NTCT
#We can't hear you now.
We lost you on that, <UNK>, can you repeat the question.
It's on a proforma basis, so it would be off of a 21% base for fiscal year 2016.
Yeah, so I think just maybe repeating or expanding on what I said, <UNK>, earlier, so competitive environment is not changed or actually better for us as people are seeing the power of the combination of TekComm and NetScout on the carrier side.
Also, in terms of better conditions, there is some competition from (inaudible) and we think our emerging big data strategy is actually going to convert them to partner.
So given those things, our competitive environment is really improving.
Yet, we see challenges approach versus last year then moving forward, so in the short term we are doing several things.
And some of the visits I had is generating some interest.
But the impact of that is not really going to see, it not going to be seen until next year.
And next year, even if the environment is the same, we think our total addressable market will technically improve because of all the product integration which will become aligned before the end of the fiscal year.
So that's where we see the market mix.
The M&A we were talking about was that in the enterprise sector, because we are one of the unique companies in service assurance which has decent, big business built on the enterprise sector and on the service provider side.
On the enterprise side, the bigger difference has been end to end monitoring.
That means we can tell you when there is a problem, is it the network or is it the server.
That has not been true on the service provider side because those servers are owned by the content providers.
So sometimes there is still finger pointing when you have for example bad quality of service.
Is it the network or the server.
So we feel that we owning the service provider now getting into the content business, will create yet another differentiator for NetScout because we are the only one who can provide the end to end service assurance.
And in the process, customer satisfaction, which in turn will result in more investment in NetScout products.
Yeah, so maybe let me take the second question first.
So pipeline is still building out.
As you probably know that, we announced the software based solution only last month.
We made the announcement of availability.
In fact, probably this month.
And so the pipeline I think will gravitate toward the software solution over the next year.
But this year we don't see the impact, much impact.
Most of the pipeline is still traditional product.
And some of the pipeline which actually will result in product sales next year is actually moving toward the software set.
So pipeline is moving towards software, but the revenue is not necessarily going to be significant for the software this year.
And I think to your first question, I think we already mentioned that we saw very good growth on the enterprise sector and on the security part.
So if you look at our business as security, enterprise service assurance, and service provider service assurance.
So the first two areas, which is Arbor and traditional enterprise where NetScout is doing quite well, we are seeing some growth in that area.
But service provider service assurance is biggest portion of the business and we continue to see challenges which offset some of the growth on the other two areas.
Yes, it's everywhere.
But because the number of big providers in US is just a few, and that's a bigger portion of NetScout's business, percentage-wise the impact is more dominant in the US.
But yeah, it's across the board and I just gave, we gave two reasons.
They appear to have made a big investment in LTE and because of 4G explosion they have not been able to monetize it.
And a virtualization initiative has started, some of the decision making, where people say, why should I invest in this right now which is going to change in a year or so.
And those two in combination is creating the situation environment of lengthening sales cycles or renewing, negotiating fixed service contracts, or slower spending budgets.
Well I think maybe you are mentioning the Tektronix services solution versus NetScout services solution.
Because the packet flow switch solution was identical with both, and that's not necessarily a comparative.
Maybe you are mentioning that.
So when we look at spending, we are selling, we have a common platform now and on which we put Tektronix software or NetScout software as we go to the customer.
So we are able to service the demand of Tek customer or NetScout customer with a common platform.
So the spending issues and challenges are independent of whether it's a Tek customer or a NetScout customer.
Yeah, just to step back and just summarize our view on the service provider market, as we've said before, there are general trends, but everything is specific to each particular service provider.
As a general trend, the 4G here in the second half, where they are monetizing their networks, trying to get an investment, so we have had wins in VoLTE and we have wins as <UNK> has mentioned and will continue when it comes to On Demand.
We do not see it as a competitive issue whatsoever.
In fact, as other geographic areas including India, Asia and EMEA, are rolling out their 4G, they have turned to NetScout.
And this is why we have a software only solution.
They have bought that to be able to standardize on 4G and build out their areas.
So it is an evolution where there is a fourth half, the second half, I'm sorry, of their 4G and they are scrutinizing their investment.
And they're also looking at and designing and contemplating their 5G environment.
So we do not see it as a competitive issue.
We're in fact very happy after <UNK>'s travels around the globe with all the customers, that we feel secure in our differentiation with our scale, our real-time abilities, and our ability to go from the end of the ramp to their data centers.
But we just see it as a general trend as to where they go from implementing their 4G to 5G.
That's right.
Obviously, you'll see a bigger difference because Tektronix portion of the revenue was higher than the NetScout portion.
So in terms of scale, you'll see that.
But the same challenges apply to both, in both areas.
It should be relatively consistent on an absolute dollar basis from Q2 into Q3.
So what we've done over the last year, the last 12 to 15 months, is we've looked at the businesses, we understand the business models much better.
We understand where the market has been moving.
And we have been over the past year investing in the areas that are good growth areas as well as strategically looking at the headcount and some resources in some other areas that are not good growers.
So just going back to an earlier point, FY15 had proforma operating margins of 18% and then we improved them by 2 percentage points in FY16 to 21%.
And then our guidance as you know now, at the low end would imply 23%.
So what we're doing at this juncture, after understanding the market, any shifts in the market from when we bought the Danaher business, communications business, it's just looking at what assets we think make the most sense to continue to invest in.
And which other assets we should probably pause and see what makes sense to happen with those.
I think we talked about for Arbor double digit growth.
And for packet flow switch, we don't carve it out because we are again, <UNK>, different than all other packet flow switch vendors because our (inaudible) is the combined probe plus the (inaudible).
So that's why we don't carve it out like that.
But overall we have been winning competitive deals.
We look at PFS as an accessory to our probe business, so that's all bundled into our numbers.
And on the enterprise side we are seeing better growth rates because our overall business is growing there.
On the service provider, we see lesser growth rate for PFS because it's all a tag along with the probe business.
Sure, so the first point I would make is that one of our large tier ones has already explained to us their purchasing patterns, their requirements for what they would like from our product and their timing.
So that's why we understand that Q3 of last year, they had purchased significantly more in that quarter than they are planning to purchase in Q3.
They've actually told us they plan to purchase more in our Q4.
So that's the main reason for the shift in the timing of orders from Q3 of last year to Q3 of this year.
This year for service revenue, we might see an overall decline.
One, Arbor has been moving some of their traditional product revenue to more of a flex subscription, so that's got a significant impact.
And then as we have said, we're in the final stages of closing some large installed base customers' renewals.
And in the current environment where operating expenses are very important to them to constrain, we'll have to see how those negotiations go.
Thanks, <UNK>.
So yeah, when you look over the next 3, 4 years, long term vision, I think the majority of the products will move to the software area.
And we already enjoyed prior to the acquisition very high gross margins of 80% plus.
And I think this will become even higher.
And you're right, the price of the software is going to be about 30% to 50% cheaper per unit, but it will allow us to be deployed in more places where they were going with cheaper solutions or going with other technologies like Netflow and Competent Management.
So we believe overall impact, what we are hearing from customers, is people really don't buy our (inaudible).
They actually have budgets to buy whatever we have.
So we think that budgets for the customers are not going to decrease because they buy cheaper solutions or a cheaper unit.
They are going to fill it in more places and that will make us more pervasive.
And I think we have seen this trend in the past 10 years in the enterprise and I think we're going to see that again.
Yeah, so we are looking at that not this year, because we don't want to disrupt the current model.
We will look into that, into that area.
But the bigger opportunity of cooperation between the NetScout sales team and the Arbor sales team is in the advanced area which is practically zero revenue right now.
So Arbor basically had a DDoS product which is bulk of the business, and a product Spectrum which was announced earlier in the year.
And that will be consuming ASI technology before the end of the year.
And that's going to create great synergies on top of whatever cooperation we can do with the DDoS sales team in the future.
And that's why, just to add on to <UNK>'s question, that's why we're very happy with the Arbor asset.
Currently they are the market leader in DDoS and they've been growing very strongly.
But what we see is their next evolution and their next growth path is clearly a linkage with NetScout with the differentiation that NetScout's product and Arbor's product technology together can bring to the marketplace.
Sure.
Thank you, <UNK>.
So, as you know, we generate significant free cash flow.
And our first priority for deployment is to invest back in the business as we did this quarter with the acquired technology assets from Avvasi.
Following that then, our next deployment priority is to patriate excess cash to our shareholders and we've done that in the form of share repurchase.
We should be done with our 20 million share authorization in mid-July, and based on our continued anticipated success, we will continue to generate significant share, significant cash flow, to which end we probably will continue with the same deployment priority.
So that means we probably will go back to, or continue, I'm sorry, with share repurchase.
NetScout as a standalone basis before the Danaher TekComm communication had about 42 million shares outstanding.
And right now we have about 92 million, down from about a little less than 105 million.
So clearly there is a sweet spot somewhere between 42 million and 90-ish million that we will probably end up targeting with our next share repurchase program in FY18.
I'm sorry, <UNK>, you broke up.
I guess if you wanted to use the past as an example, we bought back 20 million shares over a two-year period, so in FY18, if we did that again, I think I heard you saying that we could be down to close to 70 million shares, which is not unrealistic.
Thank you very much, Operator.
And thank you, everybody who joined us for today's call.
Appreciate you taking the time to spent with us this morning.
We look forward to our next call when we announce our third quarter results.
And obviously, if we are on the road, we hope to see you in person.
Thank you very much.
