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NetScout Systems Inc. (NASDAQ:NTCT)

F2Q10 (Qtr End 09/30/09) Earnings Call

October 22, 2009 4:30 pm ET

Executives

Cathy Taylor - Director, IR

Anil Singhal - President and CEO

David Sommers - CFO

Michael Szabados - COO

Analysts

Mark Kelleher - Brigantine Advisors

Jonathan Ruykhaver - ThinkEquity

Alex Kurtz - Merriman Curhan Ford

Eric Martinuzzi - Craig-Hallum

Sanjit Singh - Wedbush

Gabe Lowy - Noble Research

Operator

Ladies and gentlemen, thank you for standing by and welcome to NetScout second quarter fiscal year 2010 operating results conference call. (Operator Instructions).

With us today is NetScout’s president and CEO, Anil Singhal. He is accompanied by NetScout’s Chief Financial Officer, Mr. David Sommers; and NetScout’s Chief Operating Officer, Mr. Michael Szabados. Also with Mr. Singhal is NetScout’s Director of Investor Relations, Ms. Cathy Taylor.

At this time, I will turn the call over to Ms. Taylor to provide the opening remarks. Ms. Taylor, please proceed.

Cathy Taylor

Welcome to NetScout’s second quarter fiscal year 2010 conference call for the period ended September 31th. In terms of the format of this call, Anil will begin with an overview of our financial and operating results and David will then discuss our financial results and company performance in more detail. At the conclusion, Anil, David or Michael will take your questions.

Before we begin, however, let me remind you that during the course of this conference call, we will be providing you with a discussion of the factors we currently anticipate that may influence our results going forward. Such statements are forward-looking statements made pursuant to the Safe Harbor provisions of section 21-E of the Securities and 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, our guidance for fiscal year 2010 and our new product releases. It should be clearly understood that the projections in 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 can 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, 2009 and subsequent quarterly reports on Form 10-Q on file with the Securities and Exchange Commission.

Also in our discussion non-GAAP revenue excludes the effect of purchase accounting adjustments representing the fair value of Network General’s deferred revenue and non-GAAP net income excludes share-based compensation expenses, amortization of acquired intangible assets, costs and expense of various acquisition related items and related income tax adjustments.

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

Anil Singhal

Today we are reporting our second quarter results of fiscal year 2010. Those results are up from last quarter, but are still reflective of the slow economy and depressed IT spending across most of our verticals.

Second quarter GAAP revenues were $59.7 million, up 3% sequentially. Non-GAAP revenues were $60.1 million, up 2% sequentially. We are encouraged by the growth we are seeing in our pipeline and we continue to expect the economy and IT spending to improve in the second half of fiscal year.

As we have said since the beginning of the year, we expect that economic uplift to amplify the normal second half seasonal expense of our business. As a result of all these factors, we are reiterating our view that orders and the revenues will accelerate significantly in Q3 and Q4.

Our second quarter bottom line results were good. GAAP net income for the quarter was $7.1 million, up 35% sequentially with earnings per diluted share of $0.17. Non-GAAP net income was $9 million, up 23% sequentially with earnings per diluted share of $0.22. Our continued diligence on controlling cost and expense is paying off, raising our GAAP operating margin to 20%, which is an improvement of 5 points over the last quarter.

Our non-GAAP operating margin was 25%, a gain of 4 points sequentially. As a result, we are raising the low end of our fiscal year 2010 EPS guidance by $0.05. Recognizing that first half of our fiscal year was relatively weak, we have tightened our fiscal year 2010 guidance and guidance range by loading the high end for revenue guidance, because of our strong margin performance, we are maintaining the high end of the EPS guidance despite the reduced revenue outlook. David will give you some specifics in a few moment.

Looking forward, we see strength in our core verticals and the market remains strong for our solutions. We see increasing opportunity in the wireless service provider market and we are starting our investment hiring to accelerate market gains in that sector. We are working on tailoring our market leading technology and adding new functionality, particularly focused on the needs of the service provider space.

We will be communicating our service provider strategy to the marketplace in greater detail later this quarter. As a part of the service provider solution, earlier this month, we released a new add-on software product for the wireless carrier market that delivers a unique analysis of session performance, networks and service response times and deep packet build down of mobile data traffic.

It provides visibility for managing the exploding number of mobile data sessions from smart phones and other devices. With this and the rest of our full service provider solutions, we are optimistic about the future growth of the wireless space and believe it will contribute strongly to the achievement of our high-teens organic growth target.

In addition, we have recently released a new product focused on the increasingly important private cloud and virtual computing environment. Our new nGenius Virtual Agent software significantly enhances NetScout's role in managing and optimizing application traffic from within virtual servers located in data centers and in private clouds.

We believe this new capability improves our position in the market, by adding value to our solutions and lowering the barriers to expanding use of our solutions into the data centers of our customers who are implementing virtual technology.

On the partnership front, we are working closely with Cisco in a number of different areas. We have joined the Cisco Developer Network programs and we are participating in Cisco's wireless LAN and unified communications categories. The Cisco wireless LAN initiative that we announced last quarter uses our newly released enhancements through our Sniffer Global product.

Sniffer Global now integrated with Cisco's mobility services engine to help Cisco customers more quickly indentify and resolve network and service performance issues over wireless LAN networks.

We recently announced that two of our products have successfully completed interoperability testing with Cisco's Unified Communications Manager 6.1. NetScout nGenius Performance Manager version 4.6 and Sniffer Intelligence version 4.6 have been certified to support Cisco's voice-over-IP installations with monitoring and trouble shooting capabilities.

In summary, we are rolling out new products, technology and expanded relationship at a faster pace. We are seeing signs of improvement in the economy and strength in our pipeline. Our guidance for fiscal 2010 as it has been all year it based on our product plans and expectation of the improved global economy combined with our normal seasonality in the second half of the fiscal year. In addition, we expect that our new wireless service provider product initiative will boost our business in the second half.

Over the strategic horizon, we see a return to our IT revenue growth target, as our continued investment in technology and distribution channels bare fruit, and as we compete even more aggressively from our leadership position in the instrument and network performance management [fit].

We expect to increase our level of partnering with major player such as HP and Cisco. We are planning to grow both organically and through acquisitions to achieve or exceed our growth target.

Stay tune for announcement in the near future in all of these areas and we look forward to speaking to you again next quarter.

I would like to now turn the call over to David.

David Sommers

Our quarter results are in our earnings press release financial statements. We report our results on a non-GAAP basis as well as on a GAAP basis. Our non-GAAP results eliminate the GAAP purchase accounting effects of the acquisition of Network General by adding back revenue related deferred revenue revaluation and removing the cost and expense of various acquisition related items.

In addition we removed the GAAP effects of stock-based compensation, which increased significantly as a result of the acquisition. I will give you the specifics about the difference between GAAP and non-GAAP, as I discuss our results. These differences are disclosed in a reconciliation table in the financial table attached in the press release.

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

For the second quarter, GAAP revenue was $59.7 million and non-GAAP revenues was $60.1 million. Non-GAAP revenue excluded $387,000 of purchase accounting adjustment to recorded fair value of the acquired Network General deferred revenue.

Product revenue on a GAAP and non-GAAP basis was $30.6 million. The GAAP revenue was down 22% year-over-year and non-GAAP revenue was down 25% year-over-year, both were up 8% sequentially.

Service revenue on a GAAP basis was $29.1 million, down 1% year-over-year and 2% sequentially. Non-GAAP service revenue was $29.5 million, down 8% year-over-year and 3% sequentially.

GAAP income from operations was $11.7 million. GAAP operating margin was 20%. GAAP net income for the quarter was $7.1 million, yielding earning per diluted share of $0.17. GAAP net after-tax margin was 12%. Non-GAAP income from operations was $14.8 million and operating margin was 25%.

The following items totaling $3.2 million are adjustments to arrive at the non-GAAP operating income. The purchase accounting adjustment to recorded fair value of the acquired NetGen deferred revenue of $387,000 was added back to the GAAP revenue.

Amortization of acquired intangibles of $1.5 million, which was principally from the Network General Acquisition was removed from GAAP cost and expense. Share-based compensation expense of $1.3 million was removed from GAAP expenses.

Non-GAAP net income was $9.0 million, or $0.22 per diluted share. Non-GAAP net after-tax margin was 15%. We have used the statutory tax rate of 38% to tax effect the $3.2 million total non-GAAP adjustment amount, removing $1.2 million from GAAP tax expense.

The non-GAAP adjustments to our GAAP results are summarized in the reconciliation table included with the press release financials.

The provision for income taxes is recorded based on a full year effective tax rate of 35% on a GAAP basis and 36% on a non-GAAP basis.

Our GAAP gross profit for the quarter was $46.8 million. GAAP gross margin was 78% in the quarter. On a non-GAAP basis, gross profit was $48.3 million and non-GAAP gross margin was 80%.

We made the following adjustments to non-GAAP gross profit. The $387,000 was added back from revenue, we removed $85,000 of share-based compensation expense and $995,000 of amortization of required intangible assets. GAAP and non-GAAP gross margin were down one point from last quarter.

Gross margin remained strong due to the accelerated cost improvement actions as part of our aggressive cost and expense management program, and due to steady discounting performance in the quarter.

We expect non-GAAP gross margin to remain in our long-term target range for the rest of the year. Our current long-term model is the following. Non-GAAP gross margin is 78% to 81%, R&D expense to revenue is 13% to 15%, sales and marketing expense to revenue is 33% to 35%, and G&A expense to revenue is 6% to 8%, yielding an operating margin range of 27%.

This quarter, we achieved that range based on our strict cost and expense management. In the future as we invest in driving revenue and return to sustainable expense levels, we expect that higher revenue levels will be required to achieve our target margin range.

Our balance sheet remained strong. Cash and short-term marketable securities were $142.8 million, compared to $141.6 million as of the end of the prior quarter, up $1.2 million.

Long-term marketable securities include investments and auction rate securities valued at $28.9 million. As of September 30, the value of these securities included a temporary decline in the value of $3.8 million below par to reflect the liquidity concerns.

All these securities are related A or above by Standard & Poor's with underlying support from the federal government through the Federal Family Education Loan Program. And we believe they have no credit issues, only short-term liquidity issues.

We have classified these securities as long-term on our balance sheet and recorded a temporary decline in value to accumulate at other comprehensive loss on the balance sheet. With our strong cash position and positive cash flow, the illiquidity of these securities poses no liquidity problems for us.

We believe, we will achieve liquidity well before the maturity of the underlying bonds and our temporary valuation adjustment reflects that outlook. Because of our strong cash position and cash flow last quarter, our board approved a reinstatement of our previously authorized stock buyback program.

Depending on market conditions, we expect the buyback to be active at times during the balance of the fiscal year. The previous buyback authorization has 3.5 million shares remaining. Due to the strong upward moments of our stock and other factors, we did not buyback any shares during the quarter.

Accounts receivable net of allowances was $33 million, up from $29 million last quarter. Day sales outstanding were 49 days for the quarter based on GAAP revenue and within our typical DSO range of 40 to 50 days. This is up from 44 days in the prior quarter. Using non-GAAP revenue, DSOs were 48 days. Inventories were $7.4 million, up from $7.3 million in the prior quarter and inventory turns were 2.8 times.

Turning to other metrics. Revenue contribution from direct customers was 35% and reseller revenue 65%. Revenue from international sales was 25% of total revenue, up from 21% last quarter. Europe delivered 13%, up four points and Asia came in at 5%, up one point from last quarter. Other international sales were 7%, down one point.

Summarizing large deals that we booked in the quarter, 119 customers gave us orders over a $100,000 up from $102,000 in the first quarter. 21 customers gave us orders over $500,000 and six were over a $1 million. Three of the $1 million orders came from the government, two from wireless service providers and one from financial services.

We saw bookings from following sectors. The financial services sector was up slightly with 27% of total, government was 23% and telecommunications was up this quarter to 19%. Healthcare was at 7%, followed by high-tech at 5.

We expect much of our second half growth to come from pent-up demand from financial services and from the return of our lumpy wireless carrier buying.

As of September 30th, our product backlog and product deferred revenue was not substantial enough to disclose. Last quarter [$6] million. The product backlog decline was a result of the continued weak economy.

Our first two fiscal quarters are typically or seasonably weakest quarters, when we often see backlog declines, as we saw this year. We do not expect our Q2 bookings level, which was affected by seasonality combined with weak IT spending to be indicative of our future bookings. I will refer you back to Anil’s discussion of that in his comment.

Now the guidance, as Anil mentioned earlier, recognizing at the first half of our fiscal year was relatively weak. We have tightened the fiscal 2010 revenue guidance range by lowering the high end of the revenue guidance.

We now expect GAAP revenue to be in the range of $259 million to $269 million. The non-GAAP revenue range, we expect to be $260 million to $270 million.

In addition despite the weak first half of our year, we have been successfully managing costs and expenses with consequence improvements in operating margins, and as a result we have raised the expected low end of the range for fiscal 2010 net income per diluted share and we have not lowered the high end of the EPS range despite lower expected full year revenue, at the high end.

GAAP net income per diluted shares now expected to be in the range of $0.65 to $0.75, and non-GAAP net income per diluted share between $0.85 and $0.95.

The fiscal year 2010 non-GAAP revenue and net income per share estimates include a purchase accounting adjustment to fair value of approximately $1.3 million of Network General’s deferred revenue.

Amortization of acquired intangible assets of approximately $5.9 million, share-based compensation expenses were approximately $5.6 million plus the related impact of these adjustments on the provision for income taxes of $4.9 million.

That concludes our financial discussion this afternoon. Thank you for joining us for our prepared remarks and we look forward to taking your questions. Sean, would you go ahead please.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mark Kelleher from Brigantine Advisors. Your line is open.

Mark Kelleher - Brigantine Advisors

I was just wondering if you could dig a little deeper into the wireless opportunity. What are you seeing there? Where are the new products in that development cycle? How much benefit are you seeing maybe if you can quantify from the Cisco relationship on the wireless side and maybe touch on the competition that you are seeing on that sector as well?

Anil Singhal

I’ll say few things and David can add few other things and Michael can add other things to this. On the product front we have made quite a few investments and most of the product is already developed and ready to be used by the customers.

On the competition side, we continue to see the competition from Tektronix and Agilent and host of other vendors. Tektronix being part of Danaher, and I don't think the Cisco relationship is directly tied to our service provider business. We'll be seeing more help from them on the enterprise side.

David Sommers

Mark, this is David. The Cisco relationship has expanded a bit from what we announced earlier in the year, but as Anil said it's not service provider focus, it's enterprise focus and even on the enterprise side, it's yet to any significant of revenue. We expect that to happen over time, but it will take a while.

Operator

Your next question comes from the line of Jonathan Ruykhaver from ThinkEquity, your line is opened.

Jonathan Ruykhaver - ThinkEquity

Congratulations on the execution as it relates to profitability. My question is, David, when you look at the growth targets, what did it implies for revenue in the second half, do those assumptions basically implied at Telco as a percentage booking get back to where it was, let's say, in the third quarter of last year, fourth quarter of last year in the mid-20% range?

David Sommers

Well, Jonathan, we certainly expect Telco to grow. When we talked about lumpiness, we haven't had in the last two quarters a significantly sized Telco deal, and we did have in the last half of last year. So, yeah, it's implied, and that is a return of significant Telco big lumps, and that's not a strategy of hope, we have in them pipeline and we're working on them actively as you would expect.

Jonathan Ruykhaver - ThinkEquity

Okay. Just as it relates to those the newer service provider-focused products, are those products important to driving that Telco business or is that somewhat of an incremental opportunity on top of what you think you would normally do in technical markets?

David Sommers

As you would expect, we have a continuing flow of our products that our customer expect from us always. What's different here is, we have now a Telco-focused stream of products and as we also ways do, we share our maths with our customer and they have some general idea of what's coming, and it is on that basis that we can today provide them value and even more value tomorrow that they buy our products.

It is not that the step up in the business is that we are guiding to is depended upon that, but clearly without that kind of continued investment and focus on the service provider business, we wouldn't continue to penetrate and gain share in that market, so there is an indirectly, but not a direct one.

Jonathan Ruykhaver - ThinkEquity

Okay, good enough. Then I have a question on the new InfiniStreams 2900 product that started shipping in September. Is that product viewed as a cost-effective solution targeting may be a lower segment of the enterprise market relative to were you have sold historically, or is it more of a focus on existing costumers within secondary network links as opposed to some of the high capacity links where deep packet capture has historically been placed.

Anil Singhal

In early part of this, we see second of these, which people putting a 2900 on lower or smaller sized-segments or medium-sized segment of our big enterprise costumers who are buying the high end product also, but over time we hope, we can go after costumers who are not currently using InfiniStreams.

Jonathan Ruykhaver - ThinkEquity

Okay. Is this an important component in terms of what you are seeing on the part of customers and then heed to more holistically have Probes deployed in a broader network environment in order to troubleshoot [intermediate]?

Anil Singhal

Yes, that’s true and I think you used the word holistic to talk about widespread coverage and in order to get the complete value out of our product you need visibility across the network and for that you have to instrument both the big segment and the small segment.

Jonathan Ruykhaver - ThinkEquity

Okay, good enough and just final question as it relates to the Cisco partnership. When would you expect to see some pull from that Cisco channel?

David Sommers

We expected in the several quarters probably not much this year, but into the beginning of next year we hope to see some results.

Jonathan Ruykhaver - ThinkEquity

When you say next year you mean calendar year or fiscal year?

David Sommers

Fiscal year, sorry no dependency on this second half of this year.

Operator

Your next question comes from the line of Alex Kurtz from Merriman Curhan Ford. Your line is open.

Alex Kurtz - Merriman Curhan Ford

The government vertical looks like it was down sequentially, you would have thought that would be a little bit better this quarter considering the fiscal year end. Get us a little bit understanding what may have happened there, maybe some of that spending was done in the June quarter, a little color will be great.

David Sommers

Sure. Yes, there may have been some pull ahead it’s hard to tell exactly. There are still deals in the government pipeline that didn’t close in the quarter. Our quarter wasn’t depended upon them, but there is business, if we didn’t see this what was has often been the seasonal fiscal year end [across] with the government and some deals that we thought might be benefited by that didn’t happen and we still expect them to happen at some point, but quite frankly, we’re trying to figure that out, why that is; whether it’s new administration issues or it was alternative priorities or what, but it was weaker, you’re right, it was down. It wasn’t so much that our second quarter, September quarter results were low, that the June quarter results were high in relation to normal, right?

Alex Kurtz - Merriman Curhan Ford

Right, that was 30% and so, look at the enterprise vertical, David what do you seeing there as far as improvement and demand outside your core verticals?

David Sommers

Well, it’s fair to say that we read the same papers as everyone else in the call reads, and we see the predictions that things are going to turn up and we’re expecting to see that. We haven’t yet seen that in terms of significant deal flow. Pipeline is healthier in the backend of the year, but certainly with financial services, part of enterprise, we expect government to continue to be to grow for us and be strong.

Some of the seasonality, we just talked about a little difficult to get our hands around at the moment. Outside of the enterprise space service provider we expect to be strong. The general enterprise is, we still need to see, what’s going to happen with that, but with that all part of our guidance fabric.

Alex Kurtz - Merriman Curhan Ford

Just to face up here, when you guys are lowering your the high-end of your guidance on the top line, which one specific vertical that stood out that I mean to say looking at into the pipeline, is that vertical, you need to lower estimates of your guidance?

Anil Singhal

Yes, David may have a comment also on this, but it was not particularly on any one segment. I think it's just showing the general weakness in the first half. It's the reason for lowering the end of the guidance, and obviously proportionately it will be higher on our big segments, but it was not really localized to any one segment.

David Sommers

That’s correct. I have nothing that.

Alex Kurtz - Merriman Curhan Ford

All right, that's all on the operating side. Thanks.

Operator

(Operator Instructions). Your next question comes from the line of Eric Martinuzzi from Craig-Hallum. Your line is open.

Eric Martinuzzi - Craig-Hallum

On the lumpy wireless carrier buying comment, I’m curious to know, a lot of times you guys are not the primary, CapEx is being acquired your part of the larger project. Just curious to know if there is milestones that as the project already been laid out, and it just a question of achieving milestones or is the larger projects yet to be committed to, and you are anticipating that to happen?

Anil Singhal

Eric most of the projects, which we are bidding for and RFPs are available, and that they are clearly defined. There are some other projects which are on the related to 4G and LTE, which are in the labs right now, but the rest of the business, the project are clearly well-defined and request for proposals are being sort out aggressively by these vendors.

David Sommers

Eric, everything that's in our Q3, and virtually everything that's in our Q4 pipeline and service provider is subject to a projects that's already defined. The team worked, the timeline is set, obviously subject to change always, but the timeline is set, and we are working against that timeline.

As Anil said, sometimes they are competitive and we thus not guarantee that we are going to win them all. If it's not in the pipeline now, we are not counting on it.

Eric Martinuzzi - Craig-Hallum

Shifting gears to the competitive landscape and acquisitions in the space. CA acquired NetQoS back in September, just curious to hear to your thoughts as to how you believe that impacts the competitive landscape in both, the near-term and longer term?

Anil Singhal

First of all this acquisition shows the importance of network management and the types of things, which we are providing, but we competed with NetQoS only in a small portion of their product line, and we think that competition overall will be lesser with CS acquisition and somewhat because of their slightly different focus than NetQoS.

As a small vendor, I think they got more chances as a second choice against our products in the marketplace. So, overall we expect similar effect as what happened when CA bought Concord. We were seeing more competitive deals against Concord at that time than we saw after CA acquired Concord. So, we see roughly the same thing playing out again.

Eric Martinuzzi - Craig-Hallum

Do you believe in the larger hardware networks, the dashboard guys see them deciding that this space is much more strategic than it may have been perceived as in the past.

Anil Singhal

I'm not sure. I think I am sure that those people are thinking about it, providing any much specific them. It's not very clear right now. I think they were already interested in that. We have done integration with many products in the marketplace dashboard for HP and IBM and Smart, and we see continuing interest in this space.

Operator

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

Sanjit Singh - Wedbush

A couple of housing keeping question, you have CapEx, headcount and depreciation and amortization?

David Sommers

CapEx is $1.2 million, depreciation in the quarter was $2.1 million, amortization $1.5 million, headcount 770.

Sanjit Singh - Wedbush

Now with this quarter could you talk about the sales cycles and whether they were longer or shorter, this quarter?

David Sommers

Sure. Yes, we saw some lengthening of sales cycles principally due to the economic effects, we believe, and it was pretty much across the board. That has to do with the people thinking hard and committing slowly. It normally happens this time in an economic cycle. It’s not unusual and has been part of our expectation for the first half of the year versus the second half.

We expect that will, as people start to spend as we talked in earlier about enterprise spending that we really haven’t seen the turn on yet, but as it does turn in the general enterprise and we think it’s turning now in financials and certainly service providers we expect to pickup those. The part of the effect of that it’s a cycle shorten, yield out of the pipeline increase and we expect that, that will happen in our second half.

Sanjit Singh - Wedbush

Two quick follow-ups, again on the competitive landscape are you seeing any competition from SolarWinds maybe coming upstream into your business and then my follow-up after that is on the guidance without getting too specific into numbers. What is risk that as we go into fiscal Q4 that we are going to be faced with enough challenge in terms of seeing a significant ramp?

Anil Singhal

Let me talk about the first question on the competitive front. We are not seeing any competition, I know there is little bit competition for budget, but we are not seeing any competition from SolarWinds.

There are two or three kinds of category of product customer need as far as part of their management portfolio and we are in different categories than SolarWinds. SolarWinds compete more with the dashboard players, people who are using existing instrumentation in the network to drive their management solution. So, SolarWinds as really literally no affect on competitively on for [network]. For guidance, David.

David Sommers

Regarding the second half ramp yes, there is a significant uptick and we’ve try to address that in the prepared remarks to give some clarity on that. We expect that our normal seasonality that always occurs on our back half, which is typically 20% to 30% higher than the first half will be accentuated this year by the pent-up demand in both service provider and financial services and that it will be accentuated further by any economic impact. You think about our guidance has as at the low end hits those first factors.

Normal seasonality and the pickup in demand that we can see today, and the high end of guidance as the added benefit of an economic tailwind as opposed to headwind. Having said that, I don't want to leave you with the impression that we just look at those macro factors and say, well that's got be where our revenues goes.

We don't do that. We have a pipeline that is substantial, it's much bigger now in the second half than it was for the first half and we track those deals, deal-by-deal and we have them all in sight to achieve that second half guidance otherwise we wouldn't give it.

Operator

Your next question comes from the line of Gabe Lowy from Noble Research.

Gabe Lowy - Noble Research

A couple of quick ones here, David, or may be not so quick. In the broader enterprise market and to an extent within your financial and Telco verticals, to what extent do you think it's possible that as virtualization is taken deeper into the organization for consolidation projects and as customers are looking for next generation data center builds.

Do you think, that might be having a bit of a lag effect on you as they would bring you in sort of even though they designed you in they would bring you in after the fact, once they have committed to dollars and started these projects. Is that sort of having an ancillary impact to the overall macroeconomic environment?

Anil Singhal

We don't see that impact like that. In fact, we made an announcement on the virtualization front a new product and we are getting lot of good feedback from analyst and customers, we don't really feel that importance of our products will be as much if not more in the virtualized environment as for the non-virtualized or previous environment.

Also we see virtualization instrumentation not necessarily replacing the other parties in addition to the non-virtualized environment. There are key concentration points they will continue to use InfiniStreams and the deeper down we are virtualized environment are there and there is a reduced visibility on, which application is running on which server.

They will need additional instrumentation in the form of Virtual Agents. Yesterday they didn't need. So, overall we see incremental gain, because of virtualization rather than the effect on existing projects.

Gabe Lowy - Noble Research

Also, I was just wondering if you had any thoughts on the recent acquisition by Compuware of Gomez, and if you think that that lays out a new market extension that could affect you as well.

Michael Szabados

Well, so don't know why Compuware whereabouts, about Gomez more than anyone else, but it’s an interesting extension that doesn't do what we do, obviously. Therefore, we thanked our competitiveness. We don't really compete much with Compuware in the first place, but end user experience with Active Agent technology is something that we have looked at in the past, and we continue to assess whether or not that kind of thing would ever be useful to us, so it was an interesting transaction.

Anil Singhal

Just one thing I want to add to that is, there are products, which can help you improve the user experience, and then there are products, which can used to just measure than user experience and we believe the things, which help us improve the end-user experience are more important, comparatively what the thing, which measure that.

So, government product and what the activation product, which David is talking about, really addresses the first category of measuring than user experience, and we think that once you know, it’s not right, then you need other product to really drilldown and figure out, what’s going on, and that’s where our product comes into the picture.

Gabe Lowy - Noble Research

Thanks and just last quick one, has any of the media noise about high speed trading platforms and competitive advantage affected you all on the financial services budget planning or is this going ahead full throttle and do you have any thoughts on whether this going to be any added regulation there?

Anil Singhal

I don’t know David. Do you have any idea on that regulation front?

David Sommers

Yes, I think the issue from my perspective that leads to ,this is in the company perspective, because we don’t have one on this, but I think the high speed trading issue for regulation isn’t one of high speed trading its way of, principally one of how high speed trading is done. It seems unlikely that the growth of high speed trading will be stopped.

Some people may think twice about how they do it, and I think that’s the probable purpose of the regulators, but in case with regard to our near-term pipeline and projects we can’t tell any change, any impact, from any of that.

Operator

There are no further questions in queue.

Anil Singhal

Alright, well thank you very much all for coming. Thanks for good round of questions. We appreciate your interest in NetScout and our quarterly results, and we will look forward to seeing you in 90 days at the end of our next quarter. Thanks again.

Operator

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

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Source: NetScout Systems Inc. F2Q10 (Qtr End 09/30/09) Earnings Call Transcript
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