Ladies and gentlemen, thank you for standing by and welcome to NetScout's Fourth Quarter and Full Year 2020 Earnings Results 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 Fourth Quarter and Full Fiscal Year 2020 Conference Call for the period ended March 31, 2020. 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. 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 on 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 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 financial results presentation as well as in the Company's Annual Report on Form 10-K for the year ended March 31, 2019 and subsequent Quarterly Reports on Form 10-Q 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 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 rational for providing the non-GAAP measures along with the limitations of relying solely on those measures is detailed on this slide and in today's press press release. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Additionally, as a result of the sale of the HNT tools business we will provide certain organic, non-GAAP performance trends, which will remove HNT tools revenue for comparability purposes. Reconciliations of the non-GAAP metrics with the applicable GAAP measures are provided in the appendix of the 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.

Thank you, Tony. Good morning everyone and thank you for joining us. Let's begin on Slide number 6 with some introductory comments. As we are all aware, we are in unprecedented, uncertain and challenging times as a result of the COVID-19 global pandemic. During these times, our purpose as guardians of the connected world has never been more important. Our customers depend on NetScout service assurance and security solutions to support and protect critical networks and infrastructure that connect people and support businesses around the globe. It is essential that these infrastructures continue to perform even as they are stressed with unparalleled demand as many of us now work remotely. Accordingly, we have been effectively operating our business throughout this crisis given the critical nature of what we provide to our customers. In line with our lean but not mean culture, our first priority has been the health and safety of our people, partners, customers and the communities where we live and work. Early on in this crisis, we activated our contingency plans, which have allowed us to ensure the safety of our team while effectively operating the company with most of our employees working remotely. Finally NetScout generates significant free cash flow as demonstrated in the fiscal year 2020 where we generated more than $200 million. Additionally, at the end of our fiscal year, we had approximately $390 million in cash, cash equivalents and marketable securities, which represents approximately six months of our normal working capital requirements. We also have borrowing capacity on our $1 billion revolving credit facility with only $450 million outstanding at our fiscal year end and no principal repayments due until the facility matures in January of 2023. Therefore, I believe that our solid balance sheet and strong financial position currently provide us the flexibility…

Thank you Anil and good morning everyone. Slide 11 outlines the areas that I will cover. Starting with customer wins, we continue to make good progress with both new and existing customers. A new customer that we won during the quarter, a global leading manufacturer and marketer of beauty products was advancing their digital transformation initiative including moving to the cloud. The customer was experiencing performance issues and they could not address issues with sources that were not based on smart data. The customer placed a low seven figure order to gain the full complement of our solutions for global [indiscernible] to assist in resolving performance using our [indiscernible] information solutions. They are also utilizing our visibility as a service or VATS offering to accelerate and optimize the value of our solutions demonstrating the value for packet-based visibility solutions and best offerings as customers advance in digital transformation and cloud migration strategy. Within the public sector area, we also had some nice wins both domestically and internationally as we continue to assess these customers with their digital transformation initiatives as well. One of the largest cities in the United States decided to upgrade their education information infrastructure. They placed a low to mid 7 figure order with us to deploy state of the art service assurance and visibility as the foundation of that digital transformation initiatives. While not the initial trigger, [indiscernible] is also enabled by this upgrade, this is only the start of modernization effort as they have more than 1800 schools to upgrade in the city. In the International government area, we had a mid 7-digit figure win to provide a system-wide augmentation and [indiscernible] service assurance solutions at a large government agency that provides IT services to all the government agencies of that country. Both wins demonstrate…

Thank you Michael and good morning everyone. I will review key metrics for our fourth quarter and full 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 of 2018, I will highlight certain revenue trends on an organic non-GAAP basis, which removes HNT tools revenue for the applicable period referenced. I will note the nature of any such comparisons. Slide number 13 details our results for our fourth quarter and full fiscal year 2020 focusing on the quarterly performance first, revenue declined 2.5% over the same quarter in the prior year to $229.4 million dollars, product revenue declined 7.2% and service revenue grew 2.8% over the prior year's quarter. Our fourth quarter fiscal year 2020 gross profit margin was 76%, down 3% points over the same quarter last year. The lower margin was attributable to a higher volume of radio frequency propagation modeling revenue that has lower gross margins in the initial stages as well as increased variable compensation in the quarter. Quarterly operating expenses increased 7.3% from the prior year, primarily due to higher variable compensation costs and a one-time loss contingency. We reported an operating profit margin of 21.2% with diluted earnings per share of $0.50. For the full fiscal year 2020 revenue was $892 million, which was a decline of 2.1% over the prior year on a reported basis. Adjusting for the divested HNT tools business, revenue was relatively flat compared with the prior year despite the COVID-19 pandemic impact on our fourth quarter. Gross profit margin was 76.4%, which is consistent with the prior year, strong software-only sales at 29% of service assurance product…

[Operator Instructions]. We do ask in the interest of time that you limit yourself to one question and one follow-up. We will go first to Matt Hedberg with RBC Capital Markets.

Hey guys, good morning, thanks for taking my questions. Anil, I wanted to start with you. Can you talk a little bit more about when you started to see [indiscernible] in March and also whether or not those trends have begun to improve in April, I know you noted a few nice wins in the financial services vertical in March and April as well as an 8-figure international service provider transaction. I am just trying to get a sense of the timing of disruption and perhaps maybe some improvement that you're seeing in April.

We don't know the exact timing, it was ongoing depending on different parts of the business, different regions. I think the most important point is that because it is end of the fiscal year, March is traditionally one of the very big quarters and so we saw some effect, but later in the month we started getting some other orders, we made up for this. As a result yearly, we are able to deliver flat year-over-year performance and are only down by about 1% from the guidance we provided a year ago. So overall I think we did quite well and I think that different parts depending on where we could travel and what kind of conditions where there, and at the same time there were people who had additional demands including a couple of people have new budgets, which were called the COVID-19 projects. So there are all kinds of mixture, it is very hard to sift through that Matt and I think this quarter is where we will be able to see how this is impacting on the positive side versus the negative side given the importance of what we do.

Got it, okay, and then something stood out to me in your prepared remarks. I think you noted that a software-only revenue was about 30% of service assurance, which was a huge move higher on a year-on-year basis, which is great to hear. Can you talk a little bit more about the factors driving that mix and might we expect a similar mix shift over the next several years in terms of what the magnitude of improvement there?

Yeah, I think the factors driving is really is NetScout and we have been pushing our salespeople to go through that because it is a higher margin business and it improves our capability for that and Jean might go over some more details of that. But I mean this is the company plan and we focus initially on service provider business because that market was very challenging, sometimes we were getting -- we have the best technology in the carrier space or in other areas, maybe by 2 to 1 margin but the market was very, very price-sensitive because of challenges with OTT traffic and on the 4G infrastructure. So we lead in there and it made a big difference and then we decided to do that on the enterprise part of the business and this year, Matt, we are launching in the remaining part which is DDoS which is through the integration of Arbor, which we did last year. Now we'll be able to offer that in all 3 parts of the business. So I think the trend is that this is going to go up and some of this was negated by low margin propagation dealer business. So once these thing gets sorted out overall trend is what we have been predicting, it has been a little bit slower, but I think the move is that at some point it will be a majority of our revenue will be software-based.

Got it. That's great to hear. Thanks a lot guys.

We will go next to Eric Martinuzzi with Lake Street.

All right. Hopefully I am live. I had a question with the onset of COVID and work from home, learn from home. Are you seeing, as far as bandwidth demand, is there a benefit to your service provider customers increased bandwidth translating into revenue opportunity for NetScout.

Well, on the carrier side, if you look at the mobility provider. there is a different trend. But if you look at fixed line operators, then yes there is a need for that, but we are seeing a bigger short-term impact, Eric, on the DDoS part and the service assurance parts of the enterprise business and at the same time carriers like Verizon and ATT and although they have their own operation, IT operation, which we have like enterprises. So for the short-term we are seeing an impact on that part of the business. And Jean, do you want to add?

I would just say I was very excited about the virtual Engage and some of the new products like Edge monitoring that the company is looking at and I don't know if you want to go into more detail about the future.

Yeah. So I think that is what Jean is talking about Eric and we are looking at how we can provide some additional information in future calls about some of the directions we announced at Engage and one of the things was Edge monitoring, which allows you to monitor the performance on the provider side, even though you have outsourced a lot of your infrastructure and that will be even more important in these times because I think one of the ways to do business continuity is to outsource some of the hardware stuff to providers so I think the cloud migration might increase or accelerate and so some of the things, which we announced, which is all software also I think it's going to make a big difference and we will be releasing those things in the next quarter.

Okay. And then from the personnel side it sounds like you're keeping an eye on the discretionary, your headcount was 2,517 the end of December, where did you finish out the fiscal year on head count.

Hi, Eric. This is Jean we finished out the fiscal year relatively flat with that Q3 number around 2,500 people.

Okay. And then as far as the things that you can predict about your business, let's talk about the service revenue. I understand products a little bit harder to get your arms around but [indiscernible] revenue element is there any reason to believe that that is under threat from either retention issues, churn, because historically that has been able to hold up pretty well in circumstances like this.

Yeah basically I feel that at the high level if at all it's further strengthened. When we talk to our customers and they see us in a very unique place, a company of decent size, strong financial position invested in last four years, a lot of things in R&D and support and they can upgrade many of the software. So the features, which we are adding at essentially free with renewals. So I think that unless something really unexpected happens, our position in the renewal and service revenue is further solidified. It was already good in the past, but I think it may be even better.

Yeah, the only other thing I would add to that, Eric is in the year the service revenue, as you noted, grew 3% plus and we have multiple offerings in there with the vast majority of it being like 85% to 90% to maintenance and as Anil discussed it is important that the unique offering that we have where you continue to be supported, as well as to receive enhancements keeps our customers wanting to pay that. We also have offered a [indiscernible] offering, which we call visibility as a service, which grew pretty well over that year and then we also have on-site engineers and they have been growing also as our customers really like the value that these people can supply. So I would say that service revenue growing 3% was very good this year and it looks steady going in the future for FY 21.

Thanks for taking my questions.

Yeah. Great. Operator, we can move to the next question.

And we will go next to Chad Bennett with Craig-Hallum. Please go ahead.

Thanks for taking my questions. So just on the software penetration of overall revenues, just following up on a prior question, I guess how should we think about the growth there this year or maybe even a exit kind of penetration rate, could that get to 40% to 50% when we exit the year this year?

So the chronology of the timeline of the software only was, as you remember a few years ago, we introduced it into our international service provider markets based on their desire for full functionality and robust at a price that made sense for them. It has migrated towards domestic service providers also, and this year what was very interesting is that it's also started to migrate into the enterprise. So the enterprise is [indiscernible] use of software only probably a little less than doubled in FY21. So when you take that as an exit rate, I think you know in the past has said that probably our software-only could get to at least more than 50%. So I would see FY21 especially given the COVID-19 pandemic issues having software-only being driven, since it's a very good price point with excellent functionality, potentially more stronger, so on a guesstimate I would say probably could get closer to 40% in FY21.

Got it. Perfect. And then just on the enterprise side of the business, what are the puts and takes considering the majority of your enterprise business is still on-prem or data center related for an enterprise and during this pandemic, I think we've heard from a lot of customers that digital transformation or just flat out move to the cloud has been accelerated significantly even more than it already was beforehand. So if we see that acceleration to the cloud by your enterprise customers, is that a net positive to revenue at least over the next year or a net headwind to revenue, any way you could answer that would be great.

So I think it's sort of a multi-part answer to this, and you mentioned one of the issues in the current time is new hardware deployment. So we have announced some software modules last week, which increase the functionality of existing deployment. Second thing as Jean mentioned earlier, we have announced an initiative called Edge monitoring. We strongly feel that IT operations want to give the control back into visibility while they want to outsource some of the infrastructure to cloud provider, and if they do that they can convert finger pointing in case of issues because I'm still going to call my IT when I have a problem with Office 365 or any of the outsourced applications yet they don't have access to what's happening in the cloud. So as monitoring solution we have announced is going to make a big difference. Now having said that, Equinix and providers like that, which provide high speed links to cloud infrastructure are the best option. So, our solution, Edge monitoring solution, can be actually deployed in likes of Equinix and it looks like as if we deployed it in the cloud, it is the extension of on-prem but it's really not on-prem infrastructure. So that's a very interesting development and also our software can be run on top of as [indiscernible] and so we have made a lot of innovations in the last 2 years. So I think just because infrastructure has moved to all cloud doesn't mean all the monitoring has to be on the cloud. Somebody has to make them the cloud providers and SaaS application people accountable and that's how our solutions will work. Having said that, there are couple of other SaaS providers, big one, which I cannot name right now, they are actually also using our technology to actually support their customer. So all these combinations, I think is a net positive because it extends our leadership into a bigger market, it makes our higher margin business increased further and the visibility [indiscernible] means that on-prem is a deployment option, it is not a requirement so our solution works anywhere you want and no excuses and some people will put it on-prem, some people will put it in the cloud and some people will put in the intermediate side like Equinix.

Got it, that's great color. Thanks. Great job managing the business and the balance sheet in these times. Thanks.

Thank you. Operator, we can take the next call.

Our next to Kevin Liu with Kay & Company.

Hey, good morning. First question here, just wanted to get a sense for the quarter-end disruption that you guys saw, was that primarily just on kind of new product sales or did you see any impact maintenance renewal agreements and the like.

I would say it was probably exclusively on product revenue.

Got it. And then more generally, as you kind of work through this environment it sounds like the demand generation side of things in terms of going virtually but curious as to what other impacts you are seeing on your general sales activities. For instance, are you still able to complete the kind of the proof of concepts that you need to or deploy equipment on the client sites to the extent that is possible. I'm just wondering what sort of what parts of the sales cycles are impacted.

We were all we were doing all proof of concepts remotely, because our engineers who are very involved, they were not traveling to customer site. So that's not impacted at all. Yes, there are issues with people not being able to meet customers, and that has some impact, but overall, and that's sort of balanced by the time people have to discuss the projects with us and Michael mentioned why did we get [indiscernible] in some companies where we have big areas, we had 10 to 20 people attending and one company had 50 people attended. So I think we are getting the mind share of the people, and that's a positive side, the negative side is that we are not able to travel to customer site and have a direct dialog with people and eye contact and I think is sort of make good balance and net effect will be I think neutral.

Got it, and if I could just sneak one more in on the security side, so that you guys acquired [indiscernible] in early February. Anil, could you just talk about kind of the longer-term vision for your security platform here, are you guys still primarily recognized as a DDoS player or do you see recognition out there in the market as being more on kind of advanced threat prevention side, just wondering how this platform is evolving and what other gaps, if any, you plan on filling in over the coming years.

Sure. So I mean, because of the technology based on packets and visibility we provide, we could actually make security adjacency for us, which is very strange word that how could security be adjacency to service assurance, but the way we handle it is the two sides of the same coin. So our current business DDoS is about 20% of the total business, and this year we announced some feeds from service assurance side to do Layer 7 monitoring on DDoS and we coined the word smart DDoS, which we announced last week. So I think that's going to have a impact on the DDoS business but over the last one year we acquired 2 companies Eastwind; very small, two small technology companies, one was [indiscernible] as you mentioned and they were in the VDI based security space and they had some encryption and some other features. So, towards the end of the year we were going to be bringing out that solution, which is based on some existing technology from on the enterprise side of the house and with ASA technology combined that with some of the thing Eastwind was doing in the advanced security area plus some of the building blocks from the VDI acquisition. And all three together is going to announce our entry into the advanced security space, which is very crowded but because of our building blocks and incumbency in other areas. I think we're going to have a big impact in next year. So we did alluded to that announcement also last week during Engage and we are a lot of interesting questions that came from the customers. So over time I think security will be a much bigger portion of the business and it will obviously include a big portion from DDoS, but advanced security will be another big portion in the next couple of years.

Thanks for taking the question.

Okay. Operator, we'll take the next question.

We'll go next to James Fish with Piper Sandler.

Thanks for the question. Maybe going off of the last one, you guys have a pretty positive on Arbor but can we get a breakdown of growth rates across the business and within each vertical as well as the total percentage that Arbor now represents that you guys typically do annual, I get you just said DDoS but that's not the entire Arbor business.

Since the sales force has been integrated, the way I would think about it is for the quarter, but did very well. They actually grew in enterprise in close to the mid-single digit and so for the year they were probably flat to slightly up, they also had a tremendous year and quarter and service provider. So this year Arbor did pretty well. They are still probably somewhere between 20% to 25%.

Yeah that's helpful color and then obviously a big catalyst for NetScout is the potential 5G core spending, a lot of debate around this. But what is NetScout's seeing with 5G core timing, given the impact of COVID-19. Were there any push outs [indiscernible] Tier I or international carriers.

What we are getting is that is either going to be neutral, meaning coming at the same speed level as was forecasted in the past, or it might even accelerate and because of the same reason as we talked about in earlier questions that Edge computing and other areas, but we also see that one of the big car manufacturers are buying their own spectrum in Europe. And so, we don't know the timing but in terms of BOC and evaluations, there is lot of interest, anywhere we talk in carrier, they want to know about 5G story and all the investment we made in last 12 months has made a big difference and we being the incumbent, we can share some of the assets we have already deployed in 4G and their BOC timeline can be a dramatically compressed because they don't need to check everything out. They just need to check incremental things we have done. So all in all, I think that the 5G is going to grow at the same speed in terms of timing or maybe even slightly faster.

Alright. Thanks. Thanks everyone.

Yes.

Thank you.

And that concludes our question-and-answer session.

Great. Thank you everybody for joining us today. We appreciate that. This concludes our remarks. Have a great day and stay healthy and safe. Thank you.

This does conclude today's program. We appreciate your participation and you may now disconnect.