NetScout Systems' CEO Discusses F4Q 2013 Results - Earnings Call Transcript

Apr.25.13 | About: NetScout Systems, (NTCT)

NetScout Systems, Inc. (NASDAQ:NTCT)

F4Q 2013 Earnings Conference Call

April 25, 2013 8:30 a.m. ET

Executives

Anil Singhal – President & CEO

Michael Szabados – COO

Jean Bua – CFO

Cathy Taylor – Director of Investor Relations

Analysts

Mark Kelleher – Dougherty & Company

Chad Bennett – Craig-Hallum

Aaron Schwartz – Jefferies

Eric Martinuzzi – Lake Street

Robinson – Wonder Lake Securities

Alex Kurtz – Sterne Agee

Gary Spivak – ABR Investment Strategy

Scott Zeller – Needham & Company

Kevin Liu – B Riley & Company

Sanjit Singh – Wedbush

Mark Jordan – Noble Financial

Operator

Ladies and gentlemen, thank you for standing by and welcome to the NetScout’s Fourth Quarter 2013 Fiscal Year and Operating Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given to you at this time. As a reminder, this conference call is being recorded.

With us today is NetScout’s President and CEO, Mr. Anil Singhal. He is accompanied by NetScout’s Chief Operating Officer, Mr. Michael Szabados; and NetScout’s Chief Financial Officer, Ms. Jean Bua.

At this time, I will turn the call over to Ms. Cathy Taylor, NetScout’s Director of Investor Relations to provide the opening remarks. Ms. Taylor, please proceed.

Cathy Taylor

Thank you, and good morning, everyone. Welcome to NetScout’s fiscal 2013 fourth quarter conference call for the period ended March 31st. Before we begin, let me remind you that during the course of this conference call, we will be providing you with a discussion of the factors that we currently anticipate may influence our results going forward. These statements include forward-looking statements made pursuant to the Safe Harbor provisions of Section 21-E of the Securities Exchange Act of 1934 and other federal securities laws.

These forward-looking statements may involve judgment, and individual judgments may vary. Forward-looking statements include expressed or implied statements regarding future economic and market conditions, guidance for fiscal year 2014, acquisition integration success and new product releases. It should be clearly understood that the projections on which we base our guidance and other forward-looking statements and our perception of the factors influencing those projections are highly likely to change over time.

Although those projections and the factors influencing them will likely change, we will not necessarily inform you when they do. Our company policy is to provide guidance only at certain points in the year such as during the quarterly earnings call. We do not plan to update that guidance otherwise.

Actual results may differ materially from what we say today and no one should assume later in the quarter that the comments we make today are still valid. For the further discussion of the risks and uncertainties that could cause our actual results to differ, see the specific risks and uncertainties discussed in NetScout’s Annual Report on Form 10-K for the year ended March 31, 2012 on file with the Securities and Exchange Commission.

Our quarterly financial results are included with our earnings press release. We report our results on a GAAP basis as well as on a non-GAAP basis. Our non-GAAP results eliminate the GAAP effects of our acquisitions by adding back revenue related to deferred revenue revaluation and removing expenses related to the amortization of acquired intangible assets, the GAAP effects of stock-based compensation, and restructuring charges.

Our non-GAAP results also exclude certain expenses relating to our acquisitions including compensation for post-combination services, inventory fair value adjustment and business development charges. We exclude the related impact of all these adjustments on the provision for income taxes. The differences between GAAP and non-GAAP are disclosed in reconciliation tables in the press release.

We believe these adjusted financial measures will enhance your overall understanding of our current financial performance and our prospects for the future. We use these adjusted financial measures internally for the purpose of analyzing, managing and forecasting our business.

We have included on today’s webcast a slide presentation that provides a summary of key financial data that accompanies the financial section of today’s discussion. For those listeners who have dialed into the call this morning and would like to view this presentation, you can find it by going to our website at www.netscout.com/investors and then clicking on today’s webcast.

That concludes the prepared remarks. I will now turn the call over to Anil Singhal, our Chief Executive Officer.

Anil Singhal

Thank you, Cathy. We are very pleased with the fiscal year 2013 results. Non-GAAP revenue for fiscal year ‘13 was $352 million towards the high-end of the guidance that we issued a year ago and an increase of 14% over the prior year. Non-GAAP earnings per share were $1.32 up 20% over last year and surpassing the high end of our fiscal year guidance by $0.02.

Our non-GAAP operating margin improved by one point to 25% up from 24% in fiscal year 2012. In addition, our non-GAAP product revenue for the fiscal year grew by 18% over last year.

Over the past two years, we have been working diligently to reach our aggressive revenue growth milestones. In fiscal year ‘12 we passed the $300 million revenue mark and then this year which is fiscal year ‘13 we passed $350 million mark.

Today, we are issuing guidance for fiscal 2014 which could allow us to reach another important milestone approaching $400 million in annual revenues. Jean will give you more detail on the guidance shortly.

Our fourth quarter results were at the high-end of the full year guidance we provided 12 months ago and within the revised narrowed guidance range we issued last quarter. Non-GAAP revenue was $98.6 million up 10% over last year. Fourth quarter non-GAAP earnings per share was $0.43 and increase of 10% over Q4 of last year. Keeping this our tradition, we’ll be providing full year guidance today for fiscal year ‘14.

During the fiscal year 2013, we saw growth in total bookings which includes new business and service renewal bookings. Our service provider business remained strong with total bookings maintaining at significant growth rate. Additionally, our enterprise verticals displayed growth with the exception of the government vertical.

As we have previously discussed, the government sector was down due to a well publicized budget constraint. All in all, we are pleased to have achieved these good results against a backdrop of economic uncertainty.

The past fiscal year was a first in our four year strategic growth plan and has delivered results in alignment with the plan. The key objectives have been to continue to grown market share in the wireless service providers and to accelerate our enterprise growth by expanding in to application performance management segment.

A key component of both initiatives has been our aggressive acquisition of the strongly complementary, packet flow or monitoring switch technology. Our enterprise direction has passed a major milestone two weeks ago at our annual user forum, where we unveil to our customers our next generation engineer solution, the result of extensive concentrated development effort throughout the previous fiscal years.

Our approach in the product was met with resulting approval and excitement. A new technology is currently in advanced customer trial and will be publically launched and available to our customers later in this quarter. Our dual objectives with this new technology initiative are to deliver new value to existing customers and to increase our new customer acquisition rate in the enterprise segment.

Thus new solutions expands our scope from NPM, which is Network Performance Management to NPM plus APM with new analytics, displays and work flows for application manager. The new solution is based on the latest advancement in next cost proprietary and patent pending ASI technology, and is closely aligned with our leading customer service management initiative.

In late fiscal year 2012, we entered the market with the packet aggregation switch we acquired from Semana, and we recently added a high-capacity chassis-based packet flow switch line that we acquired from ONPATH Technologies last November.

The combination of the two product lines have provided NetScout with an un-parallel range of price, performance and scale, and well-suited for both large enterprise and service provider applications. Our solution in this area has resonated very well with our customer base and initial interest has been extremely high.

In the wireless service provider sector, we continue to gain market share, primarily driven by our leading 3G and LTE data service assurance solutions globally. Our strategy here has been to complement our solution portfolio with an integrated legacy and 3G and 4G voice service assurance capabilities.

A critical component of this strategy has been the acquisition of Accanto earlier in fiscal 2013, bringing important voice service monitoring for legacy voice environment and next generation network voice services.

Overall, in the service provider market we continue to capitalize on major growth drivers. The massive IP transformation continues, and is a focus of the majority of cap expanding. We have gained a foothold in Tier 1 mobile packet switch core where we are servicing 2G and 3G and now 4G infrastructures that have been driven further with capacity upgrades from existing customers.

We also have been gaining new Tier 2 customer as we expand our presence both in the U.S. and around the world. We have been building our products to capture the carry rapid expansion of IP services where we have become a leader.

In addition, there are large opportunities within IMS, where we have been involved on numerous projects. We are playing a central roll in managing the complexity of the explosion of different devices from NSU tablets and now those users are – and how those users are attached to the network in area such as authentication, authorization, policy and charging.

Also within IMS, it’s the opportunity for us in the service of load balancing and diameter routing agents. Another area of growth is RAM aggregation where there is a major transformation of the access and backhaul areas of network where carriers are consolidating 2G, 3G and 4G into one box, combined with new LTE rollouts.

We are helping to manage the handset and sort our issues as well. Over the year, we’ll continue to expand our capabilities to provide end-to-end monitoring by adding significant enhancements and speeches to our product set.

In summary, our customers continue to validate our unified service delivery management platform as a total solution for advanced application and service assurance as validated by our performance in fiscal year ‘13. We are also very excited about the advance investments we have been making over the last 18 months in technologies and new product development as well as targeted acquisitions which will open up new opportunities across our service providers and enterprise segments.

Based on the resounding positive initial feedback from our customers, we anticipate rapid adoption in our customer base and beyond. We look forward to sharing our accomplishments with you throughout the coming year. As always, I like to thank all of our employees’ customers’ investors and other stake holders for their continued support.

Michael will now discuss some additional highlights of our performance and direction.

Michael Szabados

Thank you Anil. I will focus on the highlights of our operational execution this past quarter and fiscal year and in particular on the strategic – book that Anil has just outlined. A center piece of our customer outreach is our annual Engage User forum which had record attendance and excitements surrounding our new product initiatives.

This event continues to be our point of focus or intense interaction between executives, our engineering team and our customers ensuring we stay and walk steps with the needs of the market. We utilized this year’s Engage to overview to attendance of our four year strategy to our enterprise and service by the customers. We showcased our – nGenius for which we received this endorsement.

As Anil noted, this initial release of our next generation nGenius solution will be focused on delivering network oriented application performance management, initially targeted to toward the enterprise segment of our business. With this new generation nGenius product set we building support for information technology service management or ITSM that will provide a differentiated approach to application performance management based on our ability to orchested the work of additional or traditional APM tools implemented by our customers.

In forward releases we will deliver enhanced functionality to manage the performance and delivery of our customers, most critical applications and we will provide additional services provider specific functionality running on this new unified platform. Key to our continuing growth in the service provider segment is the completeness of our integrated voice and data management solution. At engaged 2013, we also unfolded our comprehensive voice and customer experience management directions for the service provider and Cable/MSO users to positive reception.

And important element of our voice direction is the acquisition of the Accanto team and the technology earlier in fiscal year 2013. This acquisition has accelerated our product roadmap in both legacy circuit switched voice such SS7 – as well as in next generation packet switched voice including OT, voice over TE, voice over IP and IMS.

The first integrated voice product based on Accanto was launched to the engaged audience at the show on the non-disclosure. As outlined by – a key element of our strategic direction is our packet-flow switch or PFS set of products. These products have and will continue to accelerate our growth in the company’s target market.

In November of 2012, we acquired ONPATH a strategy extension to the earlier acquisition of Simena. We were able to release the new NetScout brand at state-of-the-art 3900 series switch in record time in January.

The result in line of modular and chassis-based products that is always successfully starting into the high-end enterprise and service provider account with high density networks that the demand also related.

The high-end product in this family called 3912 has 576 watt capacity and it’s the largest non-blocking switch in the industry. The 3900 has quickly gain market acceptance and we are successfully capturing many of our customer’s technology refresh cycles where we are replacing incumbent vendors.

These offerings we also been instrumental to our ability to support customer upgrades to 40 gigabit and 100 gigabit networks.

Our PFS products finally will enable our customers to extend the reach and impact of the NetScout nGenius service assurance solution and provide them with the ability to quickly adapt to them – as a revolving network infrastructure.

I’m also pleased to note that NetScout’s nGenius is 3900, packet flow switch has been selected as long as three finalists in the networking category for the 2013 best of interrupt award.

Although at analyst 2013 we highlighted the continuing relevance of NetScout’s performance management in the CyberSecurity arena. Our products are being utilized for natural behavior analysis and incident response and as a result we are seeing increased demand for our product and solutions in this critical area of IT operations.

As confirmation of this important direction, the info security products guide awarded NetScout’s nGenius services assurance as 2013 – as a 2013 gold winner in the security product and solutions for the federal government category.

Info security product guide recognized NetScout for an advanced round baking solution that is healthy set bar higher in all areas of security and technologies.

And final, in fiscal year 2014 we will continue to work with our top customers to develop product enhancements specific to the cyber category. Within our broader enterprise sectors including financial services, we continue to benefit from very strong customer loyalty as measured by the high renewal rate for service and maintenance services and high marks for our Omega customer satisfaction survey.

With that, I will turn the call over to Jean.

Jean Bua

Thank you, Michael and good morning everyone. As Anil outlined, our business performed well against sub plans for the fiscal year with annual revenue growth of 14%, which was at the higher end of our original guidance from last April. Our non-GAAP EPS result was equally strong, ending about our original EPS guidance.

This strong performance was delivered in the fiscal year which was made difficult by the federal budget encrustation and continued uncertainty around the European economy. We will be starting with the third slide of our presentation which is accompanying our call and is posted on our website. Our fourth quarter non-GAAP total revenue was $98.6 million, which is an increase of 10% from the same quarter in fiscal year ‘12. Within non-GAAP total revenue, non-GAAP product revenue was $59.6 million, which is an increase of 9% over the same quarter in fiscal year ‘12.

Service revenue was $39.0 million on a non-GAAP basis, which is an 11% increase from the same quarter in the prior year. The GAAP total revenue for the same period was $98.1 million, which is an increase of 10% from the same quarter in fiscal year ‘12. Within GAAP total revenue, GAAP product revenue was $59.6 million, which is an increase of 9% over the same quarter prior year. Service revenue was $38.5 million on a GAAP basis, which is a 10% increase from the same quarter in the prior year.

On a non-GAAP basis, our earnings per share for the fourth quarter were $0.43. This is $0.04 higher than the fourth quarter of fiscal year ‘12 and represents a 10% increase. On a GAAP basis, our earnings per share were $0.34. This is $0.04 higher than the fourth quarter of fiscal year ‘12 and represents a 13% increase. Turning to slide 4, the business maintained strong growth profit margins.

On a non-GAAP basis, our gross profit was $78.6 million, representing a 79.7% margin. Our GAAP gross profit for the quarter was $77 million and GAAP gross margin was 78.5%.

On a comparative basis last year’s quarter included non-occurring vendor credit for a component that we had replaced in our product line. Without this credit Q4 fiscal year 12 non-GAAP gross profit margin would have been approximately 80.0%. Both non-GAAP and GAAP gross margins are within our long term operating margin expectations.

Non-GAAP income from operations was $27.6 million. Our non-GAAP operating margin for the quarter was 28%, which is a 1 percentage point decrease from the same quarter of prior year. The decline is due to this quarter’s growth profit margin difference from the comparable quarter of last year and the operating cost associated which is trading the legacy voice product from our Accanto technology acquisition with our current service provider offering.

GAAP income from operations was $21.9 million. GAAP operating margin was 22.3%, which is a 60 basis point decline over the same quarter in the previous year. Non-GAAP net income was $18.1 million or $0.43 per diluted share. The non-GAAP net income margin was 18.3%, which is flat from a year ago. GAAP net income for the quarter was $14.6 million yielding earnings per diluted share of $0.34. GAAP net income margin was 14.8%, which is an increase of 30 basis points from a year ago.

The major differences between our non-GAAP and GAAP income from operations for the quarter the exclusion of the accounting adjustment to fair value of deferred revenue was $500,000, stock-based compensation for $2.3 million and about $2.8 million of cost associated with our acquisitions, which includes amortization of intangibles for $1.5 million.

Business development expenses totaling $200,000. $900,000 the deal related compensation and $200,000 for inventory fair value adjustment. These are detailed in our reconciliation of our non-GAAP to GAAP results presented in our press release.

This quarter’s provision for income taxes is recorded based upon a full year tax rate of 36% on a GAAP basis. Our GAAP tax rate for the quarter is 32.8% consistent with past practice we have used the statutory tax rate of 38% to tax effect to non-GAAP adjustments. The adjustments reconciling our non-GAAP results to our GAAP results are summarized in the reconciliation table included with our press release.

Turning to slide five, which shows our total booking and new business booking components. Total booking in Q4 were $99.1 million a decrease of $10.9 million or 105 year-over-year. Within total bookings our new business bookings were $64.8 million a decrease of $10.2 million or 14% over the prior year’s fourth quarter. Almost half of the new business bookings declined was related to the drop in government business. Service contract renewal bookings in the quarter were $34.4 million, a decrease of $600,000 or 2% year-over-year. Product backlog at the end of the quarter $7.2 million.

The components of our new business bookings for the fourth quarter of fiscal ‘13 were as follows; service provider 38%, financial enterprise 24%, government enterprise 8%; general enterprise 30%. This compared with the prior years quarter new business bookings components as follows, service provider 42%, financial 25%, government 13%, general enterprise 20%.

Slide six is a summary of our deals for this quarter. For large deals within the quarter 167 customers gave us orders of over $100,000 in comparison to 157 customers from last year. We received 16 orders over $1 million of which nine came from service providers, four from financial services, one from government and two from general enterprise. This compares to 21 orders over $1 million that we would see last year in the fourth quarter. Last years orders that were greater than $1 million included nine from service providers, six from financial services, two from government and four from general enterprises.

Slide seven, shows our results for fiscal 2013. For fiscal year 2013, non-GAAP revenue was $351.8 million, which is an increase of 14% from fiscal year ‘12. GAAP revenue for fiscal year ‘13 was $350.6 million, which is also an increase of 14% from fiscal year ‘12. Non-GAAP and GAAP product revenue was $198.7 million for the fiscal year’13, an increase of 18% over prior year non-GAAP and GAAP product revenue.

Non-GAAP service revenue was $153 million and GAAP service revenue was $151.8 million for fiscal year ‘13. This is an increase of 9% over prior year for non-GAAP and 8% for GAAP service revenue. On a non-GAAP basis, our year-to-date gross profit was $283.3 million representing an 80.6% margin. This margin was 20 basis points higher than the prior year. On a GAAP year-to-date gross profit was 27.5 million and GAAP gross margin was 78.9%, which is 20 basis points higher than the prior year.

Non-GAAP year-to-date income from operations was $88.6 million; our year-to-date non-GAAP operating margin was 25.2%, which is a 1 percentage point higher than prior year. GAAP year-to-date income from operations was $64.5 million. GAAP operating margin was 18.4%, also 1 percentage point higher than the previous year.

On a non-GAAP basis, our earnings per share for fiscal year ‘13 are $1.32. This is a $0.22 higher than fiscal year ‘12 and represents a 20% increase. On a GAAP basis, our per share earnings were $0.96. We continue to operate at the high end of our gross margin model and along the mid-point of our operating model.

Turning to slide eight, which shows our total bookings and new business bookings growth for the fiscal year 2013. Total bookings for fiscal year ‘13 were $352.8 million, up $19 million or 6% year-over-year. Within total bookings, new business bookings were $252.5 million, up $14.5 million or 6% over the prior year. Renewal bookings were $100.3 million, which is an increase of $4.5 million or 5%. Our new business bookings for service provider sector grew 22% on a year-over-year basis as we continue to win new customers and LTE deployments across the globe.

Our new business bookings for financial enterprise sector have grown 2% on year-over-year basis. Our general enterprise sector grew 15%. The growth in this sector had come from the diversified subgroups including high-tech, manufacturing business services and utilities and shows the strength of our packet-flow switch technology since this segment was the leading consumer of the product.

The new business bookings for the government verticals decreased 35% year-over-year, largely due to the federal government temporary spending on long-term strategic initiatives. Within the government verticals, federal government new business bookings decrease 40%, while the rest of the government business which includes foreign governmental agencies and state government agencies decrease 24%.

Slide 9 shows our new business bookings by vertical. Component of our new business bookings for fiscal year ‘13 were as follows. Service provider 39%; financial enterprise 26%; government enterprise 9%; general enterprise 26%. This compares with the prior year new business booking components as follows. Service provider 34%; financial enterprise 27%; government enterprise 15%; general enterprise 24%.

Turning to slide 10, this is a depiction of our full year revenue by geography. The fiscal ‘15 revenue from international sales was 25% of total revenue, which is flat for fiscal year ‘12. Within our international sales, Europe delivered 12%, which is 2 percentage points higher than last year. Asia sales and rest of world sales were relatively consistent with the past fiscal year.

Europe revenue of $42.9 million has grown 30% over the fiscal year ‘12 alone. While we continue to see a difficult climate for our European and Asian financial institutions, we have been able to expand our footprint in our European service provider market.

Slide 11 includes highlights from our balance sheet. We continued to maintain strong liquidity. At the end of the fiscal year we have invested cash, short-term marketable securities, and long-term marketable securities of $154.1 million. This represents a decrease of $59.4 million from the prior year’s ending balance for cash and short and long-term marketable securities of $213.5 million.

Our fiscal year ‘13 free cash flow generation of $83.5 million was $26.5 million higher compared to the fiscal year 2012. In the quarter, we repurchased 250,000 shares for $6.5 million. On a fiscal year basis, we have repurchased one million shares for $23.5 million.

Accounts receivable, net of allowances, was $73.9 million, up from $69.8 million at the end of fiscal year 2012. Day’s sales outstanding were 68 days for the quarter. This is down from 70 days for the fourth quarter of last year. Inventories were $7.6 million. This is a $400,000 decrease from the fourth quarter of fiscal 2012. Inventory turns have increased to 5.4 times in the quarter from 3.7 times for Q4 fiscal ‘12.

In November, we paid the outstanding balance of $62 million on our revolving debt facility. Since this is a revolver, we have the full facility of $250 million, should we need it for the remaining term of the agreement. Our liquidity at the end of the fiscal year was approximately $400 million. Additionally, our total deferred revenue was $121 million, which is an increase of $8.8 million from fiscal ‘12 year end.

Turning to our guidance for fiscal year ‘14, slide 12 illustrates our growth for revenue and earnings per share. For fiscal year 2014, we are issuing non-GAAP revenue guidance of $385 million to $400 million yielding a revenue growth rate of 10% to 14%. We are issuing non-GAAP net income per share guidance of $1.40 to $1.50 yielding EPS growth of 65 to 14%.

For fiscal year 2014, we are issuing GAAP revenue guidance of $384 million to $399 million and GAAP net income per diluted share of the $1.06 to $1.16.

For fiscal year 2014, the non-GAAP net income per diluted share expectation excludes the purchase accounting adjustments to fair value of approximately $800,000 for deferred revenue. Forecasted share based compensation expenses of approximately $13 million, estimated amortization of acquired intangibles assets of approximately $6.7 million, compensation for post-combination services of $2.8 million and the related impact of these adjustments on the provision to income taxes of 8.9 million.

Regarding revenue, we believe that the release of our new products and the associated sales pipeline build will skew our revenue patterns more dramatically in fiscal year ‘14. As such, we anticipate that the first half of fiscal ‘14 would carry approximately 40% of our revenue, while the second half of fiscal ‘14 could carry approximately 60%.

Regarding non-GAAP earnings per share on a comparable basis, the first quarter of fiscal ‘14 will include approximately $5 million of operating expenses for the two acquisitions of Accanto and ONPATH that were part of our operations during Q1 of fiscal year ‘13. We also project that our effective non-GAAP tax rate for fiscal year 2014 will be approximately 37%.

Lastly, we plan to continue our share repurchase program to offset the dilutive effect of our employee share based compensation. That concludes our financial discussion this morning. Thank you for joining us and we will look forward to taking your questions. Jessica we will now take the questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mark Kelleher from, Dougherty & Company. your line is now open.

Mark Kelleher – Dougherty & Company

Great. Thanks for taking the questions. Wanted to look at the product and service line, the product line has had some pretty strong growth, the service line seems to have kind of flat line for the last few quarters, and then connected to that maybe you could talk about deferred revenue and backlog, it looks like deferred revenue was up fairly significantly. The backlog has pulled back a bit. And I know those are connected to those two lines as well. Could you just tell us what’s going on between the service and product lines there and the growth?

Anil Singhal

Well let me – yeah first of all deferred revenue is not directly tied to the backlog. It includes other things and I mean backlog is the only product related but as we growing faster than in the past I mean our product line will always be higher than the service revenue and we have been also doing refreshes of technology which impacts the renewal stream.

So as we had products all the way down from the network general time and many of these products are in end of life right now which has impacted the renewal stream. So we see a slight pick up in that but overall the growth of product will always be faster which is good news as well as challenging to some extend.

Mark Kelleher – Dougherty & Company

So, with the increase...?

Anil Singhal

I’m sorry, go ahead please.

Mark Kelleher – Dougherty & Company

With the increase in deferred revenue that we saw in the balance sheet imply a pickup in the service line?

Anil Singhal

Sure. I mean, the deferred revenue is where we pause all of the renewal booking and it varies – it continues increases because the renewals increase, but also varies in the composition. How many people are doing one-year, three-year, five-year, five-year maintenance.

What we see though going forward from 2013, probably and to say, the mid point of the guidance, 2013 had higher service revenue growth probably about 9% on a year-over-year basis, that has to do with ONPATH coming in towards end of our fiscal year, and it would have contributed service revenue from those. So that’s why 2013 grew slightly faster than 2012.

And as Anil mentioned, as we forward, like any technology company we do end of life certain products, so I think going forward in the mid point of our guidance to service revenue, we probably would see a decrease in that growth over FY ‘13.

Mark Kelleher – Dougherty & Company

Okay. Thanks.

Operator

Your next question comes from Chad Bennett from Craig-Hallum. Your line is now open.

Chad Bennett – Craig-Hallum

Hey, thank you. Couple of question for you. So not to give obviously too detail on guidance, but should we expect that the June quarter be in the way you kind of laid out first half versus second half. The June quarter is the low quarter of the year which I believe it normally is?

Michael Szabados

That’s true. the. June is usually from a seasonality perspective one of the worst quarter that we have for revenue. And then as I mentioned this quarter, we will have the affect of on task and the contract positions that we did not have in Q. In the same quarter five year across, as we talked about on the call we were very excited about the attendance which was record attendance at our meeting, so that in Q1 also – once through our operating cost.

Anil Singhal

Yeah. So our operating cost – yeah what Jean is talking about just one other thing we always had first half in the 40% to 45% range in the first half of any fiscal year. And for the last seven year so, at this time we have seeing it could be at the lower end of that range.

Chad Bennett – Craig-Hallum

I guess do you have visibility into the second half of the year in any part of your business whether its service provider, enterprise or anything. I guess trying to get a level or comfort of, of you going into this year with maybe a little more back and waited second half than last and kind of your comfort level there?

Anil Singhal

I think we have as much visibility as any other company like us will have for the second half and – but if you think but not feeling good about it we won’t be providing the full year guidance.

So I think the best way to look at it, if there are always challenges, is hard to see too much into the future but we think we have made lot of investment in last 18 months which will allow us both on the acquisition front and coming up with new products and technology that we think that that’s a reachable goal.

Chad Bennett – Craig-Hallum

Okay. And couple of more. Jean, do you have roughly what acquisitions provided in terms of revenue for the last year?

Jean Bua

So, the acquisitions of ONPATH probably provided combined between test automation and PFS in the last quarter in the low to mid-single-digits of revenue.

Chad Bennett – Craig-Hallum

Okay. And Anil, how should we expect the packet aggregation switch market? How impactful should we expect that to be for your business this year?

Anil Singhal

I think it could be in the higher single-digits this year. And as – yeah, I think basically we are not directly giving out those numbers because many of those deals are combined with the merger, but our long-term plan is that we could get to 10% to 15%, share of our revenue will be packet flow switch.

Chad Bennett – Craig-Hallum

Okay. And last one for me. So, the mid-point of your guidance range for this year – you kind of imply, if I’m just kind of doing rough numbers right, maybe a 15% to 20% growth rate in service provider, if I’m thinking about the mix right, and then potentially a mid-single digit growth rate for enterprise. Is that the right way of thinking about the mix?

Anil Singhal

I think if you look at 15% growth, you can look at 10%, 14% growth. It could be around 10% or so on the enterprise and 20% or so on the service provider which will result in a blind date 14% number.

Jean Bua

Yeah and we’ve consistently said that the service provider vertical was a 20% to 25% growth vertical. We’ve done that over the last few years, and as Anil mentioned the enterprise we are very excited the products coming out and the reception for them we believe. So the enterprise, we are believing, we will grow in closer to 10 plus this year.

Anil Singhal

I think one other think to mention is that when you start breaking it down if you had look at product revenue only that will be higher than if you were to meet our guidance we will be hitting higher than 14% closer to 20 and that’s why I think we will need 10% plus on the enterprise to reach these goals.

Chad Bennett – Craig-Hallum

Okay. Thanks much.

Anil Singhal

You’re welcome.

Operator

Your next question comes from Aaron Schwartz from Jefferies. Your line is now open.

Aaron Schwartz – Jefferies

Good morning I had a follow up question on the service provider vertical its been extremely choppy for the peck industry so far this year I think it’s a very lumpy vertical its sort of difficult to get a I guess a read on how you believe if there in the quarter obviously you had the optics of a difficult compare.

But it sounds you are pretty optimistic for growth here in the year contrasting that will see the drop in backlog can you just sort of talk to us about service provider did it come relative to your plan above or below and what gives you the confidence for that 20% growth this year or are you just being brought into sort of more run rate – and avoiding some of the lumpiness that may be some other technology peers are seeing?

Anil Singhal

I think those are basically lined with what we thought this year. Moving forward, I mean like any other company, more than 60% of the service provider business is going to come from less than 10 customers.

And we have very good relationship and we have special conferences going on with them. We don’t have estimate from all the deals we can do there, but there are plenty of projects which are in the work throughout the world, and so that is what is giving us the confidence that our talk time which will bring 60%, 70% of service provider revenue, we have very good visibility context and good feeling about NetScout in all some of the things which we announced this month.

Aaron Schwartz – Jefferies

Okay. And then just shifting to the product releases, I think you said it in sort of final beta stages and should come out later this quarter. Can you just talk about how you expect the growth to come in from that partly? Is that more or so refresh in units? I think you eluded to that or given that you’ve added lot of capabilities to the product, how do you view pricing there? Would you expect a price increase with the product as well? Thanks.

Anil Singhal

Yeah there is no real price increase and in fact many of the customers on the software side with latest hardware and appliances will get that great for free. The real gain will come in the enterprise from reinstrumenting the application side of the house because as you know our big strategy which we talked about since November even at the Investor Meeting and today as well as in the user forum couple of weeks ago is that we are transitioning from NPM space to NPM plus APM space, but since it’s a new area for us or in some sense new set of customers, that’s why as Jean mentioned that impact will be seen more on the second half.

On the service provider side we are going to be announcing something new but we are not able to talk about it today, but one big change is our voice product is finally getting online and from the Accanto acquisition and there lot of money being spent on LTE on IMS and voice-over-LTE. So that allows us to not only get new projects, but also build confidence what’s continued to do some refreshes of the 3G and 4G stuff they brought from us or other vendors in the past.

Aaron Schwartz – Jefferies

Terrific. Thank you.

Operator

Your next question comes from Eric Martinuzzi from Lake Street. Your line is now open.

Eric Martinuzzi – Lake Street

Thanks and congratulations on the year just finished. I know it’s difficult to predict a business 12 months out but you guys did a nice job last year. I have question – first of all just a housekeeping the cash from ops, and the CapEx and then I want to ask a question about the forecast, the federal business, but first the housekeeping item.

Jean Bua

So you want cash from operations for the fourth quarter?

Eric Martinuzzi – Lake Street

Correct?

Jean Bua

It was $28.4 and CapEx was $3.6.

Eric Martinuzzi – Lake Street

Okay. The Federal business – I mean that’s its just in free fall here and you guys have done a nice job growing in the other verticals, but I was just curious as you put together the 2014 forecast, I would assume you are feeling – things are probably pretty ugly here through the end of September the current Federal fiscal year. But the other half of your own fiscal year will be the first half of the next Federal fiscal year. So, just curious to know, what – how you thought about that as you put together the projections for the coming year?

Jean Bua

Well, we assume that will be slightly better than fiscal year ‘13, but not any better than fiscal year ‘12. So, yeah, we have lot of projects sort of on hold and we are assuming it will be slightly better than or somewhat better than last year, so, no growth from fiscal ‘12 to fiscal ‘14 in the best case.

Anil Singhal

But we are continuing to keep the investment in the federal sector and continue to build our customer relations and support the installation. So, we really want to be prepared when the market comes back and our commitment remains strong.

Eric Martinuzzi – Lake Street

Is there anything anecdotal that you could say, gives you that hope or expectation for a slight recovery?

Anil Singhal

Well, I do think that the drift of our product increasing the – pronounce, drift our product into the security space by our customers using our technology both for segment and incident response is going to begin definite upside beside our segment in particular.

Eric Martinuzzi – Lake Street

Okay. Thank you.

Operator

your next question comes from Robinson from Wonder Lake Securities. Your line is now open.

Robinson – Wonder Lake Securities

I’ve got a couple of questions. First on the modeling here in the mix of – in the space of revenue. Can you comment on the customer projects and how they have stretched in the fourth quarter relative to maybe three and six months ago? And how that aspect of the industry pace affects the – your outlook in terms of the revenue percentage in the first half and whether that’s impacted it or if it’s all just the timing of new product releases?

Anil Singhal

I think the first half will still be – I mean still be higher than the first half than last year. So what Jean was talking about is – the results will be much – I mean the component of the results will be much higher than usual in the second half because lot of the products we are announcing are really not going to be selling actively until the end of this quarter.

And those are the ones which are – we are using will be counting on to do the growth for us both in the voice area for example, for the service provider side and entering the APM space – sorry, on the service provider side for the voice product and for the APM side for the enterprise.

So, those are the reasons why but we don’t see any lengthening projects. We see lot of interest except for federal we are not seeing any real change in terms of projects getting delayed.

Michael Szabados

Right. So as we talked about in the past quarters, actually probably there was past couple of years with the – whether it’s continuing economic condition, the pipeline always remains stronger, always interest where we have lost from visibility in the past year across what really goes into funding we – we have founded and we have talked before that company’s large enterprises have put in one cycles for funding and have delayed them.

So there is no change that we’ve seen in Q4 over that and I don’t really anticipate that much increase in our fiscal year ‘14 will have much, much, much more than economically answer to that, that funding scrutiny is part of our pipeline doesn’t improve significantly.

Robinson – Wonder Lake Securities

And I expect that as DN becomes prevalent you will have more things to measure and monitor but there has been a fair amount of interest I guess of the caps that are part of the open floor standard and use of these types of functions for distributor to internet monitoring and I was wondering, how you will plan around that and how it impacts your the way you look at this packet switch business?

Anil Singhal

Well as we said that our packet switch business share is going to increase from single digits to double digits starting this year or moving forward and so that’s the indicator of that we’ll be taking market share there and second is not only increasing the share but of a bigger number. And second thing is we are doing also initially packet low switch competes with the budgets for pro but overall it enables the instrumentation more effectively and you see bigger sales for everyone specially for somebody like us who is the leader in both the spaces.

As to the SDN and open floor is still lot of marketing hype, but we are very involved with SDN initiatives and we will be upgrading our switch also to that as other people do it.

Jean Bua

And we do see additional opportunities as the end base networks for monitoring solutions, so we are very aggressively exploring just traditional but new ways of applying our technology to SDN.

Robinson – Wonder Lake Securities

Does the voice-over-LTE augmentation for a service provider offering, is that – the release timing also this quarter or is that more – is that later in the year?

Jean Bua

I think it’s later in the year. Like I said; our product will be fully ready later in this quarter. And because, as you know, part of the technology is being coming from the Accanto acquisition and that has been migrated to the NetScout platform now. And now we’re ready to go full board with that. And so, by the time, these deals take time and so more impact will be seen in the second half than in the first half.

Robinson – Wonder Lake Securities

Well, will we start to see R&D moderate as a percentage in that timeframe?

Jean Bua

I don’t know.

Robinson – Wonder Lake Securities

Well, I know you will just because of the top line but it seems like there’s been quite a push for ASI too and these other products.

Jean Bua

Right. So as we’ve talked in the past, R&D is a little higher than our long-term operating model we’d suggest, mostly due to the acquired technology and the engineers that we have in huge development move now. That 16%-ish as we increase revenue will go back to the 13%, 15% range.

Anil Singhal

If any one acquisitions which we can’t predict at this point. So that is to answer that.

Robinson – Wonder Lake Securities

Jean, can you give us the depreciation number?

Jean Bua

Sure. Depreciation for the quarter was 2.1 million.

Robinson – Wonder Lake Securities

Thanks a lot for taking my questions.

Jean Bua

You’re welcome.

Operator

Your next question comes from Alex Kurtz from Sterne, Agee. Your line is now open.

Alex Kurtz – Sterne Agee

Yeah, thanks Cathy for sneaking in here. Great quarter guys. I just had a quick question Jean about how we should we really thinking about product growth. First up, I know you mentioned low mid single-digit acquisition revenue for fiscal ‘13, is that all in product Jean or is that spread across the product?

Jean Bua

That is – one second, it’s mostly product.

Anil Singhal

I just want to also mention while Jean is looking at it that in the past I think there will be lot of question about – lot of question about organic growth and acquisition related. All of our growth is mostly or most of our growth is organic. All these companies I mean practically very small in revenue and also in area – some of the areas we shifted around. So some of it acquisition related, but is being sold by the same sales force. It’s being developed by the same team. The teams – engineering team have been integrated and so we look at it as part of really being and had it too much revenue from the existing revenue from the acquisitions.

Alex Kurtz – Sterne Agee

So fiscal ‘13, let’s say organically it maybe 15% product, obviously fiscal ‘12 had some issue, so is it fair to say that product growth for fiscal ‘14 should be roughly 10%, is that the right way to think about it on normalized basis?

Anil Singhal

No I think it is closer to high teens.

Jean Bua

It should be product growth at the mid point of our guidance would imply mid teens.

Anil Singhal

Yeah.

Alex Kurtz – Sterne Agee

For fiscal 2014?

Anil Singhal

Yes.

Jean Bua

Just like this year, we had at the high end of the guidance this year we had fiscal year 2013 was 14% and 18%. Last year was with 14% and 18%.

Anil Singhal

So last year our product revenue growth was 18%.

Jean Bua

Yeah.

Anil Singhal

Yeah.

Jean Bua

So that’s always few points higher than overall growth which will be the trend depending on where we end up this year.

Alex Kurtz – Sterne Agee

So just to finish here, mid teen product growth and most of that’s organic for fiscal 2014?

Anil Singhal

Yeah.

Alex Kurtz – Sterne Agee

Okay thanks guys.

Anil Singhal

Thank you.

Operator

Your next question comes from Gary Spivak from ABR Investment Strategy. Your line is now open.

Gary Spivak – ABR Investment Strategy

Hi thank you. Jean I believe you mentioned that the decrease in bookings this quarter over last year that half of that was from the government, what was if that’s true then what was the other contribution to that?

Jean Bua

Decrease in bookings for the quarter or for the year?

Gary Spivak – ABR Investment Strategy

For the quarter?

Jean Bua

Well on all of the verticals for this quarter we are down on a year-over-year basis for the exception of General enterprise. As we’ve previously mentioned on the call, last year’s comp was a difficult comp. We had we passed $100 million. So all of the verticals with the exception General were down slightly or down.

In General what we saw was over the year different some of our new products NVVM and the Packet Flow Switch technology really taking hold in the multitude of industries that stick within the general enterprise. So government on a new business basis for the fourth quarter year-over-year was down about 50%. And the rest of them were down in the mid to upper teens with the exception of general enterprise.

Anil Singhal

But clearly, as we have mentioned before and as well as this morning, because you can see the number of $1 million deals we do especially on service provider the business is so lumpy, that’s why we give yearly guidance. It’s good to track how company is going every quarter, but I think, the best way to look at our business is on yearly basis. And despite what Jean said, I think that’s – when you start looking at quarter-over-quarter comps, it becomes difficult, one quarter suddenly looks so great and other quarter looks bad. So, I think we should just keep that in mind as we compare the quarter versus the year.

Gary Spivak – ABR Investment Strategy

Yes. I understand that. Thank you for that clarification. My next question is regarding the security space with incident response. Do you have any partnerships or natural alliances that you can tell us about or point that as potential alliances or partnerships going forward?

Anil Singhal

Now, we have couple of very important one, but I should object before the call whether, yeah, I don’t think we can talk about it. But we’ll make sure that we talk about it in the next quarter assuming we have the clearance. But we have couple of high profile once.

But overall, this year we were highlighting IBM stuff and like Michael said, we’ll probably announce something towards the end of the year a special initiative on the cyber space. What Michael was talking about is, currently how people are using our product for cyber security that is well has lot of interest and that has resulted in at least one partnership maybe two already.

Gary Spivak – ABR Investment Strategy

And then my last question is on the APM. Is that going to be applications specific? Will it be a targeted application or is it going to be plug-and-play and allow people to instrument whatever they have?

Anil Singhal

Yeah. It’s what all applications – they will use. I mean they will need certain volume of our past equipment to be able to get it for free. But I don’t know whether your question was about are we targeting, let’s say middleware application or oracle. Our solution is unique in the ATM space that same solution works with slight configuration and provisioning for all applications in the customers IT environment once we have the ASA adapter which is customization and so that’s the goal.

So every time you do, use it for a new application you don’t need – necessarily need a whole new product or upgrade.

Gary Spivak – ABR Investment Strategy

Great. Yeah that was my question. Thank you very much.

Anil Singhal

Yeah.

Operator

Your next question comes from Scott Zeller from Needham & Company. Your line is now open.

Scott Zeller – Needham & Company

Hi. Good morning. Want to ask you about the financials vertical? Can you explain the types of projects that you’re seeing in that vertical right now? They are of course questions around all the verticals. But just the character of projects and if you’re seeing any differences or is it more of the same?

Anil Singhal

Let’s talk about I mean there are continue to be things in the trading, at trading verticals, I mean sub verticals where people want to look at latest he operates and things like that where are is sort of fragmented competition there.

Then we have e-commerce and we have just released something in the – which allows us to look at encrypted traffic in real time which most people either cannot look at it or are blind to that information or cannot do it in real time. So our traditional competition does it offline and we are able to provide now the same capability for encrypted traffic and which is very important for them to get visibility.

And so some of our product was have ended useless in places where their traffic was encrypted. So we are able to do that and that’s under test right now and that’s going to be part of in this release we are announcing. So I see those two areas at least in addition to all financial have customer applications and can benefit and investment a lot in the ATM space and I think we can use our champion in the networking area to target those budget.

Scott Zeller – Needham & Company

Okay. Then another vertical the government area there has been some Q&A on that already but as we look over the past several quarters, it’s good to company tempered expectations or on government as you’ve done. But I guess when you look back to one government was material and doing better for the company were the projects concentrated with a few large buyers from the government and perhaps those efforts have rolled off because there has been a dramatic slowdown in government as you have guided us, but how would you characterize what has happened, was it a few buyers only in the government, or any color there would be helpful.

Anil Singhal

I think top 10 is again applicable there; also we were more on the defense side not on the civilian side and that has been impacted quite a bit. But we were doing business in other – I mean, most of the projects were quite large and million-dollar deals as you probably see from couple of years ago were quite high in the federal area. And so, I don’t – I can’t tell you exactly, but it’s across the board. I mean the kind of depression we saw last year in terms of how much down it was, it was across the board. But yes, I think it’s mostly big projects.

Scott Zeller – Needham & Company

Okay. And then...

Anil Singhal

Those big projects long-term in nature. And as we continue to say, we have the pipeline. In fact, the pipeline keeps building. It is just more a question of whether the funding for the types of projects that our customers have will come through or not.

Scott Zeller – Needham & Company

Okay. And then for service provider, I may have missed this in the previous commentary, but there’s been some question around the strength of 4G LTE roll outs and how much of a driver that is for your business versus let’s say 3G, older network projects or projects were on VoIP. Could you give us some color on if it’s the new efforts around 4G LTE that are driving or is it a balance of old versus new? Any color would be helpful.

Anil Singhal

So I think 4G LTE is still – I think people still continue to expand. And you are right that lot of the initial investment is done, but they continue to expand. But in the voice-over-LTE and IMS area they are investing – I mean that’s new investment which we are counting on, that’s traditionally part of because triggered by LTE also. And lastly there is lot of interest on how you what kind of analytics you do. We talked about cell based analysis and how – what kind of issues that impacted by cell towers, the handset types like Google phone versus others. So there are new features needed on existing LTE also.

And thirdly the vendors are coming out with infrastructure vendors like Ericsson, Cisco are coming out with common boxes to cut down reduce of shelf space and everything with 2G 3G and 4G combined, so in those cases that requires a refresh of our equipment also even though they brought for LTE.

Scott Zeller – Needham & Company

Thank you.

Operator

Your next question comes from Kevin Liu from B Riley & Company. Your line is now open.

Kevin Liu – B Riley & Company

Good morning. Just looking at your growth for fiscal 2013, you guys had strong performance in both North America and Europe and I was wondering if you could just talk a little bit about the geographical expectations for growth as we look towards fiscal 2014?

Anil Singhal

It’s still going to be basically similar to this year it will be little more so now it’s internationally is that right 25%?

Jean Bua

So portions are relatively consistent 25% and 25%. What we see internationally and how we think about the business going forward is that Europe it has Europe and Asia still when it comes to the financial institutions as we’ve talked about it’s been very-very quite.

We continue to keep up our partnerships and our relationships and those customers still continue to be loyal evidenced by the fact that they continue to purchase maintenance and support of the existing product. But they are very focus still internally on their internal operation. We saw some shift and it was – as I mentioned in the comments, only about a 2% increase. It was in Europe. And that is – that’s mostly focused on service provider.

We get a lot of questions on service provider in 4G and 3G. And just summarize 3G has been where we been playing even if it IT-based. And 4G is as Anil mentioned still rolling out. We still see a lot of opportunity in that area. In 2014, we probably think it will be spread out a little more through the international operations, because we will have the voice product for refreshes.

We will also be able to do – be a vendor for one-stop shopping. So the revenue might be a little more disbursed in FY ‘14 in SP rather than concentrating like top U.S peers. So, we haven’t really seen much of a shift to our revenue base going international.

Anil Singhal

Yes. So U.S. will still be 75% to 85% next year also, that’s what we think.

Kevin Liu – B Riley & Company

Thanks. That’s helpful. And then, just few quick ones on the new product areas. For packet-flow switch launch are you getting better reception right now within enterprise or service provider, and then both for that product as well as the newer that you’re announcing for APM.

What your sense about your relationships with appropriate decision makers and your customers. Do you feel like you already have pretty descent traction and could therefore drive that growth with some confidence or is there a lot of, I guess, business development that needs to be done?

Anil Singhal

I think we have existing relationships and all those and initial traction has been higher on the enterprise side, but – because service provider make more long-term decision and they already spend something. So as Michael talked about as refreshes are coming up for 10G and otherwise the higher core density that’s where we have a chance. So moving forward we see traction sort of equal -equally on both sides as a percentage of revenue.

Michael Szabados

Right. So regarding the PFS question, if you – the Simena acquisition that we did about a year ago that was a lower scale product. So naturally, it fit more into the enterprise segment. The ONPATH acquisition at 3900 that Michael also talked about that is much higher capacity and that would be of interest to the service provider market also.

Kevin Liu – B Riley & Company

Thank you.

Operator

Your next question comes from Sanjit Singh from Wedbush. Your line is now open.

Sanjit Singh – Wedbush

Yeah, thank you for taking my questions. I wanted to get back to what’s driving the momentum in general enterprise. We had some nice bookings growth over the last couple of quarters. Is it just a function of the new products? Or is there something going on the channel or competitively, do you see some opportunity there with or maybe Riverbed or Opnet, just wanted to get a sense of what’s driving momentum in general enterprise?

Anil Singhal

Well first of all its not new product yet because even though people knowing that we have been investing and we have been done – doing a lot of little smaller user forum guide meetings, people are feeling very good about continue to invest in NetScout. So that’s helping to some extend indirectly, but new product is not that had a direct impact yet.

PFS as we talked about, lot of the growth which we talked about single-digit in PFS was coming from the enterprise. And the rest of the business has – I mean has stayed steady except in few places where we take some special application or work for a couple of large customers that has helped. But most of the growth so far has been – in the enterprise has been in those areas.

Jean Bua

And as we talk about that has been in the industry and in the past we have always seen different businesses to different applications whether as retail or utilities and the products that we have invested in the past. So for instance, nVVM had sold few times in there. Also as I had mentioned just a few moments ago, the products that we acquired from – the PFS 1500 has sold nicely into those industries also.

Sanjit Singh – Wedbush

I appreciate that. I think Jean last quarter you mentioned that – maybe the shift or the incremental shift might loose to more – and the search provider business might shift to the European Tier 2 search providers. Is that something that you saw this quarter, if you talk about the mix between the Tier 1s in the U.S. versus the Tier 2 opportunity? How should we think about that mix for fiscal year ‘14?

Jean Bua

In the quarter I don’t – I think in the quarter we didn’t really see much of the shift towards overseas, heights of service providers. Just to be clear, we will still continue to sell into Tier 1. We still have sort of our top customers of the U.S. Tier 1.

We just see as we have talked about before to continue the growth of 20% plus and the amazing adoption and recognition that we’ve got in the globe on our IT based product that we will naturally just be able to sell more and more into international as the Tier 1 are in the labs right now with VoLTE and might come out in the second half with choices and things like that. I don’t see that its going to be dramatic I just think that it might be a subtle enough shift.

Sanjit Singh – Wedbush

Right, appreciated. And my last question the gross margin, first half is still below 80% in several quarters still within your range was anything driving was it less federal that has higher gross margin would have just simply a mix issue or was there potentially more discounting as well?

Jean Bua

The gross margin percentages I am just looking real quick, this quarter it’s been about 80% or so over the last few quarters so you are correct about. It is slightly lower this quarter. As we had mentioned on calls before the PFS staged product which is much more of a hardware product rather than the software that we sell with the antenna stream also has a lower margin. It has maybe a 70% to mid-75% gross margin. Going forward I think will go although our gross margin should still stay around the 80% range.

Sanjit Singh – Wedbush

Got it. Thank you so much.

Anil Singhal

Good.

Operator

Your next question comes from Mark Jordan from Noble Financial. Your line is now open.

Mark Jordan – Noble Financial

Good morning. Couple of questions just related to the GAAP reconciliation. You mentioned that post-combination compensation services were 2.8 million; two questions related to that one, is that earn-out related or is that just redundancies that are incurred during the simulation process and how does that 2.8 million get spread-out over the quarters?

Jean Bua

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So the $2.8 million is compensation related to acquisitions, so some of the leading personnel from acquisition. It is not an earn-out, it is not performance-based, it is time-based. So it is relatively consistent over the quarters for the next few years.

Mark Jordan – Noble Financial

Okay. Then secondly, related to stock comp, 13 million estimated for fiscal ‘14, little under 9.5 last year. And in last – I mean fiscal ‘13 versus fiscal ‘12 we only saw relatively much less per million increase year-over-year. You got about 3.5 million increase here. Is there a specific reason for the larger jump in this year?

Jean Bua

This will be the first year that we will have the full impact of the way we schedule share-based compensation. We’re moving more towards annual and in the past few years it has been about two years. So this year it will have the first time, it will be like a full year effect.

Mark Jordan – Noble Financial

Okay. Thank you very much.

Operator

There are no further questions at this time. I turn the call back over to the presenters.

Cathy Taylor

Okay. Thanks everyone for your questions. We’ll talk again in July.

Operator

This concludes today’s conference call. You may now disconnect.

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NetScout Systems (NTCT): Q1 EPS of $0.43 beats by $0.02. Revenue of $98.1M beats by $0.67M. (PR)