Ladies and gentlemen thank you for standing by and welcome to NetScout's Second 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’d now like to turn the call over to Andrew Kramer to begin the company's prepared remarks.

Thank you, Tony, and good morning, everybody. Welcome to NetScout's fiscal year 2017 second quarter conference call for the period ended September 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 it by going to the investor relations section of our netscout.com website and then clicking on today's webcast. You can advance the slides in the webcast viewer to follow our commentary. We will try to remember to call the slide number we are referencing in our remarks. Today’s agenda will be consistent with prior quarters. Anil Singhal will share his perspective on our second quarter and first half results, current market conditions and recent new product highlights, and our outlook for the second half of the year. Our COO, Michael Szabados will highlight recent key wins and recap notable go-to-market developments. And our CFO, Jean Bua, will then provide greater detail and insight into our financial results, and review our fiscal year 2017 guidance. Moving on to Slide number 3, I’d like to remind everybody listening that forward-looking statements in this conference call 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 conference call, which are not strictly historical statements, including but not limited to, the statements related to the financial guidance and expectations for NetScout, market conditions, and customer demand, and all of the other various product development, sales and marketing, expense management,…

Thank you, Andy. Good morning everybody and thank you for joining us today. As Andy mentioned, I’ll first recap our results for this quarter and the first half of this fiscal year, and then focus the rest of my comments on the second half outlook and long-term prospects. There are several slides that will accompany my comments, so let’s begin on Slide number 5. As you know, the second quarter of fiscal year 2017 is the last quarter in which the timing and magnitude of our acquisition of Danaher’s Communications Business would have any impact on the comparison of our quarterly results. The table on this slide compares key metrics for the second quarter and the first half of fiscal year 2017 against the prior year periods. Jean will provide a more detailed review of the pro forma performance, but I’ll share several brief observations on our non-GAAP performance. I would like to frame our results to date against the fiscal year 2017 guidance we provided about six months ago at the start of the year. Our original targets were for pro forma annual revenue growth of 0% to 4%, operating profit margin growth between 200 basis points to 400 basis points, and significant EPS growth in the range of 10% to 25% using a fixed share count of 94 million shares. This guidance was based on roughly flat top line growth in the first half, with the bulk of potential growth to be delivered in the second half, which has been the traditional pattern for our business in the past. I’m happy to report that we performed well for the first half of fiscal year 2017, both on the revenue and operating margin front. For the first six months, first-half revenue was $561.2 million and our operating profit was…

Thank you Anil and good morning everyone. Slide number 10 provides an overview of the areas I plan to cover. I’ll first review some recent customer wins that help illustrate Anil’s commentary and then I’ll highlight some of our go-to-market activity that is helping to drive greater sales traction and broader market awareness. In terms of wins and use cases, in the service provider sector, we are already generating traction with our InfiniStreamNG platform. We have already received initial InfiniStreamNG orders from two legacy Tektronix Communications customers and evaluations on this platform are underway at many other accounts. Making the InfiniStreamNG available as a software platform is also proving very relevant in today’s buying environment. We are happy to report that we recently closed a multiyear, eight-figure enterprise-wide site license for our InfiniStreamNG software with one of our longstanding Asia-Pacific customers. This was the consummation of a prospective deal that we highlighted for investors at the end of fiscal year 2016. In addition, our software was selected by a leading carrier in Eastern Europe to support their continued roll out of 4G services. In terms of other next-generation instrumentation developments, we recently announced enhancements to our family of packet flow switches or network packet brokers, and these investments have been critical to gaining greater wallet share with our customers. In particular, we secured a major win in excess of $6 million with a branch of the U.S. military that is deploying our packet flow switches to further standardize on NetScout performance management solutions, and also support planned security applications in the near future. We won this significant deal in competition against another market-leading vendor of network visibility fabric technology. We are delivering a very efficient solution to help this customer as they increase the capacity of key network links to…

Thank you Michael and good morning everyone. This morning, I will review key second quarter and first-half fiscal year 2017 metrics, and then review our guidance for the remainder of the 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. Consistent with our comments earlier on the call, our acquisition of Danaher’s Communications Business was completed two weeks into the second quarter of fiscal year 2016. This timing slightly impacts comparisons with the second quarter of fiscal year 2017 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. 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 detail. To begin our financial discussion, we will be starting with Slide number 12 of our presentation. I’ll review our second 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. For the second quarter of fiscal year 2017, total revenue was $283.3 million, down slightly by 1.8% over the prior year’s second quarter pro forma revenue. This was modestly ahead of our plan due in part to strength in the federal sector late in the quarter. Product revenue was $174.9 million, or 62% of total revenue during the past fiscal quarter. This declined 4.3% from the same quarter one year ago on a pro forma basis due to the difficult comparison from the prior year. Service revenue grew 2.6%…

Thank you. [Operator Instructions] We’ll take our first question from Alex Kurtz with Pacific Crest Securities. Please go ahead.

Hi guys, can you hear me okay?

Yes.

Yes.

[Indiscernible]

We can't hear you know. We lost you on that Alex, can you repeat the question.

On the margin expansion comment from Anil about two points of margin expansion, is that based off the 24% that you guys did in fiscal 2016, am I thinking about that correctly?

It’s on a pro forma basis. So, it would be off of 21% base for fiscal year 2016.

Okay. And then maybe Anil of Jean can you talk about the competitive landscape right now and what that’s doing to deal flow and visibility with large projects? [Indiscernible] Some of the softness that you are seeing in current spending or is it really about what the broader trends in the sector M&A and some of the comments you talked about over the top content.

Yes, so I think just maybe repeating or expanding on what I said Alex earlier is, so competitive environment has not changed or actually better for us, as people are seeing the power of the combination of TekComm and NetScout on the carrier side. And also in terms of budget conditions there is some competition from [indiscernible] and we think our emerging big data strategy is actually going to convert them to partner. So given those things our competitive environment is really improving. Yes, we see challenges of growth versus last year and moving forward. So, in the short-term we are doing several things and so the business I had is generating some interest, but we the impact of that is not really going to see, is not going to be seen until next year. And next year even if our environment stays the same we think our total addressable market will technically improve because of all the product integration, which will become online before the end of the fiscal year. So that’s where we see the market dynamic. The M&A we were talking about was in the enterprise sector because we are one of the unique companies in service assurance, which has big business port on the enterprise sector and on the service provider side. On the enterprise side, our biggest difference has been end-to-end monitoring that means we can tell you when there is a problem, is it the network or is it the server. That has not been true on the service provider side because the servers are owned by the content providers. And so sometimes there is still finger-pointing when you have for example bad quality of service and is it the network, is it the server. So we feel that we owning - the service provider now getting into the content business will create yet another differentiator for NetScout because we are the only one who can provide the end-to-end service assurance and in the process customer satisfaction, which in turn will result in more investment in NetScout products.

Great, thank you. Next we’ll move to Chad Bennett with Craig-Hallum. Please go ahead, your line is open.

Yes, good morning. Thanks for taking my questions.

Sure.

To follow up a little bit on the first question - questions asked, so how much, so if you look at your December quarter guide it’s obviously down year-over-year and this is kind of the first full quarter of apples-to-apples since the Danaher transaction, I guess, so how much of that would you attribute to service provider weakness versus enterprise and if we are, I guess the second question would be how has the service provider pipeline changed from your traditional appliance-based solutions as a percentage of the pipeline versus software only probes over the last six months and has there been a big change there?

Yes, so maybe let me take the second question first Chad. So, pipeline is still building, as you probably know that we are announced the software-based solution only last month. We made announcement of the availability, in fact probably this month, and so the pipeline I think is going to more gravitate towards the software solution over the next year, but this year we don't see the impact - much impact. Bulk of the pipeline is still traditional product and some of the pipeline which actually will result in product sales next year is actually moving towards the soft software side. So, pipeline is moving toward software, but the revenue is not necessarily going to be significant for the software this year. And I think to your first question, I think we already mentioned that we saw very good growth on the enterprise sector and on the security part. So, if you look at our business at security enterprise service assurance and service provider service assurance. So, the first two areas, which is Arbor and traditional enterprise for NetScout are doing quite well. We are seeing some growth in that area, but service provider, service assurance is biggest portion of the business, and we continue to see challenges, which offset some of the growth on the other two areas.

And just one follow-up, are the challenges in the service provider side of the business, are they beyond or across regions, meaning not only the North American Tier 1’s, but also for international service providers also?

Yes it’s everywhere, but because the number of big providers in the U.S. is just a few and that’s the bigger portion of NetScout business. Percentage wise the impact is more dominant in the U.S. but yes it is across the board and I just gave two reasons that we have made big investments in LTE and because of it OTT explosion they have not been able to monetize it and the virtualization initiative had stalled some of the decision-making where people say why should I invest in this right now, which is going to be changed in a year or so. And those two combinations is creating the situation environment of lengthening sales cycle or renewing negotiating big service contracts or slower spending by this.

Makes sense. Thank you.

Yes.

Thank you. Next we will move to Mark Kelleher with D.A. Davidson. Please go ahead.

Great, thanks for taking the question.

Sure.

Just wanted to, you talked about some weakness in service provider, is there any differentiation in that weakness between the Tektronix products and the Packet Switch products, Packet Switch visibility products of traditional NetScout?

I think maybe you were mentioning the Tektronix service assurance solution versus NetScout service assurance solution because the Packet Flow Switch solution was identical with both and that’s not necessarily a comparison. So, maybe you're mentioning that. So when we look at spending, we're selling, we have a common platform now and on which we put the Tektronix Software as we go to the customers. So, we are able to service the demand of Tek customers or NetScout customer with a common platform. So, the spending issues and challenges are independent of whether it’s at a Tek customer or a NetScout customer.

Yes, just to step back and just summarize our view on the service provider market, as we’ve said before there are general trends, but everything in specific to each particular service provider. As a general trend, the 4G here in the second half where they are monetizing their networks trying to get an investment, so we had wins in both and we have wins as Anil has mentioned and we will continue when it comes to on demand. We do not see it as a competitive issue whatsoever. In fact as other geographic areas, including India, Asia and EMEA are rolling out their 4G, they have turned to NetScout and this is why we have had, this is why we have strong performing solution. They have bought that to be able to standardize on 4G and build-out their areas. So it is an evolution where they are in the fourth half - the second half of their 4G and they are scrutinizing their investment and they are also looking at and designing and contemplating their 5G environment. So we do not see it as a competitive issue, we are in fact very happy after Anil travels around the globe with all the customers that we feel secure in our differentiation. We now scale our real-time abilities and our ability to go from the end of the ramp to their data centers, but we just see it as a general trend as to where they go from implementing their 4G to 5G.

So just to clarify because it really wasn't a competitive issue I was concerned about, I’m concerned that the Tektronix products aren’t growing as fast as the NetScout products and you're saying that the weakness you’re seeing in service providers is even across all products, it isn’t specific to certain product lines?

That is right.

That’s true.

I mean, obviously you will see a bigger difference because Tektronix portion of the revenue was higher than the NetScout portion, so in terms of scale you will see that, but the same challenges apply to in both areas.

Okay, thanks.

Thank you. Our next question comes from Scott Zeller with Needham & Company. Please go ahead, your line is open.

Hi good morning, thank you. I wanted to go back on Jean’s guidance around OpEx for the third quarter, could you tell us you mentioned that OpEx will be flat Q to Q, could you tell us if that’s absolute dollars or if that’s percentage of revenue?

It should be relatively consistent on an absolute dollar basis from Q2 into Q3.

Okay. And if that’s the case, was the commentary around looking at the cost structure of the company now that’s been a year, you know that would suggest that you’re using into cost management if OpEx is flattish Q to Q, should we expect that the change to OpEx will accelerate or is it going to be a gradual change?

So, what we’ve done over the last year, you know the last 12 months to 15 months is we’ve looked at the businesses, we understand the business model is much better. You know we understand where the market has been moving and we have been over the past year investing in the areas that are good growth areas, as well as strategically looking at the headcount in some resources in some other areas that are not good growers. So just going back to an earlier point, FY 2015 has pro forma operating margins of 18% and then we improved them by two percentage points in FY 2016 to 21% and then our guidance as you know now at the low-end would imply 23%. So, what we’re doing at this juncture after understanding the market, any shift in the market from when we bought the Danaher business communication business it’s just looking at what assets we think makes most sense to continue to invest in and which other assets we should probably pause and see what makes sense to happen with those.

Okay and then just follow-up, any color you could give us around the growth rates for the Packet Flow Switch and also for Arbor on a year-over-year basis?

I think we talked about for Arbor double-digit growth and for Packet Flow Switch we don't carve it out because we are again, Scott different than all other Packet Flow Switch vendor because our sale is a combined pro plus PFS sale. So that’s why we don't carve it out like that, but overall we have been winning competitive deal. We look at PFS as an accessory to our pro-business, so that’s all bundled into our number, and on the enterprise side we are seeing better growth rate because our overall business is growing there. On the service provider we see lesser growth rate what we have said because it is all that tag along with the pro-business.

Thank you.

Thank you. Next we will move to Eric Martinuzzi with Lake Street Capital Markets. Please go ahead your line is open.

Thanks. I wanted to address the December quarter relative to the December quarter a year ago. In Q3 of 2016 you had revenue of $333 million on a non-GAAP basis, at the midpoint of which you talk about here in December it would be $310 million, curious to know, as far as the mix there? Because you said you're entering some, I guess maintenance renewals, contract renewals on the services side. What we're talking about on the total non-GAAP revenue is a 7% decline at the midpoint for Q3, and I'm just wondering, does that speak to declines in both product and services? Or is services up versus a year ago and product declines in the 8% to 10% range? Any clarity would be helpful.

Sure. So, the first point I would make is that one of our large tier ones has already explained to us their purchasing pattern. Their requirements or what they would like from our product and their timing. So that’s why we understand that Q3 of last year they had purchased significantly more in that quarter than they are planning to purchase in Q3. They’ve actually told that they plan to purchase more in our Q4. So that’s the main reason for the shift in the timing of order from Q3 of last year to Q3 of this year. This year for service revenue, we might see an overall decline, one however has been moving some of their traditional product revenue to more flat subscription so that’s got a significant impact. And then as we had said we are in the final stages of closing some large installed base customer’s renewals, and in the current environment where operating expenses are very important to them to constrain. We’ll have to see how those negotiations go.

Understand. Thank you.

Thanks.

Thank you. And we’ll take our next question from Matt Hedberg with RBC Capital Markets. Please go ahead, your line is open.

Great, thanks for taking my questions, guys. There was a couple of earlier questions on software only solutions and I realize it's still pretty early here, but any sort of anecdotal thoughts on how the pricing is going to line up? In other words, do you think you're able to offset potentially lower software prices with higher volume? Potentially better gross margins? Just any other color on sort of how you are kind of thinking about a more software rich product cycle.

Okay, thanks Matt. So, yes, so overall when you look over the next 3, 4 years a long-term variance, I think majority of the product will move to the software area and we already enjoy it prior to the acquisition, very high gross margins of 80% less and I think this will become even higher. And you’re right, the price of the software is going to be about 30% to 50% cheaper per unit, but it will allow us to be deployed in more places where they were going with cheaper solution or going with other technologies like NetFlow and component management. So, we believe overall impact what we are hearing from customer is that people really don't buy our boxes or pro [ph], they actually have budgets to buy whatever we have. So, using that budgets for the customers are not going to decrease because they buy cheaper solutions or cheaper units. They are going to fill it in more places and that will make us more pervasive and I think we have seen this trend in the past 10 years in enterprise, and I think we're going to see that again.

That is helpful. Maybe one last quick one on your Arbor products, I know you are still working on getting, I think a more cleaner sales motion into your install base to take advantage of cross selling there, any update on sort of thoughts of selling Arbor and DDoS into the base?

Yes, so we are looking at that not this year because we don't want to disrupt the current model, we will look into that area, but the bigger opportunity of cooperation between the NetScout sales team and Arbor sales team is in the advanced trend area, which is practically zero revenue right now. So, Arbor basically had DDoS product, which is bulk of the business and a product spectrum, which was announced earlier in the year. And that will be consuming ASI technology before the end of the year, and that is going to create a great synergy on top of whatever corporation we can do with the DDoS sales team in the future.

Got it. Thanks guys.

And that's why, just to add on to Anil question, that’s why we are happy very happy with the overall asset currently the other market leader in DDoS and they have been growing strongly, but what we see is the next evolution and the next growth path is clearly a linkage with NetScout with the differentiation that NetScout’s product and Arbor’s products technology together can bring to the marketplace.

Thank you. And next we will move to Alex Kurtz with Pacific Crest Securities. Please go ahead.

Hey, Jean, just wanted to follow up on expectations around share count and what the plans are when the program expires. And maybe give us maybe your longer-term view of where you think share count could be fiscal 2018 and beyond? Just maybe high level what you are thinking about as far as buyback and repurchase programs.

Sure. Thank you, Alex. So, as you know we generate significant free cash flow and our first priority for deployment is to invest back in the business, as we did this quarter with the acquired technology assets from Avvasi. Following that then our next deployment priority is to repatriate excess cash to our shareholders and we’ve done that in the form of share repurchase. We should be done with our 20 million share authorization in mid-July, and it was based on our continued anticipated success we will continue to generate significant share - significant cash flow to which end we probably will continue with the same deployment priority. So that means we probably would go back, or continue I’m sorry with share repurchase. NetScout as a standalone basis before the Danaher TekComms Communication had about 42 million shares outstanding, and right now we have about 92 million down from about a little less than $105 million. So, clearly they are in a sweet spot somewhere between 42 million and 90-ish million that we would probably end up targeting with our next share repurchase program in FY 2018.

Okay, so fair to say somewhere in the not too distant future we could be looking at a share base of maybe 70 million to 80 million [indiscernible]. Is that the right way of thinking about number of shares?

I am sorry Alex, you broke up. I guess if you wanted to use the past as an example, we bought back 20 million shares over a two-year period. So in FY 2018 if we did that again, I think I heard you saying that we can bring down close to 70 million shares, which is not unrealistic.

Okay, thank you.

You’re welcome.

Thank you. And at this time we have no further questions. I’d like to turn the conference back over to management for any closing comments or remarks.

Thank you very much operator and thank you everybody who joined for today's call. Appreciate you taking time to spend with us this morning. We look forward to our next call when we announce our first quarter results, and obviously if we are on the road we hope to see you in person. Thank you very much. Bye-bye.

Thank you. This does conclude today's conference. You may disconnect at any time and have a great day.