Please stand by. Your program is about to begin. Ladies and gentlemen, thank you for standing by, and welcome to NETSCOUT's 3rd Quarter Fiscal Year 2020 Results Conference Call. At this time, all parties are in a listen only Tony Piazza, Vice President of Corporate Finance, and his colleagues at NETSCOUT are on the line with us today. I would now like to turn the call over to Tony Piazza to begin the company's prepared remarks.
Please go ahead.
Great. Thank you, operator, and good morning, everyone. Welcome to NETSCOUT's third quarter fiscal year 2020 call for the period ended December 31, 2019. Joining me today are Anil Soncoll, NETSCOUT's President and CEO Michael Zabados, NETSCOUT's Chief Operating Officer and Jean Bua, NETSCOUT's Executive Vice President and Chief Financial Officer. There is a slide presentation that accompanies our prepared remarks.
You can advance the slides in the webcast viewer to follow our commentary. Both the slides and the prepared remarks can be accessed in multiple areas within the Investor Relations section of our website at www.netscout.com, including the IR landing page under Financial Results the webcast itself and under financial information on the quarterly results page. Moving on to slide number 3, today's conference call will include forward looking statements. These statements may be prefaced by words such as anticipate, believe, and expect and will cover a range of topics that are not strictly historical facts such as our financial guidance, our market opportunities and market share key business initiatives and future product plans, along with their potential impact on our financial performance. These forward looking statements involve risks and uncertainties, and actual results could differ materially from the forward looking statements due to known and unknown risks uncertainties, assumptions and other factors, which are described on this slide and in today's financial results press release as well as in the company's annual report on Form 10 K for the year ended March 31, 2019 and sub sequent quarterly reports on Form Ten Q on file with the Securities And Exchange Commission.
NETSCOUT assumes no obligation to update any forward looking information contained in this communication or with respect Let's turn to slide number 4, which involves non GAAP metrics. While this slide presentation includes both GAAP and non GAAP results, unless otherwise stated, financial information discussed on today's conference call will be on a non GAAP basis only. This rationale, the rationale for providing non GAAP measures along with the limitations of relying solely on those measures is described on this slide and in today's press release. These measures should not be considered in isolation from or as a to for financial information prepared in accordance with GAAP. Additionally, as a result of the sale of the HNT Tools business, We will provide certain organic non GAAP performance trends, which removes HNT tools revenue for comparability purposes.
Reconciliations of all non GAAP metrics of this slide presentation in today's earnings press release and they are also on our website. I will now turn the call over to Anil for his prepared remarks. Anil?
Thank you, Tony. Good morning, everyone, and thank you for joining us. Let's begin on slide number 6 with a brief recap of our quarterly non GAAP results. From a financial perspective, we delivered strong third quarter fiscal year to 2020 performance with both revenue earnings per share exceeding the high end of our expectations for the quarter. Revenue for the quarter increased 6% over the same quarter last year at $260,100,000 The quarter benefited from year over year growth in both our service provider and enterprise verticals.
We exceeded our expectation of revenue primarily due to the acceleration of service provider of a service provider transaction that we originally expected to occur next quarter. Earnings per share was $0.73, which increased more than 60%, 60% compared with the same quarter last year. We exceeded our earning per share expectation due to record software only revenue that benefited our gross margin as well as corporate tax clarifications and capital structure management initiatives that added incremental benefits in the quarter. From a strategic perspective, we continue to advance our product initiatives at a steady pace and have begun combining elements of our with assurance and security technologies to provide enhanced capabilities to our customers that leverage the sense of our offerings. We believe this combination provides something unique and valuable in the marketplace.
On our go to market initiatives, We continue to showcase our products at major industry events and believe that our Salesforce integration has stabilized and the times and the teams are beginning to build pipeline and gain good traction. Let's move to slide 7 for some further perspective as we review business highlights. In our service provider vertical, revenue grew 8% compared with the same quarter last year. In the quarter, We recognize, revenue from a tier 1 North American carrier that continues to evolve its nation tie nationwide 5g Networks. There's a second 5 g related order from this carrier this fiscal year.
Michael will elaborate further on this transaction in his remarks. During the quarter, we also recognized revenue from a couple of large orders from international carriers that continue to evolve their 4 g LTE networks. These deals for a continuation of our relationship with these carriers that demonstrate the value of our visibility solutions and our incumbency as they evolve their networks. Finally, as I said earlier, the service provider vertical also benefited from the acceleration of revenue associated with the transaction that we originally expected to occur in that quarter. We are pleased to recognize the revenue early, but it's timing related.
But but as it is timing related, it does not alter our revenue patient for this full fiscal year. We see customer advancing their 4G LTE networks in international geographies including Latin America, Europe and the Middle East and parts of Asia. We also continue to work closely with our North American and Asian customers as they advance their 5G initiatives. While we are pleased to see some leading carriers accelerate their 5G initiatives, We believe that 5G is a long term opportunity and driver of our growth that will benefit our business in numerous ways especially as edge computing becomes more mainstream. We are looking forward to showcasing our 5G service assurance solutions at the Mobile World Conference in Barcelona, Spain next month.
Turning to our enterprise vertical, revenue grew 3% over the same quarter last year. Overall, in this vertical, our customers continue to advance their digital transformation and security initiatives. Michael will highlight some of these wins during his remarks which demonstrates the value of our visibility solutions as customers transition to the cloud. We also believe that the path disruption that we experience from the international side, our Salesforce area organization in this vertical, is now primarily behind us. In both verticals, our customers are adopting our software only form factor and our record revenue in this area during the quarter with 42% of service assurance product revenue coming from the software only products.
Finally, continue to advance our security initiative and recently announced Arbor's lifeline with Sentinel to deliver the next generation of DDoS visibility and protection for service providers and large enterprises. This is an example of how the combination of service assurance and security technologies can add unique value for our customers. We will showcase this product at the RSA contract next month in Las Vegas, Nevada. Michael will elaborate further on this during his remarks. Now let's move on to slide number 8 to review our outlook.
We remain excited about the opportunities we are seeing and our ability to capitalize on them with three quarters behind us the view of our pipeline and the radio frequency propagation modeling projects that are expected to produce revenue in the fourth quarter We are narrowing our revenue guidance to a range of $900,000,000 to $910,000,000 which implies a single low single digit organic growth rate over last year and increasing our earnings per share guidance to a range of $1.51 to $1.56. The $0.06 increased primarily reflect benefits associated with tax reform, registration clarification, and capital structure management benefits such as recent share repurchase. As we approach the end of our fiscal year 2020, and start to look into fiscal year 2021. We are excited about the trends we see in front of us, such as 5G, digital transformation, security and business analytics. We believe that these trends should benefit us in the future and that we should transition from dealing with the headwinds that we have experienced over the past few years to seeing growth again in the business.
I look forward to sharing our progress with you as we finish this clear and look to the future. I will turn the call now to turn the call over to Michael at this point.
Thank you, Anil, and good morning, everyone. Slide 10 outlines the areas that I will cover. In the service provider vertical, we continue to gain traction in 5G as evidenced by an additional high 7 figure bin for monitoring 5G deployment from the same North American service provider that placed similar orders earlier this fiscal year. The pace of their build out is strong and the continuation of orders from this provider demonstrate the value of our solutions as well as our incumbency. In the enterprise vertical, at a large financial institution customer, we won a low 7 figure service assurance deal.
The opportunity arose as a result of the customer's digital transformation initiative. This situation, we displaced an incumbent competitor at the local and regional head office locations as they standardized on NETSCOUT solution across the enterprise. The award encompass deploying our solutions in 13 regional head offices more than 50 remote local offices within the data centers as well as into their east and west co locations to support their interconnects to the cloud. Our strong product strategy and close collaboration with both the network and applications teams is what's secured this win for us. Our cloud capabilities and our alignment to the customer's initiatives for cloud and virtualization position NETSCOUT as the superior solution and led to the decision to standardize on NETSCOUT across the enterprise.
In the security space, our Arbor DDoS solutions continue to lead in our large enterprise customer base because we can provide robust and simple to configure and adapt protection as well as network wide visibility during an attack, which is not the case with as a service alternatives. For example, at another large financial institution, we closed an incremental expansion opportunity in the high 6 figure range demonstrating our staying power and continued critical role in a fast evolving threat landscape. We also added a low 7 figure deployment to our already massive installed base at a major cloud player. Annual revenues from this customer continue to be strong as they expand expanded their business and have been a solid repeat customer for our solutions. In terms of go to market activities, We continue to participate in key industry events and we'll attend 2 major shows over the coming weeks.
We will participate in the Mobile World Congress Conference in Barcelona where we are highlighting our 5G capabilities and we'll share our insights and early experience in this space. We will also participate in RSA in San Francisco where we will focus on our new DDoS product called Arbor Site Line with Centinoff, which was announced last week. Combining Arbor and NETSCOUT core technologies, the product will provide ISPs with a deep understanding of the services their customers use as well as allow them to detect a broader range of application layer threats to enable a new breed of visibility and security value added services. Finally, we will host our annual Engage Technology And User Summit in Hollywood, Florida in April. We are currently in full recruitment mode and are exceeding to exceed last year's results record attendance.
We are excited about showcasing our solutions and engaging with our customers at this event. That concludes my prepared remarks and I will now turn it turn the call over to Jean.
Thank you, Mike. And good morning, everyone. I will review key metrics for our third quarter 1st 9 months for year to date fiscal 2020 performance along with our guidance for the remainder results appear in the presentation appendix. In addition, due to the sale of the HNT Tools business in mid September of 2018, I will highlight certain revenue trends on an organic non GAAP basis, which removes HNT Tools revenue for the applicable period referenced. Regardless, I will note the nature of any such comparisons.
Slide number 12 details our results for our fiscal third quarter year to date 2020 performance. Focusing on the quarterly performance, revenue grew 5.6 percent over the same quarter in the prior year, to $260,100,000. Product revenue grew 6.9% and service revenue grew 4.1% over the prior year's quarter. Our third quarter fiscal year 2020 gross profit margin was 77.8% up 2.2 percentage points over the same quarter last year. Contributing to the improved margin was the strong software only sales at 42% of service assurance revenue as compared to 14% in the third quarter of the prior year.
Quarterly operating expenses decreased 1.7% from the prior year, primarily due to continued cost controls and headcount management. We reported an operating profit margin of 27.3 percent with a diluted earnings per share of $0.73. Turning to Slide 13, I'd like to review key revenue trends for the 1st 9 months of the year. For the 1st 9 months of fiscal year 2020, The service provider customer vertical revenue grew approximately 4% while the enterprise vertical declined approximately 3%. After removing the revenue impact total revenue was generated from the service provider vertical on a GAAP basis.
Revenue by geography was relatively consistent with the 1st 3 quarters of the prior year. Additionally, there were no customers in the quarter or the 1st 9 months of the year that represented 10% or more of revenue. Slide 15 details our balance sheet highlights and free cash flow. We ended the quarter with cash, cash equivalents, short term marketable securities and long term marketable securities of $346,500,000, which is an increase of $38,700,000 since the end of the second quarter. Free cash flow generated in the quarter was $63,200,000.
During the quarter, we repurchased approximately 1,000,000 shares or an average price of $24.91 per share. In the 1st 3 quarters of this fiscal year, we have returned approximately $25,000,000 to our shareholders. We anticipate continuing to be active in the market, depending on market conditions and subject to daily trading volume and price considerations. Standing on our $1,000,000,000 revolving credit facility. To briefly recap other balance sheet highlights, accounts receivable net was $244,900,000, up by $42,600,000 at the end of September, BSOs were 77 days versus 88 days at the end of fiscal year 2019 91 days at the same time last year.
The decrease in the DSOs in the third quarter of this year compared with the third quarter of the prior year is primarily attributable to strong collection activities. Moving to Slide 16 September 2018 and it contributed $18,000,000 to last year's revenue prior to the completion of the sale, Accordingly, the impact of the divestiture should be taken into consideration when comparing fiscal years 2019 2020 especially for the 1st 2 quarters of both years. Consistent with the NIL's remarks with 1 quarter remaining in the fiscal year, We have now owed fiscal year 2020 revenue guidance to a range of $900,000,000 to $910,000,000, which imply low single digit organic growth. We expect our non GAAP tax rate to be in the range of 20% to 22% after the issuance of regulations by that was passed in December of 2017. Assuming approximately 76,000,000 shares outstanding after updating for our recent share repurchase activities, we are expecting to deliver earnings growth in the high single to low teens range with diluted earnings per share between $1.51 $1.56 compared with our prior year's performance.
That concludes my formal review of our financial results. And we can now turn the call over to STAAR Q And A.
And we'll take our first question from Matt Hedberg with RBC Capital Markets.
Maybe, Anil, on the on the North America service provider, you noted an additional 7 figure win for 5g monitoring. Sounds like this is the 2nd order, within this fiscal year for this, for this carrier or this service provider, which is great. I guess I'm wondering based on historic build out trends, how much more capacity might this service provider have for additional orders such as this as they continue to build out their 5 g network?
Yeah. For this, Matt, I I don't think for this this provider. I there's a lot more capacity next year, but this is a springboard to other opportunities in the US. So that's the big side because This establishes our cell and people know even though we don't talk about the names, other vendors know that we want this and one is against the competition. And so this helps us cement other deals next year.
In fiscal year 'twenty one, which are 5g related with a lot of credibility plus solidifies the solution. So while I don't see big orders from them, up this base next year, I think this is this is something which is going to help us in all other places and where 5G is going to be deployed.
That's great. No, it's really great to hear some of the some of the 5G momentum. I know we've talked about this the last couple of quarters and it really seems like it's starting to come through now. So that's great. And I know you talked about it being a long term benefit for you guys.
And then maybe as a follow-up, on the service assurance side, I think you noted a record 42 percent of revenue was from software only transitions, transactions. Which is also really good to hear. I know we've been talking about this for the last several years. If you were to look forward the next couple of years, Neil, what might that mix look like where can that mix go, I guess, is what I'm wondering. And then maybe secondarily, I know we've talked historically about the competitive landscape for software only transactions.
Can you remind us again sort of where you guys sit and what the competitive landscape looks like there on the
service to service side?
So on the on the first part, Ahmed, we have only about 1 third of our business. Or I would say maybe 40% of the business, which is service assurance service provider is dominated by software solution. That's where we introduced it first. The Arbor business, we have just started doing that and, I started offering the software software model enterprise was, and they started a little later. So the big reason for the 42% is because of this big order on 5G and a higher contribution to service provider.
So long term, I think this trend can span all three areas. And, we don't know the timing, but the goal is to get into 60s, 60s, 70% share over the next couple of years. As to the competitive landscape, I mentioned that in the past, I mean, we our challenge has been as a market leader to grow the market size. Not really competition. Most of the direct competition is a 1 10th our size, each of them.
And there has been price competition in the past because we we are we needed more higher margins than other competitors who are much smaller some of them are not even public. And the software model has completely solved that problem. So at the same time, whenever there's a technology term like 5 g, there is competition from NAMS, perceived competition from NAMS, we have seen that throughout our life when our 25 years. So I I think the competition is our number 1 or number 2 issue. At the same time, we do need computation grow the market size.
And we do ask any interest of time We'll take our next question from Alex Kurtz. Please go ahead.
Yes, thanks. Just to follow-up on that previous question. So, Anil, you said the goal is 60% of your service provider business. To be software only in the next couple of years? Did I understand that correctly?
No, no, 60% of the total business.
Of the
total business. Like I said, we may be already there in 60%. I don't know, because of 42% of, if this quarter is big portion is dominated by service provider. What I was saying was one of the reasons we don't have success in enterprise and and Arbor because the Arbor business, which is almost 60% of the remaining business, is that we introduced much later, like the Arbor business. We just introduced this 6 months ago.
So long term, we think if this trend continues, goal is the 60, 70% range of the total revenue, not service provider.
Okay. And just the unit economics around the software only deals and they'll look at this large 5G deal that you just did. I think there's always been a question of like Did the gross profit dollars kind of wash out between a traditional appliance deal versus the software only deals or any way that to kind of guide us through that? Like, would you say like it was a net net net push on that front?
I think overall, the, the, the outcome we want is the gross profit will go up And they have gone up in the past, but but they are marked by what was happening in the in the downturn. On the US service provider by, on, on 4 g. So I think overall, I feel that it improves competitiveness. It increases the deal size. People don't say, I want to buy 20 units.
They say I have this much money to spend. And so when they that's the budget. And so if we can have more units, it creates pervasiveness. And makes our solution more sticky. So I think long term benefit.
I mean, when we talk about our guidance next year, if we talk about growth, it's going to be in spite of the fact that units are unit prices are coming down. And so it's a great story that you can drive growth even the prices are coming down and that has a multiplying effect on EPS growth.
Okay. Just to finish then, would you say within You ended up capturing more dollars with the software only solution than you would have with a traditional appliance?
Yeah. Like I said, like, if you remember, we had announced a $75,000,000 deal 5 year deal few years ago. That that carrier has done half that money in the previous 5 years. So, yeah, it did it's a it's a net positive on all fronts. And typically when, people have this kind of pricing from incumbent was the best technology, they tend to get rid of other competitors and consolidate the market.
So as a as a vendor, as a customer, they're really not their net spend is actually goes down, but the spend on net cost goes up.
We will take our next question from Eric Martinuzzi with Lake Street. Please go ahead.
Curious about the service revenue line. Historically, if I look back to your normal seasonal patterns, you guys take a breather sequentially between Q3 and Q4. Is that seasonal pattern expected to repeat itself in FY20?
Hi, Eric. This is Jean. Yes, as you said, Q3 is generally our highest service revenue quarter. Due to it being equated with a calendar year. And so on a revenue basis from Q3 to Q4, there has historically been a slight step down.
I think we anticipate that Q4 service revenue will still show growth over Q4 of the prior year.
Okay. And then, based on that, backing into the product side, we it it does, you know, we are anticipating growth here. It's nice to see NETSCOUT back in product revenue growth mode. Do you believe this is sustainable? I'm not looking for a for guidance for 2021, but just from a year on year perspective, X HNT is product now kind of comfortably back in a a growth mode?
Yes, I think that's it. You can see the trend lines from last year. I mean, single digit growth from minus double digit in the past. I think you can see the trend. So I think all the investment we have made, even during tough times, We have cemented our leadership, improved the margins.
So I think we are expecting this trend to continue next year. And we'll wait to share that guidance with you next quarter.
Our next question will come from Chad Bennett with Craig Hallum. Please go ahead. Chad, your line is open.
Maybe you can go to the next one then.
And we'll take our next question from Kevin Liu with K. Lu and Company.
Hi, good morning. First question, just with the completion of these larger RF propagation modeling projects, can you just speak either historically or maybe as you look pipeline, what sort of opportunities does that kind of naturally feed into and how confident you are in your ability to kind of grow on top of this as you look forward to the next few quarters?
Are you talking about did you say RFP? It was not very clear. You're talking about the calibration. Yeah. I think the calibration order which we got big ones which we got, like, last year.
I don't think that's going to be of that high order. Because that usually in the early phases of 5 g deployment, so that was the case. We expect order on the other front, on the core side, not on the radio access side, in a in a bigger way next year, and which is actually better from a margin perspective. So we don't expect that kind of calibration type order this year. Coming year as we had last year, but there'll be revenue contribution, some of it in the next year because of the order from last year.
Got it. And then you talked about some of the digital transformation opportunities that helped grow the enterprise business. As you look into the pipeline going forward, what sort of use cases do you see driving enterprise adoption and what are the prospects for continued growth on the enterprise side of the business?
I think the biggest thing is that, is that as people, do more and more transformation, they have more and more challenges of finger pointing and root cause analysis. Is it me or is it the other provider? And our product is instrumental in triaging, those, those issues. And so if people want to have savings by moving OpEx, CapEx Savings from moving to the cloud and digital transformation, they want to make sure they are not negated by OpEx issues or service assurance issues. And so by using our solution, they are able to enjoy the benefits of digital transformation without worrying about the potential cons And so the digital transformation, adoption, and acceleration is directly helps, our growth and, in the enterprise.
And we appear to have no further questions at this time. I apologize. We do have a question from James Fish Please go ahead.
Hey guys, congrats on the quarter and the large win. Jean, 1, 2, we didn't hear a whole lot on Arbor. Security revenue compared to service assurance. Is there still pressure coming in, Arbor, or how were the growth rates this quarter?
I think it was slightly down, from, in general, versus the service assurance. And, we still see some lingering effects of the organization changes. And we see because of, those changes winding down this year and the effect of the combined product we announced the Centinil product last quarter for the space to pick up next year.
Got it. And then maybe, Anil, on sort of timing of the core deals, how should we think about core, service assurance deals, especially related to, obviously, there's the big spectrum auction in June. How are carriers looking to kind of purchase either ahead or after that, that timing?
Yeah. I think so. They're not very necessarily waiting for the option to complete to do that. They already have plans. I look at 5 g is a part of money people want to spend And they're and if they look at all the, all the innovations we have done, how we are helping them in the lab, our incumbency, that innovation helped us spend the money.
Some of it gets spent on 5 g. Some gets expand on the 4 g expansion. Because the part part of the network for 4 g and 5 g is common. So we look at it overall, our leadership in 5 g. And our incumbency in 4 g when combined with the price power of of, of software.
I'll put that as a unique position unlike we ever were before. So I think that's that's the what I see is the reason a lot of people are asking us for POC and log equipment even outside of US or 5 g. And, and I think that's going to overall help us our service assurance business in service provider next year.
And we appear to have no further questions at this time. So I'll turn it back to the speakers for any closing remarks.
Great. Thank you very much. That concludes our call for today. We appreciate everybody joining and I hope everybody has a great day. Thank you.
This does conclude today's program. Thank you for your participation. You may now disconnect.