Good day, ladies and gentlemen. Thank you for standing by and welcome to NetScout's First Quarter 2017 Results Conference 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. Andrew Kramer, Vice President of Investor Relations, and his colleagues at NetScout are on the line with us today. [Operator Instructions] I would like to turn the call over to Andrew Kramer to begin the Company's prepared remarks. Please go ahead sir.

Thank you, Erica, and good morning, everyone. Welcome to NetScout's fiscal year 2017 first quarter conference call for the period ended June 30, 2016. 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 that accompanies our prepared remarks. For those dialing into the call this morning and would like to view the slides, you can find them by going to our website at www.netscout.com/investors and then clicking on today's webcast. You can advance the slides in the webcast viewer to follow along with our commentary. We'll try to remember to call out the slide number we are referencing in our remarks. In terms of today’s agenda, Anil Singhal will share his perspective on our first quarter results and offer his perspective on some of our promising new product opportunities. Our COO, Michael Szabados, will review our integration progress, highlight some recent wins and recap notable go to market developments. Our CFO Jean Bua, will then provide greater detail and insight into our financial results and our guidance for fiscal year 2017. Moving on to Slide number 3, I would like to remind everybody listening that forward-looking statements in this conference call are made pursuant to the Safe Harbor provisions of the Section 21E of the Securities Exchange Act of 1934 as amended and other federal securities laws. Investors are cautioned that the statements in this conference call, which are not strictly historical statements including without limitation, the statements related to the financial guidance and expectations for NetScout, market conditions and customer demand and all of the various other product development, sales and marketing, expense management, integration and other initiatives planned for fiscal year…

Thank you, Andy. Good morning everyone and thank you for joining us today. As Andy mentioned, I will first recap our results this quarter and then focus and then focus my comments on helping you better understand how our product roadmap can help us reinvigorate our top-line performance. There are several slides that will accompany my comments. So let’s begin on Slide number 5. For the first quarter of fiscal year 2017, we generated revenue of $278 million and diluted EPS of $0.28, both of which were slightly ahead of our quarterly plans. This enabled us to generate solid free cash flow, which, in turn, helped support our repurchase of approximately 2.1 million shares of our common stock during the quarter. As you know, the timing and magnitude of our acquisition of Danaher’s Communications business has skewed comparisons with NetScout’s results in the prior fiscal year. The table on this slide provides a pro forma comparison of key metrics for the first quarter for the fiscal years 2016 and 2017 with the first quarter of 2016 being presented as if the acquisition had been completed on April 1, 2015. Jean will provide a more detailed review of the pro forma performance later on the call, but I’ll share several brief observations. In terms of our pro forma, non-GAAP performance, revenue grew 3.6% as we benefited from decent growth with our service provider customers. Within this customer segment we enjoyed robust demand for our distributed denial of service DDoS cyber security solutions along with moderate service assurance growth. This helped offset a modest decline in our enterprise business, primarily arising from transitional challenges related to the acquisition. Our efforts to drive synergies related to the acquisition and control our cost structure enabled us to convert relatively modest revenue growth into a…

Thank you, Anil and good morning everyone. Slide number 9 provides an overview of the areas I plan to cover. First, I’d like to briefly update you on the integration activity. Next, I will highlight some key customer wins that supports some of Anil’s commentary. I will close by sharing some highlights from our major sales events this past quarter. As Anil noted, last week was the one-year milestone of the consummation of our acquisition of the Communications Business from Danaher. I am pleased that, by end of June, we wound down every significant transition services agreement with Danaher, as we plan to close out the last two smaller ones - TSAs next month. Most notably, we completed the transition of order processing and fulfillment services, and manufacturing operations from the former FNET business, including the portable tools product lines. Critical to this transition, our Connect360 enterprise channel partner program has been up and running for over a quarter in support of the tools business. As a result, we are starting to see major partners for our tool offering move forward with larger orders consistent with traditional restocking activity. As the next step in completing the integration, we have kicked off programs to align and integrate our business processes and IT systems with the legacy Tektronix Communications business, which we expect will extend through fiscal 2017. Just as critical, retention of key talent and senior leaders has remained high. As Anil noted earlier, we have continued to win business with both new and existing customers. In the service provider market, interest in our capabilities remains high although the spending environment has been choppy. Nevertheless, validating our overwhelming technology advantage, we regained traction with a tier-one North American provider over the past quarter who has returned to the combination of TekComms…

Thank you, Michael, and good morning everyone. This morning, I will plan to review key first quarter fiscal year 2017 metrics, and then I will review our guidance for the upcoming fiscal year. As we noted earlier, 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 our acquisition of the Communications Business also impacts comparisons with the prior year period and any other extrapolations of our first quarter results may not be representative. When possible, we will frame our results against prior periods on a pro forma basis. As noted earlier on the call, there is an appendix at the end of the slide presentation that provides a reconciliation of the non-GAAP pro forma financials, along with other supplemental data. To begin our financial discussion, we will be starting with Slide number 11 of our presentation. I’ll review our first quarter performance with a focus on comparing it against pro forma FY 2016 results, which assumes our acquisition of Danaher’s Communications Business had been completed on April 1, 2015. Let’s turn to Slide 11 for this review. Please note that a reconciliation of the pro forma results is available in the appendix of these slides, and it is available for downloading on our website. For the first quarter of fiscal year 2017, total revenue was $278 million, up 3.6% over the prior fiscal year’s first quarter pro forma revenue. This was modestly ahead of our plan by more than 1% in part due to the acceleration of a few orders for certain projects that we had originally expected to receive in the second quarter. Our…

[Operator Instructions] We will take our first question from Alex Kurtz with Pacific Crest. Please go ahead.

Thanks guys. Can you hear me okay?

Yes.

So, Anil, can you just go back to those transactions that had shifted out of last fiscal year and just give us a quick update on where those said as well as the sort of overall take on service provider spending that you saw exiting the first quarter? And then, Jean, if you can just update us on the timing of the $20 million share repurchase when that ends and sort of when you could sort of start thinking about extending that or sort of adding on to that in future periods?

So, Alex, I’ll just cover the service provider spending environment question and then Jean will talk about those four deals you are talking about from the previous call, as well as cover the other part of the question. So, we don’t see any – as you have noted that in January, we saw some certain changes in spending as the new budget was coming up. And so we have not seen any further deterioration of the spending climate and people are still – have – still looking at – there is some inertia related to virtualization and a few type initiatives. But it’s not related less directly to the spending or anything to do with NetScout. So I think, we are hopeful that things will be same or better as the year progresses.

Related to the four deals, Alex, one of them has closed already, it closed and a portion of it closed in the late part of the fourth quarter with the remainder closing in the beginning of our Q1 quarter and I would say, three of them are still in process. And then, it includes the one that is, like a COTS software only.

Right.

Regarding – I am sorry, what, please?

Just go ahead.

And then regarding the timing of our 20 million shares, so as we said we have 7.8 million shares left. We have until about July 15 of 2017 to use the remaining shares under the R&T rules. That 20 million share repurchase at this time currently does not have a defined timeframe with it and the way we think about share repurchase is it’s a best use at this time for our free cash flow and our cash balances. So the timing of the share repurchase will probably be over the next what we have, four quarters until we enter the R&T limitations. After that, we will think about other ways which could include share repurchase a dividend to continue to return any kind of excess free cash flow capacity to our shareholders.

Okay, thank you.

Thank you.

We’ll go next to the site of Matt Hedberg from RBC Capital Markets.

Hey, thanks for taking my questions guys. In our model, lot of the short-term margin assumptions that we have are more OpEx-driven and on the call, you’d spend a lot of time talking about gross margins and we assume over time they are going to get back to more historic levels. Including the release of your InfiniStream platform, could you outline any possible rank the opportunities for gross margin expansion?

So, let me mention Mark, at a high level and then any specific, maybe Jean can cover it. So, we have – we continue to sell our products in three forms. One is, the NetScout-only, which has the same 80% gross margin type situation as we had before or as tech-only products, which is – has lower margins and then we have the new product which is very similar to the margin levels we had in legacy NetScout. So, we are not pushing people to move in one or the other direction. Greenfield customers, which is a very small portion of our business, I mean, 10% plus is going to be using that NetScout original customer base will be using that, but we are giving the choice right now to the original TekComms customer base which is a big portion of the market share and customer base to decide at their own pace. So as we mentioned on the call that – in my portion of the script that we don’t know what the timing of this will be, because people have different commitments and expectations as far as the deployment. So depending on how fast this transition happens for the customer – from a customer-to-customer, I think margin – there will be margin improvement. So, your comment about the OpEx was right. So I’ll let Jean to cover that part.

Hi, Matt. This is Jean. So just as a recap of the gross margin, the gross margin on a pro forma basis in FY 2015 was about 71.5% and in FY 2016, it improved up to about 73.5%. We would think that gross margin this year could close in again around the mid-75 around 75-ish. And as Anil said, we have good gross margins in a lot of the product lines and as we migrate the tech customer in to the InfiniStream NG which is the platform of very robust platform, it has better product gross margins. We also anticipate that we will be able to simplify the selling processes - selling process and that should also be able to give faster service as well as higher margins to our customers. And then just as aside, the gross margin percentage, as software becomes more and more important in the virtualized world, the gross margin percentage should increase over time also.

Very helpful. And in your prepared remarks, you spent some time talking about the success of your DDoS product. I am curious, could you help us with how successful that product has been selling inside of the traditional NetScout base? I assume, there is certainly a cross-sell opportunity, but I am curious about the adoption inside your traditional base of customers. Thank you.

So, there is a good penetration inside the customer, NetScout customer base, but it’s more accidental right now. It’s not that we have a common sales team working together. We are not leveraging that. We don’t create confusion in the sales force right now. So while lot of the traditional NetScout enterprise customers do use the DDoS product, but they are not because they were original NetScout customers. I think we see that opportunity starting in the next calendar year, which could help us as we make some minor integration changes, that’s when we want to capitalize on that, but at this calendar year, it’s still not taking advantage of the synergies.

Thanks, guys.

We will take our next question from Mike Kelleher from D.A. Davidson. Please go ahead.

Hi guys, it’s Mark. Thanks for taking my question. Yes, I wonder, now you’ve completed a year of the acquisition. I was wondering if you could go kind of review the expectations for the growth rate of your total addressable market? And how you think you can do versus that yourself taking market share perhaps? And then maybe talk about how the expectations for the individual components that you purchased Arbor Tektronix and Fluke have played out versus your expectations? Thanks.

Well, I think so, we have – and we have talked about that, I think expectation on the – if you look at the three big areas, Arbor, FlukeNET and TekComm. In the Arbor area, I think it’s inline with our expectations, but I think we can do more as we provide integrate this solution in the advanced threat product area which was introduced recently and both at the sales level and at the engineering level. On the FlukeNET side, I think there have been some internal challenges because of it was to unwind from the – we didn’t buy the whole FlukeNET or Fluke business. Some – a big portion of that remains with Danaher, so as a result we had to do transition services, we had to look at to the channels, we have to renegotiate the contracts and so there was some disruption because of that. Other than that, I think it’s inline with the – other than that plus some confusion in some duplication of product lines. I think that’s inline with our expectations. On the TekComm side, I won’t talk – think of – we had some lower – I mean, the maybe actually our expectations are higher than where we are right now. But that’s not because the integration is not working or technology is not good or talent is not good, it’s because there is some – there was some change in the spending environment and I think we can overcome that as we come up with the software solution, which will keep the deal sizes bigger, but reduce the cost of instrumentation and they are getting combined functionality which will then take advantage of our incumbency. So all in all, I think it’s a very good situation and lastly, I think 90% to 95% of the talent we have identified at the highest level is still with the company. So I think overall, it’s going very well and we are counting on translating this into revenue growth next year as a result of all the investments we have made.

Hi, Mark. This is Jean. I think I would just add a few comments to Anil’s commentary. The first being that, as we had mentioned on our prepared remarks, we now have the capability to provide operational intelligence and analytics from the edge of our customers’ network whether that’s the cellphone tower or the cloud, right into the datacenter. So one of our thesis for the acquisition was to be a platform to our customers that included economies of scale which will get to a operating margin, but it also means stickier revenue because we will be able to provide one visibility product and solution, so that they can see service assurance from the edge right to their datacenters. As service providers and enterprise have to up 24/7 this consistent approach will enable them to rapidly solve any issues that come up. And as we also talked about in the APM area our nGeniusONE came in with a service triage approach which was how to identify problems quickly. We are now being able to move into the DevOp space, so we will be able to also provide continued visibility in analytics in that area. Finally, the only other point I would make is that, Arbor which is clearly the DDoS leader in service provider right now and it’s moving into enterprise. There it has a good growth in that market also. That market is maturing and the way we view Arbor is that Arbor’s unique capabilities in cyber intelligence along with NetScout forensic ability should be able to be a product differentiation for the customers when it comes to advanced persistent threat. So we really are very happy with the Arbor asset it has grown well. We anticipate as we merge our technologies together that will create opportunities for Arbor to continue their growth rate.

I think just one more thing to add – to I just remember something important which I have been telling customers and to investors in private meetings that, we are a not just a number one player, but the number one player in almost all segments of our space by very, very wide margins. And so, in order to grow, we not only have to maintain our market share, but more importantly, we have to be the leader in increasing the market size and there is addressable market size and there is capitalized market size. And that means, we move other dollars in IT to our kind of solutions and which I call it almost like providing high definition TV at a black and white TV price. And that’s how we increase the market size whether it’s for DDoS, advanced threat, or analytics area which Jean talked about and that’s one of the biggest reasons why we decided to do this combination.

Okay, thanks.

We’ll take our next question from Eric Martinuzzi from Lake Street Capital. Please go ahead.

Yes, just curious to know on the services side, it looks like you had decent – I think it was 3. something percent growth there on the services. As we anniversary these contracts, whether they are Arbor, Fluke or more specifically Tektronix, are you seeing those renewals happening as you would have expected? And is there an end of life program that’s going to help drive transition to next-gen products?

Yes, I think we are very – Eric, so, first of all, our renewal rate continues to be good. There are always timing issues and – but this is from a revenue basis this is recognized over a year, I think, I mean, you don’t see those impacts. But overall, we are very careful with end of life situation because we want to use customers’ timetable to come up with those end of life or end of sales decisions. So a lot of the decisions are – is it going to drive the refresh or additional product or replacement is going to be not end of life type situation, but end of sales situation. So, for example, when we come with InfiniStream NG, which we started selling six or nine months ago, there is no need to continue to sell InfiniStream, because that’s much more cost-effective for customers and it has more functionality for us to go after a biggest market share. So that’s what’s going to happen and that has the best impact of keeping service revenue growing as well as being able to migrate people to new functionality.

Understand. Thank you.

We’ll take our next question from the line of Chad Bennett from Craig-Hallum. Please go ahead.

Chad?

Chad, your line is open. Please check your mute button.

Oh, sorry, I was on mute. Thanks for taking my question and nice job on the quarter.

Yes.

Thank you.

So, you spoke about a large North American tier-1 service provider that, I think, you indicated kind of came back to you and put in an eight-figure order this quarter. I guess, couple questions around that. First, was that traditionally a NetScout customer or Tektronix?

It was – go ahead, Michael.

So it was both. Actually it was both and they came back to both of us. So we essentially continued that.

The reason it’s a combination like Michael said, but it was driven more on the Tech side of the functionality even though they were a bigger customer of Tech than NetScout.

Okay.

Yes, this customer, when we had talked in the past about a tier-1, we have said that, most of them had gone either with a Tech solution approach or with a NetScout, there was always one that when it came to 4G for the most part had tried to couple together, their own analytics using – an outside analytics package and I think we’ve talked about last year they decided that that was not meeting their requirements. So they had purchased the NetScout solution and they have been a customer previously of Tektronix. So this year, they had gone back and purchased more the Tektronix solution also.

Okay, and I assume they are a large customer of Tektronix previously.

Probably, I can say how large they were, but it’s probably been a few years, since they’ve purchased. As I said, they had gone to – I wouldn’t even really call it a competitor, but they had decided to do like an in-house development using a NIM analytics product and that didn’t scale or meet their needs. So they turned to NetScout last year and then this year they turned to some products from Tech.

Got it. Okay. And then, I think, there has been a lot of questions around the gross margin and specifically product gross margin, I guess, what – can you give us an idea of – you talked about seeing the benefits of the new InfiniStream integrated product towards exiting this year, I think is how you described it. Can you kind of quantify how close to historical NetScout product gross margins you can get by the end of this year? Is there any quantification there?

Well, let me just mention high level and then Jean will get to specifics. So everyone understands. So – and these are going to be in very general terms, so you get a relative indication of what the gross margin situation was or is going to be. So NetScout was in the 80% area in terms of gross margins in the past and Tech was more like 70%, Arbor was very close to NetScout as net was somewhere in between. So where we are right now is as Jean mentioned, we could reach the midpoint – mid-70s. So, we basically, which is the average of 70 and 80. As we move towards InfiniStream NG, if everyone moves to InfiniStream NG, we should be in the 80% area back again and then, if people move to software version of InfiniStream NG, then it would go higher than even 80. So how this mix is going to look like is what’s going to moderate where we end up with this, but this year’s estimate is what Jean mentioned. So, Jean anything?

I guess, the only other comment that I would say is that, we’ve always been very bottom-line focused which translates into as our earnings per share for our shareholders. So regardless of how the gross margin rolls out over this year which is in – I said, we would anticipate we would probably be in the mid-70s. We still will focusing on delivering our bottom-line on our earnings per share.

Okay. One last housekeeping for me, Jean. What do you expect depreciation to be this year and CapEx if you have it?

Depreciation this year should be around $30 million to $35 million and CapEx should be about – the capital intensity of the business has not really changed. We have spent in Q1 some money, we had about $9 million of CapEx this quarter and that was mostly I would say, acquisition-related some fitting our facilities as we consolidated certain areas and then some computer-related equipment. So I would say that, CapEx for the year would probably be somewhere around – equates to about the depreciation level, $30 million to $35 million.

Great, thank you.

You are welcome.

I think we have time for a couple more questions.

Okay. We will go next to the line of Scott Zeller with Needham & Company. Please go ahead.

Hi, thank you. Regarding the revenue mix between service provider and enterprise, I think you broken out as 56 service provider, 44 enterprise. Could you tell us though what the growth rates were year-on-year and if it’s a pro forma growth rate, please let us know?

Sure. The service provider growth rate was about 12% and the enterprise growth rate declined about 5%.

And is that pro forma in last fiscal first quarter, so that’s apples-to-apples or is it – how is that calculated?

Yes, it is.

Okay.

It is pro forma of Q1 FY 2016 of enterprise. And then the decline in enterprise, as we have talked about was mainly driven by some of the transitional issues in Fluke and as we’ve said in our prepared remarks, we think those transitional issues have stabilized and will just probably take a few more quarters for the Fluke enterprise system to sum to start growing again.

Thank you.

You are welcome.

And we will take our final question from Kevin Liu from B. Riley & Company. Please go ahead.

Hi, good morning. Just related to kind of enterprise and Fluke, you talked about some major partners starting to re-stock. Can you give us a sense for how many quarters you expect that sort of re-stocking activity to continue?

So, in those comments, that was talking about on the tools-related business that those are tools that we sell mostly to channels and I would say that we would anticipate as we exit FY 2017, we should probably see positive growth albeit in the low single-digits for that piece of the business.

I think you just wanted mention that tools business overall is low to mid single-digit size of the total business. So, it’s not a huge portion of the business.

Understood. Thank you. And then, just lastly, with the new product introduction of NG, I am curious just where you are seeing your customer interest lie in terms of how they wanted to play, are you seeing many of them still want to go the traditional rate of deploying on an appliance basis or is there increasing interest on kind of software only?

Well, I think it’s – I mean, there are – I mean, when you go to software, I think, you have to do a N number of things to make it transmit into people. For example, people, did they still want finished products, so we have to increasingly use the channel and all those. So, there are few things we are working on to really get ready for that model because just getting a one-stop shopping was more convenient for the customer, but lower margin for us and higher price for them and so, everyone is attractive towards that, but I think it’s going to take some time every customer is making a decision on their own timetable and depending on – it also depends on what’s the traffic rates are. If the traffic rates are very high, then going to a software solution is lower price and they will probably want to go on to – will probably want to go to the software model. But when the traffic rates are lower, like tier-2 provider, it’s not big advantageous because there is a minimum threshold of price that you have to cross to take advantage of software. So, all these make a difference, also the software product has basically two versions. One is basically buying software for traditional datacenter and that’s what we are talking about. Moving forward, as we have go to the cloud, the software is the only judge. So, when we say we are releasing multiple versions, there are about 10 to 20 different models, deployment models ranging from software in the cloud to software in the datacenter to buying a full function appliance to buying the tech product the way it was. So, it’s a many choices and we work with them to come out with the right thing for different customers. But it’s not clear right now and at this point, we are not pushing customers one way or other and that’s going to have a impact on the margins, but, we are actually quite conservative when we talk about the gross margins. We are assuming that it is going to take some time to move toward the software model.

Hey, Kevin, this is Jean. Also, just stepping back from a business and market perspective, our technology is such that we can sell in any form factor that the customer wants and as we have talked about in our remarks, we see the move to virtualization. But that will be a process where in the interim there is a hybrid. And so what we are doing right now is we have customers who are potentially interested in buying software only from us as they put it on hardware that they purchase themselves, because we’ve always been hardware-agnostic. Some customers are interested in that idea and some customers are still not interested, because it requires them purchasing and things that are not as easy as just want buying our product. We are in conversations with many of our carriers about potentially will they want to do that, but we sell in any form factor and as the market moves towards virtualization, our technology is there and we are ready to be able to sell it however the customer would prefer.

All right, thank you for taking the questions and congrats on a good quarter.

Thank you, Kevin.

Thank you.

I would like to now turn the call back over to Andrew Kramer for closing remarks.

Great, well I appreciate everybody taking their time this morning to listen to our commentary. If you do have questions, you can certainly give us a call at Investor Relations. You can email us as well. Look forward to seeing folks when we are out at the road, out on the road on various conferences and various money centers. And look forward to connecting with you when we report our Q2 results later this Fall. Thank you very much.

We’d like to thank everybody for their participation on today’s conference call. Please feel free to disconnect your line at any time.