Ladies and gentlemen, thank you for standing by, and welcome to NETSCOUT’s First Quarter Fiscal Year 2022 Financial 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. Tony Piazza, Vice President of Corporate Finance, and his colleagues at NETSCOUT are on the line with us today. [Operator Instructions] I would now like to turn the call over to Tony Piazza to begin the Company’s prepared remarks.

Thank you, operator, and good morning, everyone. Welcome to NETSCOUT’s first quarter fiscal year 2022 conference call for the period ended June 30, 2021. Joining me today are Anil Singhal, NETSCOUT’s President and Chief Executive Officer; 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. 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 financial information on the quarterly results page. Moving to Slide number 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 outlook, 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 those forward-looking statements due to known and unknown risks, uncertainties, assumptions and other factors, which are described on this slide and in today’s financial results press release as well as, in the Company’s Annual Report on Form 10-K for the year ended March 31, 2021 on file with the Securities and Exchange Commission. NETSCOUT assumes no obligation to update any forward-looking information contained in this communication or with respect to the announcements described herein. Let’s turn to Slide number 4, which involves non-GAAP metrics. While this slide presentation includes both GAAP and non-GAAP results, unless otherwise stated, financial information discussed on today’s conference call will be on a non-GAAP basis only. The rationale for providing non-GAAP measures along with the limitations of relying solely on those measures is detailed on this slide and in today’s press release. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations of all non-GAAP metrics with the applicable GAAP measures are provided in the appendix of this slide presentation, in today’s earnings press release and they are also on our website. I will now turn the call over to Anil for his prepared remarks. Anil?

Thank you, Tony. Good morning, everyone, and thank you for joining us. Let’s begin on Slide number 6 with a brief recap of our first quarter non-GAAP results. We had a solid start to the fiscal year. First quarter revenue increased more than 3% to $190.3 million compared with the same quarter last year. Strong product revenue growth in both the service assurance and cybersecurity product lines more than offset lower service revenue and drove our service, our revenue increase, while contributing to our strong diluted earnings per share performance. Diluted earnings per share increased more than 17% to $0.20 compared with the same quarter last year. Let us move to Slide 7 for some further perspective as we review business insights and market trends. In our service provider vertical, revenue grew approximately 10% compared with the same quarter last year. This growth was partially attributable to a large domestic cable operator investing in their 5G core and edge environment solutions. We also benefited from an international carrier customer accepting completion of an implementation earlier than expected, as we recognized revenue a quarter earlier than planned. During the quarter, we also received a low-eight-figure Radio Frequency Propagation Modeling order from a Tier-1 North American carrier as they progress their 5G network planning. We anticipate that we will be able to complete these projects by the end of our fiscal year. Within the service provider market, we have started seeing some momentum around 5G network advancements globally. Michael will discuss some of these wins during his remarks. Turning to our enterprise customer vertical, revenue declined approximately 1% compared with the same quarter last year. Low-single digit revenue growth in the service assurance area was offset by a mid-single digit decline in the enterprise security area, primarily attributable to reduced spending from…

Thank you, Anil, and good morning, everyone. Slide 10 outlines the areas I will cover. In the service provider customer vertical, we continue to see some momentum around 5G globally. Some customers continue their planning, with Radio Frequency Propagation Modeling projects, while others are starting initial deployments. During the quarter, we won a couple of low-seven-figure deals in the large domestic cable operator space where they are using both our service assurance and cybersecurity solutions as they build out their 5G core data centers or protect their edge environments. Internationally, we won a low-seven-figure deal with a mobile carrier in Asia, related to the core to RAN service assurance visibility for their initial rollout of 5G. We successfully won these deals due to our superior technology, comprehensive solutions, and incumbency, despite the competitive bid processes used in some of these transactions. In the enterprise customer vertical, we continue to gain traction with existing as well as new customers. Within the pharmaceutical sector, we closed two low-seven-figure deals with two leading pharmaceutical manufacturers. First, with a long-standing customer that leverages our solutions for visibility of all the network traffic related to their manufacturing operations. Our proactive application visibility is trusted to ensure operations run smoothly by identifying and assisting in mitigating service disruption. This customer also deploys our cybersecurity solutions given the unwelcomed interest from bad actors due to the Company’s trade secrets and medical importance. Second, a new customer purchased our service assurance solutions to replace an incumbent’s product to gain superior visibility as they transition their hybrid infrastructure and advance their digital transformation. This deal was won during a highly competitive bid process. Both wins demonstrate the critical value of our comprehensive and powerful solution in winning deals by leveraging our incumbency and in securing new customers. In terms of go-to-market activities, we continue to focus on advancing our cybersecurity and public cloud brand awareness. Beyond marketing campaigns, we are also attending leading trade shows to showcase our brand and solutions. Later this month, NETSCOUT will attend the virtual version of Black Hat 2021 and later this year we will be attending the AWS Re:Invent conference in Las Vegas. At the Black Hat event, we will showcase our Omnis Cybersecurity and Arbor DDoS solutions as well as host presentations addressing the threat of triple extortion being used by ransomware gangs. During these events, we will demonstrate how our visibility and cybersecurity solutions can be leveraged to detect, investigate, and respond to these threats and reduce mean-time-to-resolution and cost while fostering collaboration between IT and Security operations teams. At the AWS Re:Invent conference, we will support our partnership with AWS and showcase our visibility tools that can be leveraged in the cloud environment. That concludes my prepared remarks. I will now turn over the call over to Jean.

Thank you, Michael, and good morning, everyone. I will review key metrics for our first quarter along with our outlook. As a reminder, this review focuses on our non-GAAP results unless otherwise stated, and all reconciliations to our GAAP results appear in the presentation appendix. Regardless, I will note the nature of any such comparisons. Slide number 12 details our results for our first quarter of fiscal year 2022. Revenue grew 3.5% over the same quarter in the prior fiscal year to $190.3 million. Product revenue grew 14.3% and service revenue declined 3.4% over the prior fiscal year’s quarter. The decline in service revenue is due to non-renewals associated with service provider consolidation and discontinued product lines. Our first quarter fiscal year 2022 gross profit margin was 74.2%, down 0.4 percentage points over the same quarter last fiscal year as inventory associated with discontinued products was reserved. Quarterly operating expenses increased 2.4% from the prior fiscal year, largely due to variable sales compensation and increased cost associated with our first quarter sales kick off and Engage events. We reported an operating profit margin of 11.4% compared with 11.2% in the same quarter last fiscal year. Diluted earnings per share was $0.20, up 17.6% from the same period last fiscal year. Turning to Slide 13, I’d like to review key revenue trends for the first quarter. In the service provider customer vertical, revenue grew 9.6% while the enterprise customer vertical declined 1.1%. Approximately 54% of total revenue was generated from the enterprise customer vertical with the remainder from the service provider customer vertical. Turning to Slide 14, which shows our geographic revenue mix, on a GAAP basis. Revenue by geography continues to be domestically weighted but international revenue increased compared to the same quarter in the prior year. There was no…

[Operator Instructions] And we will take our first question from Matt Hedberg with RBC Capital Markets. Your line is now open.

Hi. This is Anushka for Matt Hedberg. Thanks for taking my question. Could you talk about how the federal vertical performed in the quarter? And do you see any benefits as Fed spending picks up?

Well, our big federal quarter is actually the coming quarter and so we have a lot of orders in the pipeline. But as always, the federal spending and last minute spend is still up for the grab. So we are looking for a good Fed quarter. And normally, Q1 is not a good Fed quarter, but Q2 is a good Fed quarter being the end of the fiscal year. So I’m not sure Jean what we had in this quarter, but I think big orders for Fed are expected in the coming quarters.

The Federal sector this quarter, on a quarter-over-quarter basis went down in the single millions of dollars. So ranging from $2 million to $4 million less this quarter than in Q1 of last year.

Got it. And if I could ask one more. Did you mention anything on software-only mix?

So the software, what we’ve been calling software-only, which is the transition of customers from hardware appliances to costs or to just buying software from us for the quarter was about 32%. It was 40% in Q1 of last year, which was predominantly due to the financials and government dynamics this quarter versus last quarter. And last year, for the full fiscal year, we ended the software-only portion at about 34%.

Got it. Thank you.

We’ll take our next question from Eric Martinuzzi with Lake Street. Your line is now open.

On the services revenue, it was down sequentially, a little bit more than I would have thought. Is that tied to – is that just a lagging indicator tied to weak product sales a year ago?

Eric, there’s a few things going on in there. One is there was a comparison – a difficult compare of about $1 million where we had back maintenance in Q1 of last year. The other item is, as I mentioned in the script, service provider consolidation, where the largest – one of the two largest carriers combined and they’re reassessing their renewals on all of their equipment as they rationalized their network deployment. And then we’ve talked in the past about some ancillary product lines such as Fluke. And as those product lines continue to not be sold, so certain customers do not renew on their service revenue.

Okay. And then how should we think about it for the September quarter, is Q1 a base from which we grow?

I would say, those dynamics continue at this point into Q2 and that there are programs in place that sales of wanting to reincentivize certain customers as well as just looking at other areas where they can improve the service revenue renewal focus. For the full year, it would appear at this point that we will probably be flat to maybe down slightly 1% in service revenue at the midpoint of guidance.

Got you. Thanks for taking my questions.

And we will take our next question from James Fish with Piper Sandler. Your line is now open.

Thank you. Good morning guys. So you guys called out enterprise security weakness. And obviously, we have been gaining the strength across the board given what’s going on in the attack environment, much like what we had about seven years ago now and really some of the strongest budget in times we have actually come across in a long, long time. I guess why isn’t NETSCOUT not seeing that strength? Is it a competitive thing that the financial institutions specifically are shifting toward others in your space? Or is it just the flow-through of running out of the pipeline from last year? And then, Jean, anyway to think about the mix for NETSCOUT with service assurance versus Arbor as well as Arbor enterprise versus service provider to, help us with what is going on with the enterprise Arbor weakness here?

James, let me just cover high level, and maybe Jean can add some commentary. So this one quarter is not the trend overall we think the service assurance – as cyber security growth for the year will be close to twice the rate of service assurance growth in the year. So as we talked about single-digit overall growth, security growth will be much, much higher than that. I think it’s just a timing. There are some big deals in different quarters, the one quarter trend. And so there is no real issues related to what is happening in the competitive environment. It’s just the timing of the deals. And sometime in Q1 last year may have been better for some reasons. But overall trend this year is that we are going to see higher growth trends in cyber security even though some of the new products may not hit the mark if we are not able to do trials, because of COVID issues international. Also, cybersecurity is almost – a much larger percentage of our business is international. And as you know, we have a lot of pandemic related issues. So overall, you will see that our cyber security growth will be higher than the overall growth and it could be as much as two times the service assurance growth this year.

Jean, any color on the mix there?

So what I would say is Arbor declined this quarter due to most of the U.S. and financials, as you point out, probably the decline was, again, probably around somewhere between $3 million to $5 million in overall revenue. And then as Anil said, it’s mostly due to the timing of deals. Going forward, Arbor focuses on DDoS, and there are some new products coming out, which would include mobile security. And as we’ve talked about in the past, Arbor is a Cadillac. So they do well in the large institutions that are enterprise and then they do well in service provider. And then going forward, with the security products that Anil and team are rolling out, the anticipated growth of that is probably the difference between the different ranges in our guidance.

Understood. Just one more for me, if you got a second. One of your networking peers actually called out earlier product orders due to supply chain shortages. And it does seem like you guys had some more net pull in effect this quarter, especially as you left guide unchanged despite the product upside here and eight-figure large deal that we were talking about. Is it fair to think about that net pull in effect of a couple of million, and that’s kind of the difference between where the Street is here for total revenue versus – in fiscal Q1 and versus fiscal Q2 that we got the upside on?

Yes. I would say, it’s not only to the supply chain. It is related to one of the Asian providers that had been rolling out their 4G network over a few years now, and they completed one of their projects involving our solution in this quarter rather than last quarter. And then – I’m sorry, this quarter rather than next quarter. And as you stated, it’s probably somewhere between, say, $2 million to $4 million that was pulled forward from Q2 over Q1. And so if you normalize for that, where our product revenue grew 14%, if you normalize for that, our product revenue would probably have grown somewhere between around 8% in Q1.

That’s helpful, Jean. Thanks guys.

Thank you.

And we will take our final question from Kevin Liu with K. Liu & Company LLC. Your line is now open.

Hey, good morning. Just a quick follow-up on the security side of the business. You’ve talked in past quarters just about the ability to demo some of these newer solutions. Have you guys seen that start to open up much at all or is there still some risk to being able to trail and get that in front of customers?

Yes. So yes, Kevin, there is some risk into that. I just wanted to mention that what our cyber security line is 100% based on Arbor solution right now. So not only we expect to grow that area with some new ideas we have and new way of deploying the product, but we are also adding now non-DDoS security to our portfolio, Omnis security. So for the DDoS product line, we are not as much – DDoS extensions to the product line, we are not as much dependent on doing POCs. But for the new additional non-DDoS security, which is we are counting on at least toward to meet the higher end of the guidance as Jean mentioned, called Omnis security, we are counting on POCs and yes, that could be impacted. But that will be the difference between where we end up in the guidance. So our guidance range assumes these scenarios that was in best case. And the big difference is going to be how well we do – how well our traction goes in the face of pandemic, both international and U.S. in this fiscal year.

Got it. I appreciated that color. And just one for Jean as well on the product gross margin side. I think you mentioned an inventory reserve taken. I was wondering if you could provide the size of that? And then maybe more generally, just talk to whether that was the primary factor and kind of the decline relative to the back half of last year? Or if there are other things, whether it’s component costs or freight that might be also impacting the margin there?

So this quarter’s product margin is down due to about $1 million of discontinued products that we reserved. I would say the last half year – last prior fiscal year was gross margin was probably a little more suppressed by the product mix, where we had more calibration revenue, which as you know is lower margin, lower gross margin overall.

Got it. And then just one last one. Just with respect to the Smart Edge monitoring solution that you guys introduced. I’m curious if that’s something that your customers have been asking for a while or if there’s more kind of an opportunity that you identified, given some of the hybrid work dynamics that’s gone on since the pandemic?

Yes. So Kevin, so we have announced our Smart Edge monitoring solution last year and for remote sites. And unfortunately, most of the remote site people went home because of pandemic. So we got a lot of input from our customers that they are looking for similar capability for work from home users. So this now the revised Smart Edge monitoring solution, which we sort of re-announced and we had a recent press release, is basically provide the same functionality, which was available in data center and the remote site to the work from home user, which is that if you have an IT problem, is it your carrier, is it your cloud provider, is it your laptop or is it your VPN? And we are the only solution in the market, we can quickly do triage for that. This also requires trials and POCs, but it’s still with existing customer and is incremental to our existing solution. So I think, yes, there is a – we are counting on some traction in that area in the coming quarters.

Great. Well, thanks for taking my questions and good luck as you make your way to the rest of the year.

Thanks.

Thank you.

I will now turn the program back over to Tony Piazza for any additional or closing remarks.

Thank you, operator. This now concludes our call. Thank you for joining us today and have a great day.