Good day, ladies and gentlemen. Thank you for standing by and welcome to NETSCOUT's 1st Quarter Fiscal Year 2019 Results Conference Call. At this time, all parties are in a listen only mode until the question and answer portion of the call. As a reminder, this call is being recorded. And Du Kramer, vice president of investor relations with his colleagues at NETSCOUT are on the line with us today.
I would now like to turn the call over to Andrew Kramer to begin the company's prepared remarks. Please go ahead.
Thank you, Keith. Good morning, everyone. Welcome to NETSCOUT's 1st Quarter Fiscal Year 2019 Conference Call for the period June 30, 2018. Joining me today are Anil Singhal, 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's a slide presentation that accompanies our prepared remarks.
You can advance the slides and the webcast viewer can be accessed in multiple areas within including the IR landing page under financial results, the webcast itself, and under financial information on the quarterly results page. Our agenda is as follows. Anil Singhal will briefly review our performance, highlight key trends and recent developments, and offer his views on our outlook for fiscal year 2019. Michael Zabados will briefly review some customer wins that help highlight some of our near and longer term growth as well as recap go to market highlights. Jean Boah will then review our first quarter results and fiscal year 2019 guidance.
Moving on to Slide number 3, I would like to remind everybody listening that forward looking statements as part of this communication are made pursuant to the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934 as amended and other federal securities laws. Investors are cautioned that statements on this conference call, which are not strictly historical statements, including, but not limited to, The statements related to the fiscal year 2019 financial guidance for NetScout, market conditions, technology trends, customer and customers and customer demand anticipated revenue from any specific customer or specific product share repurchase activity and all of the other various product development, sales and marketing, expense management, cost reduction and other initiatives planned for fiscal year 2019 constitute forward looking statements, which involve risks and uncertainties. Actual results could differ materially from the forward looking statements due to known and unknown, risks, uncertainties, assumptions and other factors. This slide detailed these factors, and I strongly encourage you to review each of them. For a more detailed description of the company's risk factors, please refer to the company's annual report on Form 10 K for the fiscal year ended March 31, 2018 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. Now, let's turn to Slide number 4, which involves our non GAAP metrics. While this slide presentation includes both GAAP and non GAAP results, unless otherwise stated financial information discussed on today's call, will be on a non GAAP thesis only. This slide, which we also encourage you to read, provides information about the use of GAAP and non GAAP measures because non GAAP measures are not intended release and those and other reconciliations and supplemental detail are included at the end of the slide presentation, which is available on our website. We've also provided supplemental data for comparability purposes related to the reclassification of product and service revenue and the applicable costs for prior period.
Again, that information can be found in the press release in the appendix of the slide presentation and on the Investor Relations website. Overall, we reported relatively solid EPS results despite revenue at the lower end of our plans. We made solid strategic progress and operational progress and we are excited about our prospects over the coming quarters. With that said, I'll now turn the call over to Anil for his prepared remarks. Anil?
Thank you, Andy. Good morning, everyone, and thank you for joining us. Let's begin on Slide 6 with a brief recap of our first quarter non GAAP results. We delivered a relatively solid first quarter earnings performance with diluted EPS of $0.03 primarily due to our ongoing efforts to manage cost. Total first quarter revenue of $2,600,000 was at the lower end of our targets, primarily due to order delays with a our service enterprise customers.
Jean will review our first quarter results in more details in a few moments. Despite a slow start to the year, we continue to make good progress on multiple fronts. We continue to advance key develop initiatives to enhance and expand our product portfolio. We also took gradual steps to further fortify and expand our customer relationships and validate our product strategy through our annual sales kickoff and user conference events, along with a new strategic partnership with IBM. Just as critical, we are advancing actions to proactively recalibrate our cost structure.
With that as the backdrop, I would like to review our core strength and how they are relevant to today's market trend as well as the key development in the quarter. Let's move to Slide number 7 for that. Over the past 30 plus years, NETSCOT has built its market and technology leadership by leveraging its extensive expertise in understanding network traffic or via data. Network traffic is very high fidelity data, but until recently, It has been relatively expensive to collect and difficult to make it actionable. Through both organic development acquisition, our efforts have been focused on making it more affordable for customers to proactively deploy our technology and more relevant to different stakeholders across and beyond IT operations from network engineers to cloud architect and from Chief Information Officers to Chief Security Officer and other senior level executives.
To do this, we have focused our product strategy around the concept of smart data, which is our patented ability to instance,aneously, convert high volume network traffic into highly conceptual structured metadata at the collection files. By reshaping and expanding our offering into a software centric feature rich portfolio of smart data solutions, our software based smart data instrumentation, and analytics can cost effectively address a broad range of use cases spanning from network assurance to application assurance, security and big data. Our performance over the past few years has portfolio with increasing software content. The constrained service provider spending environment was most pronounced at our largest carrier customer who substantially reduced spending after several years of elevated purchasing. In addition, enterprise purchasing has been choppy as customer grapple with digital transformation and the threat landscape for security continues to rapidly evolve.
However, with the resizing of our business and because of the investments we have been making, we believe that most of these challenges will largely bottom out within the first half of this fiscal year. In the service provider market for service assurance, our ability to deliver a software only version of our plat for collecting network traffic is increasingly appealing to carriers with more limited capital budgets for their 4G networks. We are making tangible progress in this part of our business. Service provider's revenue for our service assurance products stabilized in the first quarter and we believe that this trends will continue over the coming quarters. Adoption of the software version of our ISNG real time information platform has continued to grow highlighted by a sizable new deployment by a North American Tier 1 mobile operator in the first quarter.
Michael will share further insight into this win later in the call. We are well positioned to benefit as major carriers begin their a next investment cycle and start spending on next generation networking technology involving network virtualization and 5G architectures. For example, in the first quarter, we received high 7 figure orders related to 5G. Additionally, Telefonica recently certified our virtualized solutions for deployment in their next gen lab infrastructure. Earlier this week, we announced a new partnership with IBM that highlight the intrinsic value of our smart data.
Under the agreement of our ICG software, we typically integrate with IPMs telecom analytic solution, which we believe positions us as IBM's Proving platform. We are working closely with IBM to advance opportunities in which mutual customers can benefit from deploying our software to gain timely impactful insights into subscriber experience using IBM's customer experience management analytics. In the enterprise, digital transformation is a high priority with customers as they seek to reshape the delivery of enhanced new products and services. Improved operational workflows and lower capital operating costs, all without sacrificing quality, performance or security. We believe that NETSCOT is well positioned to support large enterprises and government agencies on this front by helping them manage the constantly evolving hybrid infrastructure as results from digital transformation, improve collaboration across their IT organization, consolidated number of tools they use, and improve the end user experience.
However, given the strategic importance of digital transformation, many large enterprises are moving cautiously and this dynamic continues to impact the tightening of certain projects, which contributed to the order delays we experienced in the first quarter. Last year's launch of new offerings such as vscout, vscream and Ingenius Pulse extends our value proposition beyond network assurance to include application and infrastructure performance management. These new solutions are highly complementary to our core Ingeniusone analytics suite thereby providing enterprises with a unified consistent view into an evolving hybrid infrastructure that can span traditional data centers private cloud and public cloud. Michael will highlight a couple of these wins in a moment. Moving forward, We expect that sales of these new products will continue growing, especially in the second half of the fiscal year.
In terms of security, our NETSCOT Arbor unit is a leading provider of solutions for distributed dialogue. Services attack or DDoS with a leadership position in the service provider market and an enviable high end enterprise customer base. Arbor's carrier and ISP relationship remains very strong, although prior year investment in capacity and modernization, and volumetric attacks are likely to continue weighing on the Arbor top line to further enhance Arbor's value proposition and sales reach in the enterprise we plan to substantially enhance Arbor's non premise system and relaunching later this quarter as Arbor Edge Defense. In addition to continued best in class detection of application specific details attack, this new platform will offer new parameter defense and reporting capabilities and better support cross selling initiatives into our service assurance enterprise customer base. While data is also very valuable to the security teams, and NETSCOT is mobilizing to capitalize on this.
In addition to our investments to continue enhancing the Albert portfolio, we are also adding new software capability to our ISNG platform called Ingenious Packet Shaper. This new capability is designed to cost effectively collect and filter packet data before forwarding it to other security tools that our enterprise customer use, thereby reducing the need for more security probes in the network. In addition, we are planning to release an extra iteration of our advanced threat solution later this fiscal year. This product will use NETSCOT smart data to help security teams work faster and more efficiently to identify, investigate and contain network, network born advanced threats. Finally, I would like to provide an update on our operating cost initiatives.
We have been diligent about managing our cost structure. Our first quarter operating costs declined approximately 8% from the prior year, thanks primarily to lower headcount and related personal costs. As we discussed last quarter, We are also in the process of advancing certain programs that we believe will further streamline of operations and boost overall efficiency. In total, we estimate that these actions will remove at least $50,000,000 of annual run rate costs from our business although we will not realize the full benefit of these actions in fiscal year 2019 due to the timing. That divestiture of our handle tools product area, which we determined is no longer core to our long term strategy, is well underway with multiple bidders involved.
As a reminder, about 5% of our workforces involved in this area, which represented our 4% over 4% of last year's total revenue with gross margins below the next quarter average and breakeven operating profitability. And then another initiative involving further adjusting the size and complexion of our it's the size and complexion of our workforce. With the integration effort following our acquisition of the Dana Communication Business, largely behind us, we have identified certain areas that we plan to realign. These plans have already been communicated to our workforce and will be implemented in a way that doesn't compromise our important initiative overall agility and company values. In addition, we also plan to consolidate certain facilities In combination, we believe that the divestiture of the tools business, the implementation of the restructuring actions and careful management around new hires will enable us to reduce the size of our work by at least 10%.
We'll provide the specific cost savings and related charges from these actions once they are completed. Turning to Slide number 8, we move forward with continuous enthusiasm about the opportunities we see to improve performance and return the business to consistent top line growth, notably strong profitability and robust free cash flow. Nevertheless, the first quarter represented a muted start to the year. Moving into the second quarter, there is a continued uncertainty around the timing of certain price deal, and we see continued software in the DDoS product area. Just important, the bulk of just as important, the bulk of our new product initiatives won't yet impact the revenue stream.
For these reasons, we are taking a conservative view on the 2nd quarter revenue performance which we currently expect to be in the range of $215,000,000 to $225,000,000. We recognize that our anticipated first half revenue trajectory will currently put us on track to achieve the lower end of our full year revenue guidance. Which were declared to a relatively flat, with last years on a comparable accounting basis. With with that said, we are bullish about our prospects in the second half of the fiscal year. We expect seasonably strong spending by service provider, anchored by several large size projects, including some 5G related projects.
In the enterprise, we also expect better results from our enterprise service assurance products and contributions from our newest GAAP revenue guidance unchanged at this time. Our fiscal year 2019 non GAAP diluted EPS guidance also remains intact as we work to complete certain cost reduction initiatives this quarter. Just as important, we believe that the stronger second half results we will demonstrate that we have built the sales momentum necessary put us on a point to achieve the long term financial target we shared with you last quarter. Finally, I would like to publicly thank Jim Lyco for his service on the network board, which will end after our upcoming annual meeting in September. Jim's counsel since joining our board 3 years ago has been very helpful, particularly in regard to the integration of Tanner Communication Business.
I know he has a very full plate as CEO of Fortive Corporation, and we wish him continued success in its future endeavors. That wraps up my comment. And I would like to turn the call over to Michael at this point.
Thank you, Anil, and good morning, everyone. Slide 1, the 10 outlines my plan to highlight some recent wins handicap Engage our annual technology and user summit. In the service provider market, Anil highlighted the progress we have made in driving adoption of the software only version of our ISNG platform which enables carriers and cable operators to cost effectively effectively expand their monitoring coverage. With service provider capital budgets still under pressure, this strategy is helping us stabilize revenue in this important vertical. During the first quarter, a major Tier 1 operator in North America began deploying our ISNG software after deploying our legacy platforms to gain end to term capacity to handle continued traffic and subscriber growth as they focus on upgrading key links and extending visibility to new parts of their network.
From our perspective, this deal solidifies our incumbency improves the profit profile of this account and creates new sales opportunities for our Ngenius business analytics, NFV, Instrumentation and eventual 5G related projects. In the enterprise market, our VCAT and V stream offerings are positioned as a high value platform that can help a sure application performance across traditional data center, private cloud and public cloud environments. We are starting to see meaningful deals involving these offerings successfully progressed through their sales funnels. 2 resentments each worth over $1,000,000 help showcase all these solutions lead with the risks inherent in digital transformation initiatives. For example, one of the world's largest appliance manufacturers and the long standing NETSCOUT customer for network performance selected our vscout v stream and virtual engineers want offerings to aid in their cloud and virtualization transformation.
This customer is using these products to extensively instrument business critical manufacturing sites, call centers and data centers as part of a larger project to transition from legacy infrastructure applications and data centers to cloud based platforms and applications. By using our solutions, this customer can base life performance and quality of service for key applications, sites and users before during and after the transition to ensure business continuity and user experience. In the government sector, a large municipalities, IT organization has licensed multiple thousands of Piscount agents and virtual NG1 instances to instrument their complete infrastructure in preparation for transitioning to a multi cloud architecture because our technology is cloud agnostic the IT teams can maintain visibility into an application's performance, their user's experience and their user's experience throughout the transformation. On the security front, although revenue for the NETSCOUT Arbor DDoS revenue has been challenged, in the recent quarters, we continue to win new logos to build on our leadership position in the service provider market in particular. Last quarter, BSNL, the largest provider of telephony and broadband services in India, with over 160,000,000 end users selected NETSCOUT Arbor for DDoS detection and mitigation.
Having suffered multiple network outages due to severe DDoS attacks during the past year BSNL turned to NETSCOUT Arbor to address its need for a proven, highly scalable and robust solution. In addition to gaining the visibility and availability protection required for its massive core network, PS and L plans to monetize this protection by reselling DDoS as a value added managed service to its enterprise customers. In terms of go to market highlights, I'm pleased to report that our annual Engage Technology and user summit held in May was a resounding success. Based on the record attendance, and the feedback we received, it was our best engage yet. Overall attendance increased by 16% from last year with over 700 IT and security professionals, representing net ops, dev ops, cloud ops and security ops, as well as line of business executives and distribution partners, not to mention some of our analysts and shareholders who joined us on the events first day.
This was a great opportunity for customers to appreciate the breadth and depth of our solutions, gain insight into our product roadmaps and new product plans and participate in certification programs, technical tutorials and hands on training. That concludes my prepared remarks. And at this point, I will turn it over to Jean.
Thank you, Michael, and good morning, everyone. This morning I will review key first quarter fiscal year 2019 metrics After that, I will briefly recap the guidance for fiscal year 2019. 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. Additionally, in conforming with the new revenue standard ASC 606, Our first quarter results reflect the reclassification of certain subscription oriented security offerings as services rather than products. Prior period revenue and related costs for those offerings have been reclassified to conform to the current period presentation for comparability purposes.
That detail is available in the attached financial tables of our press release in the appendix of our conference call slides and it can also be downloaded from the Investor Relations website. Slide number 12 shows our results for the first quarter of fiscal year 2019. Total revenue of $206,000,000 declined by 10%, which is at the lower end of our target. The adoption in the quarter. Our gross profit margin of 74.8 percent declined by 110 basis points, primarily due to lower sales volume and product mix.
Operating expenses declined by 8% due primarily to lower headcount and related personnel costs. We reported an operating profit margin 3.6%. Diluted earnings per share was 0.03 dollars, reflecting the reduced headcount and a lower quarterly effect tax rate. Turning to Slide 13, I'd like to review key revenue trends. 1st quarter revenue and on service provider customer segment declined by approximately 13%, primarily due to lower carrier and ISP spending on our DDoS solutions.
Consistent with Anil's earlier remarks, revenue for our service assurance products from service providers was essentially flat. Revenue in our enterprise customer segment declined by nearly 7% in the first quarter due primarily to continued softness in our ancillary product line. For the first quarter, revenue was evenly split between our service provider customer segment and the enterprise customer segment. In terms of revenue by geography which is calculated on a GAAP basis, the aforementioned declines contributed to a decrease in revenue in the United States of 8% 38% of GAAP revenue versus 39% last year. We did not have a 10% revenue customer in the first quarter.
Slide 14 details our balance sheet highlights and free cash flow. During the past 3 years, we have made considerable progress in our efforts to improve the overall efficiency of our balance and long term marketable securities of $459,100,000, an increase Free cash flow for the capital tied principally capital spending, of which approximately $4,000,000 is associated with the facility relocation. Our portion of the facility relocation is anticipated to be approximately $8,000,000 with the remaining $4,000,000 expected to be recorded in the second quarter. We will receive incentive reimbursements offsetting the relocation costs over a multi year period through our cash flow from operating activities. To briefly recap all the balance sheet highlights, accounts receivable net were $165,300,000 down by $48,100,000 from the end of March.
DSOs were 69 days versus 78 days at the end of fiscal year twenty team 71 days at the same time last year. I'd like to provide a brief update on our share repurchase activities We expect signed in early February, we received an initial delivery of 7,400,000 shares of common stock once the repurchase activity is completed, the share count will be further reduced for the number of shares actually repurchased excluding the number of shares reflected in the initial reduction. Let's move to Slide 15 for guidance, which is fundamentally unchanged from the original guidance we issued in May, Although I typically focus my guidance commentary on our anticipated non GAAP performance, I would like to point out that our GAAP guidance for fiscal year 2019 was updated to reflect that we recorded a non cash intangible asset impairment charge of $35,900,000 in the first quarter of fiscal year 2019 related to the handheld tools product area as we move forward with activities related to the divestiture of this asset. Turning to our non GAAP opportunities and challenges we see in both our enterprise and service provider customer segments, with 3 quarters still left in the year and consistent with his commentary, we have left our full year non GAAP guidance unchanged at this time.
Our full year revenue guidance ranges from a low single digit decline to low single digit growth on a percentage change basis over fiscal year 2018. In terms of our diluted earnings per share for the coming year, We expect diluted earnings per share guidance ranging from a 20% decline to low double digit percentage growth over last year's diluted EPS of $1 $4.1 per diluted share. Other key assumptions are outlined on this slide. We currently expect that our first half revenue SKU will likely be in quarter revenue in the range of $215,000,000 to $225,000,000, which would represent a mid teens percentage point decline from the prior year. This guidance includes an anticipated revenue reduction of approximately $7,000,000 in deferred revenue that cannot be recognized under ASC 606.
We anticipate 2nd quarter operating expenses to be between 7% to 8% lower than the same quarter 1 year earlier. Diluted earnings per share for the second quarter is expected to range from $0.10 to 0.17 dollars. That concludes my formal review of our financial results, Before we transition to Q end. I'll now turn the call over to
take our first question from James Fish with Piper Jaffray. Please go ahead. Your line is open.
Hey guys, thanks for the question. I guess what gives you the confidence that service provider spending will come back in the second half as this would mark 3rd year in a row in which the company has thought that essentially we would have a good back half?
Yes, it's a good question. So I think in the past, the anticipation on the second We anticipated, primarily that second half will be better because of increased budgets from top tier 1 provider. We are not using that as the reason this time to feel good about the 2nd quarter. When I look at our order entry, bookings, performance, which is not easily directly translated from revenue right now, when I look at or the traction we are seeing to the new initiative. And when I look at, we are not counting from the top 2 or 3 tier 1 provider any upside in the second half, then it comes from then it looks like our positive feeling about second half is similar to the last 2 years, as you said, but it's for an entirely different reason.
I think now it's based on not hoping for the budgets to come through in that top tier provider, but actually some initiative working. And I'm personally involved in many of these customers. So it's hard for to believe, but that's the one area of more confidence than some of our other sectors right now.
Got it. And then maybe on the large $10,000,000 deal here in the quarter, Was that existing footprint of a NETSCOUT customer that was essentially refreshing? Or was that actually a competitive win in so, can you give us some color around that?
Yes. So it is it was the existing customer. I mean, almost all of our business will be an existing customer, but trying to completely transform them into a software model been a challenge as well as an opportunity. So this is from a budget point of view, but it's not a refresh. It's capacity enhancement.
So as the traffic is growing, they need more capacity from us And so I wouldn't call it a refresh of old technology. It's basically a capacity enhancement.
Got it. Thanks guys. Okay.
We'll take our next question from Eric Martinuzzi with Lake Street. Please go ahead. Your line is open.
Yes. On the cost reduction side, which you guys have done a nice job. I think you said down about 8% on the operating expense and expectations for similar. What does that represent? I think you finished out the end of last fiscal year at around 3000 employees Where were you as of the end of June?
Hi, Eric. This is Jean. At the end of June, we were down at this point about 100 100 people on a year over year quarter over quarter basis, we were down about 200 people.
Okay. And does that capture the, the tools business or is that being treated separately?
No, since that divestiture has not yet happened, that does not include any divestiture, related to the employees at that point, at this point. And the guidance also still includes that the tools business is in there. Okay.
All right. And then, seasonally, this would be, the September quarter for you guys. Typically you see a bump up there, from the federal government. First of all, what is on an annual basis your federal government percent of product sales. And then, what's your expectation trend wise for the September quarter for Fed?
So Jean is going to go over the maybe talk about the balance sheet looking at the percentage in terms of federal, I mean, this is this has been because of the external budget issue with federal government and timing of the things it sometimes becomes such a big disappointment. Sometimes it's a great opportunity. So we have a big, very big pipeline. We have, use average conversion of that in this quarter in our estimates. And so we are hoping there'll be some upside, but things always are challenging with the federal budgets.
Jean, if you want to.
Yes, hi, Eric. Government business is about 5% of total revenue and that is predominantly by federal, the federal, Department of Defense.
All right. And then was that, you talked about these enterprise deal push outs in the June quarter, Was that, you know, kind of across the board or can it be, can you point it to any particular vertical for the enterprise office?
Well, I think we talked about that Arbor Business is challenging both sides of the house enterprise and service provider because of the built in capacity And we are making some strategy changes, which will take longer to execute. Secondly, on the security side, Some of the delays are ongoing like that like we talked about transition to cloud digital transformation and all those But we are hoping that our traction will start happening in the second quarter, for some of the initiatives we had announced at our user conference, some of the shafer products, some of the security stuff, where there was a lot of excitement in the meetings and and, the customer I visited, but it's just going to take a little longer than we thought. And so that's why this first half will will not benefit from that. And that's also the reason why we are bullish about the second half.
Hi, Eric, and this is Jean. Just to add on to the question, as Neil said, Arbor, it is in a fragmented market and they are the pure in the enterprise and they are a pure play DAS product. And so their strength obviously is in service provider With that said, while they're down at why they are down on a quarter over quarter percentage basis, if you looked at it, actually, the revenue drop, it's about say a $1,000,000 The larger contributor is the ancillary product lines, which is mostly the fluke network systems. And that's down, which that's down due to the natural discontinuation of those products over a period of
this question last time also that we talked about why we're feeling good about the next 4 year plan. And we said our new initiatives have not delivered on revenue and they'll start doing that this this year. And even though it's a little slower than I thought, and also our negatives will be start bottoming out and you see that it has already happened on service provider. And that's why I think we're going to have a good year. And on the enterprise to a smaller extent is still happening and which is what Jean is talking about the Fluke network portion of the business.
I'm looking forward to that snapback in the second half.
We'll take the next question from Chad Bennett with Craig Hallum. Please go ahead.
Great. Thanks for taking my questions. So I guess I'm trying to understand, product revenues for the quarter think we're down about 15% year over year off of I think what you guys would characterize is a pretty rough June quarter last year. But service provider has stabilized as you indicated and showed in the slide presentation. So should we I mean, the implication is, is enterprise is off materially year over year from a product revenue standpoint.
Is that a fair characterization?
I think you will see enterprise pick up in the second 2nd quarter to make up for some of the first quarter and which was we talked about some deals moving in. But yes, the general effect of, what we talked about first half versus second half reasons is still true. But Q1 versus Q2, if there is another effect And I think enterprise will be better in the service assurance enterprise will be better. Will be a make up for some of the things, some of the shortfall in Q1.
Okay. And then maybe a couple for Jean. Jean, the gross margins for the quarter, both product and service were below what I was thinking. Can you give And I think you talked about mix and just overall volume being the reasons. I guess, how should we think about product and service gross margins or how do you think about them for the remainder of the year?
I would say that product gross margins when we look out at the forecast, probably somewhere around the midpoint, probably should be relatively flat. With gross margins from last year. I think that is, as you said, partially due to, some of the higher margin product, being in anticipate it to be less than the revenue mix this year. And some of the products that will drive service provider like some of our 5G related initiatives and some of the projects that we've already won so far tend to have a slightly lower margin also. They tend to be a little more labor intensive.
And on service?
On service, let me look at that. Hold on. Service looks like it's going to be Again, about, I would say, down maybe a little bit. Part of that is because there's less professional services associated with some of the products from legacy tech. So, the service revenue itself looks like it's going to be slightly down, mostly due to the less product service, less service related to the product associated with implementation and installation related to some of the legacy tech products.
Sorry, just a reminder that the guidance this year, does have a fairly notable a haircut related to 606, which would drop straight to your gross margin and your operating profit. So on a comparable year basis, does come up, it does mask some of the progress that we would expect to see from that transition to higher margin software products.
Got it. I appreciate And one last one real quick. What are have we changed your expectations on where we exit the year from a product revenue standpoint from a software only revenue standpoint? Thanks.
Yes. Software only as a percentage of total product revenue for this year on the 606 basis was almost 15%. So I think the software only is gaining good traction continuously as we said around international service providers, somewhat probably a little more in U. S. Service providers.
And then in a few instances, it's starting to gain traction in the enterprise.
Thank you.
We'll take our next question from Matt Hedberg with RBC Capital Markets. Please go ahead.
Hi, good morning guys. Thanks for the questions. In the prepared remarks, Neil, you talked about a 7 figure of 5G win Q1? And you also you seem bullish on sort of the 5G uptick in the second half of the year. Remind us again, I know we've asked this in the past, but maybe some refreshed assumptions around the dynamics and spending assumptions around the 5G cycle versus prior cycles?
So I think we have basically, if you look at our 4 gs solution is a fully developed market and 5G's early market solution. So there we have another solution for calibration and things like that, which is the one we are talking about some of the progress we have made and in this year. Moving forward, we see our same devices, our 4G devices seeing 5G traffic as the primary way for us to be more sticky in account and drive larger deals. So being incumbent in LTE and 4G, makes us a candidate, automatic candidate for 5G, and that's the opportunity of 5G. A 5G is in 2 phases in phase 1 there's no big infrastructure upgrade.
It's just a capacity increase and there there'll be incremental opportunity for us for 5G. In the second phase for 5G, my understanding is there'll be a rebuild out of the network also, something like what has happened on 4G, but not as big. And that will create new opportunities. So when I look at early market opportunity is in the testing calibration in those areas, some POCs in the lab, not a huge volume, even though I think the excitement is more about So we are winning those rather than the amount. Then in the midterm, in the phase 1 of a 5G deployment, which is next year, which will be mostly capacity related increases.
And then after a year and a half or so, when people move to a new infrastructure, then there'll be some major investments. So throughout this process, getting early into the market, which is what we are showing with some of the events is going to be a proof point for getting into the phase 2 and phase 3.
That's helpful. And then maybe just I wanted to follow-up on the IBM news. You touched on it briefly in the prepared remarks, but a little bit more color on how that impacts you guys from a revenue perspective, when might we see that flowing into the P and L? Any additional detail there would be helpful.
So I think there'll be a very small, we are, I mean, we are not, this is not going to make any real difference this year. I think the biggest improvements from this is coming from the fact that IBM has stopped using their own products. And they're going to use our probe, including possibly reselling them. But that's not was not a huge business for them. Second thing is I think this could be a wake up call for other people who may be interested in using our data than building their own smart data or or all or all data set or probes.
So I think this could be enabler for a more open environment where big data analytic vendors or centimeters vendors say, this is the best way. We are in the end of we are analytic company. Let's pair ourselves with smart data companies or become smart square analytics, which I've been saying. So having somebody like IBM, is a good endorsement. It took it was very tough, especially when they had their own probe.
And second is there is a opportunity to talk to IBM Watson Group for machine learning type opportunities And, and we might do that, even though that's a completely different group in IBM, at least we can show the success, let's say, year down the road for this partnership to talk to that group and I'm very excited about that big data analytic and machine learning area use of our ASI data.
That's great. Thanks a lot.
So just to mention, so I see this not from a revenue point of view from, but from other point of view. There is much getting penetration of a technology endorsement of what we have been saying. I see that as a bigger proof point at least in the short term than revenue.
That's super helpful. Best of luck.
Thank you.
The next question comes from Kevin Liu with B. Riley FBR. Please go ahead.
Hi, good morning. Just in terms of the Tier 1 carrier that you started to move over or at least see more expansion on the software side with. Could you just talk a little bit about whether there's more opportunity over the course of this year to continue to expand that deployment and would you expect other Tier 1s to follow suit in the near term?
Well, I think we have, I mean, I mean, there are 4 tier ones and we already have big deployments in 2 tier ones. And as we talked about, the other 2 tier ones have been bottoming out, but they're also looking at our software solution but that's not going to change the numbers. But we work with about 50 other carriers, throughout international, and you'll hear a lot of endorsement about a software model and what we have done in big data analytics, potential positive feeling about the IBM relationship because many of these customers have IBM products. And, for for Centimeters and they'll say, oh, now we have a plug and play. So I'm very positive about, the, our service provider I think our business is going to increase this year versus last year, but it's not because of the tier 1 provider in the U.
S. I think we are already talking and doing good and other other ones have bottomed out. And that's the story. So and some of this progress was there last year also, but it was completely negated by what was happening and the tier 1 providers, couple of tier 1 providers for last 2, 3 years. Now that cloud is sort of move away from us, we're starting to see some progress.
Some of that in U. S, some in Canada, but throughout the world, and we'll be able to show all the power of a technology solution and strategy, now, which was actually there to some extent in pockets, but was not seen because of those other negatives.
Understood. And just going back to the enterprise performance in the first quarter, it sounded like a lot of it was just tied to maybe lower expectations in terms of what you could do on the security side there, but just wanted to better understand that dynamic and to get a feel for how much of the rebound in the second half would come from say new products versus just being able to continue to sell into your base with some of your legacy technologies?
It's new, I mean, it's a new functionality in existing product, not always new products. So for example, there is some security in existing product, then there are some new security products. So, yeah, we are counting on, targeting more security budgets which we thought we'll start seeing that in the 1st second quarter also, but maybe that was too ambitious. As the main reason, for making up for the first half, downward trend from last year, security being in the enterprise, being the key data event. And there are 2 parts of that.
1 is Advanced Sress. Other with DDoS. DDoS, we are changing it to to enhancing it to hardware edge defense, but not only look at inbound threat, but now can also block outbound threats. When IoT devices, because that's a big change there. And then using combining Arbor Analytics with NETSCOUT data sources is the advanced threat initiate.
That's the one which is slower to traction. Some deals got delayed for other budget reasons, but some was related to just takes longer to evaluate something new. But I think we'll be in the December March quarter we will see the effect of distraction.
We'll go next to Alex Kurtz with KeyBanc. Please go ahead. Your line is open.
Hi, thanks for taking my question. This is Steve Enders on for Alex. I know that you mentioned you're starting to see traction with Scott and V stream within the enterprise and had a couple of $1,000,000 deals in the quarter. Just kind of wondering, the pace of adoption looks like for those products within the enterprise and broader what the pace of adoption looks like for software only and within the enterprise?
So, these products are part of almost every sales conversation today. So, every time we evaluate and go after a new opportunity, this is part of the portfolio. Often, we end up selling a combination with the legacy hardware product. But these two products, rescars and V stream, are certainly the Cizzle on the stake and this is what is, enabling and catalyzing the next deployment. So it's critical.
Demand is not directly transforming me to revenue. On the other hand, in terms of actual revenue and traction and proportion, it's probably a small percentage even including those $2,000,000 deals that I mentioned, but it continues to be the major driving force.
I think this allows us to give them end to end vision. They don't want to use if the application is running in the cloud, and or running on on prem and it's going to be moved to the cloud or part of it is running in the cloud and part of it is running on the data center, even if 90% is running in the data center, they would love to have a product which covers both aspects. From the same company. And I think so we scout and we stream currently playing that role. When, and as over the next 5, 6, 10 years, as the hybrid environment changes from, let's say, 90% on prem to 90% cloud, we'll be the best solution for them to allow that migration.
In fact, we could accelerate the mic nation. So we, Scott, we stream, as Michael said, is the important component of the portfolio. I think if we didn't have that, it will affect our non cloud revenue. That doesn't mean it's driving big deals right now because it's not because of us. It's our competition.
It's because of the time it takes for them to deal with their own initiatives.
Okay. Thank you. Anything else?
Okay.
And it appears we have no further questions. I'll return the floor to Andy Kramer for final remarks.
Great. Thank you, Keith. Thank you everybody for joining us here this morning. Look forward to the Q2 results. This fall.
And certainly, if there are any questions, feel free to reach out to Investor Relations in the interim. Thank you again for your time.
And this will conclude today's program. Thanks for your participation. You may now disconnect.