Ladies and gentlemen, thank you for standing by, and welcome to NETSCOUT Second Quarter Fiscal Year 2020 Results Conference Call. As a reminder, this call is being recorded. 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.
Thank you, operator, and good morning, everyone. Welcome to NETSCOUT's 2nd quarter fiscal year 2020 conference call for the period ended September 30th, 2019. Joining me today are Anil Sengal, NETSCOUT's President and CEO, Michael Sabados, 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 project 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 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 subsequent quarterly reports on Form 10 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 to the announcements described herein Let's turn to Slide 4, which will involve 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. The rationale for providing non GAAP measures along with the limitations of relying solely on those measures is detailed on this slide and in today's press release. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Additionally, as a result of the sale performance trends, which remove HNT Tools revenue for compatibility purposes.
Reconciliations of all non GAAP metrics with the applicable GAAP measures are provided in the appendix 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 solid second quarter fiscal year 2020 performance with both revenue and earnings per share exceeding the high end of our expectations for the quarter. The revenue for the quarter was $216,500,000 with corresponding earnings per share of $0.28.
The quarter benefited from a large cable service provider order, which was delayed from last quarter, as well as strong government spending as previously approved projects were funded this quarter. From a strategic perspective, we continue to advance our product product initiatives at the study space and have made great progress on our go to market initiatives, including our Salesforce integration that started at the beginning of our earlier. Let's move to Slide 7 for some further perspective on this as we review business highlights. In our service provider segment as noted earlier, this quarter was this quarter, we completed a deal with a large U. S.
Cable operator. That had been in negotiations for several quarters. This customer is expanding its mobile virtual network operated or MVNO Space. Where they are concentrating on optimizing their subscribers' experience. I'm happy to report that the customer expanded the scope and using a broad offering of our integrated platform to assist in achieving their objectives.
This expanded scope resulted in a larger deal size than originally proposed. Michael will elaborate further on this transaction on in his remarks. As we mentioned in our last earnings call, during the second quarter, we received an 8 figure order from 1 of our Tier 1 domestic mobile service providers, for radiofrequency propagation modeling as this customer prepared for 5G. Subsequent to the initial orders The customer placed an incremental order, which increased the size and scope of the project. We are working on the propagation modeling and expect that a significant portion of the project along with the associated revenue recognition should be completed in our 4th fiscal quarter which enhances our visibility for that quarter as well as the second half of our fiscal year.
We are pleased to see carriers begin to prepare for 5G and when we continue to engage with our customers on this front. While we continue to believe that this is a longer term opportunity and driver of growth, that will benefit our business in numerous ways, especially as edge computing becomes more mainstream. We are beginning to see some leading carriers accelerate their 5G initiatives. Within our international service provider geographies, we continue to see 4G LTE related opportunity throughout EMEA, Latin America, and emerging Asia PAC Countries as they advance their networks. Turning to our enterprise segment.
As we have said before, we have a large pipeline of user approved orders within our federal government business that has been waiting for funding. During this quarter, we benefited from the release of funds for some of our pipeline. Although some of these orders were completed during our 2nd quarter, we had a few other orders that will be completed in our 3rd fiscal quarter. Michael will elaborate on these deals in his remarks. Overall, within the enterprise segment, our customers continue to advance their digital transformation and security initiatives.
Given that our customer operates some of the most complex networks in the world, evaluation and implementation of these newer technologies takes time and we anticipate this order to be uneven throughout the quarters. However, we expect the pattern to level out over time as these projects mature and believe we should benefit from this during the second half of the fiscal year and beyond. Now let's move to slide number 8 to review our outlook. We remain excited about the opportunities we are seeing and our ability to capitalize on government and the radio frequency propagation modeling projects that should benefit the second half of the fiscal year We are reaffirming our original revenue guidance range of $895,000,000 to $915,000,000 and increasing our earnings per share guidance range to $1.45 to $1.50 due to our capital structure management. The regional range was $1.40 to 1.45.
I look forward to sharing our progress with you as the year continues. I will now 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 segment, as Anil mentioned, we won an 8 figure deal with a leading U. S. Cable company as they advance their strategy to expand into the NVN or mobile virtual network operators.
Phase, our customer's objective is to use a superior customer experience as their key differentiator in order to help ensure service quality and availability of their WiFi and mobile video services. They are deploying solutions from both our service assurance and DDoS security portfolios to assist in ensuring an optimal customer experience. This deal is the initial phase of a company wide in implementation initiative and includes our core ISNG and NG1 platform, our NPA customer experience analytics software our N Paws synthetic testing platform and our flagship site line and TMS products from the Arbor Security portfolio. In the enterprise segment, we had multiple 7 to low 8 figure deals from the federal government. The common theme in these deals is the indispensable role we play in assuring the performance and availability of large scale mission critical systems.
In the largest of these transactions, we are part of a 1st phase of a new initiative to ensure end to end visibility, continuous monitoring and remediation in conjunction with the orchestration of mandated security solutions in hybrid cloud environment initially involving AWS Golf Cloud Services. In this deal, we leveraged our entire service assurance arsenal of offerings including active and passive monitoring and monitoring switches predominantly in software and virtual form factors. In another case, we displaced the incumbent due to our strong reputation and track record with the government based on our successes with our superior service assurance, technology and our extensive knowledge of their requirements and internal operations. Finally, in the 3rd deal, We leveraged our platform strength combined with our superior agility to customize a solution to meet a uniquely strict monitoring accuracy requirement in a mission critical application, which helped to refresh our own incumbent solution many years of dependable service. From a go to market perspective, we continue to successfully expand our partnerships.
I'm going to cite two examples. With AWS, we recently completed the first deployment of our V stream and V engineers 1 product. By a large COMMENT Agency in AWS, the Cough Cloud. Our capabilities now include both agent agent based deployment inside the workload and separate VPC deployment in combination with AWS traffic monitoring. This illustrates the importance of NETSCOUT's visibility in assuring the performance of applications migrating to AWS Scott Cloud.
It also highlights the benefits of our Advanced Technology partnership between AWS and NETSCOUT in terms of delivering to market well detected and fully interoperable solutions. We will further demonstrate these capabilities of assuring performance and security of applications in hybrid cloud environment at the upcoming AWS Reinvent Conference in Las Vegas. Finally, with VMware earlier in second quarter, we announced the availability of our V stream NSX addition or VMware NSX, T, extending our leading visibility and troubleshooting analytics platform to be deployed natively and invisibly to the workload in the virtual infrastructure for the data center and cloud for dequisibility and consistent security. That concludes my prepared remarks, and I will now turn the call over to Jean.
Thank you, Michael, and good morning, everyone. I will review key second quarter and first half fiscal year 2020 metrics, along with our guidance. As a reminder, this review focuses on our non GAAP results unless otherwise stated, and all reconciliations with our GAAP 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 Regardless, I will note the nature of any such comparison. Slide number 12 details our results for the second quarter and first half of fiscal year twenty twenty.
Focusing on the quarterly performance, we reported revenue of $216,500,000, which slightly exceeded the high end of our color for the quarter as Anil outlined in his remarks. 2nd quarter revenue declined by about around 3% on a year over year basis, but was flat on an organic Our second quarter fiscal year 2020 gross margin was 76.6 percent, up over 1 half of a percentage point over the same quarter last year. Quarterly operating expenses were down over 2% from the prior year, primarily due to lower personnel related costs resulting from reduced headcount We reported an operating profit margin of 14.6 percent with diluted earnings per share of $0.28. Turning to Slide 13, I'd like to review key revenue trends for the first half of the year. For the 1st 6 months of fiscal year 2020, the service provider customer segment revenue grew approximately 2% and the enterprise segment declined approximately 6% after removing the revenue impact from the service provider segment with the remainder from the enterprise.
Revenue by geography was relatively consistent with the first half of the prior year, There were no customers in she highlights and free cash flow, we ended the quarter with cash, cash equivalents, short term marketable securities and long term marketable securities of $307,800,000, which is a decrease quarter. Free cash approximately 2,900,000 shares of our common stock at a cost of $66,800,000 or an average price of $23.34 per share. In the first half of this fiscal year, we returned approximately $100,000,000 or over 2 thirds of our anticipated free cash flow for the fiscal year back to our shareholders. We anticipate continuing to be active in In addition to our share repurchases, we also repaid $50,000,000 outstanding on our $1,000,000,000 revolving credit facility. To briefly recap other balance sheet highlights, accounts receivable nets, was $202,300,000, up by $42,200,000 since the end of June.
DSOs were 79 days versus 88 days at the end of the fiscal year 2019 73 days at the same time last year. The increase in the DSOs in payment from one large customer that is paid subsequent to the end of the quarter. Normalizing for this, the DSO was relatively flat this quarter as compared with the same quarter last year. As a reminder, we sold the HNT Tools business in 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 first two quarters of both years.
Consistent with Anil's remarks, we continue to target fiscal year 2020 revenue in the range of $895,000,000 to $915,000,000, which implies low single digit organic growth. In terms of the other key fiscal year 2020 operating model assumptions outlined on this slide, we currently anticipate gross margin to be relatively flat compared to last year as improvements from adoption of our software solutions are offset by the increased radio frequency propagation modeling activity where the initial phases have a higher associated cost. Our plan currently calls for lower operating costs compared with last year, as we benefit from a reduction in personnel related costs, primarily attributable to lower headcount, partially offset by increases in annual merit adjustments, We expect our non GAAP tax rate to be in the range of 22% to 24%. Assuming 76 700,000 shares outstanding, we anticipate delivering mid to upper single digit earnings growth with diluted earnings per share increasing to a range of $1.45 to $1.50 due to our capital structure management. The original range was $1.40 to $1.45.
I'd also like to offer some additional color on the third quarter. As a reminder, last year's third quarter revenue of $246,300,000 was not impacted by the sale of the HNT Tools business as the sale was completed in the second quarter of last year. As we assess the timing of opportunities in front of us, we currently anticipate revenue in the range dollars to $255,000,000. Diluted earnings per share for the 3rd quarter is expected to range from $0.57 to $0.60. That concludes my formal review of our financial results.
Before we transition to Q And A, I'd like to quickly note that our upcoming patient is listed on Slide 16. I'll now turn the call over to the operator to start Q
We'll take our first question from Matt Hedberg with RBC Capital Markets. Please go ahead.
Hey, guys. Good morning. Thanks for taking my questions. Anil, congrats on the improved results this quarter. So in your prepared remarks, you noted that you're pleased to see carriers begin to prepare for the 5G.
Obviously, you had the 8 figure order from a T1 domestic carrier this quarter here. But you also said that it's a long term opportunity. I guess when we look at the opportunity from an external perspective. What are some of the guidepost milestones that you see that gives you confidence this opportunity is progressing?
So I mentioned last time or in previous calls that I see this 5G as a much longer term opportunity. And over the last 6 months, there are a couple of new findings. One is the carriers are accelerating the 5G deployment. In fact, T Mobile just announced and they're advertising heavily on the TV for last few weeks, 5G as a differentiator. So this T Mobile announcement, which I saw in detail yesterday, I think it's going to trigger acceleration at other carriers in the U.
S. Second thing, which is, a very interesting trend, which I discovered during my travels in about last 3 months is that 5G will also be used outside of carriers. In federal government is being used as the next local area network technology. So the implication of 5G will be beyond, carriers, which is what not known to us at least 6 to 9 months ago. So those are the trends.
And so right now, I'm more bullish on 5 g impact on the next 12 months to 18 months. Than we had than we were last year.
That's great. Very encouraging. And then, as a follow-up, there wasn't a ton of commentary about Arbor this quarter in the prepared remarks. I'm wondering if you can provide a bit more color on what you saw in your broader security portfolio?
So as I mentioned, we are in really going to be in 3 segments starting very soon. With the announcement of threat analytic products. So one area is DDoS Security, which is where Arbor is And in the first half, the business was roughly flat versus last year. And, other one is our traditional service assurance with half enterprise and half service provider. The security, even though DDoS is part of that, is the 3rd area.
And, and that's that's a new area we are getting into. We are aware. And so when I look at the broader security portfolio, There are many things we're looking for next year in addition to DDoS. 1 is our threat analytic product we just announced and also we had acquired a small company which is doing some work in the machine learning and AI area based on the NETSCOT data set. So overall, I think there has been, as we mentioned in the last quarter, some of the international business was impacted in the first half because of the integration issues and which are mostly behind us, I think.
And Arbor was a much bigger portion of the internet business and then service assurance. So it was somewhat impacted by the training and all those. So I think we'll we hope to make this up And, but the bigger security story is not just EDoS, but the other two areas which we have invested in over the last 12 months.
Super helpful. Thanks a lot guys.
Yeah.
We'll take our next question from Eric Martinuzzi with Lake Street. Please go ahead.
Yeah, just curious, just looking at the first half of the year on the enterprise side, you know, we've we've had a my math is correct. Excluding the the handheld networking tools business, it was down about mid single digits or so. Just wondering what your expectations are for that business in the second half of the year? And then I have a second question.
So I'll just mention high level and Jean may have some additional commentary. But overall, we it's it's some of it is timing of order, some affected by integration thing in the first stop and training and resource alignment. So we think Alex that, we'll be able to make up and be flat to slightly up in enterprise by theendofthisyear.
And by the way, you're talking to Eric. Alex will get his chance soon enough.
Okay. Okay. I saw you, man. So, okay. Good.
Still a good question.
And on the MVNO, obviously, a big win with a large, your large US cable operator expanding their MVNO, work that they're doing with you what about other North American MVNOs? Are there any of those in the pipeline, Anil?
Well, we do good business. I mean, this was I mean, this is very I mean, the last year, there was a different one. And they spent a not consecutive year. So this the deal here was very big because they bought everything, including Arbor Solutions, but it we had a bad year with them last year. So there was a pent up demand.
So, yeah, we are working with other operators, but nothing close to this size or magnitude.
Understand. Congrats on the quarter.
Thank you.
We'll take our next question from Alex Kurtz with KeyBanc Capital Markets. Please go ahead.
Yes, thanks. Thanks for taking the question here. So, Anil, when you look at the intensity of spending that you saw during 4G, that was obviously a great cycle for the company. And now that you have a better understanding of how 5G could work for NETSCOUT, you had a sense that it could potentially match the 4 g cycle in the U. S.
As far as dollars over a span of time. And I guess all of this relates to how maybe fiscal 'twenty one could be an uptick from how you see it, maybe 6 or 9 months ago?
Yeah. I, I, I think so, but not just because of 5 g, but 4 g spending in the U. S. Has come down dramatically. As you know, affected by the 2 biggest operators which affected our business during the last 3 years, that downward trend has brought down 4g to a reasonable number versus 4 years, 4g spending for NETSCOUT to a reasonable number.
And now I think there is a visibility over next to 12 months for us to keep that trend going or taking higher, because of 5G And yeah, certainly that has changed, as I mentioned in my earlier remark, over the last from what we thought this time last year.
So you feel like there's been a base, you're at a baseline of kind of maintenance spend on, on 4g domestically. That's where we're at right now.
Yeah. I think it's maintenance, but also want to mention that, there are 3 different version deployment modes of 5G. And, in the first non standalone case, you have they basically using maintenance dollar to do some 5G upgrades. And that's where we are right now. And then very soon, when you get to the cups model, which which requires partial spending, additional spending for control plan, then you need to buy additional stuff from us, additional new stuff, And then moving forward, as you go to pure 5G, there are new areas and the edge and everything, and that's the big opportunity.
So Most of the investment in the last 8, 9 months is in the shared area, which doesn't drive a lot of spending, but keeps us more sticking in account, we are now in the domain of, where there could be some additional investment initially in more in the pre deployment area, like calibration order we got And, and moving forward, that's where there might be some acceleration driven partly by some leaders, in the market that we will see accelerated spending. And lastly, I mentioned we, there is a positive trend with the impact which is not well known at this point is what's the relevance of 5G outside of the carrier market because we are in a unique position that we understand the 5G, 4G infrastructure and also understand the enterprise traffic and application. We are both sides of those. That's a combination which will be very valuable if 5G takes off outside of the carrier space.
Our next question comes from Chad Bennett with Craig Hallum. Please go ahead.
Great. Thanks for taking my questions. So the large MVNO order that happened this quarter that came from last quarter. I think at least last quarter, we were thinking about that in terms of dollars around $20,000,000, but it sounds like that even expanded. Jean, could you quantify the contribution from that this quarter?
As you said, we thought it was probably going to be it is a deal that was started many quarters ago and you can tell, it's obviously a very complex deal based on how they wanted to roll out their strategy and the amount of integration that they wanted in all of their products to be able to have one single pane of glass to have complete visibility. So over the time, you know, the multiple quarters that we have been working on, it had increased from, say, a mid single digit service assurance deal and then they started putting, some of our security products in there. So it went to, you know, in the $10,000,000 to $12,000,000 range, and then it expanded from that. And so you're correct in that we thought it would probably be somewhere between the mid around $15,000,000 to $20,000,000, but it actually went up probably more than more like $5,000,000 to $10,000,000 after that. And the interesting part is that a lot of it was shipped in our second quarter, but there's still a portion of it that came in quarters, but that will actually ship in our 3rd quarter.
Okay. So from a revenue rec standpoint, there's still more more of that order to be recognized this quarter?
Yes, that's true. Along with is, Anil said in some of his comments, some of the orders that we received from the Federal them in.
Got it. Okay. And then, is there considering where we are today and I thought it was interesting in the commentary about the Fed orders that you received. I think you noted that They were a fair amount of software based or software defined solutions. Can you give us a sense of where you think you'll be at this year in terms of software based or software defined percentage of product revenue?
I think that's, I don't have the percentage, but, I don't know what our assumptions were, but we are, I mean,
So let me let me as Neil was looking at something, let me just give you some of the facts. On a percentage basis of service assurance product revenue. Our it was about consistent with last year. And this is just the move from hardware appliances to software only. And it was about 20% on a for both periods.
The very interesting thing, as you point out, Chad, is that in the enterprise, we started see significant use of our software only also, such that last quarter in why 'nineteen's Q2 in service assurance enterprise, it was probably in the mid single digits as a percentage of revenue However, in Q2 of this current year, it went up to almost a third of our revenue. So as you as you correctly pointed out, the Fed and some of the other enterprise, larger enterprise strategic customers are definitely interested in software only.
Interesting. And then maybe last one for you, Gene, real quick. How should we think about, from a capital deployment standpoint, the appetite for share buyback versus debt pay down, which you did both this quarter.
Sure. I think what we did for the debt paydown was, you know, this was a year in our revolver where the gross leverage amounts were going down as you get, it's just a natural structure that's in a revolver. We decided to manage our debt levels according to the gross leverage ratios that were in our revolver credit facility. And so, we continue to believe that the best use of our capital after investing it back into the business is to give it to the shareholders in the form of share repurchase. Share repurchase has a better ROI at this point than debt pay down.
So we will continue to monitor our cash levels and we'll continue to keep the minimum required cash of around $300,000,000, which represents our working capital domestically, our working capital internationally, as well as some of the cash that stays in your international entities due to operations. So we'll just continue over the next probably foreseeable future defined as probably at least a year of share repurchase. We're at 76,000,000 to 77,000,000 shares outstanding. And we probably could, we still have about $10,000,000 less 2,000,000 shares left, sorry, on our share repurchase program. And so we could get down to 70 ish 1,000,000 over the next few years.
Got it. Thanks so much.
Thank you.
Our next question comes from Jim Fish with Piper Jaffray. Please go ahead.
Hey guys, congrats on the print here. Jean, so I just want for you, maybe double clicking on Matt's prior question from before Can you just give us more color around the service assurance portfolio and security portfolios within the respective verticals?
Sure. From a on a year to date basis within Service Assurance, I would say that the service provider market probably was relatively consistent, maybe down a point or 2. Aubber, however, has grown close to the mid single digits. And I'm sorry, mid teen in secure in the service provider place. In enterprise, as we talked about, it's down about overall 6%.
And as we talked about the digital transformation since we work with so many large customers that have very complex network. Their projects tend to be uneven in the pattern as they figure out when they move towards what they want to do with digital transformation in the cloud. We saw over a few years ago that it was kind of a wait and see pattern for these people as they decided what they wanted to do with their architecture. And now we see projects in some of our largest customers. Like last year, we had a lot of our financial institutions due some digital transformation.
So we continue to believe that digital transformation will be very important to us. We also and that also pertains to Arbor when other part of your question, they're probably down on a year over year basis in the enterprise, maybe in the mid teens. And again, that speaks to some of the very large security projects that they have done in the prior years with financial institutions.
Got it. Thanks for the color there, Keene. And just maybe on the guidance, the last few years, we talked about more than 5% of revenue coming in the back half of the year on sort of initial guide and whatnot. And that kind of resulted in mid year guide downs. For Kiera, again, based on my math at about 56% of the annual business in the second half of the year based on the midpoint of your guide.
And it looks like your guide implies actually accelerating double digit organic product growth in the fiscal fourth quarter. I guess what besides some of the remnants of the larger deals makes you confident that you can hit this again when the macro has started to kind of come down this quarter and you guys saw a benefit this quarter from some larger deals with timing?
Well, first of all, as we mentioned, and Dean may have more color to this, is that we have much better visibility because of those federal deals and those 8 figure deals on the cable provider. Which we didn't have in the leading entry in the second half. So I think we are slightly ahead in terms of visibility point of view. Than last year. And so I feel that, that, I mean, notwithstanding the challenge you're talking about I think we are in a much better situation than in the past past few years because of many different reasons.
And despite the fact that it's only 44% there, but typically throughout the history of the company, we have been in this 43 47% range in the first half. So I think if we look at that, we are in the similar domain because of the additional visibility we have. Moving into the third quarter.
We'll take our next question from Kevin Liu of K. U. Lu in the company. Please go ahead.
Hi, good morning. Just kind of a somewhat macro type question as you look at maybe the pipeline of deals you had coming into Q2 absent the large eight figure type opportunities, Did those kind of move through as the way you sort of expected or did you see any sort of delay or macro concerns that would have affected the sales cycles?
No. We didn't see any macro issues. Like I said, whenever you have this large deal, the timing of this order, whether it's gonna be in on the cusp of the previous quarter or early in the second quarter is always debate. And you saw that in the last quarter, we made this cable provider deal, but fortunately, it not only came through, but it was a bigger size. On the federal side, clearly, the end of, federal year in September is a big driver.
And typically, we do very good in September. And that's what happened, but that pent up demand has been there. And project had been approved, but there were delayed funding. So I think overall, the macro effect maybe was positive. We don't really see any trends, negative trends on the macro side.
That's great.
And then just looking at your R and D spend, that was, I know it's down year over year, but on a sequential basis, it seemed like it ticked up fairly meaningfully. I'm just kind of curious if there was anything sort of one time in there or if that's kind of a reasonable run rate going forward?
I was when I look at it, Kevin, over the quarter. I would say that, Q2 probably absorbed the merit increase that we gave in the beginning of July. And I think for the year, on a full year basis, it's probably going to be down about 15. Oh, I was going to get about $15,000,000 over, FY19.
All right, great. Thanks for taking the questions and congrats on a strong quarter.
Thank you, Kevin.
Our next question is a follow-up from Kurtz with KeyBanc Capital Markets.
About the company and the model. So a lot of companies with your approach, which is software and appliance, have been moving to subscription models, to match how customers buy a lot of their technology and their software now from from cloud providers and at least not a complete page, you go, but something akin to that. And I just wonder, has that something you guys have considered in moving away from life of device? Is that a strategic decision that maybe the customers started to ask you about. And that's something we could see in 'twenty one and 'twenty two or maybe there hasn't been that kind of, interest from your bigger service provider and government customers?
I think I'll give you a cool answer and in the interest of time, but, and then maybe on a future call, we can go over. We did announce visibility as a service with a success offering offer, of of a solution. Few quarters ago. I think we do have 2, 3 customers, but, there has not been a, like, a tremendous demand right now. And maybe there'll be similar demand when we go on the lower end of the market, but the the high end customer, people have not been demanding but we are already from a product and packaging and sales point of view.
And so at some point, yes, we'll see some revenue from the SaaS offering. Hardware also has a SSS offering and, but it has not been any reasonable portion of the revenue.
Dan, just to follow on to Anil's comments, you know, we can sell our products in hardware in various forms, factors, and through various pricing models. And we did we do have a subscription offering in our mainstream customers, the Fortune 500, I think over the last 5 years, there's maybe been 1 or 2 customers that were interested in a subscription model. Maybe they did it for like a year or 2 years. So we're not seeing it for most of our customers. As Anil had mentioned, in our VAS offering, which is generally targeted towards less complex network.
There might be an uptick in offering subscription in that area, but we would see that as incremental growth.
But couldn't there be an argument, Jean, that moving your core business to subscription or like on a 3 year term or whatever it is, could could iron out or at least create some better visibility and how you guys go to market and sort of the volatility we see in these service provider deals? Or it's just they're not ready to do that?
I mean, you're right about obviously subscription models and visibility and certainty. We have offered it to our customers. We have not willingness at this point for, the vast majority of our customers
to wanna move to a
subscription model. Yeah. Sorry. That there'll be low end of the enterprise market or mid year, I don't think carriers are going to use subscription models.
Okay. Are we going to discuss offline? Thank you.
And it appears we have no further questions. I'll return the floor to our presenters for closing remarks.
We have no more remarks at the time. Thank you for joining us today and have a nice day.
And this does conclude today's program. You may now disconnect.