Ladies and gentlemen, thank you for standing by and welcome to NetScout's fourth quarter and fiscal year 2019 results conference call. At this time, all parties are in listen-only mode until 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.

Thank you Aaron, and good morning everybody. Welcome to NetScout's fourth quarter and full fiscal year 2019 conference call for the period ended March 31, 2019. 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 referencing 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, in the webcast viewer itself, and under financial information on the quarterly results page. Our agenda is as follows: Anil Singhal will briefly recap our fourth quarter financial and full year results, highlight key trends and recent developments, particularly as they relate to our outlook for fiscal year 2020. Michael Szabados will cover go-to-market highlights and recent customer wins. Jean Bua will then review our fourth quarter and full-year results in detail, and share our fiscal year 2020 guidance. Moving to Slide 3, today's conference call will include forward-looking statements. These statements may be prefaced by words such as anticipate, believe, and expect, and will cover a range of topics that are not strictly historical facts, such as our financial guidance, our market opportunities and market share, key business initiatives, and future product plans along with their potential impact on our financial performance. These forward-looking statements involve risks and uncertainties and actual results could differ materially from the forward-looking statements due to known and unknown risks, uncertainties, assumptions, and other factors, which are described on this slide and in today's…

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 quarterly and full year non-GAAP results. Today's results were fundamentally consistent with the preliminary results we reported in early April. Our fourth quarter revenue of $235.2 million was approximately $15 million lower than we expected, primarily due to a delayed revenue recognition on the largest phase of a service assurance project at an international mobile operator. Unfortunately, this customer's implementation schedule progressed slower than originally planned, and we were unable to backfill this given the ongoing spending challenges facing our service provider customers. Nevertheless, excluding the since-divested HNT tools revenue from last year's fourth quarter, we generated overall organic revenue growth of 3% driven by an 8% underlying increase in the enterprise customer segment driven by strong growth in DDoS security and relatively stable service assurance revenue. We successfully absorbed the top-line shortfall to deliver fourth quarter diluted EPS of $0.66 due to higher gross margins, lower operating costs, and a lower tax rate. Despite falling short of our top-line ambitions in fiscal year 2019 with full year revenue of $911.5 million, our diluted EPS of $1.38 was above the midpoint of our original targets, due in part to the proactive initiatives we implemented to reduce costs and tightly manage spending earlier in the fiscal year. Overall, we made important progress during the past fiscal year on multiple fronts, which we believe will set the stage for generating better and more consistent results going forward. Let's move to Slide 7 for some further perspective into this. As you know, NetScout's topline has been negatively impacted over the last couple of years, largely as a result of reduced carrier spending, especially at our 2 largest tier-one customers.…

Thank you Anil, and good morning everyone. Slide 11 outlines the areas I will cover. As Anil mentioned, we held our annual technology and user forum, Engage, last month in Nashville. It was a resounding success with 700-plus attendees spanning our service provider, enterprise, government, and partner universe. Across both customer segments, digital transformation has become the common theme. We are well positioned to help our customers reduce the risks and maximize the rewards of their highest impact digital transformation initiatives that include 5G, cloud, application performance, and security. I will intersperse some additional observations from Engage as I cover several notable wins from the past quarter. In the service provider market, carrier marketing around 5G is increasing, although the infrastructure build-out and rollout of 5G services is moving at a more measured pace. Our recent success with a tier-one U.S. service provider demonstrates our potential to leverage our 4G incumbency to win new 5G-related projects and participate in all phases of the 5G network lifecycle. In the fourth quarter, this carrier awarded us a mid-seven figure deal to help calibrate the design of its 5G radio access network or RAN. This long-standing customer is also starting to deploy our 5G-compatible RAN monitoring tools, as they begin to launch new 5G-related services in limited markets. In the enterprise, our range of integrated offerings is enabling our enterprise customers to move forward with major datacenter transformation and multi-cloud migration strategies. To that end, we have continued to advance our relationships with major public cloud vendors like AWS and Microsoft Azure. NetScout is now an advanced technology partner at AWS and we have recently achieved a co-sell ready status with Microsoft Azure. This enables us to actively collaborate with Microsoft's sales teams to support customers who are migrating and managing applications in…

Thank you, Michael, and good morning everyone. I plan to review key fourth quarter and full year metrics, along with our guidance for fiscal year 2020. 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. In addition, due to the sale of the HNT tools business in mid-September, I will highlight certain revenue trends on an organic non-GAAP basis, which removes HNT tools revenue for the applicable period referenced. Regardless, I will be sure to note the nature of any such comparisons. Slide number 13 details our results for the fourth quarter and full fiscal year 2019. Focusing on the quarterly performance, we reported revenue of $235.2 million. Fourth quarter revenue declined by 1% on a year-over-year basis, but grew at 3% on an organic basis excluding the HNT tools business. Revenue in the service provider customer segment was relatively flat while our enterprise customer segment grew 8% organically. On a comparable organic basis, product revenue grew nearly 9% and service revenue decreased 2%. Our fourth quarter fiscal year 2019 gross margin was 79%, or a 2.3 percentage point increase from the same quarter last year largely due to favorable product mix shifts. Quarterly operating expenses were down by 17% from the prior year due to lower personnel costs primarily resulting from lower headcount. We reported an operating profit margin of 29.2% with diluted earnings per share of $0.66, which ended up higher than our April 9th estimate due to a lower-than-expected tax rate, as we finalized our year-end numbers under the first full year of implementing the new tax code. As Anil mentioned, we completed our restructuring program during the fourth quarter. We ended the fiscal year with 2,581 employees, which is a…

[Operator Instructions]. We'll take our first question from Matt Hedberg with RBC Capital.

In your prepared remarks, you outlined some of the assumptions of getting to low single digit growth in fiscal '20 here. And I guess in the enterprise segment in particular, you noted contributions or I guess I'd say minimal contributions from some of the new Arbor Threat Products. But can you give us a little bit more granularity about when you think about this sustained enterprise growth? What are some of the key drivers that we should be watching as the year progress on the enterprise side?

So Matt, we talked about -- when we talked about the Arbor product, we wanted to make sure there's no confusion between the previous product from Arbor, Arbor Edge Defense, and other products in the DDoS area from the new product called Arbor Threat Analytics. So we are saying minimum traction or some contribution, especially in the second half of the year on the ATA product called the Arbor Threat Analytics. But there is a good cross-selling potential as we have combined the two [indiscernible] forces. Only about 10% of the NetScout enterprise customers use the Arbor DDoS and Arbor Edge Defense product. So that's one area. Other is that in the datacenter transformation, our ability to allow people to get a single pane of glass for before and after, in the cloud, on-prem, server farm visibility is a new area, which is generating a lot of interest. So those are the two big reasons in the short-term why we expect enterprise revenue growth and we think there will be sufficient growth overall as a result of that in the single digit, despite the fact that there will be continued challenges on the service provider side, even though we think most of the challenges have bottomed out.

Then maybe as a follow-up, Michael commented about advancements with AWS and Azure. And that kind of caught my attention. I know we've talked about this in the past for you guys, but maybe a little bit of an update about how that relationship or how those relationships, I should say, should not only help customers but also how you kind of think about that eventually impacting your growth.

Well, we are now an APN member, which is Advanced Partner Network remember with AWS. And that means that they can and do reference us in working with their customers in their migration projects. So we are now part of the portfolio of vendors that AWS is publicly referencing as helpful or being part of a migration project. In the Microsoft case, because cross-sell ready means that Microsoft sales people are quoted and are credited that is paid on leads that involve NetScout. Also, any activity that either goes through to Microsoft or even just registering a deal that involves NetScout is remunerative [indiscernible] for them. So these are material relationships but I expect that the symbolic nature of it and the fact that we get the credibility from these two top vendors, we are part of the technology platform to migrate. I mean that's where the real impact is going to come over the next year or two. I think just to mention that one of the challenge of deploying on-prem our solution is people's concern that what will happen if I move some of my application assets to Azure or AWS. So regardless of how much revenue we get numerically from this relationship, that burden is taken away and people don't have second thoughts on deploying your solution because they feel that it's going to be evergreen no matter where they are on the application. So these relationships that Michael mentioned sometimes are just a check off item, sometimes create confidence for people, and then other items it cuts down the sales cycle because people don't have any fear that what's going to happen to their investment as they migrate their apps or workloads to the cloud.

Our next question comes from Chad Bennett with Craig-Hallum.

First, the services assurance product revenue. I think you indicate on the call that roughly 30% now is coming from software and it grew roughly 40% year-over-year last year, which I think is good color. What are the expectations or embedded expectations for software growth in that segment this year? And obviously, if you answer that, we can figure out where it exits the year, but do you suspect it to sustain that type of growth this year?

This will continue and the goal in this area is over the next 3-year period to get to 70%, 80% of the revenue of service provider. And some portion of the enterprise will come from software. So yes, I think expect this trend to continue without maybe going over the exact number. We are -- customers are deciding. We have both options and customers find a better price point for them and it's great for us because it's better margin for us. As a result, it's a win-win for both sides and that's why I think this trend will continue and maybe even accelerate.

Then maybe one quick follow-up for me related to that. The top 2 -- your top 2 tier-one customers on the service provider side that you indicated have stabilized now, have you had any success in penetrating those two accounts with your software offering?

The software offering consists of two parts. One is the analytic applications and other is the instrumentation. Instrumentation is vSTREAM, ISNG, and these two accounts have very, very high deployment of instrumentation maybe to a saturation point on 4G. So we have not made progress. They don't need anything from us. But on the analytic side, yes, they are buying software. But when they move to 5G, they'll have to use the software version or they would prefer to use the software version. Last time, these two accounts are dominated by our TekComm products, which were all hardware based. And so because of that, we have not seen traction from them on the 4G side for using the software solutions.

And we will take our next question from James Fish with Piper Jaffray.

Over the last few years, there's been some movements during the year and so my first one would be what could go right or wrong this year that would make you either exceed or miss your guidance given -- which would pretty much over the next few quarters make it so that NetScout hits their mark here as opposed to the last couple years where we've had some kind of adjustments midyear on the initial guidance.

Maybe I'll just mention some high level things and maybe Jean can add to that commentary. So I think the dynamics are different than in the last two years. We had -- or last three years. We have [indiscernible] reliance on these two providers and that has, as I mentioned, largely bottomed out. We have more cushion on the margin side. We have reduced the cost structure. All that will provide some headroom. Also, if you notice the last -- we are hoping that this year is less back end loaded in the second half than we had last year. And so all those things reduces the risk. Unless there is some further change in the service provider segment of the market, which at this point we don't see, I think we feel good about the risk versus reward issue this year.

Yes, I would only add one thing to what Anil had said is in his remarks he had mentioned that one of the large opportunities that we have, that we've thought about for a few years now going forward, is the ability to cross-sell and to penetrate customers that are Arbor customers that don't use our product or that are legacy NetScout customers that don't use the Arbor product. So that is the good news and as that progresses and takes traction, you know, that should be able to add a significant population to our revenue base. You know, on the downside to that, obviously, that's something that is happening in the first quarter. And so depending on how fast the traction and the integration to the new territories works, you might be able to see some drag in the short-term on that.

And then just one follow-up there. At what point, Anil, do we see service providers move from non-standalone mode to standalone mode for 5G? And actually, if I can sneak in one more, Jean, I didn't hear anything on the difference on the enterprise business between the security side and the Service Assurance. Can you give us the growth rates like you did for the service provider for that business as well? Thanks.

So while Jean is looking at that. So our instrumentation strategy is very similar for standalone versus non-standalone. For the current case, we will be using a lot of existing instrumentation. They will not need to do a wholesale upgrade because there are no new links. So in the short-term, the opportunity for 5G will be less. As they move to the standalone mode, there will be additional places to put our technology at the Edge. But our solution and architecture is sort of transparent to standalone versus non-standalone and if somebody has bought something for non-standalone on the existing links, they'll be using it for standalone or vice-versa later on. So I think that's a good story but because of these two cases, short-term opportunity for 5G is going to use a lot of the existing instrumentation or at least on the data plan side. And that will reduce the opportunity in the short-term.

And just to follow-up on [indiscernible]. In Enterprise, the split between Service Assurance -- or the growth rates between Service Assurance and Arbor. In Service Assurance, the growth was a little less than 1% and that is pro forma as if the tools -- on an organic basis -- as if the tools business hadn't been in there on Q1 over Q1. And then in Arbor, they had a growth rate in the upper single digits. As we've talked about before, Arbor is a Cadillac product, similar to NetScout's NPM products. And they do very well in very large complex customers. So in the fourth quarter, they were very successful in winning two large deployments into very large financial institutions.

And we can take our next question from Alex Kurtz with KeyBanc Capital Markets.

On the prepared remarks around sales force restructuring or leadership changes, that's something that seems new to us. So what was done exactly? How serious is it relative to changes that you've done in the past and what areas would we expect to see changes? What verticals?

So we have on the product delivery side, the change is small. There's a different leader on the Arbor side for the DDoS. Also, we have moved some of the security projects in other parts of the organization to use more resources because we are using the same data for Arbor Threat Analytics as for nGeniusONE. The bigger change is on the sales side. So we have a single leader, worldwide leader for the sales force and then under that, there is a big leader on the international side and multiple leaders on the U.S. side, sales leaders. And at the account level, a single sales team is now supporting all product sales into that account. And we tried some of those things last year but there were a lot of sales conflicts with artificial quotas and things like that and we didn't have a good impact on that. So we think to do cross selling, to get the cross selling advantages, which is either selling Arbor products to NetScout account or vice versa, we needed to do this integration. So while it's going to be some disruption, but I think it's going to be more than made up by all the positives of the cross selling arrangement. Because as I mentioned, only there is a 10% account overlap between the NetScout and Arbor customers.

Have there been leadership changes as far as personnel and reporting structure or are these just changes at the account level and how accounts are covered?

There are many -- multiple changes at the reporting level but we don't have -- we have not hired people from outside. It's within the sales team there is movement and multiple reporting changes.

We will take our next question from Eric Martinuzzi with Lake Street.

I'd like to take a look backwards just on Q4, the delayed revenue recognition with the international service provider. Wondering if there were any kind of lessons learned as a result of that shortfall, any workflow processes that were needed to be changed.

So the first thing I wanted to mention, Eric, that a good portion of that revenue has already come in, okay. And I think the lesson learned there is that we need to bring -- that when it comes to Asia and sales cycle team, we have to be more conservative moving forward. And these kinds of things happen, and there was a gap of just two weeks. But nevertheless, it affected because it was the end of the year. So I think that's the lesson learned in the sense that we -- I mean a lot of non-product delays, and paperwork, and other things can extend the sales cycle time. But the good news is that we'll be able to drive this revenue this year and we already got part of it.

And speaking of the revenue this year, the question was previously asked kind of what put you at the high end, what put you at the low end but I wanted to frame it a little bit differently, just getting to the high end of what you guys do. Is that going to be probably driven more by enterprise outperformance or is it really going to be driven more by service provider maybe not being as pessimistic as you might have framed it with your stabilization commentary?

Well, both of them. So it's outperformance versus last year on the enterprise side. And the negative impact of the service provider spending largely bottomed out. So the drag on the upside on enterprise is becoming less and less. And at the same time, shorter revenue, we have higher margin because of increased software content and the cost reduction exercises we went through last year.

[Operator Instructions]. We will take our next question from Kevin Liu with K. Liu and Company. Your line is open.

Just to follow on the software only deals, are you guys incentivizing your sales team any differently as you head into fiscal '20? Or are your customers just naturally opting for that more so as you make that push towards 70%, 80% product coming from software?

We are not incentivizing it. But we are allowing our sales force to give higher discounts and still get quota credit. So there is a dynamic there that if your flexibility of discounting to the customer on bigger deal sizes is better when you go with the software margins. So we have some things in place, which allows us to control that.

And then Jean, last year, I think you provided some long-term targets coming into the fiscal year, calling for mid-single digit revenue growth over the longer-term, low 30% operating margin, and maybe $3 in earnings over kind of a 4-year timeframe. Given some of the changes over the past year, are you guys still on track for that or is there anything that should be updated in terms of either the expectations or the timing of when those are achieved?

So on the earnings call a year ago, Anil had a slide that said he -- based on FY '18 that by the end of fiscal year '22, there would be about mid-single digit CAGR or better, that the growth margin would be in the low 80s and that OPM would be in the low 30s. And so when you look at that, my thoughts are that gross margin is being driven by software only, which has a higher product margin. As well as incredible effect by flow through on revenue -- increased revenue. So that would leave with the operating margins being at the low 30s. And so today, the cost structure is such that there's probably some rationalization that still should occur to be able to hit those. But the interesting point that I find is if you look at the performance before where the software, the gross margins have gotten close to 80 and the operating margins got close to 29, and you annualize our $235 million worth of revenue, you can see where those targets could still be relatively achievably by the end of FY '22.

At this time, there are no additional questions. I'd like to turn the program back over to our presenters for any closing remarks.

Great. Well, I'd like to thank everybody for joining us this morning. I know it's a busy time. We appreciate you making time for NetScout. Look forward to seeing investors as we appear at different conferences throughout the quarter. If you have questions, please feel free to call me at the Investor Relations number and we'll talk to you at some point as we move into the summer. Thank you.

Thank you for your participation. This does conclude today's program. You may disconnect at any time.