0.60. 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. 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..

Anil, congrats on the improved results this quarter. So in your prepared remarks, you noted that you're pleased to see carriers begin to prepare for the 5G. Obviously, you had the 8-figure order from a T1 domestic carrier this quarter here. But you also said that it's a long-term opportunity.

I guess when we look at the opportunity from an external perspective, what are some of the guidepost milestones that you see that gives you confidence this opportunity is progressing?.

So I mentioned last time or in previous calls that I see this 5G as a much longer term opportunity. And over the last 6 months, there are a couple of new findings. One is the carriers are accelerating the 5G deployment. In fact, T-Mobile just announced and they're advertising heavily on the TV for last few weeks, 5G as a differentiator.

So this T-Mobile announcement which I saw in detail yesterday, I think is going to trigger acceleration at other carriers in U.S. Second thing, which is a very interesting trend which I discovered during my travels in about last three months, is that 5G will also be used outside of carriers.

In Federal Government is being used as the next local area network technology. So the implication of 5G will be beyond carriers, which was not known to us at least 6 to 9 months ago. So those are the trends. And so right now I am more bullish on 5G impact on the next 12 months to 18 months than we were last year..

That's great. Very encouraging. And then as a follow-up, there wasn't a ton of commentary about Arbor this quarter in the prepared remarks. Wonder if you can provide a bit more color on what you saw in your broader security portfolio..

So as I mentioned, we are really going to be in 3 segments starting very soon with the announcement of our Threat Analytics product. So one area is DDoS security, which is where Arbor is, and in the first half, the business was roughly flat versus last year.

And other one is our traditional service assurance with roughly half enterprise and half service provider. The security, even though DDoS is part of that, is a third area. And that's a new area we're getting into over here. And so when I look at the broader security portfolio, there are many things we're looking for next year in addition to DDoS.

One is our Threat Analytics product we just announced and also we had acquired a small company, which is doing some work in the machine learning in their area based on the NETSCOUT dataset.

So overall, I think there has been, as we mentioned in the last quarter, some of the international business was impacted in the first half because of the integration issues and which are mostly behind us, I think, and Arbor was a much bigger portion of the international business than service assurance.

So it was somewhat impacted by the training and all those. So I think we hope to make this up. But the bigger security story is not just DDoS, but the other 2 areas which we have invested in over the last 12 months..

We'll take our next question from Eric Martinuzzi with Lake Street..

Just curious. Just looking at the first half of the year on the Enterprise side, we had a -- if my math is correct, excluding the handheld networking tools business, it was down about mid-single digits or so. Just wondering what your expectations are for that business in the second half of the year. And then I have a second question..

So I'll just mention high level, and Jean may have some additional commentary. But overall, some of it is timing of orders, some affected by integration training in the first half and training and the source alignment. So we think, Alex, that we'll be able to make up and be flat to slightly up in Enterprise by the end of this year..

Okay. And by the way, you're talking to Eric. Alex'll get his chance soon enough..

Okay, okay. I saw your name. Sorry. Okay. Still a good question..

Then on the MVNO, obviously a big win with your large U.S. cable operator expanding their MVNO work that they're doing with you.

What about other North American MVNOs, are there any of those in the pipeline, Anil?.

Well, we do good business. I mean, this is very -- I mean, last year there was a different one, and they're different and not [indiscernible]. So the deal here was very big because they bought everything, including Arbor solution. But we had a bad year with them last year. So there was a pent-up demand.

So yes, we are working with other operators, but nothing close to the size or magnitude..

We'll take our next question from Alex Kurtz with KeyBanc Capital Markets..

So Anil, when you look at the intensity of spending that you saw during 4G, that was obviously a great cycle for the company. And now that you have a better understanding of how 5G could work for NETSCOUT, you have a sense that it could potentially match the 4G cycle in the U.S.

as far as dollars over a span of time? And I guess all this relates to how maybe fiscal '21 could be an uptick from how you see it maybe 6 or 9 months ago..

Yes, I think so, but not just because of 5G. But 4G spending in the U.S. has come down dramatically, as you know, affected by the 2 biggest operators, which affected our business during the last 3 years. That downward trend has brought down 4G to a reasonable number versus 4 year -- 4G spending for NETSCOUT to a reasonable number.

And now I think there is a possibility over next 12 months for us to keep the trend going or ticking higher because of 5G. And yes, certainly that has changed, as I mentioned in my earlier remark, over from what we thought this time last year..

So you feel like there's been a base -- you're at a baseline of kind of maintenance spend on 4G domestically, that's where we're at right now?.

Yes, I think it's maintenance. But also want to mention that there are 3 different version deployment modes of 5G. And in the first nonstandalone case, you have, well, basically, you are using maintenance dollar to do some 5G upgrade. And that's where we are right now.

And then very soon, when you get to the CUPS model, which it requires actual spending, additional spending for control plan, then you need to buy additional stuff from us, additional new stuff. And then, moving forward, as you go to pure 5G, there are new areas in the edge and everything, and that's a big opportunity.

So most of the investment in the last 8, 9 months, is in the shared area, which doesn't drive a lot of spending, but it's at more sticking in account. We are now in the domain of where there could be some additional investment. Initially it's in more in the predeployment area like calibration order we got.

And moving forward, that's where there might be some acceleration driven partly by some leaders in the market and that we will see accelerated spending.

And lastly, I mention the positive plan with the impact, which is not well known at this point, is, what's the relevance of 5G outside of the carrier market, because we are in a unique position that we understand the 5G, 4G, and [indiscernible] and also understand the enterprise traffic and application. We are both sides of the house.

And that's a combination which will be ready available if 5G takes off outside of the carrier space..

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

So the large MVNO order that happened this quarter that came from last quarter, I think at least last quarter we were thinking about that in terms of dollars around $20 million. But it sounds like that even expanded.

Jean, could you quantify the contribution from that this quarter?.

As you said, we thought it was probably going to be -- it is a deal that was started many quarters ago, and, as you can tell, it's obviously a very complex deal based on how they wanted to roll out their strategy and the amount of integration that they wanted in all of their products to be able to have one single pane of glass to have complete visibility.

So over the time, the multiple quarters that we have been working on, it had increased from, say a mid-single-digit service assurance deal, and then they started putting some of our security products in there. So it went to in the $10 to $12 million range, and then it expanded from that.

And so you're correct in that we thought it would probably be somewhere between the mid -- around $15 million to $20 million, but it actually went up probably more like $5 million to $10 million after that.

And the interesting part is that a lot of it was shipped in our second quarter, but there's still a portion of it that came in, in the second quarter, but that will actually ship in our third quarter..

Okay.

So from a revenue rec standpoint, there's still more of that order to be recognized this quarter?.

Yes, that's true, along with, as Anil had said in some of his comments, some of the orders that we receive from the Federal Government..

Got it. Okay. And then is there, considering where we are today, and I thought it was interesting in the commentary about the fed orders that you received, I think you noted that they were a fair amount of software-based or software-defined solutions.

Can you give us a sense of where you think you'll be at this year in terms of software-based or software-defined percentage of product revenue?.

I think that's -- I don't have the percentage. But I don't know what some of the assumptions were. But we are, I mean --.

Anil is looking at something. Let me just give you some of the facts. On a percentage basis of service assurance product revenue, it was about consistent with last year. This is just the move from hardware appliances to software only. And it was about 20% for both periods.

The very interesting thing, as you point out, Chad, is that in the enterprise, we started to see significant use of our software-only also, such that last quarter in FY '19's Q2 in service assurance enterprise, it was probably in the mid-single digits as a percentage of revenue.

However, in Q2 of this current year, it went up to almost 1/3 of our revenue. So as you correctly pointed out, the fed and some of the other enterprise, larger enterprise strategic customers are definitely interested in software only..

Interesting. And then maybe last one for you, Jean, real quick.

How should we think from a capital deployment standpoint the appetite for share buyback versus debt pay-down, which you did both this quarter?.

Sure. I think what we did for the debt pay-down was this was a year in our revolver where the gross leverage amounts were going down as you get -- it's just a natural structure that's in a revolver. So we decided to manage our debt levels according to the gross leverage ratios that were in our revolver credit facility.

And so we continue to believe that the best use of our capital after investing it back into the business, is to give it to the shareholders in the form of share repurchase. Share repurchase has a better ROI at this point than debt pay-down.

So we will continue to monitor our cash levels and will continue to keep the minimum required cash of around $300 million, which represents our working capital domestically, our working capital internationally as well as some of the cash that stays in your international entities due to operations.

So we'll just continue over the next probably foreseeable future, defined as probably at least a year of share repurchase. We're at 76 million to 77 million shares outstanding, and we probably could -- we still have about $10 million left -- 10 million shares left on our share repurchase program.

And so we could get down to 70-ish million over the next few years..

Our next question comes from Jim Fish with Piper Jaffray..

Congrats on the current year. Jean, this one for you, maybe double-clicking on Matt's prior question from before.

Can you just give us more color around the service assurance portfolio and security portfolios within their respective verticals?.

Sure. For on a year-to-date basis within service assurance, I would say that the service provider market probably was relatively consistent, maybe down 1 point or 2. Arbor, however, has grown close to the mid-single digits -- mid-teen in the service provider place. And enterprise, as we talked about, it's down about overall 6%.

And as we talked about the digital transformation, since we work with so many large customers that have a very complex network, their projects tend to be uneven in the pattern as they figure out and they move towards what they want to do with digital transformation and the cloud.

We saw over a few years ago that it was kind of a wait-and-see pattern for these people as they decided what they wanted to do with their architecture. And now we see projects with some of our largest customers, like last year, we had a lot of our financial institutions do some digital transformation.

So we continue to believe that digital transformation will be very important to us. And that also pertains to Arbor, the other part of your question. They're probably down on a year-over-year basis in the enterprise maybe in the mid-teens.

And again, that speaks to some of the very large security projects that they have done in the prior years with financial institutions..

Got it. Thanks for the color there, Jean. And just maybe on the guidance. The last few years we talked about more than 55% of revenue coming in the back half of the year on sort of initial guides and whatnot. And that kind of resulted in midyear guide downs.

For here again, based on my math, looking at about 56% of the annual business in the second half of the year, based on the midpoint of your guide. And it looks like your guide implies actually accelerating double-digit organic product growth in the fiscal fourth quarter.

I guess what, besides some of the remnants of the larger deals, makes you confident that you can hit this again when the macro has started to kind of come down this quarter and you guys saw a benefit this quarter from some larger deals with timing?.

Well, first of all, as we mentioned, and Jean may have more color to this, is that we have much better visibility because of those federal deals and those 8-figure deals on the cable provider, which we didn't have entering the second half. So I think we are slightly ahead in terms of visibility point of view than last year.

And so I feel that -- I mean, notwithstanding the talent you're talking about, I think we are in a much better situation than in the past few years because of many different reasons, and despite the fact that it's only 44% there. But typically throughout the history of the company, we have been in this 43%-47% range in the first half.

So I think if you look at that, we are in the similar domain because of additional visibility we have moving into the third quarter..

We'll take our next question from Kevin Liu with K. Liu & Company..

Just kind of a similar macro-type question.

As you look at maybe the pipeline of deals you had coming into Q2, absent the large 8-figure-type opportunity, did those kind of move through as the way you sort of expected? Or did you see any sort of delay or macro concerns that would have affected the sale cycle?.

No, we didn't see any macro issues. Like I said, whenever you have these large deal, the timing of this order, whether it will be on the cusp of previous quarter or early in the second quarter is always different. And you saw that in the last quarter, we missed this cable provider deal.

But fortunately, it not only came through, but it was a bigger size. On the federal side, clearly, at the end of federal year in September is a big driver, and typically we do very good in September. And that's what happened. But that pent-up demand has been there and projects have been approved, but they were delayed funding.

So I think overall, the macro effect may be what's positive. We don't really see any trends, negative trends on the macro side..

That's great. And then just looking at your R&D spend, I know it's down year-over-year. But on a sequential basis, it seemed like it ticked up fairly meaningfully.

I'm just kind of curious if there was anything sort of one-time in there or if that's kind of a reasonable run rate going forward?.

When I looked at it, Kevin, over the quarter, I would say that Q2 probably absorbed the merit increase that we gave in the beginning of July. And I think for the year, on a full year basis, it's probably going to be down about 15, I'm going to guess about $15 million over FY '19..

Our next question is a follow-up from Alex Kurtz with KeyBanc Capital Markets..

Thanks for taking a quick follow-up here. So this is a longer term question about the company and the model.

So a lot of companies with your approach, which is software on appliance, have been moving to subscription models to match how customers buy a lot of their technology and their software now from cloud providers and at least not a complete pay-as-you-go, but something akin to that.

And I just wonder is that something you guys have considered in moving away from life of device? Is that a strategic decision that maybe the customers have started to ask you about and that's something we could see in '21 and '22? Or maybe there hasn't been that kind of interest from your bigger service provider and government customers?.

I think I'll give you a quick answer in the interest of time, and then maybe on a future call we can go over. We did announce Visibility as a Service with a SaaS offering of a solution a few quarters ago. I think we do have 2, 3 customers. But there has not been like a tremendous demand right now.

And maybe there'll be similar demand when we go in the lower end of the market. But the high-end customers, people have not been demanding. But we're all ready from a product and packaging and sales point of view. And so at some point, yes, we'll see some revenue from the VaaS offering, but also has a SaaS offering.

But this has not been any reasonable portion of the revenue..

Yes. And just to follow on to Anil's comments. We can sell our products in hardware -- in various form factors and through various pricing models. And we do have a subscription offering. In our mainstream customers, the Fortune 500, I think over the last 5 years, there's maybe been 1 or 2 customers that were interested in a subscription model.

Maybe they did it for like 1 year or 2 years. So we're not seeing it for most of our customers. As Anil had mentioned, in our VaaS offering, which is generally targeted towards less complex networks, there might be an uptick in offering subscription in that area. But we would see that as incremental growth..

But couldn't there be an argument, Jean, that moving your core business to subscription or like on a 3-year term or whatever it is, could iron out or at least create some better visibility in how you guys go to market and sort of the volatility that we see in these service provider deals? Or it's just they're not ready to do that?.

I mean, you're right about, obviously, subscription models and visibility and certainty. We have offered it to our customers. We have not seen willingness at this point for the vast majority of our customers to want to move to a subscription model..

I think they'll be lower end of the enterprise market or mid-tier. I don't think areas are going to use subscription model..

Okay. We can discuss it offline..

And there appears we have no further questions. I'll return the floor to our presenters for closing remarks..

We have no more remarks at the time. Thank you for joining us today, and have a nice day..

And this does conclude today's program. You may now disconnect..