Ixia's (XXIA) CEO Bethany Mayer on Q4 2015 Results - Earnings Call Transcript

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Ixia (NASDAQ:XXIA)

Q4 2015 Earnings Conference Call

February 23, 2016 04:30 PM ET

Executives

Maria Riley - IR, The Blueshirt Group

Bethany Mayer - President and CEO

Brent Novak - CFO

Alex Pepe - COO

Errol Ginsberg - Chairman and CIO

Analysts

Hendi Susanto - Gabelli & Company

Patrick Newton - Stifel Nicolaus

James Kisner – Jefferies

Mark Kelleher - D.A. Davidson

Matt Robison - Wunderlich Securities

Operator

Good afternoon. I will be your conference operator. At this time I would like to welcome everyone to Ixia’s 2015 Fourth Quarter and Full Year Financial Results Conference Call. All lines have been on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions] Please note that this call is being recorded.

I would now turn the call over to Maria Riley of The Blueshirt Group, Investor Relations for Ixia. Ms. Riley, you may begin.

Maria Riley

Thank you, Tracy. Good afternoon and thank you all for joining us today. This call is also broadcast live over the Web and can be accessed on the Investor Relations section of Ixia's Web site at www.ixiacom.com for at least 90 days. Members of the Ixia management team that are with me today on today's call are Bethany Mayer, President and CEO; Alex Pepe, Chief Operating Officer; Brent Novak, Chief Financial Officer; and Errol Ginsberg, Chairman and Chief Innovation Officer.

After the market closed today, Ixia issued a press release reporting our financial results for the fourth quarter and year ended December 31, 2015. We would like to remind you that during the course of this conference call Ixia management may make forward-looking statements, including without limitation, statements regarding financial projections, statements as to the plans and objectives of management for future operations and statements as to the Company's future performance, financial condition or results of operations. These forward-looking statement are not historical facts, but rather are based on the Company's current expectations and beliefs.

Words such as may, will, could, should, would, expect, intends, plans, projects, believes, seeks, and estimates and variations of these words are intended to identify forward looking statements. The Company's future results may differ materially from those projected in these forward-looking statements. The factors that may cause future results to differ materially from the Company's current expectations include without limitation the risks identified in the Company's annual report on Form 10-K for the year ended December 31, 2014 and in its other filings with the Securities and Exchange Commission. Ixia undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

Note that unless specifically noted otherwise, the Company is discussing all numbers on a GAAP or pro forma basis excluding certain non-cash and nonrecurring items. A full reconciliation of non-GAAP financial measures covered in this call to the most directly comparable GAAP measures is available on the Investor Relations section of the Company's Web site. I would also like to mention that the Company's revenue mix information, such as revenue percentages by product, is based primarily on amounts invoiced to customers during the specified period and the additional information regarding historic revenue mix as well as other information is also available on the Investors section of the Company’s Web site.

And lastly I would like to announce that Ixia will present at the Morgan Stanley Technology Media & Telecom Conference in San Francisco next week on Thursday, March 3rd. We look forward to seeing many of you there.

With that I would like to turn the call over to Ixia's President and CEO, Bethany Mayer. Bethany.

Bethany Mayer

Thank you, Maria and thank you all for joining us. The fourth quarter was a strong finish to a record year for Ixia. We delivered record revenue of 138.5 million well above our guidance of 127 million to 132 million. Our fourth quarter growth was driven by increased demand for our high speed Ethernet test products and our application and security solutions including the Perfect Storm platform and record bookings for our application threat intelligence subscription.

Demonstrating the leverage of our model with our top, our strong top-line performance and improving gross margin we expanded our operating margin by 350 basis points over Q3 and achieved non-GAAP diluted EPS of $0.22 also well above our guidance of $0.13 to $0.17. For the full year revenue grew to 516.9 million up 11% over 2014. Our above market growth in NTS and growing security sales were strong contributors to our 2015 performance. We believe that approximately 30% of our business is now tied to our security products as we estimate that bookings for the security portion of our business grew approximately 33% in 2015.

Throughout the year we maintained a sharp focus on operational excellence and financial discipline. As a result, we exceeded our internal operational plan for the year and I would like to share with you a few of our annual accomplishments. We improved our gross margin by 250 basis points to 78.1%, we grew our operating margin by 700 basis points to 17.6%. We doubled our net income to 56.7 million. We increased EPS by 86% to $0.67 and we generated 99 million in cash from operations, a 159% increase over 2014.

Looking at our top-line performance in more detail we saw a strong rebound in growth for our network test solutions in 2015 which grew 20% year over year in Q4. Our full year NTS revenue grew 12% a level we have not seen on an organic basis in several years. Revenue for our core high speed Ethernet products grew over 50% for the full year. Our first to market position in 100 gig and 25 gig contributed to our growth which we believe is above market. Further extending our technology lead in high speed Ethernet we have recently introduced a new 50 gig test solution designed for the testing needs of application intense Web 2.0 companies, cloud and telecommunication service providers as well as NEMs.

Our market leading application and securities solutions were also a key growth driver for our NTS biz products. Application and security bookings grew to 37% of total 2015 NTS bookings. Our continued innovation and commitment to being on the leading edge of technology transition has enabled us to gain test market share in 2015. Our network visibility solutions revenue grew 10% in 2015 muted by our performance in Q4 as a number of enterprise deals in North America slipped out of the quarter. These deals remain in our pipeline and we tracking them closely.

In looking at our full year NTS performance we made tremendous progress in winning new marquee enterprise and service provider customers adding new and differentiated security capabilities to our platform and expanding our marketing and channel programs. In order to bring our growth rate more in line with the market we're expanding our sales coverage and in early January we realigned our salesforce to be structured around three primary customer verticals, enterprise, NEM and service provider. We are also increasing our investment in sales and marketing and adding sales resources in the field to support our growing market opportunities especially in the enterprise. We believe these changes will help to accelerate NTS growth in the back half of 2016.

A strong example of our innovation in the visibility market is our newest packet broker, Vision ONE that we announced yesterday. Vision ONE integrates Ixia's leading edge, line rate performance, advanced security features, deep packet inspection for real time application and geo location monitoring and application intelligence into one affordable turnkey device, without sacrificing performance Vision ONE is an end to end visibility system that brings 100% visibility to mid-sized and large enterprises. Vision ONE serves as the ideal platform to perform SSL decryption before directing traffic to inline and out-of-band tool. In addition to eliminating hidden blind spots in encrypted traffic, centralizing the decryption at SSL traffic reduces bottlenecks in the network and improves the performance of the security tools as they no longer need to decrypt this traffic independently. We are very excited about the demand that is already building for Vision ONE and look forward to accelerating our visibility business with this edition to our product portfolio.

Turning to our customer segments, in the fourth quarter we saw a 12% sequential increase in revenue from the service provider market, bringing our full year growth to 11%, while revenue from AT&T continue to fluctuate on a quarter to quarter basis as expected, we made progress in expanding our presence in the service provider vertical driven by our LTE solutions, applications and security products and visibility platforms, specifically in the fourth quarter this included growing bookings at another U.S. tier one customer by 61% year-over-year as they rolled out their test and visibility solutions across several sites. We also continue to work with the carrier ecosystem on delivering NFV solutions. This week at Mobile World Congress, we have teamed up with HP Enterprise and Anritsu to showcase an integrated virtual solution that demonstrates customer experience assurance capabilities on the HP Enterprise open NFV platform. The demonstration is using Ixia's IxLoad to emulate real-world mobile network and our Phantom Tap and virtual GTP session controller along with Anritsu to monitor the NFV environment.

Moving to our NEM customers, revenue from NEMs grew 17% in 2015, surpassing our previous record for this segment set in 2012, demand was driven by our high speed Ethernet test solutions, our Wi-Fi validation products and our perfect storm platform with a application threat intelligence. Additionally our sales opportunities within NEM customers are expanding beyond the lab and into DevOps which is increasing opportunities for our virtual test solutions. In the enterprise we grew revenue 4% year-over-year in 2015, although this growth rate was below where we would have liked we made solid progress in expanding our presence within this market segment. This included winning over 800 new customers and growing our bookings through the channel to 33% of total bookings, which is a dramatic change from Ixia's historic direct sales model. We also brought new products to market that are specifically designed for the enterprise and channel, including ThreatARMOR our new standalone security offering that reduces the attack surface of the network, ThreatARMOR is gaining strong initial interest from channel partners and customers and we're building a good pipeline. ThreatARMOR is already delivering incredible value to new Ixia customers. For example, a financial services firm recently deployed ThreatARMOR and within just a few hours, identified an SSH Brute Force attack inside their firewall.

Looking forward into 2016, we expect technology transitions across enterprise, service provider and cloud networks to fuel growth in our market and our business. This includes the move to 25 Gig, 50 Gig and 100 Gig speeds in the data center which we expect to foster sales for our network and application and security test solutions with our NEM and cloud customers. We expect the transition to SDN and NFV along with new 4G advanced applications to drive sales for our visibility and application security products within our service provider customers. In the enterprise, we see opportunity for our security and visibility product as cyber security remains top of mind and a move to the cloud creates new risks and vulnerabilities that drives the need for 100% visibility. We have a unique ability to leverage our security expertise in IT across our test and visibility products to provide complete security life cycle intelligence in both live and preproduction networks for enterprises, NEMs and service providers. To capitalize on these growing trends, we will remain focused on investing in leading edge technologies and executing our go-to-market strategy while continuing to strive for operational excellence and financial discipline in order to create value for our shareholders.

We believe, we're well positioned to execute our strategic objectives and I'm pleased to announce that Ixia's Board of Directors authorized a $25 million share repurchase program. This share repurchase program reflects our confidence in our ability to execute our strategy and grow our business and it exemplifies our continued commitment to deliver shareholder value.

With that I’ll turn the call over to Brent for a more detailed review of our financials. Brent?

Brent Novak

Thank you Bethany, I would like to remind you that unless specifically noted otherwise we are discussing all numbers on a non-GAAP or pro forma basis excluding certain non-cash and/or non-recurring items. Total revenue for the fourth quarter of 2015 was 138.5 million, well above our guidance range of 127 million to 132 million. Q4 revenue grew 9% when compared with the 127.2 million reported in the fourth quarter of 2014. Turning to our fourth quarter revenue by product line our test or NTS revenue was 106 million compared with 88.4 million in Q4 of 2014, reflecting growth in high speed Ethernet and applications and security sales. Revenue from our visibility or NVS products was 32.5 million compared with 38.8 million in Q4 of 2014 as a number of NVS enterprise deals in North America slipped out of the quarter as Bethany mentioned.

In the fourth quarter hardware accounted for 62% of revenue, software 12%, warranty 24% and other products 2%. From a geographic perspective fourth quarter revenue from the United States grew to 77.2 million or 56% of total fourth quarter revenue, EMEA represented 20% of revenue or 27.1 million and Asia-Pac was 18% of total revenue. Approximately 47% of our fourth quarter revenue was from NEMs, 24% from service providers and 29% from enterprise and government customers. Our total non-GAAP gross margin for the fourth quarter was 79% above our expected range of 76% to 78% due impart to additional leverage driven by the higher top line. Total non-GAAP operating expenses were 81.6 million compared with 77.8 million last quarter. Operating expenses were above our expected range of flat to up 2% due to the higher sales commissioned as a result of our strong top line performance.

Looking forward in Q1 we expect operating expenses to be flat or to decrease by up to 2% compared with Q4. As Bethany mentioned in 2016 we will continue to focus on exercising financial discipline with respect to our operating spend while at the same time investing in key areas to grow our business. For the full year of 2016 we currently expect our operating expenses to increase by 4% to 5% on a year over year basis. Fourth quarter non-GAAP operating margin was 20% up from 19.2% in Q4 of 2014 and 16.5% reported in the third quarter of 2015. Fourth quarter 2015 non-GAAP net income was 18.7 million or $0.22 per diluted share above our $0.13 to $0.17 per share guidance range. This compares with non-GAAP net income of 12.3 million or $0.15 per diluted share in the third quarter of 2015 and 15.6 million or $0.19 per diluted share in the fourth quarter of 2014.

The non-GAAP effective tax rate was 29.3% compared with 32.4% in the prior quarter and reflects a 1.2 million net tax benefit related to the extension of the federal research and development tax credit. We reported GAAP net income in the fourth quarter of 5.8 million or $0.07 per diluted share. This compares with a GAAP net income of 286,000 or breakeven on a per share basis in the fourth quarter of 2014 and GAAP net income of 4 million or $0.05 per diluted share in the third quarter of 2015. Fourth quarter 2015 GAAP net income includes the following non-cash or non-recurring items. 10.1 million for the amortization of acquisition related intangible assets, a 660,000 net credit related to investigations remediation efforts and shareholder litigation, 4.7 million related to stock based compensation expense and a net tax benefit of approximately 1.2 million related to these items and certain other non-cash tax items such as changes in the valuation allowance related to the company’s deferred tax assets.

Turning to our balance sheet cash, cash equivalents and investments were 67 million at December 31st compared with 175.2 million at September 30th. Our Q4 cash balance reflects cash flows from operations of 24 million offset by a payment of 135 million to retire our outstanding convertible notes. As a result of our improved execution and financial performance over the past year, in January of 2016 we were able to expand our revolving line of credit from 75 million to 150 million. With our cash on hand and available capital under our credit facility we believe we are well positioned to execute on our strategic objectives and return value to our shareholders.

As Bethany mentioned, we just announced a new share repurchase program of up to 25 million, under the repurchase program over the next 12 months shares may be repurchased by Ixia from time to time in the open market or privately negotiated transactions or through our domains. We may also adopt a trading plan under Rule 10b5-1 for our repurchases. This repurchase program reflects our commitment to enhance shareholder value as well as our confidence in our opportunities and long-term financial performance. Fourth quarter 2015 deferred revenue totalled 130.6 million, up 10% from 118.2 million in Q4 2014 and up 4% sequentially from 125.7 million in Q3 of 2015. Capital expenditures for the fourth quarter of 2015 totalled 2.4 million. Accounts receivable increased to 121.9 million as of December 31st, from 105.7 million as of September 30, 2015. DSOs were 81 days in the fourth quarter up from the 77 days reported in the third quarter. We ended the fourth quarter with 33.3 million of inventory, a slight increase from prior quarter's inventory balance of 32.5 million. Annualized inventory turnover was 3.5 times an increase from the 3.1 times inventory turnover reported in the prior quarter. The number of fulltime employee equivalents including contractors at December 31st, increased to 1,751 as compared to 1,729 employees at the end of the third quarter.

Moving to our outlook, we currently expect revenue for the first quarter to be in the range of 121 million to 126 million, we currently expect that our non-GAAP gross margin in the first quarter will be between 76% and 78%. We expect our Q1 non-GAAP EPS to be in the range of $0.10 to $0.14 per diluted share and estimate the comparable GAAP per share amounts to be within the range of breakeven to a loss of $0.04 per share and we're forecasting a non-GAAP effective tax rate between 31% and 33%. The difference between estimated GAAP and non-GAAP results relates to expected non-cash and certain nonrecurring charges and the associated tax effects including charges relating to stock-based compensation. We estimate at this time that our stock-based compensation charges will be between 4.4 million and 5.4 million in the first quarter on a pre-tax basis. We currently estimate the non-GAAP diluted weighted average number of common and common equivalent shares outstanding to be in the range of 81.5 million to 82.5 million shares for the first quarter which also reflects the reduction in shares as the convertible debt is no longer outstanding.

With that I would like to turn the call back over to the operator for questions, operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Hendi Susanto with Gabelli & Company. Your line is open.

Hendi Susanto

My first question will be Bethany, what do you see in Mobile World Congress especially on NFV how do you characterize where we are in NFV and what our expectations should be for 2016?

Bethany Mayer

So I think NFV in the carrier market continues to be a very strong forward-looking activity, they continue to move in the direction of virtualization and there are some that are moving faster than others but overall it is an absolute compelling argument for all of these folks to continue to move towards virtualizing their infrastructure. We are partnered with a enterprise with our product specifically both our test product as well as our visibility product to showcase how a carrier can both test a virtual environment as well as enable visibility in a virtual environment. So we think that's very exciting, we think we have a very strong opportunity in the carrier market in NFV as a result of both our product offering but the fact that we are so well known in the carrier market, we've been working with many of the carriers over the last several years on the test side and as a result of that they turn to us both as they transition into virtualization for testing but they have also turned to us from a visibility perspective as well. So, we're very excited about NFV we think it's a great opportunity for us and we're going to continue pursuing opportunities in the carrier market as a result of it.

Hendi Susanto

Okay and then Bethany, what do you expect to see in the core test market in terms of 25 Gigs and 50 Gigs momentum that we've seen?

Bethany Mayer

Well, we're going to continue to see momentum there, the network equipment manufacturers are moving there very-very quickly, the chipsets are coming out this year and really the demand is around the amount of traffic that is really growing in the datacenter. 25 gig as you know we came out with that first to market to create testing for 25 gig switches and then we just recently announced our 50 gig testing capability for 50 gig switches so that will continue to be a very strong trend and the data center with cloud and the Web 2.0 companies, that's going to continue to be an opportunity for us as well as large enterprises and carriers.

Hendi Susanto

Okay, and then one more from me, you mentioned that there is some swift deals in network visibility solutions in Q4, would you be able to share some color, I'm wondering whether that is reflected the weaker enterprise IT spending environment and whether that may continue into Q1?

Bethany Mayer

Sure, so we saw a handful of NVS deals slip out of Q4. These were -- we were part of larger solution rollouts in many of these cases and so the timing on the overall solution wasn't necessarily under our control. We didn’t see them -- there wasn't a specific reason why the rollouts didn’t occur. Having said that you know it was surprising to us to some extent because the anticipation of those rollouts absolutely was there, however having said that they're still in our pipeline and we're still tracking them across the quarters. Some of them have closed but not all of them and so we're just continuing to track that throughout the year. As well we have basically invested more this year in 2016 around the visibility market, we think it's still a very strong opportunity for us and so with our Vision ONE announcement that we just made and that's actually a product that has been very well received with high interest both from customers and channel partners, so excited about that. And we've added headcount. We've made significant investment in headcount for sales coverage as well as for our marketing and channel program, so we still feel this is a good market but we did see some deal slippage in the Q4 timeframe in North America in particular.

Operator

The next question comes from the line of Patrick Newton with Stifel. Your line is open.

Patrick Newton

I really wanted to dive into the guidance. I was a little bit surprised I think sequentially either you're looking for the larger downticks that we've seen, are larger sequential downticks since about the 2008 timeframe. So much softer than seasonal and then especially given some of those NVS push outs that you just spoke to in 4Q. Can you help us understand what's happening sequentially that would give you that caution? And does this stem at all from what we have kind of heard from other players in the market. You had some customers, and also some competitors talk about some softness in service providers in the month of January. Is that impacting your outlook at all?

Brent Novak

No, no. So, the -- we have a very consistent approach that you take as you know every quarter so it's a bottoms up approach and we're pretty comfortable with that number. I also just want to point out too from a guidance perspective that AT&T was a greater than 10% customer in the first quarter of 2015 and we're not expecting that to recur in the first quarter of 2016.

Patrick Newton

Any commentary at all sequentially at least, given that AT&T shouldn't have the similar impact, it’s just -- is there anything on that. I would think that NVS sequentially given some of the deals that pushed out have closed, it would imply that the NTS side is a little bit softer sequentially, any commentary on service provider [Multiple Speakers] in how to think about that?

Brent Novak

So sequentially Q1 is typically seasonally soft quarter for us and so I don't think, there' s nothing there in terms of the deal slippage you know there is maybe a couple have closed thus far but we don't -- we're not commenting on exactly when those are going to close. They're still in our pipeline we're still expecting them to close but we're not certain. We've already factored what we believe is going to close into that guidance number.

Patrick Newton

Okay, and then I guess shifting to new product initiatives, you alluded to I believe some revenue from ThreatARMOR in the current quarter could you confirm that, and then can you speak a little bit to order flow for ThreatARMOR and then with Vision ONE and then also the 50 g test pool which seem pretty intriguing. When should we see general availability or those products starting to flow into the revenue profile?

Bethany Mayer

Sure, so we have seen deal flow for our ThreatARMOR product and we are really excited about it. We also are excited about the pipeline that we're seeing for ThreatARMOR. We have several customers who are also kind of seeing that product now as well as partners so we've got good momentum there, we're not commenting yet on the revenue in that product specifically, and as a -- primarily because it's still early on in that product's lifecycle, but we're very positive on it and we feel that it seems to have hit a compelling mark from a security perspective to basically provide more efficiency to reduce the attack surface before traffic hits the firewall of some kind, so we think it really is a valuable tool in the network to reduce that set attack surface and security.

Patrick Newton

Okay, great and then it sounds like you see opportunity to expand sales, you talked about increasing headcount and sales and marketing, yet I think Brent, you talked about your overall expenditures being sort of relatively controlled for the full year, should we think of getting some leverage off of either G&A or R&D that kind of offset some of the sales expenses or how should we think about the various buckets within OpEx?

Brent Novak

So we didn't comment on that -- the specific part of buckets in terms of operating expense for the year, we're expecting an increase to only be 4% to 5% on a year-over-year basis, we're going to see some investments in -- on the sales and marketing line as we have mentioned and those are really the key significant areas where you'd see some investment, the other areas and I think that they would remain -- I don't want to say flat but they will grow just kind of near normal a year-over-year type of growth rate.

Bethany Mayer

A growth that could help for investing in sales and marketing at this time.

Brent Novak

Yes.

Patrick Newton

Great and then Bethany, just a clarification, you had some really good data points on your enterprise channel, I'm trying to extract it real quick, I think you said that now 33% of your orders are booked through the channel, I just want to confirm that's an enterprise specific data point, correct?

Bethany Mayer

Not necessarily actually, that's the overall in the company. So, I mean our channel model does go across all segments of the business which I think is great because basically it gives us more coverage in all of our segments.

Patrick Newton

Yes, that's a really impressive stat, is there any benchmarks that year ago can you inform us what your channel order flow was?

Bethany Mayer

Well that's a good question I don't have the data here, unfortunately in front of me.

Brent Novak

Yes we really started tracking it this year so.

Patrick Newton

Then Brent, can you tell us what it was when you started tracking it?

Brent Novak

We don't have any year-over-year commentary or year-over-year numbers, we know that historically, we've basically been have a direct sales model but there was some going through the channel with the acquisition of Anue they had a channel built out also Net Optics had a channel built out but we don't have those exact number. So, difficult to say with the year-over-year compare is but we have definitely seen improvement there significantly and made a significant investment there.

Bethany Mayer

Yes, I mean the comment that we made was dramatic change and I think that's a real word, we are using dramatic change.

Operator

Your next question comes from the line of James Kisner from Jefferies. Your line is now open.

James Kisner

So I was just wondering just if you could -- could you quantify the aggregate size of the deals that you expected to close in Q4 that slipped there in visibility? Even a rough sizing would be helpful. Thanks

Bethany Mayer

So, I can't necessarily quantify for you, what we do know and what we are able to share is that for the nine month period prior to Q4, we had an NVS growth rate of about 22% and then as a result of Q4 our overall growth rate for the year was 10% and so we did see some deals slip out they weren’t a lot of deals but they were in large solutions and they had an impact on the quarter. I guess the good news for us is we have not lost these deals, this is not a -- we're fighting it out with the competition, and this is a -- we're trying to get these deals closed. So, I hope that gives you a little bit of a sense.

James Kisner

Can you also talk about the operating expense guidance it is 4% to 5% growth for the year, I see, you're not guiding revenue growth for the year but I hope you’d help us out with the planning assumptions things behind sales growth behind expense growth I think your guidance for Q1 implies 9% growth year-over-year at the midpoint I'm wondering if that might be a rough good starting point for the year?

Brent Novak

Yes, so we don't really -- we don't guide on the overall year on the top line, we have obviously had a great year this year growing 11% top-line growth we always believe, and we're always focused on adding leverage to the model, so that is trying to grow revenue faster than our operating expenses and as I mentioned operating expenses are only going up 4% to 5% and that includes what we believe, we have significant investment on the sales and marketing line.

James Kisner

Okay, so I mean just a related question, I mean your network test solutions business grew over 10% this year, I think you historically talked about flat to low single-digit growth for that business longer term it does sound like your business from NEM is expanding beyond the lab and that you have got the margin picking at switch testing that could help but I mean it seems like are you revising a lot of your strategy for that business, is there a reason why don’t always expect that the kind of revert on sort of difficult comp comparisons this year, just any kind of confidence around your ability to grow NTS above that rate would be helpful? Thanks

Bethany Mayer

Well, so a couple of things we around this year about market. I mean the reason why we believe as a result of the fact that we came out first with these technologies and you know, that's a really good thing for us as a company and helps our growth rate and these trends are huge, I mean these are big shifts that are occurring and we're in front of them which is exciting, the long term growth rate for the test business that we still consider to be single digits. I would say that this is the beginning of a cycle, so the 50 gig, 25, 50 gig, 100 gig cycle is beginning and you know we'll see where it takes us, but we're not ready to change our model at this time in terms of what we think the growth rate for this market will be. We're very excited with what we've seen so far but we think we'll continue to grow those markets but we're just not sure what that means from a percentage perspective beyond single digits.

James Kisner

Okay, just one last one just related to that I mean, on the Ethernet business can you give us a rough idea of how much of that is sort of legacy you know 1 gig and below or I don't know where you should have the cut off if it's 10 gig and above, any kind of thoughts on like the composition of that business in terms of growth versus non growth where you can test? That's it, thanks.

Brent Novak

Well we can’t say just in terms of the test business you have got about, we did comment that 37% now of our bookings are coming from apps and security that is growing nicely, we have our Perfect Storm product there which is actually a record quarter for that platform. Then you got probably about 45% to 47% or so is coming from your routing and switching or traditional layer 2-3 testing and that's where you have the 1 gig, 10 gig, a lot of the ports being sold and high speed Ethernet we're seeing you know growth there. 10 gig and 1 gig did do pretty well this year but we would expect them to trail off a bit and then the balance would be the wireless and Wi-Fi, and as we mentioned wireless has been lumpy, a lot of the LTE build outs have occurred waiting for that new cycle LTE advanced or some of the 5G technologies and Wi-Fi though has been performing pretty nicely for us as well.

Bethany Mayer

Yes and a couple of comments from me James just really quickly. You know as we said the bookings growth on the security side over the year was 33% so very strong bookings growth from a security perspective and the other piece was you know high speed Ethernet grew at a 50% clip this year, so some other good metrics for you.

Operator

Your next question comes from the line of Mark Kelleher from D.A. Davidson. Your line is now open.

Mark Kelleher

Just going real quick back to network visibility, beyond the deals that were pushed out, are you seeing any changes in the competitive environment?

Bethany Mayer

We're not, we're not seeing any new players emerge that you know are threatening, Gigamon continues to be a strong competitor for us but nobody new is really popping out for us so we can continue to be out in the market, and in some cases in accounts we've gotten to, there's nobody else, so there is some greenfield to this market still.

Mark Kelleher

Okay and then switching topics. Europe looks like it had a really strong quarter, was there anything you did particularly to get that going?

Bethany Mayer

Yes, it had a good, strong quarter, I'm glad you saw that. They came back very nicely, we moved the team under new leadership and actually integrated the team together and it did make a good difference, our leader in EMEA is very strong, he's been with the company for many years and he just did an outstanding job in the Q4 timeframe, so we're quite pleased with that. So I don’t know if you recall but in Q3 we talked about execution issues in our EMEA visibility team and we believe we've handled those execution issues at this time.

Operator

Your last question comes from the line of Matt Robinson from Wunderlich. Your line is now open.

Matt Robinson

I missed a part of the call so I apologize if I ask a couple of questions you've answered. First off, what's the book to bill commentary?

Brent Novak

Book to bill is just about 1.

Matt Robinson

Okay, any 10% customers?

Brent Novak

No.

Matt Robinson

Depreciation?

Brent Novak

4.2 million.

Matt Robinson

This oscillating behaviour for NTS, should we expect that to continue in the first quarter and the second quarter in terms of sequential comparisons?

Bethany Mayer

So oscillating behaviour, give me some more color there Matt.

Matt Robinson

Well 85 to 103 to 92 to 106.

Bethany Mayer

Yes so, we're seeing strong uptake again on the high speed Ethernet platforms, on security, we're seeing some lumpiness on the wireless side due to you know the kind of slowdown in moving from 4G to 5G, hasn't happened yet, so maybe that'll give you a sense of things, those are key metrics for how things change across the quarters.

Matt Robinson

So this isn’t really a function so much of 25, 50, 100 it is just a combination of things because if I remember back in the second quarter which was so strong it seems like if I remember you had some pent up demand for some products that were launched late Q1 and early Q2 and really executed well in the second quarter and it looked like kind of a ketchup up with the 25, 50, 100, was it not something like that for the fourth quarter deals were strong?

Bethany Mayer

No, so, again high speed Ethernet was strong, across the year high speed Ethernet grew 50% so this was a nice growth rate.

Matt Robinson

And that was bookings, I thought. [Multiple Speakers].

Bethany Mayer

Yes, that was booking yes that was bookings. [Multiple Speakers] oh yes you are right I'm sorry, you are right, that was revenue and then bookings for apps and security grew 37% on a yearly basis. So, that gives you a bit of a sense.

Brent Novak

Yes that does. So, for apps and security we grew 237% of total NTS bookings, with the apps and security. So, in terms of the affiliation what it really relates to was 25, 100 Gig, so in Q2, we have the pent up demand, that's why you saw the surge in Q2, then we knew that we're going to have a dip in Q3 which we saw and then we had a nice budget flush.

Bethany Mayer

Yes.

Brent Novak

Nice flush in the fourth quarter which tends to be the seasonally strong quarter.

Matt Robinson

Okay then on the visibility side, do you had some business slip and you are turning that to enterprise, last year you had really strong demand from AT&T in both the fourth quarter and first quarter, what is your ex-AT&T, how was the service provider business in the fourth quarter for instance in visibility?

Bethany Mayer

The service provider business in the fourth quarter was up on a total year basis revenue was up 11% and service provider for the quarter was quite good, we also had a new tier 1 U.S. service provider that came on Board and continue to grow with us and rollout our visibility on test solutions across their sites about a 61% increase in revenue with them, I'm sorry with bookings with them over the course of the year, so it's been a good year for us from material perspective, service provider perspective.

Matt Robinson

So Brent was the book-to-build about 1 I guess for the second quarter in a row, should we think while those bookings are going into the June quarter, is that the way we should think about that?

Brent Novak

So going into the June quarter along with the booking?

Matt Robinson

Revenue timing yes from them, yes?

Brent Novak

No, I -- with -- it would be just a normal process, we book, we typically booking shift at business, we do have some backlog that carries over our backlog from Q3 to Q4, is relatively the same.

Operator

Since there are no further questions at this time, Bethany I turn the call over to you.

Bethany Mayer

Thank you very much. I would like to thank our employees, the investors, the partners and customers for your continued support. Thank you so much for joining us today.

Operator

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

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