Ladies and gentlemen, thank you for standing by and welcome to NETSCOUT's Second Quarter Fiscal Year 2019 Results Conference Call. At this time, all participants 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. I would now like to turn the call over to Andrew Kramer to begin the company's prepared remarks.

Thank you very much, Erica, and good morning, everybody. Welcome to NETSCOUT'S second quarter fiscal year 2019 conference call for the period ended September 30, 2018. Joining me today are Anil Singhal, NETSCOUT's 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. You can advance the slides in the webcast viewer to follow our commentary. We will call out the slide number we are referring to in our remarks. Both the slides and the prepared remarks can be accessed in multiple areas within the investor Relations section of our website at www.netscout.com, including the IR landing page under Financial Results, the webcast itself, and under the Financial Information section on the Quarterly Results page. Our agenda is as follows. Anil Singhal will briefly review our second quarter financial performance, highlight key trends and recent developments, and discuss our outlook for fiscal year 2019. Michael Szabados will briefly review recent customer wins that help highlight some of our near and longer-term growth drivers, as well as recap go-to-market highlights. Jean Bua will then review our second quarter results, key first-half performance metrics, and fiscal year 2019 guidance. Moving on to slide number 3, I'd 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 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 guidance for NETSCOUT; expense management and related cost reduction actions and related benefits; market conditions, technology trends, customers,…

Thank you, Andy. Good morning, everyone, and thank you for joining us. Let's begin on slide number 6 with a brief recap of our second quarter non-GAAP results. Our second quarter fiscal year 2019 performance was solid. We delivered second quarter diluted EPS of $0.25 on revenue of $224.0 million. Our top line performance reflected lower revenue across our service assurance and security product lines within the service provider customer segment and relatively flat revenue in our enterprise customer segment. We also delivered improved gross margins and continued to reduce costs during the second quarter, both of which contributed to the strong diluted EPS performance. Jean will review our second quarter results in more detail in a few moments. During the second quarter, we made important financial, operational, and strategic progress. We took actions to lower our operating costs by divesting a lower margin, noncore business, restructuring key areas within our organization, and continue to manage expenses. At the same time, we continued to invest in key development projects and go-to-market initiatives that are aligned to our most promising near and long-term growth initiatives. As we look into the second half of the fiscal year, we are seeing many of the headwinds that have affected our top line in recent quarters dissipate and believe that they will be largely behind us as we exit this year. I would like to briefly expand on this. In our service provider service assurance product area, we are seeing revenue from our two largest carrier customers stabilize after substantial declines in recent years. Just as important, we believe our progress to fortify our incumbency at many of the other largest mobile operators and cable customers will contribute to improved top line results in the second half of this year and beyond. In the enterprise,…

Thank you, Anil, and good morning, everyone. Slide number 11 outlines the areas I plan to cover. As I highlight recent wins, I will also intersperse some comments about related go-to- market activities. In the service provider market, we are seeing Tier 1 North American carriers aggressively plan for 5G, while top regional carriers in international markets are investing in the build-out of their 4G/LTE networks. We recently received a substantial seven-figure order for our ISNG software platform as part of a multiyear project with one of the largest carriers in the Asia Pacific region. This relationship has evolved and expanded over the past several years since an initial deployment of legacy hardware probes. More recently, as part of its plan to increase the speed of deployment and improve its capital efficiency, while keeping pace with robust subscriber growth, the customer began rolling out our ISNG software across its network. This mobile operator is also using our packet flow switch software capabilities to efficiently feed traffic to our ISNG platform, while also benefiting from our nGenius Business Analytics product to gain greater insight into subscriber experience. This customer's success in migrating from hardware-based probes to a scalable software solution that unlocks the power of our smart data underscores the reasons why Frost & Sullivan recently recognized NETSCOUT with its Visionary Innovation Leadership Award for the global network data analytics industry. In the enterprise, we are making steady progress with our initiative to provide customers with consistent visibility into their application workloads across conventional data centers, private clouds, and the public cloud. Using our smart data solutions, enterprises can deliver consistent and high-quality user experience before, during, and after cloud migration. As Anil noted, we have established relationships to list our application performance management solution on the marketplaces of both Amazon…

Thank you, Michael, and good morning, everyone. This morning, I will review key second quarter and first-half fiscal year 2019 metrics, along with our updated guidance. As a reminder, this review focuses on our non-GAAP results, unless otherwise stated, and all reconciliations within our GAAP results appear in the presentation Appendix. In addition, due to the sale of the HNT tools business in mid-September, I will highlight certain revenue trends on a pro forma non-GAAP basis, which excludes the HNT tools revenue. Regardless, I'll be sure to note when the comparisons are pro forma versus reported. Additionally, as a reminder from last quarter, our second quarter results reflect the reclassification of certain subscription-oriented security offerings as services rather than products. Prior period revenue and related costs for those offerings were reclassified to conform to the current period presentation for comparability purposes. That detail is available in the attached financial tables of our press release, in the Appendix of our conference call slides, and it can also be downloaded from the Investor Relations website. Slide number 13 details our results for the second quarter and first half of fiscal year 2019. Total second quarter revenue of $224.0 million, which was at the higher end of our targets, declined 14% due to softness across our service provider customer segment, while our enterprise customer segment posted flat top line results. Excluding ASC 606 and the timing related to the sale of the HNT tools business, which combined to be a net benefit to revenue of approximately $5 million, revenue would have been at around the midpoint of our targets. Despite the overall decline in revenue, our gross profit margin of 76% increased by 0.5 percentage point. Operating expenses declined by 11%, due primarily to lower head count and related personnel costs. We reported…

Thank you. We'll take our first question from Chad Bennett with Craig-Hallum. Please go ahead. Chad, your line is open.

Maybe they are on mute.

Well, why don't we go to the next question, operator. We'll get back to Chad.

Certainly. We'll go next to Eric Martinuzzi from Lake Street. Please go ahead.

Hey. Just had a question regarding the growth opportunity. So I'm referring to slide 8 in the presentation here, and to me I think the things get more exciting at NETSCOUT as far as investment opportunity when the service provider business kind of comes back on track. And the bullets that you highlight under the growth opportunities there, we're talking about talent growth outside the U.S., there's the 5G potential, and then kind of DDoS was a little bit disappointing and we remain optimistic. But are there any green shoots kind of, so to speak, in that service provider business, where these growth opportunities that you're outlining give us some sense of encouragement? Because really with the bring down on the DDoS for the back half of the year, I'm just looking for some encouragement that that service provider business gets back to growth.

So I think there are a lot of things – I mean, green shoots in terms of potential and excitement about next year, there are few things, additional things. We talked about 5G, depends on how much traction is there in 5G. Also, I think finally virtualization and NFV projects are coming to maturity level in terms of people wanting to spend. There are other parts outside of U.S., who are investing in 4G. We announced one big opportunity with regard to last quarter. There'll be more things. And then in April, when we have our user conference, we are planning to announce something big in the security space for service provider. If you look at security opportunity is largely DDoS today and DDoS is partly service provider and partly enterprise. But in the main security advance threat area, we will be talking about things both for the enterprise and service provider segment. We have really not applied security to the mobility part of the network. We have been basically service assurance. So those are some of the things which we didn't talk about today, because it's too early to announce, but we should be able to share it after the end of this fiscal year.

And just keeping the focus on service provider, you talked about your two large North American Tier 1s being stable. By stable, does that mean the revenues are flat and are expected to remain flat, or is there – can you give us any visibility on those North American Tier 1s?

Yeah. We are not counting on – I mean, there could be upside, but yeah, what we meant was, it's not going to deteriorate further this year or next year. And margins will possibly improve because of movement to software models.

Understand. Thanks for taking my questions.

Sure.

Thank you. We'll go next to the line of James Fish from Piper Jaffray. Please go ahead. James E. Fish - Piper Jaffray & Co.: Hey, guys. Congrats on the upside this quarter. My first question, competitively, we've been hearing kind of rumblings more from the traditional networking guys adding their software assurance capabilities onto their offerings. Are you guys seeing more pressure from those guys per se, in takeoffs (00:38:48) compared to kind of the traditional peer group that you guys usually compete against? Thanks.

Yeah. Sorry, go ahead. I didn't want to interrupt. Is that the – additional thing on the question, or that's it? James E. Fish - Piper Jaffray & Co.: Just that's it.

Okay. So I think you're referring to the competition from NEMs, and when I look at the history of NETSCOUT since I started 30 years ago, every time there is a technology turn, whether it's going from routing to switching in the mid-1990s, going to – carrier going to IP in mid-2000s, later on with security, and now with virtualization, 5G, there is a feeling that standard solution won't survive. But customers are looking for – and that gives a impression that people like Huaweis, Ericsson, Ciscos, they're going to provide embedded solution. And every time this theory has been proven wrong, there's always a competition with them, but this somehow escalates at these points. And people are looking for multi solution, which is independent of multiple vendors. No carrier goes to a single NEMs for they don't want to depend. They, typically, will have a multivendor environment, and we are the only one who can give you a single pane of glass in that multivendor environment without any biases and all those. So, yes, competition is there. Every time we go to these new things, it creates some disruption. But in the end, it creates more awareness of what we do and usually this doesn't really affect our growth. In fact, it improves our visibility and potential. James E. Fish - Piper Jaffray & Co.: Got it. And then maybe just on the Arbor side, the DDoS business, where do you want to secure it from, some of the public CDN guys out there or some of the private guys doing well in the space? Seems actually like a very robust market. I guess, why is Arbor not more engaged with kind of the broader market and winning more deals? I get that it's more service provider exposed, but I'm just curious as to why that business is actually in more of a decline on easier comps this year.

Yeah, that's a good question. And it's natural to see that because when you look at the market studies, it looks like that market is growing. I think two answers to this is, we are quite big. We are the number one player from a carrier DoS perspective. And so we were the most affected by – if you remember, two years ago we have like outstanding year, 20% year-over-year growth. That was because (00:41:40) attack and people buying lot of insurance and capacity. So we are somehow paying the price of this as a result of that, plus U.S. carriers curtailing spending on all fronts, including service assurance, which we discussed earlier. At the same time, we have really not invested in enterprise DDoS opportunities and not taken advantage of some of the NETSCOUT customers who we could cross-sell. So we have invested that. This year was a transition year and we're going to be announcing our new security strategy, including our DDoS solution at our User Conference in April. And after that, I think we'll be able to mitigate some of the challenges on the service provider, in the sense that our negatives are bottoming out similar to service assurance, and our new strategy will start taking off. And the new strategy will have a different way of competing with CDN-based solutions, like Akamai. And so, I guess, that's basically the commentary. Yes, we have been down. There are some good reasons for it, partly because of new investment required on enterprise and reduced spending on service provider, which largely affected NETSCOUT more than other people. But I think with our new strategy, we are going to leapfrog the competition and start going again next year. James E. Fish - Piper Jaffray & Co.: Got it. Thanks, Anil.

Yeah.

Thank you. And we'll go next to the line of Alex Kurtz with KeyBanc Capital.

Good morning, everyone. Anil, just on the 30% comment you made about software in the service provider segment, is there a way to help investors understand what that number could be in more definitive terms, with specific timelines over the next couple of years? I think it's a very encouraging sign that you're seeing uptick in that adoption, but it's also creating some headwind to revenue that is hard to calculate every quarter. So two things, are you able to say by, say, fiscal 2021 you think that at least half that business or more could be software? Maybe you have to come back another time. And then, Jean, is there a way to calculate every quarter what kind of the revenue impact is as some of these service provider customers transition to software versus buying the appliance?

So let me just mention. So, Alex, good question and I think we talked about it in the past also. So, interestingly, that for large service provider deals, we are not seeing a revenue erosion because of moving to software model. And so, for example, when we are using the software model for this big deal which we announced recently, and almost a $50 million to $100 million deal we had announced in the past last year, if you remember, Alex, our actual spend on NETSCOUT increased. Because of the software, we came to price points which allowed us to mitigate the price per unit. So I think overall in terms of percentage of software, yes, in two years getting to 50% in the service provider from current 30% is very possible. And I think short-term effect of revenue decline because of price per unit go down is actually being made up in many cases, or most cases, by increasing volume and better competitive situation, which is making our technology more pervasive.

Okay. So, I guess, no question for Jean then on that point. Just on your two big domestic operator customers, what would it take to change their momentum with you? It sounds like 5G could be the answer, but it's not clear that's going to happen next year. So what are the top one or two things that would have to happen to get those two accounts back to, say, maybe 70% of what they used to be?

So I think, obviously, people like to hear we'll get back to those days. I think our strategy is to not depend on those to do 70%. So we think that that was the problem. We should not have a 20% customer, and at that time we had it. We are moving in direction where we'll have a much broader customer base. We are still going to be the biggest vendor for these two providers, even at a 5% – so they're like 5% type customer now, and I think it is going to go slightly up and down, but we are not counting on, when we have provided the growth estimates, the plan for next three years, whether it's margin or growth rates, none of them is depending on these two providers doing a much bigger share of the revenue than they do today.

Thank you.

Yeah.

Thank you. We'll go next to Matthew Hedberg with RBC Capital Markets.

Hey, guys. Good morning. Thanks for taking my questions. In your prepared remarks, you talked about vSCOUT and vSTREAM aiding your APM business and, I think, both of them are available now on AWS and Azure. Can you talk a little bit more on how these products might help the enterprise segment? And maybe just a refresher on what you see as the competitive landscape there.

So when we look at that – see, we are positioning our company as a smart data company, where we say we will provide visibility no matter where you deploy the application. There are players on the cloud side. There are start-ups on the AWS side. And there are players on the data center side like we were. And there's competition in all three area, but there is no one company which does a great job on providing single pane of glass across all these areas, hybrid cloud environment, public, SDN, SD-WAN, or data center. And that's our differentiator. And in that vein, we don't look at the revenue for vSCOUT or vSTREAM as particularly important by itself because we look at – we provide the complete picture. And customers are deploying applications in various places and they have a hybrid environment and they need NETSCOUT solutions rather than bits and pieces, which they'll have to put together from multiple vendors to do that. So our differentiator is vSCOUT/vSTREAM completes the picture. We don't know when the full transition to cloud is going to happen, but with our software model we have similar margins in all these areas. And I think the margin – the revenue contribution from cloud and vSCOUT and vSTREAM will remain small for short term, but it has enabled the bigger sale, overall sale. Michael, you had something?

Yeah, I wanted to add that a number of our customers, we are seeing a trend that IT is becoming a broker of multiple different data center services, whether public cloud, private cloud, or their own on-prem offerings. And in this role, we are finding a new use case. We are their key tool to be able to migrate how their internal customers pick the right choice or move around these different cloud choices or data center choices. So we are becoming an enabler for this kind of a new IT behavior.

So I think just to summarize what Michael is saying is that, having an end-to-end solution, and it's a big buzzword end-to-end, everyone talks about it, but end-to-end solution with a single architecture where you can compare before and after, pick up the right choices, provide the same visibility, and not just consolidating varying data sources, is our differentiator. So we compete with cloud-only players by saying we have data center also. We compete with data center people deployment saying we have cloud also. And nobody had the A plus B plus C story like we have.

That's great. That's helpful. And then, Jean, in your prepared remarks you noted the difficultly, I think, to forecast the split of revenue between Q3 and Q4, some timing assumptions there. But I think per your guidance, Q4's expected I think total revenue about 13% of 14% sequential growth into Q4. That's a little higher than we've seen over the past several years. I guess, my question is, when you think about the second half in general, can you help us on your visibility of just large deals in general on the product side and sort of the comfort level around those. And then I think federal too, I'm sort of interested in that as sort of an initiative as well.

So our guidance, as Anil said, between Q3 and Q4 is a little uncertain, mostly because we probably have at least three double-digit in the millions deals that we're finishing projects for. They're all service provider that we're finishing some projects on and we just need to get acceptance from the customer. So whether that happens on December 31, it would be a Q3 revenue; if it happens on January 1, it becomes a Q4 revenue. And then just traditionally, we have always a Q3 and Q4 heavier skew due to calendar year-end budgets, and then the new budget coming in in January plus just the accelerators that our sales team are in to be able to get to certain incentives that are important to them.

Just to add one thing. So the $20 million gap is not a visibility gap. It's a Q3 versus Q4 visibility, not a second half visibility gap. And if it comes to the high end of the range in Q3, then it won't be 13% to 14% in Q4. It'll be much less.

Okay. So basically you're saying that – more the question is when the deals close between Q3 and Q4, not necessarily if they close in the second half. Sounds like your confidence that these will close in the second half is high.

Yeah. So these deals are mostly deals that have already occurred, meaning the order's already there and we've been doing work on them. And so it's just a matter of – under our control when the projects are completed and implemented, and then under the control of the customer as to for revenue recognition when they agree and give us acceptance. And like I said, if they did it on January 1, it would be a Q4 event. If they did it on December 31, it would a Q3 event.

Got it. Super helpful. Thanks, guys.

Thank you.

Yeah.

Thank you. And we'll go next to Chad Bennett with Craig-Hallum Capital Group. Please go ahead.

Hey. Good morning. Thanks for taking my questions. And I'm hopping between calls, so hopefully I'm not redundant. So I think in the prepared remarks you talked about 30% of service provider, I believe, product revenue for the first half being software-only. Do we have a sense of maybe where we – again, if everything goes to plan, where you could end the year as a mix of service provider product revenue from software-only solutions?

I don't know, Jean – I think this is probably in the same range.

Yeah. I think we would say right now...

Same range.

Yeah, for FY 2019, we're probably – I'm just doing a quick thought for a second – we're probably – given what I had just talked about with the projects completing, 30% is probably a good target for full year of FY 2019.

And so the three double-digit million deals that you just mentioned on the prior question, those are all software-only? Is that safe to say?

I would say that one ...

Two out of three are...

Yeah, probably two out of three are mostly software.

Okay. Got it. Just on the DDoS expectations for the second half, do you think – I understand kind of the over-buying phenomenon last year and how you're kind of absorbing that this year. Is there anything else in the overall DDoS market that you believe has changed since last year?

No, that's it – for us, I think overall market is growing slightly. And we have been more focused on service providers and we have been the biggest player in service provider, and that we are the most impacted. And that combined with the U.S. carriers, so we are – the business is really impacted in Tier 1 U.S. carriers or U.S. carriers deploying DDoS, which is we sort of were the biggest player in that. And we saw the similar effect two, three years ago in the service assurance area, as we talked about earlier. So I think this is the last year, where even though we'll grow in the second half versus the first half, overall the year will be down. And from next year we'll start from a lower base and start growing again.

Right. And maybe the last one for me. How much – I guess, as much as you can tell – well, you probably can tell – how much implied 5G spend is in your second half guidance? And I assume you believe that will meaningfully change or improve heading into next fiscal year.

Yeah. No, the next fiscal year is too early to tell, but I'll just make a comment about that in a minute. But there's very little in the second half for 5G, but it's very – if we compare to zero versus last year, then, yeah, it's significant. But the next year, it's all going to depend on 5G rollout – the speed of 5G rollout. And I mentioned about a single pane of glass comment in response to a previous question. Why customer would prefer our cloud solution versus other people because we cover all sides of the house. We provide – in the hybrid environment we are the best solution. Similar to our two tier, (00:57:52) we talked about why we are competitive against NEMs is because we provide a true vendor-independent solution. Same story applies to 5G. When you have a call going through 4G, 3G, 5G networks, you need a single pane of glass to look at the quality of the call, troubleshoot, and all those. So our reestablished incumbency in 4G area because of software and better price point, not just better technology, puts us in front of the line for 5G projects. So it will all depend on how fast 5G rolls out. But if 5G is not rolled out fast enough, then capacity will be built on the 4G side. And either case, we should see some growth because of that.

And just to be clear, Chad, the 5G-related projects is that, part of our thinking for this current fiscal year are tied primarily to calibration services that are used to design those 5G radio access network infrastructures for 5G. So, it's a different capability than the traditional service assurance network monitoring solution that we – it's been deployed across 3G, 4G, and will eventually be deployed for 5G.

Right. Good color. Thanks for fitting me in.

Sure, Chad.

Thank you. And now I would like to turn it back to Andrew Kramer for closing remarks.

Thanks, Erica. I'd like to thank everybody for tuning in this morning. I know it's a busy day for everybody. Look forward to seeing you out on the road at different investor conferences. If we're in a money center of yours, we'll certainly be looking forward to seeing you there. And otherwise, we'll talk to you in the new calendar year. 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. And have a great day.