Ladies and gentlemen, thank you for standing by and welcome to NetScout's Fourth Quarter and Full Year 2020 Earnings Results 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.

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..

Thank you, operator and good morning everyone. Welcome to NetScout's Fourth Quarter and Full Fiscal Year 2020 Conference Call for the period ended March 31, 2020.

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.

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 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 presentation 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 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 rational for providing the non-GAAP measures along with the limitations of relying solely on those measures is detailed on this slide and in today's press 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 will remove HNT tools revenue for comparability purposes.

Reconciliations of the non-GAAP metrics with the applicable GAAP measures are provided in the appendix of the 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..

Thank you, Tony. Good morning everyone and thank you for joining us. Let's begin on Slide number 6 with some introductory comments. As we are all aware, we are in unprecedented, uncertain and challenging times as a result of the COVID-19 global pandemic. During these times, our purpose as guardians of the connected world has never been more important.

Our customers depend on NetScout service assurance and security solutions to support and protect critical networks and infrastructure that connect people and support businesses around the globe. It is essential that these infrastructures continue to perform even as they are stressed with unparalleled demand as many of us now work remotely.

Accordingly, we have been effectively operating our business throughout this crisis given the critical nature of what we provide to our customers. In line with our lean but not mean culture, our first priority has been the health and safety of our people, partners, customers and the communities where we live and work.

Early on in this crisis, we activated our contingency plans, which have allowed us to ensure the safety of our team while effectively operating the company with most of our employees working remotely. Finally NetScout generates significant free cash flow as demonstrated in the fiscal year 2020 where we generated more than $200 million.

Additionally, at the end of our fiscal year, we had approximately $390 million in cash, cash equivalents and marketable securities, which represents approximately six months of our normal working capital requirements.

We also have borrowing capacity on our $1 billion revolving credit facility with only $450 million outstanding at our fiscal year end and no principal repayments due until the facility matures in January of 2023.

Therefore, I believe that our solid balance sheet and strong financial position currently provide us the flexibility and liquidity required to weather this pandemic situation while we continue to invest in our technology and solutions to maintain our leadership position within the industry.

Let's move on to our financial results and then I will provide more insight on our business outlook and the trends we are seeing. Let's begin on Slide number seven with a brief recap of our full-year 2020 non-GAAP financial results. For fiscal year 2020, revenue was $892 million and diluted earnings per share was $1.57.

We delivered solid diluted earnings per share growth of 14% on essentially flat organic revenue meaning excluding the divested HNT tools business compared with the prior fiscal year. Revenue in our verticals were essentially flat in an organic basis as well.

In the service provider vertical revenue grew 1% while the enterprise vertical declined by 1.4%. During the fiscal year, our software-only product line grew approximately 35% compared with the prior year. Software-only revenue as a percentage of service provider product revenue was consistent with the prior year at approximately 30%.

During the fiscal year, we saw software software-only revenue grow to 30% of service assurance enterprise product revenue. Last fiscal year, this was only about 10%. Turning to Slide eight, I would like to briefly cover our fourth quarter financial results.

For the fourth quarter, revenue was $229.4 million and diluted earnings per share was $0.50, while revenue came in approximately 4% to 8% lower than expected due to disruption from the COVID-19 global pandemic, there were nevertheless some highlights in the quarter such as the second quarter of consecutive revenue growth in the enterprise vertical spurred by DDoS and our government, healthcare and manufacturing customers.

Michael will comment on some of these deal in his remarks. We also continue to see the decline in ancillary product lines such as Fluke system. Without the Fluke system decline, the enterprise vertical would have grown approximately 5% in the quarter. Let's turn to Slide 9 for some remarks on our outlook and the trends we are seeing.

Looking forward to our fiscal year 2021, we believe that our unique solutions set could assist our customers in dealing with some of the unexpected network and security capacity challenges in new ways throughout and after the global pandemic.

Although we remain encouraged about the opportunities we see, we are also cautiously optimistic given the current uncertainty of the global economy.

Accordingly, we will therefore providing fiscal year 2021 guidance until there is greater visibility into the elements we do not control such as the market trends, customer purchasing behavior and the duration and magnitude of the effects of the COVID-19 pandemic. However, I would like to share with you some insights.

Interest from our customer remains high; however, given the current economic environment, timing and funding of deals is challenging to predict. At this point, we have already received a large 8 figure deal from an international service provider.

We also anticipate completing the prior year's radio propagation modeling project in the first half of this fiscal year. Given our robust functionality and the ability to sell solution in many forms, we are [indiscernible] with many of the service provided on a global basis.

We are 5G ready and can support both standalone and non-standard 5G networks enabling us to support our customers regardless of where they are in their evolution. In the enterprise vertical, companies continue to advance our digital transformation and security initiatives as they work to address speed, agility and cost.

We see the potential for an acceleration of customer's digital transformation, cloud migration and security initiatives given how companies are operating and some of the lessons being learned as a deal with the impact of the global pandemic.

We have already seen multiple low 7-figure deals from some of our financial institution customers in late March and April. Michael will provide some insight on this deal during his remarks. Regarding 5G, we see this is not only a service provider opportunity, but also as an enterprise opportunity.

Enterprises and the governments are focused on leveraging 5G public and private networks to operate their businesses with greater automation and precision. Our customers are offering new products and services utilizing this technology, which offers high speeds and lower latency.

Some of the huge cases for this technology are in the manufacturing with automated factories, healthcare with telemedicine, transportation with smart vehicles and other applications such as smart cities and homes and hence gaming and entertainment and national defense.

We also believe we are uniquely qualified and positioned to help our customer as we are one of the only companies to have a service provider scalability and enterprise functionality.

Finally regarding our Arbor DDoS business, which is part of both our service provider enterprise vertical, we also believe that this area of the business would benefit as security becomes an even greater focus during the current pandemic as bad actors attempt to take advantage of distracted companies.

We continue to combine elements of our service assurance and security technologies to provide enhanced capabilities to our customers that leverage the strength of our offerings. We believe this combination provides a unique and valuable offering in the marketplace.

Turning now towards our cost structures, we remain committed to improving our operations and maintaining cost controls such that we should be able to once again provide leverage in our earnings per share.

We plan to continue to innovate and invest in our technology and solutions to ensure that we maintain our industry leadership throughout this crisis and into the future. We believe that our solid balance sheet and financial position provide us with the liquidity and flexibility necessary to weather these challenging times.

At this time, we also believe it is prudent to preserve capital and we will not implement a share repurchase program for our first fiscal quarter. Turning to our customer engagement, last week we hosted our annual technology and user summit Engage which was virtual for the first time.

This allowed the opportunity for many more of our customer and partners to attend. We had approximately 3500 people register for the event, which was approximately 4 times more than last year. We see this as an opportunity to increase visibility of our flexible solution including COTS, commercial off-the-shelf hardware.

Michael will elaborate on our Engage event during his remarks. Finally, I would like to thank all the first responders who are working tirelessly to keep us safe, my fellow guardians at NetScout for their commitment and dedication, as well as our customers and stakeholders for their continued support.

I look forward to sharing our progress with you during fiscal year 2021. I will now turn the call over to Michael for his remarks..

Thank you Anil and good morning everyone. Slide 11 outlines the areas that I will cover. Starting with customer wins, we continue to make good progress with both new and existing customers.

A new customer that we won during the quarter, a global leading manufacturer and marketer of beauty products was advancing their digital transformation initiative including moving to the cloud. The customer was experiencing performance issues and they could not address issues with sources that were not based on smart data.

The customer placed a low seven figure order to gain the full complement of our solutions for global [indiscernible] to assist in resolving performance using our [indiscernible] information solutions.

They are also utilizing our visibility as a service or VATS offering to accelerate and optimize the value of our solutions demonstrating the value for packet-based visibility solutions and best offerings as customers advance in digital transformation and cloud migration strategy.

Within the public sector area, we also had some nice wins both domestically and internationally as we continue to assess these customers with their digital transformation initiatives as well. One of the largest cities in the United States decided to upgrade their education information infrastructure.

They placed a low to mid 7 figure order with us to deploy state of the art service assurance and visibility as the foundation of that digital transformation initiatives.

While not the initial trigger, [indiscernible] is also enabled by this upgrade, this is only the start of modernization effort as they have more than 1800 schools to upgrade in the city.

In the International government area, we had a mid 7-digit figure win to provide a system-wide augmentation and [indiscernible] service assurance solutions at a large government agency that provides IT services to all the government agencies of that country.

Both wins demonstrate the value of our incumbency with our customers and our ability to provide them with continued value as they adapt to changes in their operations and advance their infrastructure. In the service provider vertical, we work with our tier 1 North America carriers as they plan that 5G initial deployments.

During the quarter we delivered and recognized a significant portion of revenue from the radio frequency propagation modeling project to be earlier in the year from a tier 1 North American carrier. We also continue to work with our international carriers as they advanced and networks to 4G, LTE and in some cases as 5G.

Finally, I want to provide some insight into some of the activity we have recently seen related to the COVID-19 global pandemic. Some of these deals occurred late in the quarter while others in early April.

On the enterprise front, we have started to see some orders from a large financial institution customers in both late March and early April as they enhance both their visibility and security solutions by upgrading their infrastructure and adding DDoS capacity to manage higher traffic demands on their networks and elevated security needs.

In our service provider vertical, we have seen interest in upgrading technology and adding DDoS capacity within their infrastructures.

One European carrier placed a low 7 figure order to upgrade its [indiscernible] mitigation infrastructure to the latest technology in one of the major countries operating and others placed a 6-figure order to increase its capacity as traffic spiked abruptly during pandemic with more people working remotely.

In terms of go-to-market as Anil mentioned, last week we hosted our first virtual annual technology end user forum Engage. The event has been an overwhelming success with a record interest in approximately 3500 people registered versus approximately 900 last year, representing more than 1,000 organizations around the globe.

Registrants represented as a service provider, enterprise and government verticals, as well as representation from our various partners. The event attracted strong global representation with more than half registrants being internationally based.

We also noticed a broader area of functions F&D event with architects, application developers and development and security operations represented in addition to network engineering and operations.

During the event, we showcased our solutions that as customers in digital transformation, security, business analytics and 5G-related initiatives that all the more critical given the recent global crisis.

In addition to the 3 days of technical presentations, we offered the virtual hands on training sessions covering approximately 30 different subjects. Delivery of these sessions to our customers are over a 2-week period for a grand total of more than 4000 seats.

Our plan is to continue to leverage a forum like this throughout the year to enhance our engagement with existing and prospective customers. I look forward to sharing additional news of our success in our go-to-market initiatives and our customer wins in fiscal year 2020. 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 metrics for our fourth quarter and full fiscal year 2020. 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. I will note the nature of any such comparisons.

Slide number 13 details our results for our fourth quarter and full fiscal year 2020 focusing on the quarterly performance first, revenue declined 2.5% over the same quarter in the prior year to $229.4 million dollars, product revenue declined 7.2% and service revenue grew 2.8% over the prior year's quarter.

Our fourth quarter fiscal year 2020 gross profit margin was 76%, down 3% points over the same quarter last year. The lower margin was attributable to a higher volume of radio frequency propagation modeling revenue that has lower gross margins in the initial stages as well as increased variable compensation in the quarter.

Quarterly operating expenses increased 7.3% from the prior year, primarily due to higher variable compensation costs and a one-time loss contingency. We reported an operating profit margin of 21.2% with diluted earnings per share of $0.50.

For the full fiscal year 2020 revenue was $892 million, which was a decline of 2.1% over the prior year on a reported basis. Adjusting for the divested HNT tools business, revenue was relatively flat compared with the prior year despite the COVID-19 pandemic impact on our fourth quarter.

Gross profit margin was 76.4%, which is consistent with the prior year, strong software-only sales at 29% of service assurance product revenue was offset by lower margin radio frequency propagation modeling services and increased compensation costs.

Annual operating expenses decreased 3% from the prior year, primarily due to the HNT tools divestiture, head count management and continued cost controls. We reported an operating profit margin of 18.3% with the diluted earnings per share of $1.57 or a 13.8% increase compared with the prior year.

Turning to Slide 14, I'd like to review key revenue trends, which exclude the divested HNT tools business for the fiscal year 2019 comparison. For fiscal year 2020 revenue for the service provider customer vertical grew 1%, while the enterprise vertical declined 1.4%.

Approximately 52% of total revenue was generated from the service provider vertical with the remainder from the enterprise. Turning to Slide 15, this shows our geographic revenue mix on a GAAP basis, which includes $18 million of revenue from the divested HNT tools business in fiscal year 2019.

The geographical split between international and domestic revenue was relatively consistent with the prior year. Additionally, there were no customers that represented 10% or more of revenue for the year. Slide 16 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 $389.1 million, which is an increase of $42.6 million since the end of the third quarter. This cash and marketable securities balance represents approximately six months of normal working capital requirements.

Free cash flow generated in the quarter was $102.5 million as we had strong working capital during this quarter. During the quarter, we repurchased approximately 2 million shares of our common stock at a cost of $50 million or an average price of $25.62 per share. During fiscal year 2020, we returned approximately $175 million to our shareholders.

Given the current economic conditions and uncertainties as a result of the COVID-19 global pandemic, our capital allocation priorities shifted to capital preservation in the near term and we do not anticipate implementing a share repurchase program in the first quarter of fiscal year 2021.

From a debt perspective as of the end of the fourth quarter, we had $450 million outstanding on our $1 billion revolving credit facility, we had approximately 1.5 times a cushion against our gross leverage covenant, which could provide borrowing capacity if required.

Our revolving credit facility expires in January of 2023 and has no required principal repayments due until maturity. To briefly recap other balance sheet highlights, accounts receivable net was $213.5 million down by $31.4 million dollars since the end of December.

DSO's were 73 days versus 88 days at the end of fiscal year 2019 and 77 days at the end of December 2019.

Moving to slide 17 as Anil stated in his remarks, given the rapidly evolving COVID-19 situation, the company will defer providing full fiscal year 2021 guidance until there is a clear outlook on the duration and magnitude of the effects of the global pandemic.

That said, I would like to comment on a few capital structure items related to our first quarter of fiscal year 2021. For the quarter, we expect the tax rate to be consistent with the first quarter of the prior year at approximately 23%. Additionally, we expect the diluted shares outstanding for the quarter to be approximately 73 million shares.

That concludes my formal review of our financial results. Before we transition to Q&A, I'd like to quickly note that our IR conference participation is listed on Slide 18 and now I'll turn the call over to the operator to start Q&A..

[Operator Instructions]. We do ask in the interest of time that you limit yourself to one question and one follow-up. We will go first to Matt Hedberg with RBC Capital Markets. .

Hey guys, good morning, thanks for taking my questions. Anil, I wanted to start with you.

Can you talk a little bit more about when you started to see [indiscernible] in March and also whether or not those trends have begun to improve in April, I know you noted a few nice wins in the financial services vertical in March and April as well as an 8-figure international service provider transaction.

I am just trying to get a sense of the timing of disruption and perhaps maybe some improvement that you're seeing in April..

We don't know the exact timing, it was ongoing depending on different parts of the business, different regions. I think the most important point is that because it is end of the fiscal year, March is traditionally one of the very big quarters and so we saw some effect, but later in the month we started getting some other orders, we made up for this.

As a result yearly, we are able to deliver flat year-over-year performance and are only down by about 1% from the guidance we provided a year ago.

So overall I think we did quite well and I think that different parts depending on where we could travel and what kind of conditions where there, and at the same time there were people who had additional demands including a couple of people have new budgets, which were called the COVID-19 projects.

So there are all kinds of mixture, it is very hard to sift through that Matt and I think this quarter is where we will be able to see how this is impacting on the positive side versus the negative side given the importance of what we do..

Got it, okay, and then something stood out to me in your prepared remarks. I think you noted that a software-only revenue was about 30% of service assurance, which was a huge move higher on a year-on-year basis, which is great to hear.

Can you talk a little bit more about the factors driving that mix and might we expect a similar mix shift over the next several years in terms of what the magnitude of improvement there?.

Yeah, I think the factors driving is really is NetScout and we have been pushing our salespeople to go through that because it is a higher margin business and it improves our capability for that and Jean might go over some more details of that.

But I mean this is the company plan and we focus initially on service provider business because that market was very challenging, sometimes we were getting -- we have the best technology in the carrier space or in other areas, maybe by 2 to 1 margin but the market was very, very price-sensitive because of challenges with OTT traffic and on the 4G infrastructure.

So we lead in there and it made a big difference and then we decided to do that on the enterprise part of the business and this year, Matt, we are launching in the remaining part which is DDoS which is through the integration of Arbor, which we did last year. Now we'll be able to offer that in all 3 parts of the business.

So I think the trend is that this is going to go up and some of this was negated by low margin propagation dealer business. So once these thing gets sorted out overall trend is what we have been predicting, it has been a little bit slower, but I think the move is that at some point it will be a majority of our revenue will be software-based..

Got it. That's great to hear. Thanks a lot guys..

We will go next to Eric Martinuzzi with Lake Street..

All right. Hopefully I am live. I had a question with the onset of COVID and work from home, learn from home. Are you seeing, as far as bandwidth demand, is there a benefit to your service provider customers increased bandwidth translating into revenue opportunity for NetScout..

Well, on the carrier side, if you look at the mobility provider. there is a different trend.

But if you look at fixed line operators, then yes there is a need for that, but we are seeing a bigger short-term impact, Eric, on the DDoS part and the service assurance parts of the enterprise business and at the same time carriers like Verizon and ATT and although they have their own operation, IT operation, which we have like enterprises.

So for the short-term we are seeing an impact on that part of the business.

And Jean, do you want to add?.

I would just say I was very excited about the virtual Engage and some of the new products like Edge monitoring that the company is looking at and I don't know if you want to go into more detail about the future..

Yeah.

So I think that is what Jean is talking about Eric and we are looking at how we can provide some additional information in future calls about some of the directions we announced at Engage and one of the things was Edge monitoring, which allows you to monitor the performance on the provider side, even though you have outsourced a lot of your infrastructure and that will be even more important in these times because I think one of the ways to do business continuity is to outsource some of the hardware stuff to providers so I think the cloud migration might increase or accelerate and so some of the things, which we announced, which is all software also I think it's going to make a big difference and we will be releasing those things in the next quarter..

Okay. And then from the personnel side it sounds like you're keeping an eye on the discretionary, your headcount was 2,517 the end of December, where did you finish out the fiscal year on head count..

Hi, Eric. This is Jean we finished out the fiscal year relatively flat with that Q3 number around 2,500 people..

Okay. And then as far as the things that you can predict about your business, let's talk about the service revenue.

I understand products a little bit harder to get your arms around but [indiscernible] revenue element is there any reason to believe that that is under threat from either retention issues, churn, because historically that has been able to hold up pretty well in circumstances like this..

Yeah basically I feel that at the high level if at all it's further strengthened. When we talk to our customers and they see us in a very unique place, a company of decent size, strong financial position invested in last four years, a lot of things in R&D and support and they can upgrade many of the software.

So the features, which we are adding at essentially free with renewals. So I think that unless something really unexpected happens, our position in the renewal and service revenue is further solidified. It was already good in the past, but I think it may be even better..

Yeah, the only other thing I would add to that, Eric is in the year the service revenue, as you noted, grew 3% plus and we have multiple offerings in there with the vast majority of it being like 85% to 90% to maintenance and as Anil discussed it is important that the unique offering that we have where you continue to be supported, as well as to receive enhancements keeps our customers wanting to pay that.

We also have offered a [indiscernible] offering, which we call visibility as a service, which grew pretty well over that year and then we also have on-site engineers and they have been growing also as our customers really like the value that these people can supply.

So I would say that service revenue growing 3% was very good this year and it looks steady going in the future for FY 21..

Thanks for taking my questions..

Yeah. Great. Operator, we can move to the next question..

And we will go next to Chad Bennett with Craig-Hallum. Please go ahead..

Thanks for taking my questions.

So just on the software penetration of overall revenues, just following up on a prior question, I guess how should we think about the growth there this year or maybe even a exit kind of penetration rate, could that get to 40% to 50% when we exit the year this year?.

So the chronology of the timeline of the software only was, as you remember a few years ago, we introduced it into our international service provider markets based on their desire for full functionality and robust at a price that made sense for them.

It has migrated towards domestic service providers also, and this year what was very interesting is that it's also started to migrate into the enterprise. So the enterprise is [indiscernible] use of software only probably a little less than doubled in FY21.

So when you take that as an exit rate, I think you know in the past has said that probably our software-only could get to at least more than 50%.

So I would see FY21 especially given the COVID-19 pandemic issues having software-only being driven, since it's a very good price point with excellent functionality, potentially more stronger, so on a guesstimate I would say probably could get closer to 40% in FY21..

Got it. Perfect.

And then just on the enterprise side of the business, what are the puts and takes considering the majority of your enterprise business is still on-prem or data center related for an enterprise and during this pandemic, I think we've heard from a lot of customers that digital transformation or just flat out move to the cloud has been accelerated significantly even more than it already was beforehand.

So if we see that acceleration to the cloud by your enterprise customers, is that a net positive to revenue at least over the next year or a net headwind to revenue, any way you could answer that would be great..

So I think it's sort of a multi-part answer to this, and you mentioned one of the issues in the current time is new hardware deployment. So we have announced some software modules last week, which increase the functionality of existing deployment. Second thing as Jean mentioned earlier, we have announced an initiative called Edge monitoring.

We strongly feel that IT operations want to give the control back into visibility while they want to outsource some of the infrastructure to cloud provider, and if they do that they can convert finger pointing in case of issues because I'm still going to call my IT when I have a problem with Office 365 or any of the outsourced applications yet they don't have access to what's happening in the cloud.

So as monitoring solution we have announced is going to make a big difference. Now having said that, Equinix and providers like that, which provide high speed links to cloud infrastructure are the best option.

So, our solution, Edge monitoring solution, can be actually deployed in likes of Equinix and it looks like as if we deployed it in the cloud, it is the extension of on-prem but it's really not on-prem infrastructure.

So that's a very interesting development and also our software can be run on top of as [indiscernible] and so we have made a lot of innovations in the last 2 years. So I think just because infrastructure has moved to all cloud doesn't mean all the monitoring has to be on the cloud.

Somebody has to make them the cloud providers and SaaS application people accountable and that's how our solutions will work. Having said that, there are couple of other SaaS providers, big one, which I cannot name right now, they are actually also using our technology to actually support their customer.

So all these combinations, I think is a net positive because it extends our leadership into a bigger market, it makes our higher margin business increased further and the visibility [indiscernible] means that on-prem is a deployment option, it is not a requirement so our solution works anywhere you want and no excuses and some people will put it on-prem, some people will put it in the cloud and some people will put in the intermediate side like Equinix..

Got it, that's great color. Thanks. Great job managing the business and the balance sheet in these times. Thanks..

Thank you. Operator, we can take the next call..

Our next to Kevin Liu with Kay & Company..

Hey, good morning. First question here, just wanted to get a sense for the quarter-end disruption that you guys saw, was that primarily just on kind of new product sales or did you see any impact maintenance renewal agreements and the like..

I would say it was probably exclusively on product revenue..

Got it. And then more generally, as you kind of work through this environment it sounds like the demand generation side of things in terms of going virtually but curious as to what other impacts you are seeing on your general sales activities.

For instance, are you still able to complete the kind of the proof of concepts that you need to or deploy equipment on the client sites to the extent that is possible. I'm just wondering what sort of what parts of the sales cycles are impacted..

We were all we were doing all proof of concepts remotely, because our engineers who are very involved, they were not traveling to customer site. So that's not impacted at all.

Yes, there are issues with people not being able to meet customers, and that has some impact, but overall, and that's sort of balanced by the time people have to discuss the projects with us and Michael mentioned why did we get [indiscernible] in some companies where we have big areas, we had 10 to 20 people attending and one company had 50 people attended.

So I think we are getting the mind share of the people, and that's a positive side, the negative side is that we are not able to travel to customer site and have a direct dialog with people and eye contact and I think is sort of make good balance and net effect will be I think neutral..

Got it, and if I could just sneak one more in on the security side, so that you guys acquired [indiscernible] in early February.

Anil, could you just talk about kind of the longer-term vision for your security platform here, are you guys still primarily recognized as a DDoS player or do you see recognition out there in the market as being more on kind of advanced threat prevention side, just wondering how this platform is evolving and what other gaps, if any, you plan on filling in over the coming years..

Sure. So I mean, because of the technology based on packets and visibility we provide, we could actually make security adjacency for us, which is very strange word that how could security be adjacency to service assurance, but the way we handle it is the two sides of the same coin.

So our current business DDoS is about 20% of the total business, and this year we announced some feeds from service assurance side to do Layer 7 monitoring on DDoS and we coined the word smart DDoS, which we announced last week.

So I think that's going to have a impact on the DDoS business but over the last one year we acquired 2 companies Eastwind; very small, two small technology companies, one was [indiscernible] as you mentioned and they were in the VDI based security space and they had some encryption and some other features.

So, towards the end of the year we were going to be bringing out that solution, which is based on some existing technology from on the enterprise side of the house and with ASA technology combined that with some of the thing Eastwind was doing in the advanced security area plus some of the building blocks from the VDI acquisition.

And all three together is going to announce our entry into the advanced security space, which is very crowded but because of our building blocks and incumbency in other areas. I think we're going to have a big impact in next year.

So we did alluded to that announcement also last week during Engage and we are a lot of interesting questions that came from the customers. So over time I think security will be a much bigger portion of the business and it will obviously include a big portion from DDoS, but advanced security will be another big portion in the next couple of years..

Thanks for taking the question..

Okay. Operator, we'll take the next question..

We'll go next to James Fish with Piper Sandler..

Thanks for the question. Maybe going off of the last one, you guys have a pretty positive on Arbor but can we get a breakdown of growth rates across the business and within each vertical as well as the total percentage that Arbor now represents that you guys typically do annual, I get you just said DDoS but that's not the entire Arbor business..

Since the sales force has been integrated, the way I would think about it is for the quarter, but did very well. They actually grew in enterprise in close to the mid-single digit and so for the year they were probably flat to slightly up, they also had a tremendous year and quarter and service provider. So this year Arbor did pretty well.

They are still probably somewhere between 20% to 25%..

Yeah that's helpful color and then obviously a big catalyst for NetScout is the potential 5G core spending, a lot of debate around this. But what is NetScout's seeing with 5G core timing, given the impact of COVID-19. Were there any push outs [indiscernible] Tier I or international carriers..

What we are getting is that is either going to be neutral, meaning coming at the same speed level as was forecasted in the past, or it might even accelerate and because of the same reason as we talked about in earlier questions that Edge computing and other areas, but we also see that one of the big car manufacturers are buying their own spectrum in Europe.

And so, we don't know the timing but in terms of BOC and evaluations, there is lot of interest, anywhere we talk in carrier, they want to know about 5G story and all the investment we made in last 12 months has made a big difference and we being the incumbent, we can share some of the assets we have already deployed in 4G and their BOC timeline can be a dramatically compressed because they don't need to check everything out.

They just need to check incremental things we have done. So all in all, I think that the 5G is going to grow at the same speed in terms of timing or maybe even slightly faster..

Alright. Thanks. Thanks everyone..

Yes..

Thank you..

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