NetScout Systems, Inc. (NTCT) Q4 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to NetScout’s Fourth Quarter Fiscal Year 2012 Operating Results Conference Call. [Operator instructions] As a reminder, this conference call is being recorded. With us today is NetScout’s President and CEO, Mr. Anil Singhal. He is accompanied by NetScout’s Chief Financial Officer, Ms. Jean Bua; NetScout’s Chief Operating Officer, Mr. Michael Szabados; and Mr. David Sommers, NetScout’s Executive Vice Chairman. At this time, I will turn the call over to Ms. Cathy Taylor, NetScout’s Director of Investor Relations to provide the opening remarks. Ms. Taylor, please proceed.

Thank you, and good morning, everyone. Welcome to NetScout’s fiscal 2012 fourth quarter conference call for the period ended March 31. Before we begin, let me remind you that during the course of this conference call, we will be providing you with the discussion of the factors that we currently anticipate may influence our results going forward. These statements include forward-looking statements made pursuant to the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934 and other federal securities laws. These forward-looking statements may involve judgment and individual judgments may vary. Forward-looking statements include expressed or implied statements regarding future economic and market conditions, guidance for fiscal 2013, acquisition integration success and new product releases. It should be clearly understood that the projections on which we base our guidance and other forward-looking statements and our perception of the factors influencing those projections are highly likely to change over time. Although, those projections and the factors influencing them will likely change, we will not necessarily inform you when they do. Our company policy is to provide guidance only at certain points in the year such as during the quarterly earnings call. We do not plan to update that guidance otherwise. Actual results may differ materially from what we say today and no one should assume later in the quarter that the comments we make today are still valid. For the further discussion of the risks and uncertainties that could cause our actual results to differ, see the specific risks and uncertainties discussed in NetScout’s annual report on Form 10-K for the year-ended March 31, 2011, on file with the Securities and Exchange Commission. Our quarterly financial results are included with our earnings press release. We report our results on a GAAP basis, as well as on a non-GAAP basis. Our non-GAAP results eliminate the GAAP purchase accounting effects of our acquisitions by adding back revenue related to deferred revenue revaluation and removing the amortization of acquired intangible assets, as well as the GAAP effect of stock-based compensation. Our non-GAAP results also exclude certain extraordinary expenses relating to our acquisitions, including compensation for post-combination services. We exclude the related impact of all these adjustments on the provision for income taxes. The differences between GAAP and non-GAAP are disclosed in reconciliation tables in the press release. We believe these adjusted financial measures will enhance your overall understanding of our current financial performance and our prospects for the future. We use these adjusted financial measures internally for the purpose of analyzing, managing and forecasting our business. I would like to add that we have included on our webcast today a slide presentation that provides a summary of key financial data that accompanies the financial section of today’s discussion. For those listeners who have dialed under the call this morning and would like to view the slide presentation it is available on our website at www.netscout.com/investors and then click on today’s webcast. I would now like to turn the call over to Anil Singhal, our Chief Executive Officer.

Thank you, Cathy. We are pleased to have completed our fiscal year with a strong quarter. We posted record quarterly non-GAAP revenue of $89.6 million, an increase of 7% sequentially and 16% year-over-year. Non-GAAP earnings per share were up 11% sequentially and 30% over last year. Our full year results have passed the $300 million mark, which was an important milestone for NetScout. Fiscal year 2012 non-GAAP revenue were $309 million, up 7% over the prior year. Non-GAAP earnings per share was $1.10, up 6% over last year. Revenue for the year came in at the high-end of the narrow guidance we issued in January, which was $305 to $310 -- $305 million to $310 million. Fiscal year 2012 GAAP and non-GAAP net income per diluted share were within the narrowed guidance ranges. For the year, total bookings were up 17% over last year. These increases were driven by total bookings from our service providers which were particularly strong with an increase of 31% over last year. As we had expected growth accelerated in fiscal 2012 from wireless carriers expanding their 3G and 4G LTE rollout and from our growing base of competitive wins globally. Total bookings for our broader enterprise sector were 13% over last year and in the enterprise vertical financial services -- enterprise verticals, financial services which was volatile across the year our total bookings were up 15%. The government sector finished the year with an 8% increase in total bookings despite a very slow start. Service renewals which are included in total booking were up 30% year-over-year and drove deferred revenue up 12%. The strength of our service renewal business is due to the increasing value that our service delivery solution brings to our customers. Our fourth quarter bookings were particularly strong. Total bookings were up 32% year-over-year and up 33%, sequentially. In the quarter, business from financial services, service provider and government came in strong over last quarter and year-over-year. Michael will provide details shortly on our achievements within these sectors. We closed the fourth quarter with $13 million of product backlog. We plan to maintain a significant backlog going forward. To recap our fiscal year, we had an unusually slow start in the first quarter when we saw minimal bookings from the U.S. government due to the budget stalemate and lower than normal orders from our financial services, which further exacerbated our historical seasonality. Q2, however, was very strong with financial services and government bookings up substantially from the first quarter and from the year before and we built a sizable backlog. We continued the Q2 momentum into the second half of the year with bookings up 37% over the first half as we saw greater than normal seasonality. This momentum was primarily fueled by orders from service providers as we gain market share. During the year, we made significant enhancements to our service provider solution and we won new business as a result seeing an increase in the number of new LTE accounts. Our proprietary patent pending Adaptive Session Intelligence or ASI technology is giving us an edge over competition providing superior real-time analytics, scalability and bright performance. The large Tier 1 carriers and an increasing number of Tier 2 carriers are directing their CapEx dollars towards our solution, because we help them better manage their overall CapEx spend and deal with the ongoing hyper growth of data traffic. We expect to continue to win market share in IP-based service assurance for wireless carriers globally. During the year, we completed three acquisitions. First, Psytechnics, a recognized leader in IP voice, video and telepresence quality monitoring for Unified Communication Services based in UK. Second, Fox Replay, a leading provider of session reconstruction and replay technology in support of CyberIntelligence based in Netherlands. And third, Simena, a leader in solutions selling packet flow aggregation switches for high performance networks based in Virginia. These acquisitions were small companies with unique technologies that enhanced our Service Delivery Management platform with product even skill that will accelerate our time to market especially in our enterprise segment. All of these acquisitions fit well into our solution set and will help us take advantage of growing market requirement in unified communication and Cybersecurity. The acquisition of Simena was a natural addition toward existing InfiniStream product line. All three acquisitions are complete and fully integrated. They will help us achieve the aggressive 10% to 15% topline growth target that we are planning in fiscal 2013. Our fiscal year ‘13 growth is our next step on the part to achieving our long-term 15% to 20% revenue growth target. The success we are seeing with our Unified Service Delivery Management platform as a total solution for advanced application and service assurance makes it clear that our market position and product strategy are strong, and that our value proposition is resonating with the customer. We’ll continue to develop new products and acquire organization and technologies to further enhance our competitive advantage in helping our customer to assure mission critical services across their infrastructures and to optimize their end user’s experience. As always, I would like to thank all of our employees, customers, investors and other stakeholder for their continuous support, and we look forward to sharing our accomplishment with you throughout the coming year. Michael will now discuss some additional highlights of our performance and direction.

Thank you, Anil. I would like to share a high level summary of our Q4 and fiscal year 2012 accomplishments, and provide some insight into our path forward for fiscal 2013. We are very pleased with our growth trajectory both in the Enterprise and Service Provider parts of our business. Our strong Service Provider bookings were visible on multiple fronts. In both Tier 1 and Tier 2 wireless communications companies there are continued investment in LTE service assurance has yielded success a number of wireless service providers globally have certified NetScout service assurance solution as LTE ready, and as a result, we are seeing an uptick in orders for 3G products and technologies also. In other words being 4G ready gets NetScout significant 3G business as well, and 3G is where a big portion of the traffic growth and CapEx spend will be in the coming year. We are also wining deals based on the significantly improved scalability of ESI technology, which is designed for network speeds reaching 100 gigabits per second giving us a significant competitive advantage. This allowed us to win significant new business from an established Tier I carrier in Europe for current 3G operations and the potential for future LTE business. We also made major enhancement to our Service Delivery Manager or SDM product prompting our service provider customers to expand their SDM deployments moving beyond post event session phase subscriber by subscriber measurements to real-time top/down user experience by region, by mobile device type and service. For example, a Tier 1 carrier has recently expanded their use of our solution to help identify and mitigate issues they have been having with their new LTE rollout with a competitive -- which a competitive solution could not resolve quickly enough. In addition to wireless carriers, cable companies have become a significant component of our telecommunications sales. As with wireless carriers, our products are now being selected to provide service assurance for cable provider customer facing networks as they continue to move to IT-based service delivery. In enterprise sales worldwide we saw good -- year-over-year growth which has been supported by our new Unified Service Delivery Management or USDM capabilities. This past year we released new functionality for unified communications, applications performance management and with the addition of our packet-flow switch product we’re enabling our customers to leverage their existing investment in our product into new functional areas. In Unified Communications we integrated the technology we acquired from Psytechnics with our InfiniStream data collectors into a product called nGenius voice video manager. Our performance analysis module for managing the user experience for unified communication services such as telepresence, video and voice. We have won some new enterprise customers in this product -- with this product. This past quarter we saw our nGenius voice video manager solution to a large networking construction supplier for managed cloud services. With the Replay acquisition, we have added Cybersecurity to our USDM portfolio and have been focused on the integration of their technology. Based on our integration success to date we plan to launch the new Cybersecurity functionality as part of our USDM portfolio in the near future. In the area of application performance management or nGenius Service Delivery Manager and/or our nGenius Enterprise Intelligence products are helping us to build expanded presence. Earlier in the year we enhanced these products in incorporating our new ASI technology creating a management system with automated analytics or system wide performance with proactive end-to-end management of the IT services and applications as experienced by the users. Expansion of USDM functionality extents of the value of existing customers investments in NetScout’s instrumentation and makes new sources of budget funding available to us. Thank you. I will now hand the call over to Jean for our financial discussion.

Thank you, Michael, and good morning, everyone. As Cathy said earlier, we have a slide presentation to accompany this section of the call. You may feel free to follow along with the slides as I speak. However, I will discuss our results without needing to reference the slides. We will be starting with the third slide which shows our fourth quarter income statement. As Anil outlined, our business produced solid results for the fourth quarter of FY 2012. Our non-GAAP revenue grew 16%, while our non-GAAP earnings per share grew 30%. Our fourth quarter non-GAAP total revenue was $89.6 million, which is an increase of 16% from the same quarter in fiscal year ‘11. With a non-GAAP total revenue non-GAAP product revenue was $54.5 million, which is an increase of 21% over the same quarter in fiscal year ‘11. Service revenue was $35.1 million on a non-GAAP basis, which is an 8% increase from the same quarter in the prior year. The GAAP total revenue for the same period was $89.5 million, which is an increase of 15% from the same quarter in fiscal year ‘11. Within GAAP total revenue GAAP product revenue was $54.5 million, which is an increase of 19% over the same quarter prior year. Service revenue was $35 million on a GAAP basis, which is an 8% increase from the same quarter in the prior year. On a non-GAAP basis, our earnings per share for the fourth quarter were $0.39. This is a $0.09 higher than the fourth quarter of fiscal year ‘11 and represents a 30% increase. On a GAAP basis, our earnings per share were $0.30. This is $0.05 higher than the fourth quarter of fiscal year ‘11 and represents a 20% increase. Turning to slide four, the business maintained strong gross profit margins and growing operating margins. On a non-GAAP basis our gross profit was $72 million, representing an 80% margin. This margin is consistent with the same quarter from the prior year. Our GAAP gross profit for the quarter was $70.5 million and GAAP gross margin were 78.8%. Non-GAAP income from operations was $26 million. Our non-GAAP operating margin for the quarter was 29%, which is a 280 basis points increase from the same quarter prior year driven by the 16% revenue growth and continued prudent operating cost maintenance. GAAP income from operations was $20.4 million. GAAP operating margin was 23%, which is a 120 basis point improvement over the same quarter in the prior year. Non-GAAP net income was $16.4 or $0.39 per diluted share. The non-GAAP net income after tax margin was 18% was up 170 basis points from a year ago. GAAP net income for the quarter was $12.9 million yielding earnings per diluted share of $0.30. GAAP net income after tax margin was 14.5%, which is an increase of 70 basis points from a year ago. The major differences between our non-GAAP and GAAP income from operations for the quarter is the exclusion of stock-based compensation for $2.6 million and about $2.6 million of cost associated with our acquisitions, which includes amortization of intangibles for $1.8 million and business development expenses totaling $500,000. These are detailed in our reconciliation of our non-GAAP to GAAP results presented in our press release. The quarter’s provision for income taxes is recorded based upon a full year tax rate of 36.3% on a GAAP basis. Our GAAP tax rate for the quarter is 35.65%, consistent with past practice we have used the statutory tax rate of 38% to tax effect to non-GAAP adjustment. The adjustments reconciling our non-GAAP results to our GAAP results are summarized in the reconciliation tables included with our press release. Turning to slide five, which shows our total bookings and total bookings component. Total bookings in Q4 were $110 million, an increase of $26.4 million or 32% year-over-year. Within total bookings our new business bookings were $75 million, an increase of $14.1 million or 23% over the prior year’s fourth quarter. Service contract renewal bookings in the quarter were $35 million, an increase of $12.3 million or 54% year-over-year. Product backlog at the end of the quarter was $13 million. The components of our total bookings for the fourth quarter of fiscal year ‘12 were as follows, service provider 33%, financial 30%, government 13% and other enterprise 24%. This compares with the prior year’s quarter total bookings as follows, service provider 38%, financial 22%, government 14% and other enterprise 22%. Slide six is a summary of our deals for this quarter. The large deals within the quarter 157 customers gave us orders of over $100,000 in comparison to 129 customers from last year. 41 customers gave us orders over $500,000 in comparison to 38 customers from last year. We received 21 orders over $1 million of which nine came from telecommunications, six from financial services, two from government and four from others. This compares to 17 orders over $1 million that we received last year in the fourth quarter. Last year’s orders that were greater than $1 million included eight from telecommunications, four from financial services, two from government, and three from others. For the full fiscal year 2012, slide seven shows our results. The fiscal year ‘12 non-GAAP revenue was $309 million, which is an increase of 7% from fiscal year ‘11. GAAP revenue for fiscal year ‘12 was $308.7 million, which is an increase of 6% from fiscal year ‘11. Non-GAAP and GAAP product revenue was $168.1 million for fiscal year ‘12, an increase of 6% over prior year non-GAAP product revenue and 5% over prior year GAAP product revenue. Non-GAAP service revenue was $140.9 million and GAAP service revenue was $140.6 million for fiscal year ‘12. This is an increase of 8% over prior year for both non-GAAP and GAAP service revenue. On a non-GAAP basis, our growth profit was $248.4 million, representing an 80% margin. This margin is consistent with prior year. On a GAAP gross profit for the -- our GAAP gross profit for the fiscal year was $243 million and GAAP gross margin was 79% which is consistent with prior year. Non-GAAP income for the fiscal year from operations was $75 million. Our non-GAAP operating margin for the year was 24%, which is consistent with prior year. GAAP income from operations for the fiscal year was $54 million. GAAP operating margin was 17.4%, 2.6 points lower than the previous year. On a non-GAAP basis, our earnings per share for fiscal year ‘12 were $1.10. This is $0.06 higher than fiscal year ‘11 and represents 6% increase. On a GAAP basis, our earnings per share were $0.76. Turning to slide eight, which shows our total bookings and total bookings growth for the full year of 2012. Total bookings in the FY ‘12 was $333.8 million, up $48.2 million or 17% over year. Within total booking, new business bookings were $238 million up $26.2 million or 12% over the prior year. Renewal bookings were $95.8 million, which is an increase of $22 million or 30%. All of our business protocols experienced growth for the prior year of 2011. Our total bookings for service provider sectors grew 31% on a year-over-year basis, which was helped by our investment and expansion to service providers on a global basis as well as LTE deployment from the major global carrier. Our total bookings for the financial sector grew 15% on a year-over-year basis in spite of weakness in this product within our European geography. Our enterprise sector increased 11% aided by our recent acquisitions of technology. The total bookings for government vertical increased 8% year-over-year as the government continued its buying after a slowdown in our first quarter of the fiscal year. Within this sector, our Federal Government total bookings increased 8% while the rest of the government business which includes foreign governmental agencies and state governmental agencies increased 8% also. Slide nine shows our new business bookings by verticals. The component of our new business bookings for fiscal year ‘12 were as follows, service provider 34%, financial 27%, government 15%, and other enterprise 24%. This compares with the prior year new business booking components as follows, service provider 30%, financial 28%, government 17%, and other enterprise 25%. Product backlog at the end of Q4 was material. We are entering fiscal year ‘13 with product backlog of $13 million. Turning to slide 10, this is a depiction of our revenue by geography. For the full year revenue from international sales was 25% of total revenue as compared with 27% of total revenue for fiscal year ‘11. Within our international sales, Europe delivered 10.7% as compared to 13% last year. Our Asia sales percent was 5.7% which is consistent with fiscal year ‘11. Other international sales were 9% as compared to 8.5% from the same quarter a year ago. Additionally, our total deferred revenue was $112 million which is an increase of $12 million from last year. Slide 11 includes highlights from our balance sheet. We continue to maintain strong liquidity. At the end of the quarter, we have invested cash, short-term marketable securities, and long-term marketable securities of $212 million. This represents a decrease of $70 million from the prior year’s ending balance for cash and short and long-term marketable securities of $229 million. Our free cash flow generation of $57 million for fiscal year 2012 was comparable to fiscal year 2011. However, during 2012 we invested in acquisitions of product technology as well as executing against our share repurchase program. Accounts receivable net of allowances was $70 million, up from $62.8 million a year ago. Day sales outstanding were 70 days for the quarter. This is down from 71 days for the fourth quarter of last year. Inventories were $8 million. This is a $900,000 decrease from the fourth quarter of fiscal 2011. Inventory turns were 3.7 times for this quarter versus 3.1 times for the fourth quarter of FY’11. Turning to our guidance for fiscal year ‘13, slide 12 illustrates our growth for revenue and earnings per share. For fiscal 2013, we expect GAAP and non-GAAP revenue to be in the range of $340 million to $355 million. This represents a growth range of 10% to 15% over fiscal year 2012. This also represents the product revenue growth in the 15% to 20% range. Non-GAAP net income per diluted share is expected to be between $1.21 and $1.30. This represents a growth of 10% to 18%. At the midpoint of the range, our growth will be 15% over fiscal year 2012. GAAP net income per diluted share is expected to be in the range of $0.96 to $1.05. Our GAAP net income per diluted share is non-inclusive of the effects of valuing any intangible assets related to acquisitions that have not yet closed or any associated incremental cost for business development activity. The fiscal year 2013 non-GAAP net income per diluted share expectations excludes the purchase accounting adjustment to fair value of approximately $300,000 for deferred revenue, forecasted share-based compensation expenses of approximately $9.8 million, estimated amortization of acquired intangible assets of approximately $6.4 million, compensation for post combination services of $900,000 and the related impact of these adjustments and the provision for income taxes of $6.6 million. As a result of shift in expenses to the first quarter of fiscal year 2013, we are also issuing guidance for the first fiscal quarter. Slide 13, shows our guidance range for Q1 of 2013. For the first quarter of fiscal year 2013, we expect GAAP and non-GAAP revenue to be in the range of $73 million to $76 million. Non-GAAP net income per diluted share is expected to be between $0.16 and $0.19. GAAP net income per diluted share is expected to be in the range of $0.10 to $0.13. For the first quarter of fiscal 2013, the non-GAAP net income per diluted share expectations excludes the estimated purchase accounting adjustment to fair value of approximately $100,000 for deferred revenue, forecasted share-based compensation expenses of approximately $2.2 million, estimated amortization of acquired intangible assets of approximately $2 million, compensation for post combination services of $200,000 and the related impact of these adjustments on the provision for income taxes of $1.7 million. We do not plan to issue quarterly guidance in the future and will maintain our practice of annual-only guidance. Additionally, our long-term operating model remains unchanged. This concludes our financial discussion this morning. Thank you for joining us and we look forward to taking your questions. Stephanie?

[Operator Instructions] And your first question comes from the line of Chad Bennett with Craig-Hallum Capital. Your line is open.

Just a few questions from me. I think the biggest surprise relative to what I was thinking is probably the financial services results in the quarter from a bookings standpoint. Can you give us a sense for what you saw there during the quarter in terms of a pickup and may be a little bit insight as to how sustainable you think that is and if there was anything that was abnormal in that specific segment in the quarter that helped it?

Well, I’ll just say a couple of things and maybe David can add to this more details. We don’t see a trend right now to really see what may happen and moving forward, I think this was some good deals we got this quarter. But it will take some time for us to see a pattern of that financial service is fully coming back for the quarter -- coming year. So I think it’s affected by couple of big deals and hopefully, this is not an anomaly and we’ll continue to see good business especially with some new products we are coming out for that space.

Let me just add that we did -- we saw a strong business particularly from one very large customer, who has been strong for us all year. And as Anil suggests some of the rest of the financial services industry has not been so strong. We think, however, that at some in fiscal year the rest of the financial services business for us will start to pick up as our customers start to compete with each other based on their infrastructure as this one large customer for us has been implementing new initiatives with their infrastructure including our solutions. So we are upbeat on the ultimate upturn of financial services as is included in our guidance.

Right. And then as much as you can give us guidance on for the year guidance, revenue guidance that you gave, how should we think about the growth rates on the service provider side and then on just lumping all the enterprise business together, how should we think about those two segments growing as much as you can say?

Well, we have a very optimistic view of our service provider business as we’ve tried to indicate to you. And the growth in the service provider bookings that Jean talked about for this year we think are indicative of the future and perhaps better for the service provider business. We are in early days of penetrating wireless carriers globally and for some carriers in the major markets that we’ve been taking business from in North America and Europe even some of the major carriers there we’re still in early days. We are having success in gaining share. So you can look at our current bookings growth in FY ‘12 and think about that going forward or better. We think that in the enterprise including financials that the kind of growth that we saw this year is likely to continue and that is the belief that supports our guidance. We see as financials comeback as Anil suggested when he talked about, that may provide some acceleration to that business. But we think the enterprise business coming and following the pickup in the economy and the pickup in their businesses, the top-line growth of their businesses that we see in the future will continue to be stronger in the future than it has been over the past several years for us. Chad, is that helpful?

Yes. Absolutely. And then one last one from me may be for Jean, the service bookings renewals in the quarter up 54% year-over-year seems like a really big number to me. Was there anything, is that just seasonality, was there anything abnormal, was there a catch up kind of renewals in there or someone renewed earlier or anything like that abnormal in that number?

I would tell you it’s probably three things. One, if you recollect on the FY ‘11, service renewal bookings were depressed from multiyear for go forward into FY ‘10. So the comparable is probably a little easier to achieve. Yes, you are correct about seasonality. The last few quarters of the year generally are higher in renewal bookings. And we have been working with some of our larger installed base and creating large multiyear contracts that one of them came through in this quarter.

Is there any way to quantify that?

I don’t think we divulge that level of analysis.

Your next question comes from the line of Matt Robison with Wunderlich. Your line is open.

Can you talk a little bit about this expense pattern that you’ve identified for the first quarter and it sounds a little bit structural that you going to front load it? That will be my first question.

Sure. I think I don’t know that we would describe it as front loaded as much as one of the effects in the first quarter is that the two acquisitions that we made Simena and Replay came in late in Q3. So the run rate on Q1 over Q1 is higher. And then as you remember last year, we put in -- we decided that we were going to, for efficiency reasons and other reasons combine our user forum with our sales meeting. So we did not have the user forum last year. We are having that actually next week. So the expenses associated with that user forum is happening in this quarter, where we can have any -- in prior fiscal year. That’s mostly the genesis of the expense shift.

Okay. And you mentioned cable companies, that was interesting. Why are cable companies stepping up now and what’s the catalyst for that change?

Well, cable companies have the same need to implement in their IP service assurance projects. And so we have been participating in voice and other and also video projects for the cable companies and Wi-Fi hotspot providing service and that sort of thing. So the cable companies are coming up the IP growth very fast also and they have constituted. They are relatively small but fast growing component of our non-Tier 1 service provider business.

So you’ve started to see this Wi-Fi proxy for 4G materialize in demand of cable companies a little bit?

I guess that’s part of it.

I think overall as Michael Szabados saying that I mean we are the IP expert from the enterprise and probably the only company who had IP expertise for the cable and telcos prior to this whole trend moving in. And so I think we are just benefiting from the trend, we are in the right place at the right time and as the transition is going to IP in various segments whether wireless or radio access network, which is going to be upcoming, LTE or cable provider. I think we have benefited from the trend because it’s roughly the similar set of problems we need to address for them and they have similar challenges.

Jean, you mentioned DSO in year-over-year comparison, but your cash flow was pretty strong given that there was a big increase in DSO from sequential standpoint. Can you talk a little bit about linearity and what we should expect in the first quarter and also, I didn’t catch it if you gave it so could you give me the head count, it will be nice?

So regarding our DSO, it is just generally -- we maintain our collection activity and we still have very high quality portfolio of receivables. The DSOs skew from the prior quarter is more related to the timing of renewal bookings and when they come in and as we’ve mentioned we had a few larger ones at the end of this quarter. So that’s why the DSO went up. And what was your head count question?

Well, I didn’t catch it if you said it, could you repeat it?

What the number of head count for the end of the year?

Yes.

About a little less than 900, about 890 employees.

Your next question comes from the line of Alex Kurtz with Sterne, Agee.

Dave, my head almost rolled off the shoulder -- my shoulders with the quarterly guidance, but I’ll discuss that later I guess, when I look at...

Unexpected...

…strength in the local bookings and then, cautioned with the little bit of Q1 outlook here, and then obviously there were -- from my calculations there was a deceleration in Europe in the quarter. Can you just give a little bit more color and then, then on top of it government, can you just give us a little bit more push and pull on the near-term demand functions across all the key verticals? So it sounds like something there is sort of a miss in government. It seems like there was a deceleration in Europe. But then obviously, mobile had very strong quarter. So, just a little bit more content, that would be great.

So, the demand in our verticals, the deceleration in Europe. I would -- we would -- we have -- what we have noticed in Europe is that we still have good demand in service provider, which is as you’ve noted in the vertical for service provider has been very strong, which is just the execution against our strategy for LTE and 3G. The deceleration in Europe is mostly due to -- there is a large percentage of banking industry over there and with the Eurozone economically the way they are right now, we’re not seeing a lot of activity within those financial industries. That is at the heart of the deceleration in the European market.

And then just a little more clarity on government and, is this, sort of, just a pause ahead of typical September budget flush or is there something more systemic that you guys are starting to see out of government?

No. I think -- I think with our long-term relationships in the project with the government is still doing, we don’t see any kind of a pause in our relationship with the government. You know we have spoken in the past about their buying processes and just general wariness with when they actually execute but other than that we don’t see any trends that would be significant.

Just last question from me, how should we think about services growth versus product growth for the year. Obviously, you had significant product growth year-over-year in March. And I’m just wondering how you guys sort to think about that. Would you expect product to outgrow services, which I would imagine you’d say, but may be a little bit more color on those two growth rates for the year versus what you gave for guidance?

Yes. Let me give Alex, just a high level of view and then David will provide more detail. So as Jean mentioned that I think that some of the growth is as a result of advanced bookings in fiscal year ‘10. So the number in fiscal year ‘11 was sort of artificially low. But overall, I think we don’t see a big growth there, but we don’t see some of the challenge we had with -- previously because of some refresh and some of the things going on with our earlier products acquired from Network General. So while we don’t see this growing anywhere close to the, I mean, the rate at which we have seen, but -- more -- lot of the growth is going to really come from the product side as we mentioned. But we -- some of the negative effects of renewal growth in the past are sort of behind us.

So just referring -- again what Anil was, of course, referring to was the big bubble of multiyear renewals that we had that we talked about a couple of year ago the depressed FY ‘11 and therefore made the -- growth in FY ‘12 look larger in that direction that is well. Alex, you anticipated that as we’ve historically said the product revenue growth will precede service revenue growth and that we expect that to be the case in FY ‘13. Anil mentioned in his prepared remarks that against a total revenue outlook of 10% to 15% growth, we expect product to be in the 15% to 20% range or perhaps Jean mentioned that sorry. And that’s indicative of that spread right. So product revenue outgrow service revenue yielding a total revenue growth in the 10% to 15% range. So I switch... And by the way don’t expect to see quarterly guidance going forward.

And your next question comes from the line Aaron Schwartz with Jefferies.

You’ve talked a little bit about on the service provider side, I guess achieving certification as a number of different providers, it’s not something I really heard you guys take about before. Just -- can you just walk through so what that means? Does that sort of put you on a, sort of, standardized list or purchasing list where you could expect, maybe steady or purchase this quarter in or quarter out or maybe, just kind of walk through, what you were referring to that?

Yes. There is no real standardization. I think there are still multiple vendors we are supplying the products to Tier 1 providers. I think we are just getting used in more bits than before. So it’s not that we are the sole vendor and provider. It is just we are being invited into more situations with the Tier 1. We had business with Tier 1 customer last year also. But now we are in a better shape as is our product and other features that have improved and ASI technology is coming around.

Yes. Maybe, maybe a better term would be operationalize rather than certify. So we got deployed into operational networks in LTE in particular and that’s really the right way to characterize what I had said about the certifications. And that acceptance and deflect to deployment is what created our acceptances at the LTE IP leader and created subsequent and attached 3G opportunity as well.

And then just a quick question on the services revenue in the March quarter it was down, fairly size on a sequentially basis, was anything going on there, was that just the fact I think you alluded to some timing of renewals coming late in the quarter, I mean can you just walk through, did that have the impact on a sequential decline in services?

No. The sequential decline is just a representation of the seasonality of the renewal patterns.

Okay. And then last question from me on the financial services customer that you’ve been working with. Can you just talk to the magnitude as the deal in the quarter, was it sort of 5 million or 10 million plus order deal, is there any way you can help us out with sort of the size of that transaction in the quarter?

I think we don’t talk about -- I mean don’t characterize beyond $1 million. Clearly, it was in the above $1 million deal and beyond that I think we have just decided not to report on that and so that’s where it is. It’s a $1 million deal, but how big it is we are not going to be disclosing.

It was significantly above the $1 million, but as Anil said we don’t disclose that. And it was not the only -- it was not only one major customer that’s why I highlighted. There were actually three financial customers in our top 10 deals for the quarter.

Your next question comes from the line of Dan Cummins with ThinkEquity.

A couple of things here. David, could you give us -- I’m sorry -- could you just go through your maintenance business or however you define your recurring revenue. The growth rate for just completed fiscal ‘12 and projection going forward, with regard to the sales and marketing spend, the quarterly profile is very, very flat, yet you obviously have a steep seasonality to your business. Can you just explain, why that is, why we shouldn’t expect some skew sort of tracking the revenue profile seasonally -- given that you do have a substantial direct model? And the organic growth rate please year-over-year for the company?

Well, I think there is a -- just let me answer the question on organic growth and then I think Jean can talk about on the renewal side. We have the organic growth is, I mean almost all of our stuff is organic growth, because yes, some of it is driven by acquisition but it’s not because of the big revenue stream coming directly from the acquisition. So we have a lot of drag effect because we sell, let say, when we have voice product, we can sell more application product or enterprise application product. So I consider the revenue from our acquired companies was very, very small compared to our total revenue. And so in that sense, everything which we are forecasting for next -- I would say almost everything is really organic growth. It won’t be there if our sales force and the delivery platform was not there.

Okay. And how about the question on maintenance please and the sales and marketing?

Can you reiterate the service revenue question please?

Sure. Just trying to get at your service line in a little more detail, specifically the maintenance space or the recurring revenue base, what was the growth rate for fiscal ‘12 and how you are feeling about it, looking ahead it feels like the business is accelerating to some degree?

So let me give you some insight into that. Of our services revenue line, the vast majority, 95% plus, is maintenance renewal contracts that are renewed annually. Our renewal rates they have been improving year-over-year and remain in the 80% range, which given the fact that most of our product is hardware based and hardware boxes have four or five year life, 80% renewal rate is excellent. So underneath renewals or maintenance service, the annual maintenance service, we have been seeing an acceleration caused in large part as Jean had mentioned by some of our large customers deciding that they really wanted to make multiyear commitments to renewals and of course, negotiate the price in the process. And that has led to the higher bookings that we talked about, but also to a little bit accelerated flow of revenue recognition because when you do multiyear bookings, there is -- there comes that time at the annual point when there might be a high risk of revenue recognition if the renewals are timely and of course, this will -- that multiyear eliminates that. So revenue flows better. You can see the growth in our bookings that we talked about I think and you can also see the growth in deferred revenue on the balance sheet that Jean mentioned that are assigned to the growth of our service business. But service business growth will always lag product revenue growth. With that, I get to what the question concerned.

Yes. Well, I mean its feel it -- sorry?

I just wanted to add a point. Let me just explain it, that there has been a recent uptick in the service momentum primarily because the burden of the legacy hardware has finally been removed from our renewal base and also our growth is proportional to new sales rather than having this other factor, which dragged it down. So now I think we are going to stabilizing it.

So Michael was referring to some of the legacy hardware that we inherited long time ago with the Network General business, legacy product in general, which has depressed our renewal rates for several years as people drop off of those products at a faster rate. Because we would not -- that we were not enhancing them, the way we do with current product. So that depressed renewal rates and that’s part of the reason, major part of the reason why renewal rates in FY ‘12 were up, but did that get the essence of your question?

Yes. I mean it’s -- it feels like the recurring business is growing easily 8% to 10%, I just want to be sure projecting forward that it just feels like it shouldn’t really be falling below 8%. I just want to be sure about that. And I think you’ve answered it, the -- yes and the sales and marketing please. Just it just seem so flat quarter-on-quarter, yeah, that’s really not your business is about seasonally?

Well, let me -- so our marketing business obviously has a significant -- our marketing expense has a significant program component and that does go up and down and you can see that in our -- and reflected in the sales and marketing line but it’s masked by the overwhelming element, which is headcount. And because of the way we manage our expenses as you would expect, we spread incentives in our accounting. We spread incentives over the year. So, that even though we will pay more for successful completion or exceeding quota at the end of the year, we accrue for that across the year. So you don’t see, so that’s to some extent disconnected with the seasonality of revenue in the way we account. So essentially, if we’re not growing headcount in sales and marketing than you won’t see -- you will see relatively flat or we’re growing it only modestly which has been our pattern. You will see relatively flat quarter-to-quarter expense in sales and marketing even though our revenue is a little more seasonal than that as you pointed out. I hope that helped you.

Your next comes from the line of Rohit Chopra with Wedbush.

Just wanted to ask you about Asia, I know it’s a small component of your business, but it was down 15%, just take a look at the quarter, is anything going on in Asia?

I think that year-over-year I think again this one or two big deals can really make a difference there. But overall our business percentage is same for the last year as it was in the previous year. So the percentage of Asia-Pac business is not much difference from what we had in the previous years.

Yes. I just wanted to add some color to it that in Asia the multinationals are definitely down, while our service provider business continues to be strong, so that, those are the dynamics.

Okay. Its more enterprise based and were there any 10% customers in the quarter, I know you calling, but I just want to make sure?

Yes. There was one.

Okay. And then last couple of things Michael, you didn’t mentioned any partnerships or anything like that contributing or helping in the previous year and even going forward? Can you just give us a sense of what’s happening?

Yes. Our partnerships have been mostly on the marketing and sort of positioning front-end and have not materially contributed to our revenues can’t really -- really that has not been our primary driver in 2012. I think going forward, we are working on number of angles, but I cannot really predict how much they’re going to contribute directly, and I think that’s probably consistent between ‘12 and ‘13 so.

Okay. And then, lastly, I just wanted to ask about competition, there is there are people who are trying to be build more aggressive more on the enterprise side. And I just wanted to get a sense of what you are seeing in this competitive landscape on the enterprise side of the business?

Well, I think like -- I think we always talked about the budget issues far out way compared to competition. I -- we -- I mean we don’t see anything on the horizon. There are small companies coming up as has been the case over the last five to 10 years and we really see that nobody has, can match the solution we have, especially as we are going to move forward, and our single appliance will be able to support voice, video, enterprise applications, as well as security. And so, I mean, there are players in each of these sub-segments, but nobody’s trying to creat this holistic picture and just the amount share -- amount of energy we have spent in this phase in the last 10 years. As you know the NetScout and Network General were the top two leaders for long time in the enterprise space and now we’re together. So, yes, the competition is there a little bit and it’s going to be, it will continue and in that sense it’s good for market awareness, but we don’t see any real issue with the competition.

Your next question comes from the line of Kevin Liu with B. Riley & Co.

You talked a little bit about coming in the next quarter with some more product backlog and probably turning that for the foreseeable future here. The business doesn’t seem like it has changed all that much. You are getting more traction with service providers, but that’s been true for the past year. So just curious what’s changed and why you guys are now able to carry such significant levels of backlog in any give quarter?

But I think the booking numbers are very high compared to last year. So it’s not, I mean, it looks -- it doesn’t look like, it looks single-digit growth on the revenue side. But on the booking side it is a huge number. We have almost more than $40 million, $50 million in booking. So that is what is allowing us to have a big backlog.

And what changed, I mean, very importantly as we have a line of the USDM portfolio all the acquisitions we made this is going to drive more growth and has already started that’s in enterprise.

And just on the acquired solutions and I know you guys have a difficult time breaking out those revenues. But maybe if you could speak qualitatively towards, I guess like Simena versus VoIP and video monitoring solutions, which functionality are your customers demanding more frequently, how has the product sales kind of corresponding with your expectations when you bought these companies?

So the easiest edition to our product portfolio is the Simena switch because it doesn’t require any different selling and it involves the same decision makers and speed expansion of our product and there has been a pent-up demand for this component to be supplied by ourselves instead of having to be bought from somebody else. And voice is the second, it’s probably is a little slower to evolve, but it will be strong and especially the video component of the UC technology will give us growth. But Simena is definitely the most easy handing glove kind of fit into our selling model.

And then just lastly from me, on the sales and marketing side, where did you guys end up on headcount for the year and what are kind of your hiring plans, specifically the sales in the coming year?

So ended the year around a little between around 300 to 325 people and we plan in fiscal year ‘13 to invest in marketing heads to continue with our USDM messaging and strategy. And we also plan on investing heads in sales within the emerging markets where we’ll be gaining traction in service provider and in the enterprise, and some of the other emerging markets as well as some of the Tier 2 then domestically.

There are no further questions at this time. I’ll turn the call back over to the presenters.

Thanks everyone for your questions and comments, and support this last fiscal year. We will talk to you again in July -- late July. Thank you.

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