Good day, ladies and gentlemen. Thank you for standing by, and welcome to NetScout's Fourth Quarter Fiscal Year 2018 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 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 fourth quarter and year-end fiscal year 2018 conference call for the period ended March 31, 2018. 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 is a slide presentation that accompanies our prepared remarks. Both the slides and the prepared remarks should be available on the Investor Relations section of our website at www.netscout.com. I've been informed that there is been some difficulty in accessing those materials and we'll make try to make sure that those are posted and available to you during the call. The slides, when they are available, should be and can be advanced in the webcast viewer to follow our commentary. We will try to call out the slide number we're referencing in our remarks. And we'll try to keep in mind that some of you may not have slides available as we're talking. Our agenda is as follows: Anil Singhal will briefly review our performance; and then, address certain questions that we believe are on the minds of investors. Michael Szabados will briefly review customer adoption trends and major go-to-market highlights. Jean Bua, will then review our fourth quarter and full-year results and detail our fiscal year 2019 guidance. Moving on to Slide number 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 on this conference call, which are not strictly historical statements, including, but not limited to the statements related to the fiscal year 2019 financial…

Thank you, Andy. Good morning, everyone, and thank you for joining us. Let's begin our Slide 6, with a brief recap of our non-GAAP results. We reported fourth quarter revenue of $238.5 million and full-year revenue of $999.3 million, which approached the low end of our guidance that we provided in January 2018. However, the EPS performance for both the fourth quarter and the full fiscal year were reasonably good and at the higher end of the January guidance due to better-than-expected gross margins and lower operating cost among other items. Jean will review our results in more detail later on this call. Although we were unable to achieve our original targets in fiscal year 2018, we made important progress with our product strategy. We have radically reshaped and expanded our product portfolio over the past couple of years, since acquiring the Danaher Communication business. Three years ago, our offering were largely appliances with varying levels of proprietary hardware with a primary use cases for our solutions being network performance and distributed denial of service. Today, our solutions are software centric, feature rich and applicable too much larger total addressable market that's beyond - expands beyond network performance and DDoS to encompass application performance, advanced threat and business intelligence. Due to our substantial investments over the last past couple of years, we moved forward with optimism that we'll start capitalizing on the attractive opportunities we see in fiscal year 2019. Although market conditions are still suboptimal and the transition to new accounting rules may dampen reported results in fiscal year 2019, we anticipate revenue growth this year and producing gross margin improvement in the process, as we see greater adoption of our software-based offering. Related to that, we are also advancing plans that we believe will help us further recollaborate…

Thank you, Anil, and good morning, everyone. Slide number 10 outlines my plan to cover recent wins and the quick preview of our upcoming user conference. As Anil mentioned, in the service provider market, many major carriers are starting to invest in new 5G network architectures. One early indicator of the potential upside of the 5G spending is our radio access network calibration services, which are used to predict signal coverage, interference and network performance, and thereby, improve capital and operational efficiency. We recently closed a multimillion dollar deal with a major North American mobile operator to calibrate 5G related millimeter wave frequencies across several U.S. markets. We expect healthy growth in this area over the next couple of years to support this customer and other mobile operators and web scale companies that are designing next-generation 5G and IoT networks as well as refreshing existing 4G radio access networks in support of new frequencies. In the enterprise market, Anil noted the opportunity we see to leverage our strength in network performance, to extend into other areas of IT. Last quarter, we won a deal valued at over $1.5 million with a major hotel operator, who realized our NetScout technology to monitor network and application performance tied to its reservation and rewards system. This win is a vital part of a major IT initiative to consolidate and virtualize the data centers and migrate applications to the cloud following a large acquisition. As part of this activity, this customer is using a combination of our ISNG and vSCOUT offerings to help them baseline system dependencies and achieve pervasive visibility into critical applications across an emerging hybrid-cloud environment. In the security area, Arbor has continued to set the standard for technology and market leadership in the DDoS market. Earlier this month, we announced…

Thank you, Michael, and good morning, everyone. This morning, I will review key fourth quarter and full-year metrics for fiscal year 2018. After that, I will review the guidance for fiscal year 2019. As a reminder, this review focuses on our non-GAAP results, unless otherwise stated, and all reconciliations with our GAAP results appear in the presentation appendix. All fiscal year 2017 and FY 2018 results reflects revenue recognition under ASC 605, and I will cover the potential impact of adopting ASC 606 in just a moment. Slide number 12 shows our results for the fourth quarter of fiscal year 2018. For the quarter, total revenue decreased 27% to $238.5 million. Our gross profit margin improved 150 basis points to 76.7%. The significant drop in revenue impacted operating profit margins, which declined substantially to 17.8%. Our diluted earnings per share was $0.36. Turning to Slide 13, I'd like to review key revenue trends for the full-year. Revenue in our service provider customer segment declined approximately 22%. Nearly two-thirds of the decline was attributable to the multiyear deceleration in spending by one of our large Tier 1 service provider customers. About 20% of the decline was a decrease in spending from all other service assurance provider customers and the remainder was due to a decrease in Arbor's DDoS revenues. Our enterprise vertical declined by approximately 10% in fiscal year 2018. Revenue for the core NetScout nGeniusONE offerings declined by approximately 5%, due primarily to softness in verticals such as healthcare and high tech, while larger verticals, such as financial services and government were relatively unchanged against last year. This was compounded by a mid-teens percentage revenue decline for the ancillary products from the former Fluke enterprise network area and a mid-teens revenue decline for Arbor's enterprise security products. For the full-year,…

[Operator Instructions] We'll take our first question from Eric Martinuzzi with Lake Street Capital. Please go ahead. Your line is open.

I appreciate the clarity on the ASC 606. I think that's important distinction to highlight. I was curious to know just as you talked a little bit about the weakness in FY 2018 and the multiyear issue with largest customer on the carrier side, and then the decrease from other service assurance customers. But I'm wondering how much of that is form factor related. In other words, does the guidance a year-ago, as we entered FY 2018, does that include maybe a greater percentage coming from hardware form factor as opposed to the software form factor?

Yes, I think so, Eric, there are effect of that. I think the challenge beyond those two large 10% customers, which we faced in last two, three years is the effect of digital transformation, that while in the industry is going through a transition to more software wait-and-see attitude on spending, moving to cloud and otherwise. We are also reinventing ourselves as a software company, even though a large portion of original NetScout was software-based, but we ship a lot of appliances. So our instrumentation volume is actually generally increased in most segments, but the price per unit has come down. But overall, this is - this disruption, while it was negative in the past, I think it's going to be a blessing in disguise moving forward. For example, we were never on server firms, because - and that's why nobody was using our product for application assurance. We were not on remote site. But now because we have vSCOUT products, which is small form factor, lower in price, we can actually go deep into the data center and into the cloud. So I think the good news, what we are excited about despite challenge in the past, I think mostly it's a positive effect of all the stuff we have been doing moving forward.

Understand. Sometimes you can learn a little bit about the future strategic direction of a company by the arrival of new directors. You just added two today, Al Grasso and Susan Spradley, does their arrival tell us anything about future strategy for NetScout?

I think not in terms of strategy, but they are willing to join because they endorse our strategy and they're very excited about it. And Al has a lot of experience on the security side. We are focusing more on the security, as the next new product we'll be announcing next month. And so he has - he is very excited about that. Su is on the carrier world. So getting some domain expertise on the Board, beyond what we already have will be very helpful. So I would look at it - strategy is not going to change, but it's a validation of strategy that they're very interested in joining. I mean, there's a lot of interest in this kind of board members and they decided to join us.

Thanks for taking my questions.

So just wanted to let the audience know that the slides and prepared remarks have been made available, both on the IR landing page and on the supporting materials page of the webcast. So if those who are interested haven't been able to find it that's where those materials are now located. Operator?

And we can take our next question from Chad Bennett with Craig-Hallum. Please go ahead. Your line is open.

Great. Thanks for my questions. I guess, either Anil or Jean. In terms of the product revenue portion of your segmentation, where did we end up in terms of the percentage that was software only or NFV this year in 2018? And what are the expectations for that percentage in 2019?

In 2018 the product revenue ended up in about the upper single-digit, so somewhere between 7% to 9%.

And I think this could - I mean again, when we are selling it we use the decision on software versus appliance versus virtual at the last step on the selling process. We are doing the rally. So we don't really push customers one way or the other, but this could be as high as 20% this year, but we have to see.

And is it still largely going to be kind of a - the service providers, obviously, going in an accelerated fashion towards that just networking in general, but are we going to see some of the software transition on the enterprise side of the business too or will that stay really appliance based?

I think you'll start seeing on both. It was practically zero on the enterprise side. But as we move more to the cloud, I think as earlier Eric had the question on some of the impact on the growth in the past was related to people not ready with virtualization and cloud stuff in the mainstream. And as those things are coming mainstream, I think that you'll see a lot of revenue on the software side, not only on the traditional on prem deployment, but definitely all the cloud stuff, the vSCOUT deal Michael talked about is all software.

Got it. And then, one last one for me. Jean in the guide for the year, I wasn't sure if the - I think you guys laid out $50 million of cost cuts that will be layered in throughout the year. Does the bottom line guide in margins factor that in?

No, the bottom-line guide does not factor - the earnings per share does not factor in any of the activities that have not occurred yet, including the divestiture of the tools business and any other cost management activities.

Okay. But we're expecting to realize some of - these are, kind of, planned and ready to the executed on, I guess, the $50 million?

The divestiture of the tools business is in process and based on where we're at the moment we would expect it would sometime probably be divested during the second quarter. That has, as we had put in the script, about 4% of a revenue impact with about the same amount of cost in there. So it should be negligible effect on earnings per share. The other activities that we discussed related to structure, going to be executed before the end of the first quarter. So at the end of our first quarter and in our earnings call for that, we'll update guidance appropriately.

Okay, real quick. Share count for the year, Jean, what should we use?

For the full-year, I think it will be - right now, I assume it will be around 80 million shares by the end of the fourth quarter. That will assume that the ASR is completed sometime in our Q3 and at the share price it is today. If the share price fluctuates, we'll update it accordingly.

Thanks so much.

You are welcome.

We'll take our next question from James Fish with Piper Jaffray. Please go ahead.

Thanks for the question. So the DDoS market is having a good growth environment, whether you want to talk about Akamai, Cloudflare, Arbor or others. However, when normalizing for the pricing changes made last year the growth at Arbor is still below the market, despite even competitors admitting that Arbor is a great product. Have there been any discussions of possibly spinning out the business so that there can be more focus on it from a pure-play perspective? And also, given the large breaches this past quarter, or at least the memcache attacks, was there a bounce back in the revenues you could recognize at Arbor networks, at least?

So first thing is, we are the most first - most focused company to own DDoS. If you look at all other companies, it's just a simple plus one thing, whether all the names you talked about, with the exception of a few. So I think there is an effect of we being the biggest player in the market. And I think there are challenges, but we are moving to a software-based solution. We are using some of the Arbor technology to grow bigger than the DDoS. DDoS market is good, but it's not as big as the one threat market. So with our focus in this area, we are going to release a product, which is a superset of the DDoS product. And it's in the advanced threat space. And there is a packet shaper product that I talked about. All this will be talked about at our user group meeting and be available by the end of June. And I think that's how we want to use the Arbor asset, continue to maintain our leadership, but not count on necessarily growth on DDoS portion, but grow our footprint in overall in the security market. And some of the enterprise growth expectations we have for this year is really because of that reason. And lot of our customers are very interested in this combination of technologies.

Got it. And then, I think the big question here is if guidance is conservative enough given the last years of kind of initial guides being cut later on. What makes you confident that the business will not be declining worse than the low single digits you're guiding to? And also, while all of your peers are actually getting a slight boost from profitability from ASC 606, you guys are actually guiding that you're not. Only looks like you're guiding for about 15% and 19% operating margins, which would be down year-on-year and yet the business it's not really growing. Can you walk us through these dynamics as to why it's going this way and that you're impacted this way? And why you aren't further reducing cost beyond sort of the $50 million run rate, given your only growing flat to low single digits?

Jean, you want to go with the ASC thing?

I can go over the ASC 600 effect and then Anil can answer the other parts of your question. ASC 606, we had from the TekComms mostly projects, as we talked about in the past there. Approach to selling was to sell the product along with implementation and milestones. And so basically in 606, the revenue recognition for those types of project changed. So the $26 million that we would've reported in fiscal year 2019 goes through retained earnings. And actually, the total amount is closer to about $35 million. So there's even a runoff in FY 2020, just based on the length of the project. And then, there is some associated support models that are changing, that will put those through our retained earnings also.

With operating margin comment, operating margin will be growing.

Operating margin would be growing on ASC 605 basis. Obviously, with a $26 million revenue headwind that is going to impact both your gross and operating margin reported results.

So adding to your comment about - we already mentioned that we'll be rather conservative in our guidance this year. And one of the reasons we wanted to talk about the long-term growth is saying where we are spending, what do we see the impact and if you look at the long-term stats for - moving over the four-year targets that looks very impressive. And we think that doing more cuts than what we're looking at are really going to compromise that model. And if you find during the year that those things are not panning out, then we will make the adjustments. And second is we are making sufficient cuts, but unfortunately, because of the timing, they will not show impact this year, but you see an impact in the next year and moving forward.

Got it. Thanks for the clarity there.

We'll take our next question from Kevin Liu with B. Riley. Please go ahead. Your line is open.

Hi, good morning. As it relates to 5G it seems like you guys have a little bit more of a positive outlook in terms of what that can do for your business. What's changed there in terms of the opportunity that you see? And is the growth there really driven more by just the refresh cycle or are you seeing kind of newer opportunities or network capabilities that you're looking to monitor?

So the items which Michael talked about are really in the pre-deployment state. There's the calibration business. And that's not necessarily our core business. But that shows that if you become incumbent, while we have reinvented ourselves and maintained our leadership despite some of the challenges we saw, but one of the rewards of the incumbency is that you get to play in the next generation. It's not a refresh cycle in terms of replacing all of our instrumentation. I think the bigger refresh cycle is coming from the cloud and virtualization. But knowing that we are in the front of the line because of our incumbency and what we have done allows us to participate in the 5G opportunity. It's not, as we mentioned, certainly, this year, is not going to the big opportunity, but I think where incumbency makes us sticky when the 5G revenue comes along.

Got it. And then more broadly as you look to your longer term growth targets, obviously, implies bit of acceleration from this year. To what extent is that driven by enterprise versus service provider and how much of it hinges on some of the new products you're introducing?

So it's the new technology and new products. So yes, we see higher growth on the enterprise side than on the service provider side. And enterprise growth is a blend of service assurance and security. So we are announcing a product related to four, five products, which all combined together to deliver what we call smart data core. And which is a consolidation play with other security and monitoring tools as well as our expansion to our bigger market beyond traditional NPM and DDoS in the enterprise space where we have had the leadership for many years.

Thank you for taking the questions.

We'll go next to Alex Kurtz with KeyBanc Capital Markets.

Yes. Thanks guys. Just want to follow-up on the last question for the long-term targets. We're talking about pretty strong re-acceleration assumptions in the topline to get to mid-single-digit CAGR or better from the fiscal 2018 period to fiscal 2020, 2022, Anil. I mean is that based on a recovery at some of your top SB account? I mean that's expectations for some really strong growth from 2018 to 2022. So can you just walk us through kind of the step functions to get there?

Well, first of all, one of the challenge - we have some growth here and there in the last couple of years, but because of the massive impact of those two providers, those benefits were not seen, but we have been making a lot of progress. And we think that the dynamic which is going to play out in service provider is the price per unit going down. It's going to be actually a positively adjusted by the volume going up. And that's going to be the effect on the service provider side. We are the number one player and we saw the negative effect of that. And then, for the negative effect of lower price because of software model, but those two effects are behind us. So the negative drag of the service provider will basically stop, starting with this year. On the enterprise side, we have really not played in the securities space. We have played in a narrow portion called DDoS. And people are looking for our solution for the security market. And some of the data expertise we have is unique in the industry. And that made us a big player on the application performance and network performance side, but that technology has not been leveraged on the security side by any company like us. And that's what we are excited about. And then we have not done any joint selling of Arbor products into NETSCOUT account. So I think the positive stuff is coming that we could drive 5% to 10% growth. And we could have a big impact on EPS because all other stats are lining up whether it's tax rate, whether it's share count, whether its margins and we, yes, we still have to do that, but I think that's a target we can achieve.

So lower price points in the service provider segment will drive higher volume along with maybe along with some recovery and just the core spending with those accounts from where they were, say, two years ago.

That's right. And I think one of the other example I give to people is that people are spending more money on Uber than on taxis, even though, price per ride is lower. And that's a digital transformation, but when you are the Uber and the taxi company, which we are, it causes a disruption in the short term. And that's what we have been managing through. So I see a lot of excitement with our customer base. And I think we have to prove it to investors and by this year that we are on the trajectory.

Just last question here. Jean, for the fiscal 2019 assumptions you're speaking to down modestly in service provider segment for fiscal 2019 in your assumptions. Is that double-digit? I don't know what modest means anymore for that segment. So how would you - is there a range that you can give us on what that could look like?

Probably at this time we really don't give guidance out in detail that way. Sorry, I would not want to guide to that level at this time.

Clearly you can have orders that end up skewing service provider just given the lumpiness of some of the opportunities that we're looking at.

All right, fair enough. Thank you.

Thank you.

And we'll take today's final question from Matt Hedberg with RBC Capital Markets. Please go ahead.

Hey guys. Thanks for taking the question. Just one from me. In the past you've noted that enterprise sales cycles may have been lengthening, some of that may have been due to customers thinking through their clouds footprint software-only deployments. Some think you're having good success there, but I'm wondering, and maybe I missed this in the prepared remarks, but could you comment on how sales cycles trended in Q4 and is there anything you guys can do operationally to shorten that curve. And accelerate those sales cycles into this fiscal year?

So one of the biggest thing was in the past, I think at least two factors, which are new right now. One is that it's much easier - we feel that we have the best technology for that advanced threat space, yet we have not leveraged that for the security market. And I think that has shorter sales cycle, more or less scrutiny and then our traditional market, so that one change. And second is we could potentially consolidate other tools in the security space with the respective share of products. So we are less on a mission versus like we had in the past, but more on helping with the customers who already has a mission to spend. And I think those are the two effects, which is getting us there, and third is, as we talked about with the vSCOUT win, we were never on certain parts of the infrastructure. We were not in the server firms. We were not in the remote sides and those are the markets we couldn't address with the price points we have. With the vSCOUT and some of the new things happening in the cloud, we have access to those budgets now. So all these is creating a dynamic, obviously, it requires couple of years of effort to get to this point. And I think this will have the effect on shortening the sales cycles.

Got it. Thanks a lot guys. Best of luck.

Thank you.

Thank you.

And this will conclude today's Q&A session. I'd like to return the floor to Andrew Kramer for closing remarks.

Thank you, Keith. Thank you, everybody, for tuning in this morning. If you do have questions regarding the call today then feel free to reach out to Investor Relations. And we look forward to seeing our shareholders and analysts over the coming couple of months at a variety of investment conferences. Thank you, very much.

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