Good morning, ladies and gentlemen, and thank you for standing by. Welcome to NETSCOUT's Second Quarter Fiscal Year 2018 Results Conference Call. [Operator Instructions]. 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 now like to turn the call over to Andrew Kramer to begin the company's prepared remarks.

Thank you, Keith, and good morning, everyone. Welcome to NETSCOUT's second quarter fiscal year 2018 conference call for the period ended September 30, 2017. Joining me today 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. There's a slide presentation that accompanies our remarks. And that can be accessed on the Investor Relations section of our website at www.netscout.com. The slides can be advanced in the webcast viewer to follow our commentary. We will call out the slide numbers we are referencing in our remarks. Today's agenda will be consistent with prior calls. Anil Singhal, our President and CEO, will review our performance and major highlights. Our COO, Michael Szabados, will briefly discuss key wins and go-to-market developments. Our CFO, Jean Bua, will then review second quarter results and our fiscal year 2018 guidance. Moving on to Slide #3. I would like to remind everybody listening that forward-looking statements as part of this communication 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 the statements in this call, which are not strictly historical statements, including, but not limited to, the statements related to the financial guidance and expectations for NETSCOUT, share repurchase activity, market conditions and customer demands, anticipated revenue from specific customers and specific products, along with all of the other various product development, sales and marketing and expense management and other initiatives planned for fiscal year 2018 and beyond, constitute forward-looking statements, which involve risks and uncertainties. Actual results could differ materially from the forward-looking statements due to known and unknown risks, uncertainties, assumptions and other factors. This slide details these factors.…

Thank you, Andy. Good morning, everyone, and thank you for joining us. Let's begin on Slide 6 with a recap of our non-GAAP results. NETSCOUT's second quarter performance exceeded our plans entering the quarter with revenue coming in at $259.9 million, a gross margin of 75.5%, an operating margin of 16.3% and diluted EPS of $0.29 per share. Jean will review our performance in more detail, but I'll share a few observations. Our quarterly revenue exceeded our plans for the quarter due largely to certain service provider orders that were previously expected for the third quarter and accelerated into the second quarter. While revenue was higher than the anticipated, it declined by 8% from the same quarter in the prior year in part due to the ongoing moderation in spending by one of our large Tier 1 customers. Our gross margin improved by a full percentage point, primarily as a result of favorable shifts in product mix as we continue to make progress with our software-driven product strategy. In terms of our profitability, we have continued to prudently manage our cost even while funding a range of development activities that we believe will play a critical role in our long-term growth and success. On the new product front, we continue to make important progress with our efforts to innovate and expand our product portfolio and capabilities. Let's move to Slide #7 to cover that in more detail. As we've discussed, our approach to collecting and analyzing network traffic or wire data is differentiated by our patented Adaptive Service Intelligence or ASI technology, which instantly converts high-volume network traffic at the collection point into highly structured, multidimensional metadata or what we call smart data. We are using this smart data to power an expanding range of analytics that address a growing…

Thank you, Anil. And good morning, everyone. Slide #10 outlines the areas that I will cover. As we've discussed on our prior calls, a top priority in fiscal year 2018 is to fortify our incumbency with service providers by driving adoption of our software-only platform. We are continuing to make good progress on this front. This morning, I'd like to cover a new ISNG software win at a major North American cable MSO. Over the years, this customer has used our traditional solutions to monitor voice applications, programming guide activity across set-top boxes and mobile apps and WiFi connectivity. WiFi is a strategic area for this customer, particularly as it seeks to continue promoting this offering to its expansive subscriber base as well as market new, high-quality mobile calling services for which it can cost-effectively offload mobile traffic to the existing WiFi infrastructure. However, tight budgets had limited the customer's WiFi monitoring to only its largest markets. Given these dynamics, our ISNG software played perfectly into the customer's plans. And it has freed up well over $5 million to fund the rollout of our software across the remaining markets over the next couple of quarters. In addition, this customer is also one of the dozen-plus accounts that has started to deploy our nGenius Business Analytics product. This cable provider plans to use the capabilities -- these capabilities in conjunction with our ISNG to enhance visibility into its network infrastructure, thereby further enriching the key datasets that should ultimately helps it make better business decisions and improve the customer experience. In the enterprise, we are starting to generate additional traction with our new vSCOUT and vSTREAM offerings that we introduced last quarter. These offerings provide enterprises with deeper application visibility, regardless of whether those apps run in a traditional data center…

Thank you, Michael, and good morning, everyone. This morning, I will review key metrics for the second quarter and key revenue trends through the first 6 months of fiscal year 2018. After that, I will review our fiscal year 2018 guidance. As a reminder, this review will focus on our non-GAAP results and all reconciliations of with our GAAP results are in the appendix of the slide presentation. Slide #12 shows our results for the second quarter and the first 6 months of fiscal year 2018. Focusing on our second quarter results, total revenue decreased by $23.3 million or 8% to $259.9 million. Our overall gross margin of 75.5% increased by approximately 100 basis points this quarter. This reflected good progress in improving product gross margins, especially in light of a $25 million decline in product revenue. This improvement primarily reflects favorable shifts in product mix due to ongoing progress with our product strategy that is aimed at replacing legacy hardware-dependent offerings with our ASI software technology. Our operating expenses were essentially flat and our operating profit margin was 16.3%. This translated into diluted earnings per share of $0.29. Turning to Slide 13. I'd like to review key revenue trends. As we've discussed on prior calls, we are managing through a significant moderation in purchasing by one of our large Tier 1 service provider customers following several years of elevated purchasing. We continue to expect fiscal year 2018 spending from this customer will decline by up to approximately $100 million from the prior year. In the second quarter, this customer's spending declined by approximately $25 million. Within our service provider segment, overall revenue declined by 10%. The decline from that large Tier 1 customer was compounded by a mid-teens decrease in Arbor's service provider business as it lapped a tough…

[Operator Instructions]. We'll take our first question from Eric Martinuzzi with Lake Street Capital.

I had a question. You talked a little bit about the carrier weakness continuing here. So this is just kind of a continuation of a theme. But you did feel it back and talked a little bit about both on the assurance and on the security side. I was wondering, are those both under pressure in equal amounts? Or is security more of a surprise for you?

I think security is more of a surprise. Not a surprise, but I mean, as a lot of customers are also finding out that -- slowly discovering that Arbor is really a part of NETSCOUT, so there is some deal consolidation, discount pressures, removal pressures. So that's somewhat different than what we thought earlier. But most of the pressure is on the service assurance side.

I think -- just to answer that, Eric, I think the other thing that Arbor would tell you is it's also an absorption of a lot of the equipment of the DDoS protection that the service providers had bought in the last part of our fiscal year after there was that large attack. And so they probably see it as a little bit of a digestion pause.

Appreciate it. Now you also talked about potential impact of carrier consolidation. This isn't the first time that NETSCOUT has been impacted by the potential for a carrier consolidation. Are you seeing a pattern repeat here? I'm specifically thinking back to the AT&T play for T-Mobile as far as how it's impacting pipelines.

Yes, I think there is some uncertainty. I think that was -- this may be a bigger impact because that was -- I think that there was a big difference between the sizes of the 2 companies. And right now, what's going on, it's isolated to 1 or 2 cases. So I think it's slightly more complex than the AT&T, T-Mobile situation previously.

Yes. And just to further add on to that, both of those customers that are being -- both of those carriers that are being contemplated in the news today are both customers of NETSCOUT. And on the positive side, their business strategy is to try to gain subscribers in a fight with subscriber population with the other large Tier 1s. And in that effort, as you know, they're cutting prices on their programs, but they're expanding their network and they are focusing on the quality of their network. So both of those customers are NETSCOUT customers. And we've seen good growth with them over the last couple of years as they continue to invest. The one thing that we would have to watch is as a combination, would that distract people from focusing on the network? And would the inventory that both of these customers have cause any kind of pause in spending? So there's upside and downside to that combination.

We'll take our next question from Matt Hedberg with RBC Capital Markets.

Anil or maybe Jean, I guess for both of you guys, you mentioned on the prepared remarks that there are some challenges you're seeing. I think, Anil, you said you're taking a little bit more conservative view to Q3. I'm curious, to offset that, you're talking about some increased sales initiatives to help, I assume, harvest additional revenue from your base. Can you talk about what some of those sales initiatives are of those sales programs?

So I think one of the things -- one of the traditional one is discounts. I think giving them a bigger solution, some assurance on that solution is going to be again spend and across the virtual and the physical infrastructure with traditional sales programs plus there are some incentives from the sales team in the second half, over and beyond for meeting the quota. So those are -- I mean, nothing special, fairly traditional and -- but somewhat more aggressive than what we had at the beginning of the year.

Yes. And the only thing I would add to that, Matt, is, as you know, we have an excellent DDoS product in Arbor. And they have good traction in the enterprise. And then as you also are familiar with, we have an excellent customer base in the NETSCOUT core enterprise sales force, who are also focusing efforts on the cross-selling and the combination of those 2 strengths to try to accelerate any kind of DDoS or enterprise selling.

Got it. That's helpful. And then maybe another one for Anil. Again, kind of referencing your prepared remarks, you talked about the software-only version of ISNG. I think what you said was 10% of product revenue. That's great to hear. Can you talk about the ACV, the annual contract value of a software-only deal for ISNG versus maybe what a hardware/software deal several years ago might look like for a similar type commitment?

I think what we are seeing is -- so the biggest trend going on in the service provider side is one of the most important places to monitor for quality and business analytics is the link where there's a lot of OTT traffic. And those traffic where it's because of all-you-can-you-eat plan and other things is doubling every year. So there's no way they could have monitored that with an effective cost and everything at the price levels before. So overall, I would say the size of the deals is roughly the same, but they are buying a lot more for that. So normally, you would have expected growth that the traffic has doubled and our revenue for that deal would be doubled or at least 1.5. But because of the budget pressure and other things, it's not linear to the traffic growth. And so whether we do it with hardware or software combination or a software combination -- software-only right now, a deal size right now will be the same. With this tested budget, you do it however you want to do it. The advantage of the software model for us is that we are able to manage this without impacting the margin, in fact, improving the margin. So that's what is the dynamic playing in. It's not really software/hardware combinations customers are demanding. They are demanding a lower price. And for a company of our size, the only way we can mitigate that is through a better margin model, which is software versus small competitors who can just throw a discount that [indiscernible].

We'll take the next question from Zach Cummins with B. Riley & Co.

So starting off, you talked a little bit about your release of nGenius Business Analytics, which is already in use with about a dozen-plus of your service provider customers. Can you talk about the potential impact this new solution can have on deal sizes down the road?

So I think -- so in terms of -- for the next, I would say, several quarters that the biggest impact is it makes us more sticky in account. It doesn't necessarily increase the deal size, but it makes us sticky in account and it makes us much more competitive. In the past, they will buy a separate InfiniStream-like product from a different vendor for business analytics and they'll buy one from us for service assurance. Now that functionality being in the same solution set makes it possible to do the big deals and multiyear agreements we have been doing across the world, especially outside of the U.S. And so that's what the big role of business analytics. Second part of that is a lot of people -- customers have big data lakes. And so they want our rich dataset feed into their data lakes. So one of the roles of the business analytic is to make, convert some of those people into our partners. And we might be announcing one of those partnerships over the next 3 to 6 months.

All right, great. That was helpful. And then on the buyback, you've bought back $1 million in stock over the first 2 quarters. And then the board recently approved a new 25 million share program. So should we assume this $100 million pace continues going forward? Or what are some of the factors that could change the pace of the buyback?

So we have bought, for the first half of the year, roughly $200 million, $100 million per quarter of our outstanding stock. And I think, as we've talked about in the past, what we generally look at is the actual market itself and what we think of the effects on our share price and whether as an investment in that share price at that time, if we think it's a good return for our dollar. So we continue to do that going forward. We have substantial liquidity. So we do have the availability to do something that would be more of a magnitude if we so chose. But this quarter, we expect that we will continue with our share repurchase program and we'll be active in the market.

And we'll go next to Chad Bennett with Craig-Hallum.

So I guess just a question on the guide and maintaining the guide. Considering, Anil, your commentary and kind of the caution that you've talked about before and then the Q3 color that you gave on the call, the fact that Arbor is a little bit weaker, enterprise was on a pretty good trend of growth year-over-year, it looks like that reversed. I guess, maybe it's a simple question. Why stick with the revenue guide considering how back-end loaded it now is and the risks that you guys talked about in the call?

So I'll mention maybe a couple of factors. Just to mention at the beginning of the year, despite ups and downs, a tough service provider market, Arbor, I think except for this one Tier 1 making up for the shortfall in the Tier 1 providers, things are going quite well. But they're not going well enough to make up for that big number. And that probably has changed as time is passing by. But the second half, even though it's much more polarized on a bigger portion versus the past, there is -- these are our best quarters because, especially in service providers, because there is a budget flush in Q3, and then there is a new budget in Q4. How much of that helps us close this gap is not clear to us. So we have traditionally updated guidance in January because we have a better view and better visibility into -- if you want to change guidance, then we want to also have to change it into something. So right now, it's not very clear how -- we see a lot of upside. We see a lot of challenges. And we need to see how this Q3 phases out and how the forecast and funnel looks for Q4 before making the decision.

Got it. And then second question for me, the Tier 1 customer that you highlight that you believe will be down, I think, $100 million this year, have they adopted your software-only service assurance solution yet?

Not yet. But basically, one of the things they were waiting for is they want -- they love the functionality, which were delivered. This was one of the -- one of the reason it was the biggest customer was they were a customer of both Tektronix and NETSCOUT. And so they want -- and both the solutions in the past were hardware/software combinations. After the acquisition, they're expecting to, before they deploy our software-only solution, to not only have both the features available in software because they like it, but in a single product. And that just happened 6 months ago. So that's why we think the future sales to even this customer will be in the software form. But that has not happened yet.

We'll take the next question from Alex Kurtz with KeyBanc Capital Markets.

I just had some modeling questions here, then a bigger question for Anil. So Jean, just running through the Q3 numbers, what you've outlined here and looking into the implied Q4 guide, it's just -- and then your high single-digit number for -- or high single digit to low double digit for EPS growth, I mean, what has to happen in OpEx and margins to get to you to that outcome when you look from Q3 to Q4?

What has to happen in the operating expenses to get to...

Yes, did you expect a big decline in OpEx to get there? And what do you think about product and services margins? Because services margin looked like it dipped this quarter. So how do you see margins ramping? And how do you see OpEx ramping from Q3 to Q4?

So I guess I would say at this point, based on where we come in at the implied fourth quarter guide, we are remaining with our $1.2-ish billion revenue guidance, that the margins are basically improving. Because you have higher volume, the operating cost will stay relatively flat. So we still anticipate that -- and as Anil has said earlier, it's 5 months, 6 months that we have left in this quarter and this year to achieve our goals. So we anticipate that the margins will improve through gross margins and that the operating cost would stay relatively flat. Given if there is some kind of a change in the revenue, there is about -- if you want to use operating cost as a proxy, there's probably about 5% of cost that we could easily identify to moderate any kind of a change in revenue.

Okay. Well, we can get into a little bit more offline. And just back to your previous question about why not derisk the March quarter a bit relative to your guide, I mean, Anil, I know you've outlined some challenges with Arbor, which is kind of a new item in my view and obviously some challenges with domestic carriers. So why kind of put yourself in a corner here with the big sequential growth into the March quarter?

Well, like I said, I think we do the best job of managing the risk versus expectations as we go. And we still have 0.5 year to go and a lot of good things happen. And if you remember, last year also, there was a similar question around this time about -- concerned about the second half and we managed to pull it up. And right now, I think the gap is bigger. And so we just feel that we want to not just change something, we need to give the reasons and change it to some X to Y. And we are not in a position to have the level of visibility to do that and don't want to make a second change again. And so all these are leading up to saying, "Let's do our analysis." We already gave you guidance for Q3 based on this caution. Yes, that puts pressure on Q4, but I think -- we'll -- we don't feel that this is the right time to make the change.

Do you feel like there's enough service provider backlog our pipeline that's pretty well along the process that kind of gives you that confidence to sort of stick with the number for the second half? Or is there enough activity in the pipeline to get there? Or at least it sounds like it's progressed enough that you feel that you can have some confidence in hitting the back half numbers there?

Well, I think confidence may be a strong word. At the same time, not having visibility is another type of strong word. I think basically if the probability was 0, we would be making the change right now. And I think that, that probability is higher than that. It's lower than when we started with the year. But it's still good, good enough to not make the change right now.

Okay. And just last question, your product growth most likely will be down year-over-year in fiscal '18. Do you think products can grow next year, Anil?

Yes, I think we have mentioned that there are a lot of -- I think this is a tough transition year for us and tough service provider environment changed, a lot of pressure on Tier 1 in the U.S., Tier 1 providers in the U.S. We had integration challenges. We had some issues with this. I think all the side effects or negative effects of that Danaher acquisition are starting -- reaching their tail end. And so I think -- and all the positives of the integrated product road map, all the investments we have made, whether in security or service assurance or service provider, has just beginning to start. So I think I'm feeling, despite what happened this year, regardless of that, it will be a good next year because we think that we are on to something, a good growth starting next year.

[Operator Instructions]. We'll go next to Mark Kelleher with D.A. Davidson.

Just want to go back to that Tier 1 issue, you talked about the decline there. Is there any risk that, that situation develops at another one of your Tier 1 carriers? And do you sense any competitive dynamic change at the Tier 1 carriers?

Yes, so good questions. So first thing is that there is no other customer anywhere close to that size. And that's number one. Second is there was another customer like that. And they tapered up last year and is actually on the rise. And it's possible that once we hit the bottom here, it might go on the rise, one of the big reasons being integrated solution and their software product. Our competitive environment is actually getting better for us, partly because only reason competitions would win against us was price. And software model has given us a leg up on that front also. I mean, everyone -- anytime anyone was winning, it will only be -- most of the time the big factor was the price. We have the reach. We are worldwide. We have the combination of Tektronix and NETSCOUT. We have the best technology. We're in business for 25 years versus many people for 5, 10 years. So price was the big reason. And our ability to discount our solutions was compromised by margin and other issues, which was not a problem with smaller private companies. And going to a software model has increased our ability for both driving bigger deals in terms of stickiness and otherwise plus we're very competitive. So I think our competitive situation is constantly improving.

And it appears we have no further questions at this time. I'll turn the floor to management for any closing remarks.

Thank you very much, Keith. I'd like to thank everybody for listening in this morning. If you do have any follow-up questions, certainly feel free to reach out to Investor Relations. Look forward to seeing those of you out at various conferences and look forward to our next communication with you.

And this will conclude today's program. Thanks for your participation. You may now disconnect. Have a great day.