Ladies and gentlemen, thank you for standing by and welcome to Nescout's 4th Quarter and Fiscal Year 2019 Results Conference Call. At this time, all parties are in listen only mode until question and answer portion of the call. As a reminder, this call is being recorded. Andrew Kramer, Vice President of Investor Relations and his colleagues at NETSCOUT are on the line with our 2020 guidance.
Moving to slide number 3, today's conference call will include forward looking statements. These statements may be preface by words such as anticipate, believe, and expect and we'll 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 the slide and in today's financial results press release as well as in the company's annual report on Form 10 K 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 announcement described herein. Let's turn to Slide 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 with the limitations on relying solely on those measures is detailed on the slide and in today's press release. These measures should not be considered in isolation for or as a sub from or as a substitute 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 the HNT tools revenue for comparability purposes. Reconciliations of all non GAAP metrics with the applicable GAAP measure are provided in the appendix of the slide presentation in today's earnings press release and they are also consistent with the preliminary numbers that we shared with the market in early April. Despite lower than expected revenue, we delivered a relatively strong EPS performance due to higher gross margins lower operating costs and a lower than expected tax rate.
We believe that the combination of the progress we've made in the past year along with our plans going forward will help position the company to deliver better results in fiscal year 2020. I'll deliver the call Over to Anil at this point, who will share his insights into what went well for NETSCOUT last year and the opportunities and challenges that lie ahead.
Thank you, Andy. Good morning, everyone, and thank you for joining us. Let's begin on slide number 6 with a brief recap of our quarterly and full year non GAAP results. Today's results are fundamentally consistent with the preliminary results we reported in early April. Our 4th quarter revenue of $235,200,000 was approximately $15,000,000 lower than we expected primarily due to a delayed revenue recognition on the largest phase of service assurance project at an international mobile operator.
Unfortunately, this customer's implementation schedule progressed slower than originally planned, and we are unable to backfill this given the ongoing spend challenges facing our service provider customers. Nevertheless, excluding the since divested HNT tools revenue from last year's fourth quarter, We generated overall organic revenue growth of 3%, driven by an 8% underlying increase in the enterprise customer segment driven by strong growth in DDoS security and relatively stable service assurance revenue. We successfully absorbed the top line shortfall to deliver 4th quarter diluted EPS of $0.66 due to higher gross margins, lower operating costs and a lower tax rate. Despite falling short of our top line ambitions in fiscal year 2019, with full year revenue of $911,500,000 or diluted EPS of $1.30 was above the midpoint of our original targets due in part to the proactive initiatives we implemented to reduce costs and tightly managed spending earlier in the fiscal year. Overall, we made important progress during the past fiscal year on multiple fronts which we believe will set the stage for generating better, more consistent and more better and more consistent results going forward.
Let's move to Slide 7 for some further perspective into this. As you know, Netcore top line has been negatively impacted over the last couple of years largely as a result of reduced carrier spending, especially at our 2 largest Tier 1 customer. This dynamic was further compounded by integration complexity and adding disparate product lines that carried different pricing models profitability levels and value proposition. As we move forward, we believe that these severe headwinds have largely receded. At the same time, we are excited about our potential to benefit from new tailwinds related to our new product innovation and security and analytics and the continued migration to increasing software content.
To summarize these use use dynamics, we have stabilized we have stabilized revenue from our 2 largest service provider customers in fiscal year 2019. We have successfully migrated most of our other tier 1 operators over the past 2 years to our software based platform for service assurance. ServiceWider related revenue for the ISNG software platform grew by nearly 40% and it represented nearly 30% of carrier related service assurance product revenue last year. We stabilized our DDoS revenue during the second half of the year primarily due to improved enterprise traction. We have completed our R and D projects to integrate key products and technologies that were acquired as part of the Danner Communication Business Acquisition.
And we have divested certain product lines that were unprofitable and had been in decline for multiple years. At the same time, we have made good progress on many other brands such as solid execution of our product strategy. We reshaped our product portfolio to focus on higher margin software centric solutions They brought in our range of solutions to provide visibility across any type of infrastructure into any service or applications. We now provide greater deployment flexibility ranging from appliances to software and virtual form factors and our solutions address an expanded range of use cases from network application and infrastructure performance management to security and big data. We have begun we have begun to build sales momentum in our enterprise customer segment as customers start to move forward with digital transformation initiatives.
We have reported 3 consecutive quarters of solid organic revenue growth in our enterprise customer segment. We completed the that began in the second quarter of last year. We expect that these actions will generate annual run rate saving of approximately $23,000,000 split between fiscal year 2019 2020. By restructuring key operations, selling non Procore product lines, and carefully managing spending. We reduce operating costs by 9% in fiscal year 2019.
And we believe that these actions will also help us keep costs costs relatively flat in the coming year. And finally, we recently realigned leadership roles and the overall structure for our technical product delivery and sales organization in order to maximize our ability to accelerate key development initiative and drive go to market effectiveness. Moving to Slide 8. We believe that NETSCOUT focus on providing ultra high definition visibility into the real time transactions embedded in network traffic is increasingly resonating with our customers who are challenged to efficiently and effectively transform a sector infrastructure to support digital transformation without compromising their current capabilities. We recently held our annual knowledge and user summit where we shared our product roadmap for the coming year and the feedback from the customers, partners, and various industry analysts was very positive.
As we move forward, we are focused on capitalizing on the falling near and long term opportunities to drive top line growth. In the enterprise, we see good scope for continuing to help our customer with their data transfer data center transformation initiatives particularly as they migrate more of their application workloads to private and public cloud environments and improve overall agility. Security represents a promising addressing as our value proposition expands beyond DDoS. We are looking to build on the large on the early momentum, we began with the last year's launch of Arbor Edge Defense, which had powerful new threat data intelligence gateway capabilities to our proven set of enterprise DDoS capabilities. We plan to launch we plan to launch Arbor Threat Analytics within the next couple of months.
This is a new enterprise security offering that takes advantage of NETSCOUT's existing footprint inside our enterprise customer's network infrastructure. This analytic platform combines our historical strength in packet forensics with Arbor's robust catalog of known security threats and new machine learning app capabilities, thereby enabling security teams to work faster and more efficiently to identify and investigate potential network based security breaches. Combining Arbor sales resources with our large service assurance enterprise sales team was the final step in completing our integration efforts. With this behind us, we move forward with improved coverage, especially in certain international markets and have strengthened our ability to maximize cross selling opportunities across network and security operations. In our service provider customer segment, we continue to fortify our incumbents in service assurance helping carriers add capacity to support growing traffic over their 4 g networks, while also mining new opportunities for our ingenious business analytics and RAN Optimization Offering.
Just as important, we are investing to support our customers as they advance their 5G network plans. To unlock new DDoS opportunities with our carrier customers, we have continued enhancing our DDoS extraction capabilities in ways that help them improve the overall efficiency of their network security infrastructure. Let's turn to slide number 9 as I would like to focus on our outlook for fiscal year 2020 and offer some closing thoughts. We remain bullish on the opportunities we see and confident in our ability to capitalize on them. As we described, We believe that many of the issues that have limited our top line results are behind us as we focus on maximizing the upside from the enough from a number of growth initiatives that are still in the early stages.
As we move into fiscal year 2020, Our top priority is to produce top line growth, which is fundamental to driving operating leverage, EPS growth, and stronger free cash flow. Our fiscal year 2020 plan is to generate low single digit organic revenue growth through a mid single digit increase in product revenue growth. Which is at the higher end of our plans, maybe at the higher end of our plan can then be converted into mid single digit EPS growth. Looking looking more closely at our fiscal year 22 revenue target that ranges from 895,000,000 dollars to $915,000,000. We have built our plan around the following assumptions.
We expect our revenue growth will be driven by higher product revenue in our enterprise customer segment as we had seen good opportunity to sustain the organic growth we have generated in recent quarter. Although we are bullish on the long term prospect of our new harbor threat analytics, we anticipate the relatively minimum contribution from this offering this year. Given the early summer launch and conventional sales cycle. We expect that the near term service provider spending environment for post service assurance and DDoS security will remain difficult. While we expect 5G to be a catalyst for better spending over the longer term, this technology turn remains in its early phase.
Nevertheless, we anticipate another good year in capturing 5G calibration deals, and we have recently won several initial deals for 5G radio network monitoring with Tier 1 operators in North America. However, these carriers are moving cautiously to build out their 5G end loan architectures, which will ultimately require investment in new services assurance solutions. In terms of diluted EPS guidance, we anticipate fiscal year 2020 diluted EPS in the range from $1.40 to $1.45 based on our plans for organic revenue growth, plus further gross margin improvement as the product miscontinues to shift towards the software content and basically flat operating expenses compared with last year's reporting of operating costs. That will enable us to deliver EPS growth even with an anticipated increase in our tax rate. Before I close my commentary, wanted to provide a brief update on our change to our Board of Directors.
Michael Sabodos, who has made extensive contributions to NetScout success in senior leadership roles including the past 12 years as our COO and Vivienne Vitale, a highly respected and experienced HR Leaders with top technology companies were appointed to our board earlier this year. Michael will serve as Vice Chairman of the board. At the same time, Vin Malarkey, a long standing NetScout Director retired, and I would like to thank Vin for his service and support of the past 2 decades. Finally, I would like to thank my fellow guardians around the world for their tireless efforts and dedication. I believe that we move forward having assembled a world class experience team that possesses unmatched domain expertise and its focus on the stellar execution of our clients this year.
I look forward to sharing our continued progress and achievements with you over the course of the coming year and return the call over to Michael at this point.
Thank you, Anil, and good morning, everyone. Slide 11 outlines the areas I will cover. As Anil mentioned, we had our annual technology and end user full of Engage last month in Nashville. It was it was a resounding success with 700 plus attendees pending our service provider, enterprise, government, and partner universe. Across both customer segments, digital transformation has become the common team.
We are well positioned to help our customers reduce the risk and maximize the rewards of the highest impact digital transformation initiatives that include 5G, cloud, application performance and security. I will introspect some additional observations from Engage as I cover several notable wins from the past quarter. In the service provider market, carrier marketing announced 5G's increasing, although the infrastructure build out and roll out of 5G services moving at a more measured faced. Our recent success with a Tier 1 U. S.
Service provider demonstrates a potential to leverage our 4G income to win new 5G related projects and participated all phases of the 5G network life cycle. In the fourth quarter, this carrier awarded us a mid-seven figure deal to help calibrate the design of its 5G radio access network or RAN. This long standing customer is also starting to deploy our 5G compatible and monitoring tools as they began to launch new 5G related services in limited markets. In the enterprise, a range of integrated offerings is enabling our enterprise to move forward with major data set to transformation and multi cloud migration strategies. To that end, we have continued to advance our relationships with major public cloud vendors like AWS and Microsoft Azure.
Netscout is now an advanced technology partner at AWS and we have recently achieved a co sale ready status with Microsoft Azure. This enables us to actively collaborate with Microsoft sales teams to support customers who are migrating and managing applications. In hybrid Azure environments. As customers seek greater visibility into application performance, our engineers policy offering is becoming increasingly valuable. All is an active transaction testing tool that complements our core portfolio of passive monitoring solutions.
It is gaining traction with customers who can use it to ensure basic connectivity, manage the availability, reliability and performance of software as a service of SaaS applications and monitor infrastructure performance. We are seeing good interest in this product as measured by indicated by our policy revenue nearly doubling last year of a relatively small base The product is almost all in tandem with our core product and a number of active trials continue to grow every quarter. During the fourth quarter, all outstanding financial services customers spent over a quarter of a $1,000,000 on energy response to monitor connectivity and over 150 offices, data centers and mission critical cost centers nationwide. This is just one part of a much larger deployment for FEDSCOUT technology that is helping the customer baseline existing base line existing dependencies support evolving data center requirements and deploy a new cloud platform. We see additional opportunities to further expand the scope of our management as this customer is actively evaluating POS's Wi Fi monitoring capabilities.
Turning to security, we are executing on our strategy to expand beyond DDoS. At Anchorage last month, we unveiled ATA or ARBOC Threat Analytics, a new enterprise security analytics software stack to detect and investigate potential security features using our ISNG and V Suite data sources. This new security product builds on our ability to support forensic use cases with our valuable packet data that can aid security teams as they seek to understand where and how they have been infiltrated. For example, last quarter, the cyber security organization at a large bid west Financial Services firm selected NETSCOUT to support a multi phase project aimed at compliance with the new state regulations that mandate the collection of forensic evidence for investigation into potential security breaches. The new Arbor Threat Analytics is designed to make this even easier for customers like this customer to benefit through easy access to our IP packet recording at scale, a robust threat intelligence feed that can help quickly detect known threats that have already penetrated existing defenses, new capabilities that rapidly identify and almost behavior on the network and integration with 3rd party security information and event or SIM platforms.
I look forward to sharing additional news of our success in technical customer relationships, if this goes to 2020. That concludes my prepared remarks. And at this point, I will turn the call over to Dean.
Thank you, Michael, and good morning, everyone. I plan to review key fourth quarter and full year metrics, along with our guidance for fiscal year 2020. 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, 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 be sure to note the nature of any such comparisons.
Slide number 13 details our results for the fourth quarter full fiscal year 2019, focusing on the quarterly performance we reported revenue of $235,200,000. 4th quarter revenue declined by 1% on a year over year basis but grew at 3% on an organic basis, excluding the HNT Tools business. Revenue in the service provider customer segment was relatively flat our enterprise customer segment grew 8% organically. On a comparable organic basis, product revenue grew nearly 9% and service revenue decreased 2%. Our 4th quarter fiscal year 2019 gross margin was 79% or a 2.3 percentage point increase from the same quarter last year, largely due to favorable product mix shifts.
Quarterly operating expenses were down by 17% from the prior year due to lower personnel costs, primarily resulting from lower headcount. We reported an operating profit margin of 29.2 percent with diluted earnings per share of $0.66 which ended up higher than code. As Anil mentioned, we completed our restructuring program during the fourth quarter. We ended the fiscal year with 2581 employees, which is 18, we saved a total of $10,000,000 from our restructuring actions, which impacted our 3rd 4th fiscal quarters. For fiscal year 2020, we expect an additional $13,000,000 in savings, which will impact our First And Second quarters.
This will result in a total run rate savings of about $23,000,000. In total, restructuring payments were approximately $17,000,000, and that is reflected in our free cash flow results for fiscal year 2019. There are no material restructuring payments associated with these programs into paid in fiscal year 2020. Turning to Slide 14, I'd like to review key revenue trends, fiscal year 2019 revenue in the service provider customer declined by 13% with service assurance down 10% and DDoS security down 20%. In the Enterprise segment, fiscal year 2019 revenue declined 4% due to the sale of the HNT Tools business, on an organic basis, enterprise revenue grew nearly 2% for the year.
In terms of other full year revenue trends, total revenue split between our enterprise and service provider includes revenue from the HNT Tools business, the U. S. Experienced a 5% revenue decrease, while international revenue declined by 12%. International customers represented 39 percent of GAAP revenue versus 41% last year. We had no customers who represented 10 percent or more of revenue in either the quarter or the year.
Slide 15 details our balance sheet highlights and free cash flow. We ended the quarterly cash, cash equivalents, short term marketable securities and long term marketable securities of $487,000,000, which is an increase of $11,200,000 since the end of the third quarter. We generated free cash flow of $76,400,000 for the quarter In addition to repurchasing $14,500,000 of our common stock standing on our existing credit facility. For the full year, we generated free cash flow of just over $126,000,000, which includes the previously noted restructuring payments flow conversion was 131 percent of non GAAP net income, and it was 116% conversion on the reported free cash flow. To briefly recap other balance sheet highlights accounts receivable net were $235,300,000, up by $21,900,000 at the end of the fiscal year.
DSOs were 88 days versus 78 days at the end of fiscal year 2018 91 days the end of December. The increase from last year's level primarily reflects the timing of large maintenance renewals. I'd like to provide a brief update on our use of capital. Moving forward, we plan to retain up to $300,000,000 in cash on our balance sheet at any given point for both working capital purposes and in consideration of overseas cash. In the near term, we plan to allocate up to $100,000,000 for stock buyback and debt repayment.
We anticipate being active in the Let's move to slide 16 for guidance. I will focus my review on our non GAAP guidance. As a reminder, we sold the HNT Tools business in September 2008 and it contributed $18,000,000 to last year's revenue before the sale was completed. Accordingly, the impact of the divest should be taken into consideration when comparing fiscal years 2019 2020, especially for the 1st 2 quarters of both years. Slide 24 in the appendix details the HNT Tools quarterly revenue contribution to last year's revenue.
Consistent with Anil's comments earlier, we are currently targeting fiscal year 2020 revenue in the range of 895 to $915,000,000, which implies low single digit organic growth. In terms of the other key fiscal 2020 operating model assumptions outlined on this slide, we currently anticipate further gross margin improvement as we drive adoption of our software solutions. Our plan currently calls for relatively flat operating costs compared with last year. We anticipate that savings from last year's cost reduction actions will enable us to absorb incremental spending tied primarily to higher compensation costs associated with annual merit adjustments and critical personnel replacements as well as additional investment in our enterprise security initiatives. We expect to deliver earnings growth despite an anticipated increase in our effective tax as certain components of the new tax code are scheduled to increase.
We are currently evaluating certain tax strategies that may enable us to keep the tax rate relatively flat with the prior year. Assuming 78,200,000 shares outstanding, we currently expect diluted earnings per share between $1.40 $1.45. I'd also like to offer some additional color on the first quarter. As a reminder, last first quarter revenue of $206,000,000 included $10,400,000 from the HNT Tools business, As we assess the opportunities in front of us, we currently anticipate flat to 1% organic revenue growth, which equates to revenue in the range 6% of our expected annual revenue will come in the first half of the year. With operating expenses in the range of per share for the first quarter is Before we transition to Q And A, I'd like to quickly note that our IR conference participation is listed on Slide 17.
I'll now turn the call over to the operator stock Q and
We'll take our first question from Matt Hedberg with RBC Capital.
And the call here. In your prepared remarks, you outlined some of the assumptions of getting to low single digit growth in fiscal 2020 here. And I guess in the enterprise segment in particular, you noted contributions or I guess I'd say minimal contributions from some of the new Arbor Threat products. But can you give us a little bit more granularity about when you think about the sustained enterprise growth, what are some of the key drivers that we should be watching as the year progresses on the enterprise side?
So, Matt, we we talked about when we talked about the hardware product, I just wanted to make sure there's no confusion between the previous product from Arbor, Arbor Edge Defense, and other products in the DDoS area from the new product called Arbor Threat Analytics. So we are seeing minimum traction or some contribution, especially in the second half of the year on the ATA product or the Arbor Threat Analytics. But there is a good cross selling potential as we have combined the 2 sole sources, only about 10% of the NETSCOUT enterprise customers use the Arbor DDoS and, Arbor Edge Defense product. So that's one area. Is that in the data transformation, our ability to allow people to get a single pane of glass for before and after in the cloud on prem, server farm visibility is a is a new area.
Which is generating a lot of interest. So those are the two big reasons in the short term. Why we expect enterprise revenue growth and we think they'll be sufficient, growth overall as a result of that in the single digit despite the fact there is going to be continued challenges on on the service provider side, even though we think most of the challenges are bottomed out.
That's super, that's helpful. And then maybe as a follow-up, Michael, Michael commented about advancements with AWS and Azure and that kind of caught my I know we've talked about this in the past for you guys, but maybe a little bit of an update about how that relationship or how those relationships, I should say, should should not only help customers but also how you kind of think about that eventually impacting your growth?
Well, we are now an APN member, which is an Advanced Partner Network with AWS. And that means that they can and do, reference us in their working with their customers. In the migration projects. So we are now part of the portfolio of vendors that that Arbor, I mean, that the deal of U. S.
Is, you know, publicly referencing as helpful or being part of a migration project. In the Microsoft case, being course already means that a Microsoft salespeople are quoted and are credited that is paid on leads that involve NETSCOUT also any activity that either goes through to AWS through Microsoft or even just registering a deal that involves Netscout is, is the numerative, remunerative for them. So these are material relationships. But I expect that the symbolic nature of it and the fact that get the credibility from these 2 top vendors, we are, part of the technology platform to migrate. I think that's where the real impact is going to come over the next year or 2.
I think just to mention that when that one of the challenge of deploying on prem, our solution is people's concern that what will happen if I move some of my application assets to Azure or AWS. So regardless of how much of a revenue we get directly from this relationship, that, that burden is taken away and people don't have second thoughts on deploying our solution because they feel that is going to be able to green no matter where they're on their application. So these relationships that my Michael mentioned pull up, sometime at just a check off items and sometimes create confidence for people. And in other times, it's cut down the sales cycle. Because people don't have any fear that what's going to happen to their investment as they as they migrate their apps or workloads to the cloud.
Great. Thanks a lot, Matt.
And our next question comes from Chad Bennett with Craig Hallum.
Great. Thanks for taking my questions. First, the services assurance product revenue, I think you indicated on the call that roughly 30% now is coming from software and it grew roughly 40% year over year last year, which I think is good color. Expectations or embedded expectations for software growth in that segment this year. And obviously, if you answer that, we can figure out where it exits the year, but do you expect it to sustain that type of growth this year?
Yeah. I mean, this will continue. And I mean, the goal in this area is to over the next 3 year period to get to 70, 80%. Of the revenue of service provider and some portion of the enterprise will come from software. So Yeah.
I think expect this trend to continue without maybe going over the exact number. We are, customers are deciding we have both options. And customer find a better price point for them and it's great for us because it's by better margin for us. As a result, it's a win win for both sides. And that's why I think this trend will continue, may even accelerate.
Okay. Then maybe one quick follow-up for me related to that. The the top 2, your top 2 tier 1 customers on the service provider side that you indicated, have stabilized now. Have you had any success in penetrating those two accounts with your software offering? Thanks.
Yeah. So the software offering consists of 2 parts. 1 is the analytic applications and other is the instrumentation. Instrumentation is v stream, ISNG. And, these two accounts have very, very high deployment of instrumentation, maybe to a saturation point on 4 g.
So we have not made progress. They don't need anything for from us But on the analytic side, yes, they are buying software. But when they move to 5G, they they'll have to use the software version or they will prefer to use the software version. Last time, these two accounts are, are dominated by our tech com products, which were all hardware based. And so because of that, we have not seen traction from them on the 4G side for using the software solutions.
And we will take our next question from James Fish with Piper Jaffray.
Hey guys, thanks for the questions here. Just one quick one. I mean, over the last few years, there's been some movements during the year. And so my first one would be, what could go right or wrong year that would make you either exceed or miss your guidance, given which would pretty much over the next few quarters make it so that NetScout hits, it's their mark here as opposed to the last couple of years where we some kind of adjustments midyear on the initial guide?
Maybe I'll just mention some high level thing, Alex, and maybe Jean can add to that commentary. So I think the dynamics are different than, in the last, last 2 years, we had, for last 3 years. We have heavy reliance on these 2 providers. And that, as I mentioned, largely bottom out, we have more question on the margin side. We have reduced the cost structure.
All that will provide some headroom. Also, if you notice, the last, we we are hoping that, this this year is less back end loaded in the second half, than we had last year. And so all those things, reduces much reduces the risk. Unless there is some further, change in in the service provider segment of the market, which at this point, we don't see. I think we feel good about, the risk versus reward ratio this year.
Yes, I would only add one thing, to what Anil had said is in his remarks, he had mentioned that one of the large opportunities that we have that we've thought about for few years now going forward is the ability to cross sell and to penetrate customers, that our Arbor customers that don't use our product or that are, legacy NetScout customers that don't use the Arbor product. So that is the good news. And that as that progresses and takes traction, you know, that should be able to add a significant, population to our revenue base. On the downside to that, obviously, that's something that is happening in the first quarter. And so depending on fast the traction and the integration to the new territories works.
You might be able to see some drag in the short term on that.
Got it. Thanks. And then just one follow-up there. At what point Aneel do we see service providers move from non non standalone mode to standalone mode for 5G. And actually if I can sneak in 1 more, Jean, I didn't hear anything on the difference on the enterprise business between the security side and the service assurance.
Can you give us the growth rates like you did for the service provider for that business as well?
So while Jean is looking at that, so our instrumentation strategy is is very similar for standalone versus non standalone. For the for the current case, we will be using a lot of, existing instrumentation. They will not do need to do a wholesale upgrade because there are no new links. So in the short term, the opportunity for 5G will be will be less as they move to the stand alone mode, there'll be additional places to put our technology attached. So, but our solution and architecture is sort of transparent to stand alone versus non stand alone.
And If somebody has bought something for non stand alone on the existing links, they'll be using it for stand alone or vice versa later on. So I think that's a good story. But because of the these two cases, short term opportunity for 5G is going to use a lot of the existing instrumentation or at least on the data plan side, and that will reduce the opportunity in the short term.
Hi, Jim. And just to follow-up on the question, in enterprise, the split between service assurance or the growth rates between service assurance and Arbor, in service assurance, the growth was a little less than 1%. And that is pro form a as if the tools on an organic basis, as if the tools had have been in there on, Q1 over Q1. And then in Arbor, they had a growth rate in the upper single digits, as we've talked about before, Arbor is a Cadillac product similar to NetScout, NPM product. And they do very well in very large complex customers.
So in fourth quarter, they were very successful in winning, 2 large deployments into very large financial institutions. Thanks, Jim.
And we can take our next question from Alex Kurtz with KeyBanc Capital Markets. Your line is open.
Thanks. And thanks for sticking me in, guys. Just on the prepared remarks around Salesforce restructuring or leadership changes, that's something that, seems new to us. So what was done exactly? How serious is it relative to changes that you've done in the past and kind of what areas would we expect to see changes, what verticals?
So we have, on the product delivery side, the change is small that the there are there's a different leader. On the on the side, on the on the Arbor side for the DDoS. Also, we have moved some of the security project in other parts of the organization to use more resources, because we are using the same data for Arbor Threat Analytics as for IngeniusONE. The bigger changes on the sales side. So we have a single leader worldwide leader for the Salesforce.
And then under that, there is a there is a big leader on the international side and the multiple leaders on the US side, sales leaders. And, at the account level, a single sales team is now supporting all product sales into that account. And we tried some of those things last year, but there were a lot of sales conflict, with artificial quotas and things like that, and we didn't have a good impact on that. So we think to do cross selling, to get the cross selling advantages, which is either selling Arbor products to NetScout account or vice versa, we needed to do this integration. So while it's going to be some disruption, But I think it's going to be more than made up by all the positives of the cross selling arrangement because as I mentioned, only if there is a 10% account overlap, between the Netsmart and Arbor customers.
So now, have there been leadership changes as far as personnel and reporting structure, or are these just changes at the account level and how accounts are covered?
Yes, there are many multiple changes at the reporting level, but we don't have we have not hired people from outside. It's within the existing sales team that is movement and the multiple reporting changes.
Okay. All
right. Thank you.
Question from Eric Martinuzzi with Lake Street.
Yes, I'd like to take a look back or it's just on Q4, the delayed revenue recognition with the international service provider. Wondering if there were any kind of lessons learned as a result of that shortfall, any workflow processes that were needed to be changed.
Yeah. So first thing I wanted to mention, Eric, that, a a good portion of that revenue has already come in. Okay? And I think the lesson learned there is that, we need to bring, that we when when it comes to Asia and sales cycle and we we have to be more conservative moving forward. And these kind of things happen, I mean, there was a gap of just 2 weeks.
But nevertheless, it affected because it was the end of the year. So I think that's the lesson learned in the sense that We, I mean, lot of, non product delays and paperwork and other things can extend the sale cycle time. But the good news is that, that we'll be able to drive this revenue this year. And we already got part of it.
Okay. And speaking of the revenue this year, the question was previously asked kind of know, what puts you at the high end, what puts you at the low end. But I wanted to frame it a little bit differently. Just getting to the high end of what you guys do is that going to be probably driven more by enterprise outperformance? Or is it really going to be driven more by, service provider, maybe not being, as pessimistic as you might have framed it with your stabilization commentary.
Well, both of them, so it's outperformance versus last year on the enterprise side. And, the negative impact of the service provider spending largely bottom out. So the drag on the upside on enterprise is is becoming less and less. And at the same time, for shorter revenue, we have higher margin because of increased software content and, the cost reduction exercises we went through last year.
We will take our next question from Kevin Liu with K. Lu and Company. Your line is open.
Hi, good morning.
Good morning.
Just a follow-up on the software only deals. Are you guys incentivizing your sales team any differently as you head into fiscal 'twenty, or are your customers naturally opting for that more so as you make that push towards 70 80 percent product coming from software?
Yeah. We are we are not incentivizing it, but we are allowing our Salesforce to give higher discounts and still get quota credit. So there is a dynamic there that if you your flexibility of discounting to the customer on bigger deal sizes is better when you go with the software model. So we have some things in place which allows us to control that.
Got it. And then, Jane, last year, I think you provided some long term targets coming into the fiscal year calling for single digit revenue growth over the longer term, low 30 percent operating margin and maybe $3 in earnings over kind of a 4 year timeframe. Given some of the changes over the past year, are you guys still on track for that, or is there anything that should be updated in terms of either the expectations or the timing of when those are achieved?
So on the earnings call a year ago, Anil had a slide that said he based on FY18 that by the end of fiscal year 'twenty two, there would be about mid single digit CAGR or better that the gross margin would be in the low 80s that OPM would be in the low 30s. And so when you look at that, you know, my thoughts are that a gross margin is being driven by software only, and which has a higher product margin, as well as considerable, effect by flow through on revenue, increased revenue. So that would leave with the operating margins being at the low 30s. And so today, the cost structure is such that, there's probably some rationalization that still should occur to be able to hit those. But the interesting point that I find is if you look at the performance in Q4, where the soft, where the gross margins have gotten close to 80 and the operating margins got close to 29 and you annualize our 2 $35,000,000 worth of revenue, you could see where, those targets could still be relatively achievable by the end of FY22.
At this time, there are no additional I'd like to turn the program back over to our presenters for any closing remarks.
Great. Well, I'd like to thank everybody for joining us this morning. We know it's a busy time. We appreciate you time for NESCO. Look forward to seeing investors, as we, appear at different, conferences throughout the quarter.
If you have questions, please feel free to call me at the Investor Relations number and we'll talk to you at some point as we move into the summer. Thank you.
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