NetScout Systems, Inc.
Q2 2016 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

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

[Andrew M. Kramer:]

Thank you, operator, and good morning, everybody. Welcome to NetScout's fiscal year 2016 second quarter conference call for the period ended September 30, 2015. Joining me on this morning's call are Anil Singhal, NetScout's Co-Founder, President and CEO; Michael Szabados, NetScout's Chief Operating Officer; and Jean Bua, NetScout's Executive Vice President and Chief Financial Officer. We've included a slide presentation of key financial data that accompanies the financial section of our prepared remarks. For those listeners who've dialed into the call this morning and would like to view the slide presentation, you can find it by going to our website at www.netscout.com/investors and then clicking on today's webcast. That should be posted now. You can advance the slides in the webcast viewer to follow along with our commentary, and we'll try to remember to call out the slide number we're referencing in our remarks. As you know, our Q2 results reflect the first quarter of combined operations since completing our acquisition of Danaher's Communications Business in mid-July. In terms of our agenda for today's call, Anil Singhal will first provide an overview of the results and share his perspective on the opportunities and challenges that lie ahead. Our COO, Michael Szabados, will offer some insights on near-term integration activity and key drivers for customer adoption with a focus on the enterprise marketplace. CFO, Jean Bua, will then provide additional detail on our second quarter financial performance, as well as discuss our guidance. Moving on to slide number three. I would like to remind everybody listening that forward-looking statements on this presentation are made pursuant to the Safe Harbor Provisions of Section 21E of the Securities Exchange Act of 1934, as amended, and other federal securities laws. Investors are cautioned that statements in this presentation, which are not historical statements, constitute forward-looking statements, which involve risks and uncertainties. These include, without limitations, statements relating to our financial guidance, anticipated share repurchase, integration and product development plans and expenses, adoption of our products and solutions by customers, our ability to effectively compete for service provider opportunities, being well positioned to drive top line growth in the enterprise segment, the anticipated benefits of NetScout's acquisition of the Communications Business lines of Danaher Corporation and the performance of the combined company. Actual results could differ materially from the forward-looking statements. Risks and uncertainties which could cause actual results to differ include, without limitation, the other risk factors outlined in today's press release and slide presentation and NetScout's Annual Report on Form 10-K for the fiscal year ended March 31, 2015, which is on file with the Securities and Exchange Commission and available on our website. NetScout assumes no obligation to update any forward-looking information contained in this press release or with respect to the announcements described herein. Finally, I would like to remind you all that while the slide presentation includes both GAAP and non-GAAP results, unless otherwise stated, financial information discussed on today's call will be on a non-GAAP basis only. Non-GAAP items are described and reconciled to the GAAP results in today's press release, and they are included at the end of the slide presentation that's made available online on our website. As Jean will note, the timing of the acquisition will skew period-to-period comparisons and the potential discussions related to growth rate. If we do note a growth rate, we will strive to clarify the nature of the comparison. As detailed in our press release today, NetScout reported solid second quarter results, highlighted by a two-plus month contribution from the acquired businesses. We've also made good progress in our efforts to advance the integration initiatives that are critical for driving the company's performance. At this point, I'll turn the call over now to Anil and then to my other colleagues to expand on these and other points. Anil, please go ahead.

[Anil K. Singhal:]

Thank you, Andy. Good morning to everyone listening and thank you for joining us today. As Andy mentioned, our second quarter results reflected the two-plus month contribution of the acquired Danaher Communications Business. At a high level, our non-GAAP revenue of $281.1 million reflected good execution across our company. In terms of profitability, we reported non-GAAP EPS of $0.47; thanks to the solid revenue performance in combination with prudent cost management and our share repurchase activity. As we discussed with you previously, the acquisition helps accelerate our strategic progress, enabling us to double our total addressable market to over $8 billion, with a broad portfolio of market-leading products, extensive domain expertise, and stronger go-to-market capabilities that can help us address the dynamic requirements of a larger, more diverse and more global customer base. With a compelling value proposition, better market access and substantially greater operational scale, we believe that the new NetScout is well-positioned to create substantial value for our stakeholders as we focus on driving solid revenue growth and expanding operating margins, cash flow, and earnings per share over the long term. An important element of our strategy to help realize NetScout's full potential involves driving tighter integration, collaboration, and coordination within and across this asset base. NetScout has used this approach before with our other acquisitions, but it's quite different for how the acquired assets had been managed under their prior ownership. For these reasons and due to the impact of various accounting considerations related to the closing of the transaction, comparisons with the prior-year period may not be representative and should be made with caution. Nevertheless, we'll try to highlight notable performance metrics and trends in our commentary when appropriate. In our service provider segment, our performance was highlighted by good traction with customers deploying our nGeniusONE solutions, along with a successful execution of a significant and exciting project with one of our Tier 1 service provider customers. This project, which involves achieving acceptance at dozens of different customer size, was completed on schedule; thanks to the diligence and hard work of our sales engineering and professional services teams. Our success this quarter helps underscore the importance of our collective capabilities in helping the world's largest and most innovative service providers, seeking to differentiate their services on the overall quality, resiliency and stability of their network. NetScout's security business, Arbor Networks, is a new and important part of our story. Arbor is recognized today as the market leader in helping both service provider and enterprises worldwide protect their networks from high-volume and application-specific distributed denial of service attacks. During the quarter, Arbor continued to make progress, fortifying its relationship with major service providers, closing a number of six and seven-figure deals during the quarter. Overall, approximately 61% of our total revenue came from our service provider customers, which is generally in line with our view on revenue by segment that we shared at our Investor Day event. With that said, given the large and lumpy nature of certain service provider projects, the mix is likely to vary considerably from quarter to quarter. In our enterprise segment, we worked diligently to address near-term customer requirements. In terms of order trends, we have seen healthy demand remain in certain verticals such as government and high-tech. As Michael will highlight, we have been very pleased that a growing number of U.S. government agencies and branches of the armed services have standardized on nGeniusONE as part of new infrastructure initiatives and technology refresh projects. This dynamic helped partially offset softness in other verticals such as financial services, as well as foreign exchange headwinds. In terms of security, Arbor continued to gain traction in the enterprise, while taking important steps to further extend its market leadership by broadening its product portfolio. We have been pleased with the overall market reception following the acquisition. While there are minimal levels of overlap between Fluke and NetScout in terms of the enterprise customer base, we did experience some disruption with certain enterprise sales and distribution channel. We do not believe that these issues will impact our performance over the long term, and we have taken and will continue to take steps to not only address those issues, but to also leverage NetScout broad product portfolio and global sales footprint. As we make further progress in refining our go-to-market approach and advancing some exciting development initiatives, we believe we'll be well-positioned to drive solid top line growth in the enterprise segment moving into the fiscal year 2017. During the past two months, I've spent considerable time with many of our largest service provider customers around the world. There is a healthy level of enthusiasm from customers about how the new NetScout can support their efforts to achieve key business objectives by improving the way they manage and protect their infrastructures. In particular, we've received positive feedback from customers about our efforts to offer an integrated solution that can support the best-in-class troubleshooting capabilities from TekComms, along with NetScout best-of-breed monitoring, and our development activities on this front are moving forward. Nevertheless, our optimism is tempered by the fact that the service provider capital spending environment remains very fluid. And we are seeing certain service providers move cautiously to advance major new infrastructure projects in light of their broader capital spending and operational expense objectives. Another product area where we have made initial progress is in our Packet Flow Switch, where we have brought together our own capabilities with the VSS Monitoring operation. As some of you know, during the past three years, we have been very successful in selling our Packet Flow Switch as a complementary accessory to our broader network managing solution. VSS allows us to compete much more effectively for service provider opportunities where legacy NetScout is not the primary incumbent, as well as in supporting security applications for enterprise customers. We are taking steps to further integrate the development teams and refine our technology roadmaps and go-to-market plans as we focus on the platforms and capabilities required to bring the most value to our customers and prospects. In summary, our progress, achievement and performance in the initial quarter of our combined operations reflect positively on the way we have brought our companies together. We have accomplished a lot in our very first quarter together, while remaining focused on addressing the needs of our customers. We have unified our sales organization and other corporate functions. We have also rolled out our vision and plans to the senior team and the broader employee base, and we have begun to execute on those plans. On the product front, we have taken important step to align our product portfolios and we have kicked off several exciting product integration initiatives, all of which will be critical to driving long-term adoption by customer and prospects. While we have made good progress, we recognize that there is more work to be done in order to achieve our goal for this fiscal year and beyond. Looking ahead, we remain confident in our strategic direction, value proposition, and in our ability to execute on a wide range of opportunities in front of us. Accordingly, we have left our non-GAAP revenue guidance for the fiscal year unchanged, while adjusting our non-GAAP earnings per share outlook to reflect the net effect of accretion resulting from our year-to-date stock purchase activity and the anticipated full-year interest expense. I would like to conclude by noting that overall level of investor interest and support for our company has been very gratifying thus far. And finally, I want to be sure to thank the 3,100-plus individuals who are part of our new NetScout team for their hard work, focus, and good execution during the quarter. With that said, I'll now turn the call over to Michael.

[Michael Szabados:]

Thank you, Anil, and good morning, everyone. It was a very busy and productive quarter for NetScout from an operational perspective. We made tangible progress in smoothly transitioning over 2,000 Danaher employees to NetScout's payroll and benefits, while also establishing an interim IT and financial control infrastructure. Because of the carve-out nature of the acquired entities, we are continuing to receive transitional services from Danaher in certain areas, pending the establishment of the corresponding functions at NetScout. These transitional services agreements, which span certain facilities, select manufacturing, human resources, and information technology services, as well as the use of Fluke and Tektronix brands, are expected to conclude by the second quarter of fiscal 2017. As we wind down these agreements, we expect to improve our expense base and streamline operations in a number of areas. For example, we plan to standardize our global sales organization on a common order management and sales CRM platform as we move into fiscal year 2017. Our other near-term priorities include cross-training our sales teams on their expanded product and solution portfolios, transitioning reseller partners to NetScout, and developing demand-generation campaigns that can leverage our extended and expanded skills and capabilities brought in through the acquisition. Our goal, whenever possible, will be to complete as much of this activity as possible during the next two quarters, in order to enter fiscal 2007 (sic) [2017] (14

[Jean A. Bua:]

Thank you, Michael, and good morning, everyone. This morning, I will review our performance for the second quarter and then discuss our guidance for the upcoming fiscal year. As a reminder, our results this quarter reflect the two and one-half months' contribution of the acquired Danaher communication assets. As expected, there were a number of acquisition-related items that impacted our GAAP results, so our convention will be to refer to our non-GAAP results unless otherwise noted. On a related note and consistent with our comments earlier on the call, the timing and magnitude of the acquisition will impact comparisons with the prior-year periods and any other extrapolations of our second quarter results may not be representative. When possible, we will frame our results against prior periods on a pro forma basis. To begin our financial discussion, we will be starting with slide number seven of our presentation, which is accompanying this call. As a reminder, the slides are posted on our website. For our second fiscal quarter, total non-GAAP revenue was $281.8 million. As Anil noted, our revenue performance was driven by the completion of a large project for a Tier 1 service provider, along with efforts to address the near-term demands of our broader customer base. On a pro forma foreign exchange-neutral basis, the revenue growth would have been approximately 8%. We were generally pleased with the overall level of demand in a number of our core product areas, most notably in security and within nGeniusONE. Product revenue was $181.5 million or 64% of total revenue with service revenue comprising the remainder. This is generally in line with the information we shared at our Investor Day event earlier this summer. Gross profit was $212.4 million. Our gross margin percentage for the quarter was 75.4%, which reflects the overall product mix for the quarter. Operating income for the quarter was $67.4 million with a 23.9% operating income margin. This reflects the overall top line performance of the business in combination with prudent expense management as we advanced our integration activities. For the second quarter, we reported net income of $43.6 million or $0.47 per diluted share. Our original estimate of the tax rate for the quarter was 45% to 47%. However, the actual results reflect a tax rate of approximately 35%. The difference between the estimated tax rate and the actual tax rate resulted in $0.08 of earnings per share. While we also repurchased shares this quarter, the reduction in the fully diluted share calculation was offset by the increased interest expense for the $250 million in debt. The net income margin was 15.5%. In terms of our first half non-GAAP performance, total revenue during this period was $382.6 million. Product revenue for the first two quarters was $235.1 million with service revenue coming in at $147.5 million. For the first six months of fiscal year 2016, EPS was $0.86. Slide eight illustrates our second quarter and first half revenue performance for fiscal year 2016 by segment. We've modified our customary year-to-date reporting to focus on the second quarter performance since this is the first quarterly reporting period of the combined business. Approximately, 61% of total quarterly revenue came from our service provider segment with the remainder coming from enterprise. As Anil mentioned, the legacy TekComms business had a very strong quarter, completing a major project for a Tier 1 service provider that span dozens of sites. It is worth noting that this business returned to positive revenue growth following five consecutive declining quarters. In terms of some color within the segment, on a pro forma basis, we generated robust revenue growth from service provider customers as the results at TekComms were complemented by a more modest increase in revenue within the legacy NetScout service provider customer base. This growth was partially offset by a more modest revenue decline from enterprise customers due primarily to the timing of certain large enterprise orders last year, sluggish spending in certain vertical such as financial services, and headwinds related to changes in foreign exchange rates most notably within the euro, the Brazilian real, and to a lesser degree, the Japanese yen. Let's turn to slide nine for a review of revenue by geography. For this slide, we'll focus on the quarterly revenue mix which was 75% domestic and 25% international. As previously mentioned, the large Tier 1 projects skewed the mix more in favor of the United States. Within our international second quarter revenue, Europe represented 14% of revenue with 5% for Asia, and 6% for the rest of the world. In terms of other revenue detail, we had one customer that represented greater than 10% of revenue. The majority of the revenue from this customer was associated with a large project we've referenced, although this customer did purchase products from multiple NetScout units during the quarter. (25

[Operator:]

Ladies and gentlemen, please stand by. We are experiencing technical difficulties and will be back momentarily. (25

[Operator:]

Ladies and gentlemen, please stand by. We are experiencing technical difficulties and will be back with you momentarily. Thank you. (28

[Operator:]

We are back in the main conference.

[Andrew M. Kramer:]

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

[Jean A. Bua:]

Hi, everyone. Why don't we just start at slide seven, which is the income statement for the quarter and for the year-to-date? And, rather than reliving the highlights of what we did, I'll just give you some of the pertinent points again. Our revenue on a non-GAAP basis – our total revenue on a non-GAAP basis was $281.8 million. On a pro forma, foreign exchange-neutral basis, the revenue growth would have been approximately 8% for the quarter. Product revenue was $81.5 million or 64% of total revenue, and service revenue comprised the remainder. Gross profit was $212.4 million, and our margin for the quarter was 75.4%. Operating income for the quarter was $67.4 million, with a 23.9% operating income (sic) [operating margin] (31

[Operator:]

Your first question comes from the line of Alex Kurtz from Sterne CRT (43

[Alex Kurtz:]

Yeah. Thanks, guys, for taking the questions here. So, Anil, can you just give us a little bit of visibility into the service provider pipeline post-close? Some of your peers in networking space have had some challenges with the service provider spending outlook for the last couple of quarters. So given you're reaffirming the guidance today, obviously, you're seeing something good about the post-close pipeline in that vertical. So that'd be my first question to you.

[Anil K. Singhal:]

Yeah. Thanks, Alex. So when we look at that, as we mentioned that I've been traveling around the world and probably have met every single major provider, and most of whom are either Tektronix, TekComms or NetScout customers. So we see a lot of OpEx and CapEx challenges which could delay some of the spending. But we think there is a strong reaction to – positive reaction to what we can do together as a company, as a solutions. And I think, because of that, we still feel that the guidance we have provided still – looks like in good shape. And we'll be cautiously watching this, as we have the end-of-year spending materializes in December. So overall, we feel comfortable because we have the best solution, notwithstanding some of the internal challenges they are facing on the spending side.

[Jean A. Bua:]

Yeah. And just to add some color, Alex, because, clearly, it's a key vertical in our company. The service providers right now are very competitive amongst themselves. They are focusing on quality because they want to reduce churn. They are being very price competitive in their pricing. They're also trying to determine how they're going to monetize their large LTE investments. A lot of the traffic that is going over their network is called over the top. So they don't necessarily get any monetization of those OTT services. They just generally get them through their data plans. So what they're doing right now is focusing on customer retention, because churn is the worst thing that they hate. So they're really focusing on quality. And along that way, they're also looking at cost. So, as we've talked about before, we have a very competitive solution. It's high-quality and it's very cost-competitive. What we're just seeing right now is that dynamic between quality and cost consciousness is making a slightly elongated purchasing cycle.

[Alex Kurtz:]

But, Jean, you stated discount (45

[Jean A. Bua:]

I'm sorry, Alex. Go ahead.

[Alex Kurtz:]

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

[Jean A. Bua:]

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

[Alex Kurtz:]

All right. Thanks, guys.

[Jean A. Bua:]

Thank you.

[Anil K. Singhal:]

Thank you.

[Operator:]

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

[Mark D. Kelleher:]

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

[Anil K. Singhal:]

So this was, Mark, was mainly the big deal we were talking about is mainly coming from tech side of the house. And as we talked about earlier, it was sold earlier. And there were some acceptance clauses and all those. And those were all delivered. And that's what the one we talked about in the last quarter also, that we are not sure whether we're going to close this quarter, but it happened, and it went very well. So it's mainly – I mean, in this provider, we do business on both sides, both from NetScout and TekComms. And both are going well. But this particular deal was about TekComms.

[Mark D. Kelleher:]

So how's Tektronix doing otherwise? (47

[Anil K. Singhal:]

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

[Mark D. Kelleher:]

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

[Anil K. Singhal:]

Yeah. I think it's – well, I mean, all plans are as we expected and as reflected in our guidance. And a lot of people are anxiously waiting for the combined solution also. And we are making a lot of good progress. So overall, I think we have good retention of key people. We have retention of customer and renewed interest in our solution, despite some of the spending challenges they're facing.

[Mark D. Kelleher:]

Okay. Thanks.

[Andrew M. Kramer:]

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

[Operator:]

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

[Eric Martinuzzi:]

Thanks. Curious to know, just a clarification first and then a question. The change in the EPS guidance, the non-GAAP EPS guidance for the year, that's $1.80 low-end moving up to $1.82, so basically a $0.02 delta. Is that entirely share count? Or does that capture some of the tax change as well?

[Jean A. Bua:]

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

[Eric Martinuzzi:]

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

[Jean A. Bua:]

No. No. No. The tax rate, what we had predicted before was that the annual tax rate would be still in the line around 35% to 37%. It was just the timing within quarters. So, when you do a tax provision in this way, with certain transaction costs going through that is deductible and intangibles being pushed down to different jurisdictions, you could get, amongst the quarters, some kind of different timing differences. So that's why we were anticipating a higher Q1 tax rate – I mean, sorry – a higher Q2 tax rate, which would have been offset by a lower Q3 tax rate. But it came out to be 35% for the quarter, so we anticipate that for the year, it would be 35% to 37%.

[Eric Martinuzzi:]

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

[Jean A. Bua:]

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

[Eric Martinuzzi:]

Thanks for taking my questions.

[Anil K. Singhal:]

Sure.

[Andrew M. Kramer:]

Yeah.

[Operator:]

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

[Scott Zeller:]

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

[Jean A. Bua:]

Thank you.

[Scott Zeller:]

The initial thoughts you'd shared with us, Jean and Anil, around cost synergies, if I recall, it was around 5% annualized. Could you share with us what your latest thoughts are? Are you seeing opportunities for additional cost cuts? Or are you maintaining the original plan?

[Anil K. Singhal:]

I think it's basically on the hiring front and we think we have enough people. So some of that are head count savings; potentially, we could have hired this year are not needed, so some savings are coming from there. Rest of them are coming with the gross margin improvements, which we talked about. And you'll see more towards the end of the year or next year as we have the combined solution. I think those areas are coming in line, maybe slightly better than what we thought earlier.

[Scott Zeller:]

Okay. I thought I picked up a tone, maybe slightly cautious tone around Fluke. Could you explain the prepared remarks and just sort of what the tone is around Fluke at this point and the prospects for it?

[Anil K. Singhal:]

So I think the – what we had done was we had focused on the initial integration of the sales force on day one for the TekComms side. Arbor business was sort of standalone. And so there was no confusion there. On the Fluke side, we basically delayed the integration and that created some confusion, and we lost a few people. But overall, that's what we are saying, that there were some disruption in the business, but nothing significant, which will affect the guidance.

[Scott Zeller:]

Okay. Thank you very much.

[Anil K. Singhal:]

Yeah.

[Andrew M. Kramer:]

Thanks, Scott.

[Operator:]

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

[Mark Sue:]

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

[Anil K. Singhal:]

I think, no, we are not able to break that down because they are looking for deals, multi-year deals sometimes, so that they can capitalize it. So preference for the service provider is capitalized. But as we mentioned that roughly (53

[Mark Sue:]

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

[Anil K. Singhal:]

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

[Andrew M. Kramer:]

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

[Operator:]

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

[Chad Michael Bennett:]

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

[Anil K. Singhal:]

Yeah. Thank you.

[Jean A. Bua:]

Thank you, Chad.

[Chad Michael Bennett:]

Yeah. So I think this maybe following up on a previous question. But can you give us a sense of how the acquired business did relative to your targets thus far; I know it's early, but just the targets you gave prior to closing the deal for the segments?

[Jean A. Bua:]

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

[Chad Michael Bennett:]

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

[Anil K. Singhal:]

Yeah. So I mean, there is competition from lot of small vendors, some regional vendors internationally, we see more and more RFPs as a way to reduce the spending or to get the best deal. And as we mentioned earlier, we need to continue to deal with that. But we still – we are ahead both in terms of software, NFV solution, as well as the traditional solution. So NetScout released a NFV-based solution over a year ago. So we are all ready for it. I think there could be little bit of disruption as people move more from appliance model to a software model. But I think long term, it's going to be a blessing in disguise, because we'll have deeper penetration and better margins. So we think we have to manage this trend. We have tried to address that as part of our guidance and reiterating it. And I think we are very hopeful that all these will turn out to be positive trends for us.

[Chad Michael Bennett:]

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

[Anil K. Singhal:]

I think it's basically in line with what you saw in the previous quarter. I think we have not been – we are not targeting Fluke Net customer with nGeniusONE for another six months. So the impact of acquisition is not going to be reflected in nGeniusONE traction until maybe six to 12 months from now. And we have a big user group meeting in May. And that's the time we'll be unveiling our plan for integrating the enterprise product lines. We have done some sales force integration, but most of that will be put in operation in six months.

[Chad Michael Bennett:]

Okay. Great. Thanks for taking my questions.

[Jean A. Bua:]

Thank you.

[Andrew M. Kramer:]

Thanks, Chad.

[Operator:]

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

[Andrew M. Kramer:]

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

[Operator:]

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