Ixia's (XXIA) CEO Bethany Mayer on Q2 2016 Results - Earnings Call Transcript

| About: Ixia (XXIA)

Call End 17: 12

Ixia (NASDAQ:XXIA)

Q2 2016 Earnings Conference Call

August 2, 2016 4:30 PM ET

Executives

Maria Riley - IR, The Blueshirt Group

Bethany Mayer - President and Chief Executive Officer

Brent Novak - Chief Financial Officer

Alex Pepe - Chief Operating Officer

Errol Ginsberg - Chairman and Chief Innovation Officer

Analysts

Patrick Newton - Stifel Nicolaus

James Kisner – Jefferies

Mark Kelleher - D.A. Davidson

Hendi Susanto - Gabelli & Company

Operator

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to Ixia’s 2016 Second Quarter 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

Good afternoon and thank you all for joining us. This call is also being broadcast live over the web and can be accessed on the Investor Relations section of Ixia's website at www.ixiacom.com for at least 90 days. Members of the Ixia’s management team that are with me 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 second quarter 2016 ended June 30, 2016. 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 conditions 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 today’s earnings release and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 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 non-GAAP or pro forma basis excluding certain non-cash or non-recurring items and an associated tax effect. A full reconciliation of the 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 website. 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 that additional information regarding historic revenue mix, as well as other information is also available in the Investors section on the Company’s website. This information should be considered in conjunction with information included in the Company’s SEC filings.

And lastly I would like to announce that Ixia will present at the Cowen Communications Infrastructure Conference in Boulder on August 9 and the Deutsche Bank Technology Conference in Las Vegas on September 13. We look forward to seeing many of you there.

With that, I will 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. In the second quarter, we reported revenue of $120.1 million at the high end of our guidance range of $110 million to $120 million.

With our very strong gross margin performance of 80.1%, and our continued focus on financial discipline, we achieved 19.1% operating margins and delivered earnings of $0.18 per share, well above our guidance of $0.05 to $0.12 per share. We also generated $25.5 million in cash from operations and repurchased approximately $6.9 million of Ixia common stock.

Overall, our markets improved from the prior quarter with NEM revenue increasing 24% sequentially and enterprise revenue growing 26% over Q1 to reach a new record.

However, we continue to see some bookings headwinds primarily within two of our large strategic accounts. A large NEM that had a reorganization in the quarter and a Tier-1 service provider based in the US that was dealing with the workforce strike. This created an approximate 6% headwind to our total first half bookings and impacted sales for both our NTS and NVS products.

Given the near-term uncertain spending dynamics within these accounts and additional changes we are making to our sales teams, we are moderating our expectations for the back half of this year, but do expect growth over the first half of the year.

Looking at our second quarter performance in more detail, in test we saw sequential rebound with double-digit product bookings growth in the US and in EMEA. While in the beginning of the quarter, spending among our US NEM customers was tepid, demand improved in June excluding the large NEM referenced earlier.

Demand for high speed Ethernet also rebounded as shipments were the second highest in the company’s history driven by our industry-leading 25 Gig, 50 Gig and 100 Gig testing solutions.

In addition, we had strong sales growth for our Perfect Storm Security Solution and strength in the enterprise for our application and security products. Additionally, while off a small base, we saw a nice uptick in our Virtual Edition test solution.

Moving to our Network Visibility solutions, revenues was up 5% from Q2 of last year and up 4% from Q1. We are starting to see some of our prior quarter slip deals close and are encouraged by the initial results from the recent investments we have made in our Visibility platform and go to market activities.

In the enterprise, we grew NVS bookings 17% on a year-over-year basis and we are building a strong pipeline for Vision ONE, which we began shipping in late Q1. To demonstrate the momentum we are building in the market with Vision ONE, let me share with you a couple of recent customer wins.

First, a Fortune-500 commercial real estate services company selected our Vision ONE platform to provide 100% visibility and ensure the security and monitoring tools see all data. The key differentiators in this competitive win included superior performance and unmatched ease of use.

And second, a global communication software and service provider selected Vision ONE along with our Virtual Tap in order to help and increase network performance and visibility in their virtualized network.

As part of their initiative to improve the performance of their network, this customer also purchased several of our test products including Perfect Storm, IxLoad and our application threat intelligence subscription.

And we continue to expand the capability of our visibility platform with what we believe to be game-changing innovation such as our recently announced innovation of ControlTower and Vision ONE with Cisco Nexus switches.

By integrating our flagship Packet Broker Vision ONE, and our configuration and monitoring solution ControlTower, with Cisco Nexus switches, we provide a low cost visibility architecture for our customers that utilizes their already in place Nexus solutions.

This Cisco’s switch will aggregate the traffic and feed that traffic to Vision ONE, which will provide deep packet inspection and visibility applications moving across the network for analysis by tools such as Flunk and Dynatrace.

In addition, ControlTower will configure, manage and monitor Ixia's Vision ONE and Cisco Nexus switches in a single pane of glass as a single solution. This is a very powerful low-cost alternative with superior ROI compared to our competitor’s product. Ixia has the only visibility solution on the market today that offers this advanced integration with Cisco switches.

We are already engaged in several deals proposing this solution and we are looking forward to working with Cisco in many deals in the future to assure our mutual customers get the best of both worlds, full visibility to applications utilizing Ixia Vision ONE together with industry-leading Cisco Nexus infrastructure all configured and monitored by ControlTower.

Additionally, in Q2, we announced CloudLens, our integrated cloud visibility platform that offers network visibility across private, public and hybrid cloud environments. CloudLens combines the power of Ixia’s Phantom Virtual Tap, as well as our exclusive cloud tap which is a unique software-only tap built to be deployed in a micro services scale out public cloud environment.

In addition, the CloudLens platform will offer application flow filtering, net flow with advanced application identification and geographic location SSL decryption and deduplication capabilities. The CloudLens platform will offer service providers, cloud providers and enterprises with unprecedented insight into network traffic in both physical and virtual environments.

With the CloudLens platform a highly scalable traffic monitoring system can be deployed in a matter of minutes rather than hours or days. We plan to deploy a beta version of CloudLens running in AWS with a few feed customers toward the end of this year.

We also continued to extend our IxSecure Architecture, which provides comprehensive security insights before network deployment and amplifies security effectiveness in operations.

During development, Ixia’s BreakingPoint Security Test platform is the industry gold standard for validating application and network security strength across physical and virtual environments. It ensures new equipment and entire networks are harden for deployment by emulating high volume application load and device traffic and attacking them with the widest array of threats.

Once in production, Ixia’s Vision ONE and Threat Armor provides the industry only active security fabric that enhances the performance of existing security tools. The security fabric provides robust resilience, context aware data handling and security intelligence ensuring the right data gets to the right tools every time even when encrypted.

The Ixia security fabric goes deeper than simple visibility fabrics. It dramatically reduces security noise by eliminating encrypted blind spots and filtering out known bad traffic. Powered by feeds from Ixia application and threat intelligence research center, the security fabric can completely filter out unknown and zero day attack mutations by blocking them at their source rather than analyzing those millions of attacks one at a time.

By reducing known bad traffic and their associated alert, Ixia’s security fabric makes existing security tools and teams more effective. As you can see from our recent product introductions, at Ixia, we strive to create the best most innovative products in the market.

As a result, we’ve built a strong brand with our customers, because they know that an outstanding product that helps them solve their problems and create value for their company can give them an edge over their competition.

We have earned and held our market leadership in test as a result of our deep technical understanding of our customer needs coupled with the desire and capability to deliver the best products for those needs. We apply the same best-in-world technical skills and innovation to our visibility portfolio and have created award-winning products.

In June, our products won multiple best of show awards at Interop Tokyo, which included Vision ONE being named the grand pre-winner for management and monitoring. Ultimately, we believe continued innovation that further expands the technology gap between Ixia and the competition will lead to long-term success in our markets and we are continuing to execute on and invest in this strategy even in a challenging environment.

While we are encouraged by the sequential improvements in the broader demand environment and growing customer interest in our new products, we are moderating our top-line expectations for the second half of the year primarily related to the previously mentioned softness in two of our strategic accounts and slower than expected productivity from our sales investments.

We recognize we have more work to do in the sales area and we are taking actions that we believe are necessary to improve our overall sales execution and drive growth. First, as we announced in our press release earlier today, we are making a change in our executive sales leadership.

The company and Hans-Peter Klaey have mutually agreed that he will step down and be departing Ixia on August 31, 2016. We plan to appoint Patti Key as Senior Vice President of Global Sales and she is now leading our sales team.

We believe she is the right sales leader to drive Ixia forward. Patti has been with Ixia for eight years and have served as Vice President of Sales in the Americas region for two years leading a team that has consistently outperformed.

During her tenure at Ixia, Patti has demonstrated strong leadership skills and achieved a commendable track record. The volume of business under her responsibility at Ixia has grown over 3.5 times and she is currently managing our largest region.

And second, we also are further refining the sales team structure that we implemented in June – in January. In addition to the teams that are focused on our three customer verticals, we have created a team fully dedicated to and compensated by selling our NVS products.

We are also allocating additional resources to drive funnel creation. We believe these changes will create the right balance and focus to support our growing visibility portfolio and accelerate the NVS growth.

I would like to note that the investments we are making in our sales activities will not be at the expense of profitability, we remain committed to investing for growth while maximizing our resources and striving for financial discipline and operational excellence.

With that, I will 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 in the associated tax effects.

Total revenue for the second quarter of 2016 was $120.1 million, just above the high end of our guidance range of $110 million to $120 million. This compares with revenue of $131.6 million reported in Q2 of 2015 and $112.7 million in Q1 of 2016.

Turning to our second quarter revenue by product line, our test or NTS revenue was $89.9 million, down 13% compared with the $102.8 million in Q2 of 2015, and up 8% compared with $83.5 million in Q1 of 2016. Revenue from our visibility or NVS products was $30.2 million, up 5% when compared with $28.8 million in Q2 of 2015 and up 4% when compared with $29.2 million last quarter.

In the fourth quarter, hardware accounted for 58% of revenue, software 10%, warranty 30% and other products 2%. From a geographic perspective, second quarter revenue from the United States was $70.7 million or 59% of total second quarter revenue. EMEA represented 16% of revenue or $18.8 million and Asia-Pac was 21% of total revenue or $25.4 million.

Approximately 49% of our second quarter revenue was from NEMs, 16% from service providers and 35% from enterprise and government customers. Our total non-GAAP gross margin for the second quarter was 80.1% which is above our guidance range of 76% to 78% and a significant improvement over Q1’s gross margin of 77.7% partly due to lower operational costs and charges.

Total non-GAAP operating expenses were $73.4 million a decrease of 4.2% when compared with $76.6 million last quarter and a decrease of 5.2% from $77.4 million in Q2 of last year.

In the second quarter, our cost and operating expenses benefited from a $3 million reversal of an accrual for certain performance-based compensation incentives. Balancing growth with our investments, we now expect operating expenses for the full year to be slightly down over 2015 in the range of 1% to 2% compared with our prior estimate of an increase between 4% to 5%.

Second quarter non-GAAP operating margin was 19.1% compared with 19.6% in Q2 of 2015 and 9.8% reported in Q1 quarter of 2016. Second quarter 2016 non-GAAP net income was $14.9 million or $0.18 per diluted share well above our guidance range of $0.05 to $0.12 per share.

This compares with non-GAAP net income of $7.4 million or $0.09 per diluted share in the first quarter of 2016 and $16 million or $0.19 per diluted share in the second quarter of 2015.

The non-GAAP effective tax rate in the quarter was 33.3% compared with 31.4% in the prior quarter. We reported GAAP net income in the second quarter of $1.5 million or $0.02 per diluted share. This compares with GAAP net income of $5.8 million or $0.07 per diluted share in the second quarter of 2015 and a GAAP net loss of $2.7 million or a loss of $0.03 per share in the first quarter of 2016.

Second quarter 2016 GAAP net income includes the following non-cash or non-recurring items. $10 million for the amortization of acquisition-related intangible assets, approximately $400,000 related to investigations remediation efforts and shareholder litigation, $3.7 million related to stock-based compensation and a net tax expense of approximately $700,000 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 $100.8 million at June 30 compared with $80.9 million at March 31, 2016. During the quarter, we generated $25.5 million in cash flows from operations.

Under our Board approved $25 million stock buyback program, we repurchased approximately 707,000 shares at an average price of $9.69 for a total consideration of approximately $6.9 million.

Second quarter 2016 deferred revenue totaled $135.8 million, up 10% from the $122.9 million in Q2 of 2015 and up 1% sequentially from $134.9 million in Q1 of 2016. Capital expenditures for the second quarter of 2016 totaled $2 million.

Accounts receivable decreased to $89.8 million as of June 30 from $95.7 million as of March 31. DSOs were 68 days in the second quarter, down from the 77 days reported in the first quarter of 2016.

We ended the second quarter with $29.9 million of inventory, a decrease from prior quarter's inventory balance of $31.2 million. Annualized inventory turnover was 3.1 times, inline with the prior quarter. The number of fulltime employee equivalents including contractors at June 30 increased to 1,826 as compared to 1,783 employees at the end of the first quarter.

Moving to our outlook, as Bethany mentioned, while we are encouraged by the sequential improvement in the broader demand environment and growing customer interest in our new products, and that we expect the second half of the year to grow over the first half, we are moderating our top-line expectations for the second half of the year primarily related to the previously mentioned softness in two of our strategic accounts and slower than expected productivity from our sales investments.

We currently expect revenue for the third quarter to be in the range of $113 million to $123 million. We currently expect that our non-GAAP gross margins in the third quarter will be between 77% and 79%.

We expect our Q3 non-GAAP EPS to be in the range of $0.08 to $0.15 per diluted share and estimate the comparable GAAP per share amounts to be within the range of a loss of $0.18 to a profit of $0.01 per share and we are 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 non-recurring 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 $4.5 million and $5.5 million in the third quarter on a pretax basis.

We currently estimate the non-GAAP diluted weighted average number of common and common equivalent shares outstanding to be in the range of 82 million to 83.5 million shares for the third quarter.

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 Patrick Newton. Your line is open.

Patrick Newton

Yes, good afternoon, Bethany, Alex and Brent. Thank you for taking my question. Just diving right in, I was wondering if we could get some stabs around how your security business performed in the quarter, I think in exiting 2015, you talked about perhaps 30% of revenue in both test and visibility being tied to security. And then similarly on the high speed Ethernet, if you could speak to the growth rate there, you alluded to it, but I think you were clipping that more than 50% just a few quarters back.

Bethany Mayer

So, with regard to the security part of our business, we basically are still estimating that we are doing about a little over 30% of our business in security. So, as of Q2, that’s where we stand for the security aspect of our business. And then with regard to high speed Ethernet, I am going to have Brent comment on that.

Brent Novak

Yes, so, high speed Ethernet, we saw significant growth about 50% in 2015 over 2014 and then we had some softness in the first quarter. In the second quarter that rebounded. So, to the second highest in company history and that was behind the second quarter of 2015. So we did see a resurgence in the second quarter for high speed Ethernet.

Patrick Newton

Any percentages that you can wrap around that?

Brent Novak

No, on the percentage side, again, we had some softness in Q1 and then in the second quarter, the second highest in the company’s history below the Q2 2015. So, growth has been muted when you take those two facts into consideration when you look at the first half of 2015.

Patrick Newton

Great and then, I guess, on the service provider side with the lowest revenue level we’ve seen, I think in about four years, and you did talk a little about the Verizon strike impacting results, but I am curious as we look forward and you talk about this have been one of the key accounts where you have some softness.

Is there any reason to think that Verizon will not rebound in the second half inline with their guidance, CapEx spends and kind of seasonality and perhaps as this kind of points to a little bit of a push out in their metro spending?

Bethany Mayer

So, we can’t always tell the timing of how things will go and I mean, clearly the workforce strike wasn’t something on our horizon. So, what I would say, Patrick, is that, we are hopeful for a rebound of some kind, but we are not certain of the timing and we are also, I would say not certain of how much of a rebound we are talking about, I mean, they have other things that they are also spending money on as you know, but at the same time, these rollouts appear to be continuing and we are looking forward to working together with them and other service providers as they do this rollout.

Patrick Newton

Great, and then, just last one from me is on new products. You talked a little bit about building Vision ONE – pardon me, you talked about Threat Armor, you talked about CloudLens, is there any way to quantify either from a revenue from a booking perspective how much these new products represent for you and how – just how does the pipeline you see building?

Bethany Mayer

Well, we are not giving numbers yet, but I can tell you that, Vision ONE is very key to us from a visibility side, that’s our flagship product and visibility is our flagship Packet Broker. We are very excited about the pipeline that we are seeing and the level of interest from customers. It’s a strong grower for us and we are looking forward to some momentum there.

Threat Armor also has good momentum and some interesting new opportunities that we haven’t anticipated when we first built the product actually for deployment. So they are both important and we are excited about their growth.

On the CloudLens front, that is a market that we are absolutely going after which is public private hybrid cloud and obviously, a lot of discussion about how the enterprise is moving to the cloud and we believe very strongly there is a issue with enterprises moving to the cloud and that they cannot see their traffic in their application performance in the cloud often times especially in a public cloud environment.

And so, we think that with our CloudLens platform, we are going to provide something pretty unique. We have capabilities that others in the market who been out there talking about it really don’t have based on our portfolio and we are already seeing very strong interest even with the products that we already have in the market today as part of that platform.

But we have more to go and I spoke about a couple of those Cloud Tap being one of them. So, we think that will be an exciting opportunity for us as we roll into 2017. But, we are looking at trials in the very last part of the year right now.

Patrick Newton

Great. Thank you for taking my questions. Good luck.

Bethany Mayer

Thank you.

Brent Novak

Thanks.

Operator

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

James Kisner

Great, thanks for taking my question. So, I guess, I want to touch on visibility again, it looks like it improved a little bit sequentially to – but the growth rate here is only around 4% and you’ve been reiterating on it you had 20% plus growth rate for visibility longer-term, it look like bookings, you said there is 70% growth rate.

So, kind of wondering if we are going to start to see revenue growth year-over-year start to converge on that longer-term growth rate in visibility in the next couple quarters, I mean, next quarter’s comps little bit tougher, but any thoughts on that?

Bethany Mayer

Yes, sure, James. I mean, what we thought this quarter was revenues up 5% year-over-year and then up 4% sequentially. And I mean, we know we have work to do here. No question and we’ve made some changes in the sales force as a result of that. Having said that however, we do believe in the growth rate of the market and we think it’s a very strong opportunity, continued strong opportunity for the company.

We believe very strongly in the products that we bring to market. We think they are by far the superior product in the market today. At the same time, we have to make sure our execution is there. So, we were pleased to see this step in the right direction, but we have more work to do there. We are very aware of it and we are working on it.

James Kisner

Okay, that’s helpful and so, I want to go back to Ethernet again for a second. It sounds like you recovered pretty nicely here. I assume that the big chunk of an improvement which is Tomahawk becoming more broadly available.

I am kind of wondering if there was any, perhaps pent-up demand and some catch-up spend on Ethernet test with that switches are looking ramping and you are expecting that eventually moderate in Q3 somewhat as a result of that? And I think in the past, you talk about Ethernet test like being kind of multi-year nature is kind of test that again, do you still feel that way about Ethernet? Thanks.

Bethany Mayer

Right. So, luckily we have our resident expert Errol here to talk a bit about what we are seeing out in the market from a chipset perspective.

Errol Ginsberg

Yes, I think you are right and that there is – availability of the switch chips from some of the key vendors. And there is definitely more volume shifting. But I think, it’s not the opportunity doesn’t end with the current generation, right, we are talking to all the semiconductor vendors.

And they are all working on next generation products as well. So this demand is, it’s not like we saw one-time demand and it’s going to go away now. They are coming out with new generation products that will only hit next year that will address even higher density, 100 Gig and then of course you put 25 and 50 Gig and then you’ll see 200 Gig from some vendors, as well as 400 Gigs. And so there is a lot on the horizon coming over the next – I don’t know, less than 18 months in the highest speed Ethernet, I am talking above 100 Gigs.

Bethany Mayer

Right. We have over the course of the first half seen softness in the NEM and we’ve talked about what we think is attributed to. However, at the same time, the progress keeps continuing in the high speed Ethernet world and so, we still feel like we are at the beginning of a cycle here. It maybe bumpy, but it’s still progressing.

Brent Novak

Yes, and if I could just add to that as well, the – what’s driving well this of course, I am sure you guys know this is the cloud providers, right, the huge datacenters who are just forever expanding and building bigger and bigger datacenters with higher capacity, as they serve in this transition from 10 Gig to 25 Gig to 50 Gig.

Now the software ex switches need to – those density, those high densities as well as the highest speed uplinks and hence driving the need for 200 Gig and 400 Gigs to build those cross architectures. So, I think the demand is going to be there for quite sometime to come.

James Kisner

All right. Just a follow-up on this briefly, I mean, I am not sure I heard this earlier, do Ethernet test to be also up in aggregate in the second half over the first half with the rest of your revenues?

Bethany Mayer

I think, yes, I think we are – we do believe there will be – from a half compare, that we will see some uptick in the second half of the year.

Brent Novak

Compared to the first half, sure.

Bethany Mayer

Right, compared to the first half, I mean, that’s not uncommon for us. But also given some of the things we’ve seen in this year with the chipset move out that sort of thing, we do hope for and believe that there will be some growth in the back half of this year for that.

James Kisner

Okay, I’ll pass it. Thank you very much.

Operator

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

Mark Kelleher

Great. Thanks for taking the question. Just wanted to go back to the sales effort, so the competitive position in NVS. The issue there that you are not getting into deals or is the issue there that you are getting deals that closing. I am just curious as to what you are going to change to improve that?

Bethany Mayer

Well, so I think that, for quite sometime we did have a coverage issue getting into deals and being there when the deals were occurring. We are basically making an investment and have been making investment in additional sales resources over the last six months.

And a couple of things, one I would say, there is a productivity improvement that needs to happen across that new set of folks, so that we see an uptick from our overall capacity in sales as a result of the additional sales focus of the team. That does take a period of time.

But having said that, we are anticipating that and we want that to happen sooner rather than later and we are not happy with where it’s been to this point. So, we think that we can increase productivity over the course of this year, going forward and there is a few things we’ve also changed.

We have brought a new sales leader up from the company. We promoted Patti Key who has been a very strong sales leader for us over the past several years. She has pretty unique abilities and that she understands very well the test business and also the visibility business and enterprise who has done a great job embracing the channel.

So, one of the big changes we’ve made is, putting a new sales leader in place. We are also focusing in a dedicated set of resources, just specifically to the NVS product set. So that means all they sell will be NVS products and we think that’s going to be important. Those product specialists will stay focused just on NVS and the last thing we are doing is, we are increasing resources to create more funnel on the front-end of the sales cycle.

We think additional funnel will help us given that the productivity isn’t where it needs to be. So, more funnel will help us continue to grow the sales conversion rates in a way over time that we need to gain growth.

Mark Kelleher

Okay, great. Thanks.

Bethany Mayer

You are welcome

Operator

[Operator Instructions] Your next question comes from the line of Hendi Susanto. Your line is open.

Hendi Susanto

Good afternoon, Bethany, Errol, Brent and Alex.

Bethany Mayer

Hi, Hendi.

Brent Novak

Hi, Hendi.

Hendi Susanto

Bethany, you mentioned that you can increase productivity of your sales team for the course of the year. May I verify that, how long will it take you to ramp up productivity in your sales team back to desirable productive level? Is it more a second half target or is it more like early on mid-2017?

Bethany Mayer

Well, we had hoped for sales productivity ramp to begin now, frankly, that was the goal was growth in sales productivity ramp. And we saw a little bit of it this quarter, but to be honest, that needs to really kick into effect over the course of the back half of this year and into early next year.

And what that means is that, their conversion rates are better. These gains got longer over that time and they also, as I mentioned, will have a set of folks that are specifically focused on the NVS product portfolio. So that all they do and specialize in is that NVS sales.

So we know how to sell test very, very well and having folks just dedicated to visibility should give us much more focus on that over the course of the year and with that, better productivity.

Hendi Susanto

And then, with regard to lower expectations for the second half 2016, would you share how your expectations are different compared to three months ago on various major areas such as NFV, high speed internet, NTS and network security? I think some of them may demonstrate some strength while the others maybe weaker than your expectation. And then any insight is appreciated.

Bethany Mayer

Well, so, I don’t think those – all of those trends are still in place and still happening. And what we’ve seen in the first half of the year is, we saw headwinds from a couple of key customer sets and couple of key customers, you know, we saw softness in the NEMs, in the Q1 timeframe.

We saw improving sales in the NEMs customer base in Q2, but not back to where we would like it to be. We have a very large NEM customer who went through a major reorg and that’s just settling out and that’s had a very big impact on us this quarter because they are a large customer. And then, we also had a large carrier who is transitioning into the world of NFV, basically go through their own issues with a workforce strike.

So the trends are very meaningful and still are positive for us as a company. Some of these things that we’ve experienced hadn’t warranted visible to us at the beginning of the year. Workforce strike is fairly not visible along with major reorgs at our largest NEM customers.

Having said that, we did have very good in fact record revenue in enterprise this quarter and that is a very telling piece of data for us, because it says that we are making progress in the enterprise and selling into the enterprise which is one of the key ingredients in our mind to growing the business.

That ability to sell over an extended customer base like the enterprise, gaining new customers every quarter which we did this quarter has a positive impact for us going forward. So, we have headwinds. There are some rather large customers who aren’t where we had hoped they would be, but we also have opportunity as well.

Hendi Susanto

Thank you, Bethany.

Bethany Mayer

You are welcome.

Operator

That ends our Q&A session. I will now turn the call over to Bethany Mayer for closing remarks.

Bethany Mayer

I’d like to thank our employees, our investors, our partners and customers for your continued support and thank you all for joining us today.

Operator

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

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