Good day, ladies and gentlemen. Thank you for standing by, and welcome to NETSCOUT 4th Quarter Fiscal Year 2018 Results Conference 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 us today.
Thank you, Keith, and good morning, everyone. Welcome to NETSCOUT's 4th quarter year end fiscal year 2018 conference call for the period ended March 31, 2018. Joining me today are Anil Singhal, NETSCOUT's Co Founder, President and CEO Michael Zaladoche, Netscout's Chief Operating Officer and Jean Boa, NETSCOUT's Executive Vice President And Chief Financial Officer. There is a slide presentation that accompanies our prepared remarks Both the slides and the prepared remarks should be available on the Investor Relations section of our website at www.netscout.com. I've been informed, that there has been some difficulty in accessing those materials and we'll make try to make sure that those are posted and available to you during the call.
The slides when they are available should be and can be advanced in the webcast viewer to follow our commentary We will try to call out the slide number. We're referencing in our remarks. And we'll try to keep in mind that some of you may not have slides available as we're talking. Our agenda is as follows. Anil Singhal will briefly review our performance and then address certain questions that we believe are on the minds of investors.
Michael Zabados will briefly review customer adoption trends and major go to market highlights. Gene Boa will then review our 4th quarter and full year results in detail our 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 the 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 NETSCO, market conditions, technology trends, customers and customer demand anticipated revenue from specific customers and specific products, share repurchase activity and all of the other various product development, sales and marketing expense management 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 details 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, 2017, and subsequent quarterly reports on Form 10 Q, which are 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 number 4, which involves non GAAP metrics. While this slide presentation includes both on today's conference call will be on a non GAAP basis 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 results in today's press release and those and other reconciliations and supplemental detail are included at the end of the presentation, which is available on our website.
We reported diluted EPS that was at the higher end of the updated guidance we provided in January, even though revenue was relatively weak Despite the year's results, there were some positive developments that lead us to be optimistic about our prospects in fiscal year 2019. I will now turn the call over to Anil for his perspective on these and other matters. Adil?
Thank you, Andy. Good morning everyone and thank you for joining us. Let's begin on Slide 6 with a brief recap of our non GAAP results. We reported 4th quarter revenue of $238,500,000, full year revenue of $999,900,000 $999,300,000, which approach the low end of our guidance range we provided in January 2018. However, the EPS performance of both the 4th quarter and the full fiscal year were reasonably good and at the higher end of the January guidance due to better than expected gross margins and lower operating costs among other items.
Jean will review our results in more detail later on this call. Although we were unable to achieve our original targets in fiscal year 2018, we made important progress with our product strategy. We have radically reshaped and expanded our product portfolio over the past couple of years since acquiring the Dana Communication business. 3 years ago, our offering were largely appliances with varying level of proprietary hardware with the primary use cases for our solution being network performance and distributed denial of service. Today, our solutions are software centric, feature rich, and applicable to much larger total addressable that's beyond spans beyond network performance and DDoS to incur incoming transportation performance, health threats, and business intelligence.
Due to our substantial investments over the last past couple of years, we move forward with optimism that will start capitalizing on the attractive opportunities we see in fiscal year 2019. Although market conditions are still suboptimal, and the transition to new accounting rules may dampen reported results in fiscal year 2019. We anticipate resuming growth revenue growth this year and producing gross margin improvement in the process as we see greater adoption of our software based offerings. Related to that, We are also advancing plans that we believe will help us further recalibrate our cost structure in ways that can help us improve our underlying operating profitability without compromising our ability to capitalize on near term and long term growth opportunity. With that as the backdrop, I would like to briefly address what we believe are the most pressing questions we are likely to get from our investors.
Let's move to slide number 7 for that. The first question is, are the strongest revenue headwinds behind us. The simple answer is yes. The more severe headwinds were in our service provider customer segment. The acquisition of Dannell Communication Business brought us a much broader global service provider footprint, but the revenue was highly concentrated with 2 10% customers.
Over the past 3 years, these customers have declined to the mid single digits as a percentage of total revenue as part of their effort to reduce capital spending on their 4G network infrastructure. Combined, these two customers represent approximately 10% of its earlier 2018 revenue, with over 40% of the revenue coming from a very healthy stream of recurring maintenance and support services. Looking ahead, we expect that spending from these two service provider customer will remain relatively stable in fiscal year 2019. With improving gross margins as they continue transitioning to our software based platform over the coming quarters. Given the overall traffic growth over their networks and the recurring nature of our service and support revenue.
We view any potential downside risk from this customer relatively minimal and very manageable. Just as important, we have made good progress to fortify our incumbency other service provider accounts by offering a unique solution with appealing price to performance characteristics. Second question is about our service provider customer segment. This is a natural lead into the next question about the outlook for our service provider customer segment. We believe that we can stabilize revenue in this segment during fiscal year 2019 and begin growing as we move into the second half of the year as we further strengthen our competitive position.
In service assurance, overlord network traffic is still growing, but carriers continue to carefully manage their spending which impacted the timing and magnitude of larger projects using the larger projects during the fiscal year 2018. Although spending pressures are likely to persist in the near term, we continue to make good progress driving adoption of the software version of our ISNG platform. For example, of over 20 largest service provider customers in fiscal year 2018, more than half a deploying the software only version on either bare metal or virtual or both. And as I mentioned, we expect other large North American various customers to migrate to our software platform during fiscal year 2019. In addition, we are seeing opportunities to capture greater wallet share to that existing customer who require cost effective visibility into their user plane traffic.
While near term service provider spending, is likely to remain muted. We believe that spending our services on our tools like ours will enjoy reasonable growth over the coming years. With 5G and virtualization now entering the early phases of the life cycle with the world's largest and most innovative carriers. We already won some small but strategically important projects with large North American operators to help them plan and design their 5G radio access networks. Michael will cover this in more detail in a moment.
Additionally, we are moving into 5G lab testing and planning to support 5G field trials for core service assurance solutions with certain tier 1 customers over the coming quarters. While we are incrementally more positive about 5G as a meaningful long term revenue catalyst for us, we do not expect substantial contribution for 5G related projects in fiscal year 2019, and it remains hard to forecast when major investment in 5G networks will begin. Along those lines, the number of deployments, proof of concept and trial for network function virtualization or NFE, and monitoring solution continues to grow. Our we anticipate that spending on these products is likely to remain relatively small this year. 3rd question is, where and why do we expect to see growth in fiscal year 2019?
Regardless of the accounting transition, we would expect to enjoy a much better performance in our enterprise customer segment. As our enterprise customers advance their digital information initiative, as well as positioned to support their transition, consolidate their tool vendors and leverage the network traffic we collect for them for multiple use cases spending from our stronghold in network performance to application performance and security. We call this approach smart data core, and it enables enterprises to deploy our product more pervasively and cost effectively by consolidating tools across multiple stakeholders within IT. Over the past several weeks, I have visited with some of our largest enterprise customer and there is a general excitement among those customer about our direction, which we plan to share more broadly during our annual user forum in Dallas in 10 days. A related question about our enterprise growth prospect is what new enterprise budgets will be we targeting and to sell during fiscal year 2019.
Our SAR Smart data code approach extends our reach beyond network operations as a buying center for our offerings. Last year's introduction of BScout and BScout enables us to extend application visibility much deeper into the application infrastructure regardless of whether those applications, servers reside in the traditional data center, private cloud or public cloud environment. Thus providing a natural single pane of glass with before and after views of performance. As a result, these solutions are increasingly relevant to DevOps, and cloud ops teams. We are pleased that the NSX edition of Weiscount was recently fully certified as VM We're ready for networking and security under VMware's NSX Partnership Program.
We believe that our ability to provide unique level of visibility into the NSX environment offers our mutual customers tremendous value and we'll add further momentum to our sales efforts. Later on this call, Michael will highlight a recent win that involved our VSAT VSCOUT technology. In enterprise security, we see several opportunities. With the next couple of months, we plan to introduce a substantially enhanced version of our advanced threat solution with a broader and richer set of analytics that is more tightly integrated with our ISNG and ASI technology so that we can drive cross sell selling opportunity into our installed enterprise customer base. Additionally, additionally, we are planning to broaden the range of capabilities within the Arbor DDoS Enterprise portfolio that are intended to further differentiate it as an edge defense platform while also complementing our advanced threat capabilities.
We also plan to introduce new instrumentation that is aimed at cost effectively collecting and filtering packet data before forwarding it to other security tool they use. This feature, which we call the ingenious package shaver, will optimize our customer spend, help them consolidate budgets and reduce their total cost of ownership. The last question is about our cost structure and what are we to adjust it in fiscal year 2019? As we move into fiscal year 2019, we recognize that we must take steps to realign our cost structure with the near term outlook in ways that do not impede our ability to grow and support our customer. As we look ahead, we are advancing clients for the 1st half of the year that range from reducing headcount related personal costs and aggressively managing discretionary spending to selling certain non core assets.
In combination, we believe that implementing this plan would allow us to reduce annual run rate operating costs by up to $50,000,000 from in due to the timing associated with these initiatives. Nevertheless, we believe that these plans will deliver meaningful saving this year to help absorb higher variable incentive compensation based on achieving certain business results and keep a total operating expense relative flat with the As a reminder, our fiscal year 2018 expense base benefited from the elimination of variable incentive compensation. Since we did not achieve our targets. A key component of a company should this will be managing personal related costs Total headcount was down about 3% last year as attrition outpaced our new hires. We anticipate the size of the workflow will decline at high rate in fiscal 1999 as we prior to his investment in our next generation product and adjust resource level in support of legacy products.
Augmenting this activity, we recently closed one of our overseas development offices that facilitated our security and service assurance marketing team and plan to reduce spending on certain discretionary marketing program for the coming year. Additionally, we are advancing plan to divest the forward much fluke tools product area. As we discussed last quarter, this is a product area that lacks sales and marketing synergy with our product services assurance offering. This product area represented just over 4% of total revenue last year and approximately 5% of our workforce. We believe that selling these assets would help us improve gross margins slightly and lower operating costs.
We'll be in a much better position to assess the overall impact of our cost reduction program when we report our first quarter results. This brings us to Slide number 8 for our outlook. To reiterate my earlier comments, I expect fiscal year 2019 will be an important year of strategic and financial progress for NetScout. Based on the opportunities we see, we expect to resume top line growth through higher product revenue over the coming quarters, which will help improve our underlying profitability. However, we are taking a very conservative view on the first quarter due in part to the anticipated impact of adopting the new accounting standard in combination with the relatively fluid timing associated with certain projects.
Even if our reported top line performance in fiscal 2019 is somewhat muted by accounting adjustments, we believe there is a good potential to drive solid EPS expansion along with very healthy free cash flow. Since the completion of Dana Communication Business acquisition nearly 3 years ago, we have navigated a much more turbulent market environment than we originally expected. To preserve a customer base, enhance our competitive position and completely reinvent ourselves as a software company. Although our performance is behind our original plan, we believe that the steps we have taken and continue to take to accelerate the shift to software expand our reach into adjacent markets and manage our cost base will play an important role in helping us achieve some of our original operating targets. For this reason, we believe it is time to share a new set of long term targets.
Over the next four years, I believe we can grow revenue at a compound annual growth rate in the mid single digit range or better. With the transition to an increasing software centric portfolio well underway, we believe that we can continue increasing gross margin into the low 80 percent range or better. The combination of the solid revenue growth, better gross margin and limited expense growth should produce meaningful operating leverage to support operating profitability in the low 30% range or better. That type of fundamental performance, along with the current tax rate and share count, could result in a diluted EPS CAGR compound annual growth rate of greater than 20 percent to more than $3 per share, along with the annual free cash flow in excess of $300,000,000. In closing, I would like to publicly welcome 2 new directors who have joined our work.
Al Grasso and Susan Bradley are both accomplished executives with a very relevant experience and we look forward to benefiting from their advice and counsel. I would also like to extend our gratitude to our shareholders for their support during the past year. Finally, I want to commend our employee for the resilience, tenacity, and hard work, which underpins our commitment to our industry to serve as guardians of the connected world. That concludes my prepared remarks. And I will turn the call over to Michael at this point.
You, Anil, and good morning, everyone. Slide number 10 outlines my plan to cover recent wins and a quick preview of our upcoming user conference. As Anil mentioned, in the service private market, many major carriers are starting to invest in new 5G network architectures. One early indicator of the potential upside of the 5G spending is our radio access network calibration services, which are used to predict signal coverage, interference and network performance and thereby improved capital and operational efficiency. We recently closed the $1,000,000 deal with a major North American mobile operator to calibrate 5G related millimeter wave frequencies across several U.
S. Market We expect healthy growth in this area over the next couple of years to support this customer and other mobile operators and webscale companies that are designing next generation 5G and IoT networks as well as refreshing existing 4G radio access networks in support of frequent new frequencies. In the enterprise market, Arun noted the opportunity we see to leverage our strength in network performance to extend into other areas of IT. Last quarter, we won a deal value that over $1,500,000 with a major hotel operator, We realize our NETSCAR technology to monitor network and application performance tied to its reservation and reward system. This win is a vital part of a major IT initiative to consolidate and virtualize the data centers and migrate applications to the cloud following a large acquisition.
As part of this activity, this customer is using a combination of our ISG and Vescout offerings to help them baseline system dependencies and achieve pervasive visibility into critical applications across and emerging hybrid cloud environment. In the security area, Oilboard has continued to set the standard for tech technology and market leadership in the DDoS market. Earlier this month, we announced that the Brazilian Network Information Center, nic. Br selected Arbor DDoS solutions to strengthen its network operations center defense capabilities to protect its infrastructure against service the distribution, distributed denial of service or DDoS attacks. The nic.
Br is vital to Brazil's internet infrastructure registering all domestic. Br domain addresses and designating all IP addresses for the entire country. With DDoS attacks, commonplace in Brazil, the NIC. Br recognized that it would not could not afford a disruption in its network resources, so we turned to our board to enhance their detection and mitigation capabilities. Arbor's combination of robust, scalable detection and mitigation offerings are critical for quickly identifying attacks and then rapidly and efficiently protecting the network from the attack via automation and other tools.
Just a quick comment on our upcoming Engage user conference, which will be held in Dallas, Texas in 2 weeks. We already have over 800 registered attendees more than ever before, composed of senior level professionals across network operations DevOps, cloud ops and security ops, as well as line of business professionals from well over 300 organizations representing every major vertical as well as NETSCAP distribution partners. With our smart data strategy resonating with the enterprise as service provider customers, We expect that this year's Engage will be a high impact event for us, and we are looking forward to showcasing our current capabilities and sharing our near term product roadmap. That concludes my prepared remarks. And at this point, I will turn the call over to Gene.
Thank you, Michael, and good morning, everyone. This morning, I will review key 4th quarter and full year metrics for fiscal year 2018. After that, I will review 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. All fiscal year 2017 and FY2018 results reflect revenue recognition under ASC 605, and I will cover the potential impact of adopting ASC 606 in just a moment.
Slide number 12 shows our results for the fourth quarter of fiscal year 2018. For the quarter, total revenue decreased 27 percent to $238,500,000, Our gross profit margin improved 150 operating Turning to Slide 13, I'd like to review nearly 22%, nearly 2 thirds of the decline was attributable to the multi year deceleration in spending by one of our large tier 1 service provider customers. About 20% of the decline was a decrease in spending from all other service assurance provider months and the remainder was due to a decrease in Arbor's DDoS revenue. Our enterprise vertical declined by approximately 10% in fiscal year twenty team. Revenue for the core NetScout IngeniusONE offerings declined by approximately 5% due primarily softness in verticals such as healthcare and high-tech, while larger verticals such as financial services and government were relatively unchanged against last year.
This was compounded by a mid teens percentage price network area and a mid teens revenue decline for Arbor's enterprise security products. For the full year, the of revenue was 53% coming from service provider and 47% from enterprise. In terms of revenue by geography, which is calculated on a GAAP basis, our revenue in the United States declined sharply in fiscal year 2018 due primarily to weaker service provider spending led by the previously discussed decrease in revenue customer segments also affected revenue performance outside the U. S. International revenue declined by declines in each major international region.
International customers represented 41% of GAAP revenue versus 38% last year. We did not have a 10% revenue
percent of total
revenue. Slide 14 details our balance sheet highlights and free cash flow. We ended the quarter with cash, cash equivalents, short term marketable securities and long term marketable securities of $447,800,000, an increase of nearly $65,000,000 from the end of December. We delivered strong free cash Our free cash flow for the fourth quarter was $69,900,000 $205,900,000 for the full year. The conversion of non GAAP net of non GAAP net income to free cash flow was approximately 165%.
Which was better than anticipated due primarily to favorable changes in working capital tied to the collection of receivables lower cash taxes and lower capital spending. For the next year, we would expect that free cash flow will be slightly better than 100% of non GAAP net income on both due primarily to quarter's call and disclosed in our filings, we executed an accelerated share repurchase or ASR of $300,000,000 in early February. In conjunction with this activity, the banks working on our behalf immediately delivered 7,400,000 shares of our common stock, which represented approximately 70% of the ASR when the agreement was signed. Those banks have been actively repurchasing our stock since that time, and we currently anticipate that this program will be completed by the early fall at the very latest. Once the ASR is technically completed, the share count would be further reduced by the number of shares actually repurchased, excluding the number of shares reflected in the initial reduction.
We have funded the ASR through additional debt of $300,000,000, which is supported under our amended and expanded credit agreement that we entered into the start of the calendar year. We have now drawn down a total of $600,000,000 on our credit facility. We are continuing to work with our board finalize appropriate long term targets for our financial profile. To briefly recap other balance sheet highlights, Accounts receivable net were $213,400,000, down by $80,900,000 from the end of last year. DSOs were 78 days versus 80 days at the end of fiscal year 2017.
Moving to Slide 15 for guidance, my commentary will focus on the non GAAP guidance. I'd like to remind everybody that the reconciliation of our GAAP guidance to our non GAAP guidance in the appendix. Today's guidance reflects our adoption of ASC 606, the new revenue recognition standard, effective as of April 1, 2018. Although we anticipate that the adoption will constrain our full year reported results, it is important to note that it will not change our customer relationships, sales practices or cash flow. We currently estimate that there is approximately $26,000,000 of deferred revenue that would have been recognized in fiscal year 2019 under the legacy standard that will now flow through our retained earnings.
Of this total, about 2 thirds of the revenue is product related with the majority of it tied to orders for legacy products from the former tech comms unit. This equates to a revenue headwind of approximately 3% for FY2019, which directly impacts our bottom line. We currently do not anticipate any material The impact of ASC 606 in revenue of over $7,000,000 anticipated in the 2nd quarter, a reduction of nearly $6,000,000 to the 3rd quarter revenue and a reduction of the remaining $4,000,000 in revenue in We plan to break out the effect of ASC 606 on our FY19 quarter and year to date results so that you are better able to the underlying performance against prior year periods, which were accounted for using the legacy ASC 605 standard. Anil has already reviewed the opportunities and challenges we see in both our enterprise and service provider customers, taking those dynamics into account of fiscal year 2019 revenue guidance ranges from a low single digit decline to low single digit growth on a percentage over fiscal year 2018. On a comparable reporting basis using the legacy ASC 605 standard, This guidance range would equate to FY2019 revenue that would be roughly flat to low single digit growth.
In terms of our diluted earnings per share for the coming year, our On a comparable ASC 605 basis, this range would be a low single digit decline to 30% growth. Key assumptions for fiscal year 2019 are outlined on the slide. As you can see, the adoption of 606 is expected to impact reported gross and operating profit margin performance in FY2019. In terms of further color on our annual revenue guidance, we expect modest growth in product revenue, which would help offset an anticipated decline in service revenue. In terms of revenue by customer segment, is important to keep in mind that a majority of the 606 related revenue reduction impacts, orders with our service provider customer segment.
Accordingly, we anticipate that service provider customer segment revenue would decline modestly on a reported basis, which we believe will be offset by growth in our price customer segments. I'd like to briefly cover our view into the first quarter of FY 2019, factoring in the aforementioned $9,000,000 headwind from the adoption 21% of our fiscal year 2019 revenue target. This would imply a mid single to low double digit revenue decline on a percentage change basis from the same quarter last year. We currently anticipate that between 46% to 47% of our expected FY2019 revenue will come in 5% lower than the same quarter 1 year ago. Diluted earnings per share for the first quarter is expected to range from a loss of 0 point 0 $5 to positive 0.04 dollars.
That concludes my formal review of our financial results. Before we transition to Q And A, I will mention that Slide 6 team details the investor conferences we plan to attend over the next 2 months. I'll now turn the call over to the operator to start Q And A.
We'll take our first question from Eric Martinuzzi with Lake Street Capital. Please go ahead. Your line is open.
Thanks. I appreciate the clarity on the ASC 606. I think that's an important distinction to to highlight. I was curious to know just on, as you talked a little bit about the weakness in FY 'eighteen, and the, the multi year issue with largest customer on the carrier side and then the decrease from other service assurance customers But I'm wondering how much of that is form factor related? In other words, did the guidance a year ago as we entered FY 2018, does that include maybe a greater percentage coming from a hardware form factor as opposed to the software form factor.
Yes, I think so, Eric, there are effect of that. I think the challenge beyond those 2 large 10% customer, which we face in last 2, 3 years, is the effect of digital transformation that while the industry is going through a transition to more software, wait and see attitude on spending moving to cloud. And otherwise, We are also reinventing ourselves as a software company, even though a large portion of original NETSCOT was software based, but we shipped a lot of appliances. So our instrumentation volume has actually generally increased in most segments, but the price per unit has come down. But overall, this is this disruption, while it was negative in the past, I think it's going to be a blessing in disguise moving forward.
For example, we were never on server farms because And that's why nobody was using our product for application assurance. We were not on remote sites, but now because we have a Viscount product, which is small for form factor, lower in price, we can actually go deep into the data center and into the cloud. So I think the good news, what we are excited about, despite our challenge in the past, I think mostly it's a positive effect of all the stuff we have been doing moving forward.
Understand. Sometimes you can learn a little bit about the future strategic direction of company by the arrival of new directors. You just added to today Al Grasso and Sue Bradley. Does there arrival tell us anything about future strategy for NetScout?
I think not in terms of strategy, but they're willing to join because they endorse our strategy and they're very excited about it. And Al has a lot of experience on the security side, we are focusing more on security as the next new product will be announcing next month. And, so he has, he's very excited about that. Sue is from the carrier world, So getting some domain expertise on the board, beyond what we already have will be very helpful. So I would look at it.
Strategy is not going to change. But it's a validation of strategy that they're very interested in joining. I mean, there is a lot of interest in this kind of board members and they decided to join us
Understand. Thanks for taking my questions.
Sure. So just wanted to let the audience know that the slides and prepared remarks have been made available both on the IR landing page and on the supporting materials page of the webcast. So if those who are interested, haven't been able to find it, that's where those materials are now located.
And we can take our next question from Chad Bennett with Craig Hallum. Please go ahead. Your line is open.
I guess, either Aneel or Jean, in terms of, in the product revenue portion of your segmentation,
Where did
we end up in terms of the percentage that was software only or NFE this year in 2018? And what are the expectations for that percentage in 2019?
In 2018, the product revenue ended up in about the upper single digits, so somewhere between 7% to 9%.
And I think it is good. I mean, again, when we are selling it, we use the decision on software versus appliance versus virtual as the last step on the selling process. We are doing the value. So we don't really push customer one way or other, but this could be as high as 20% this year, but we'll remain, we have to see.
And is it still largely going to be kind of the service providers are obviously going, in an accelerated fashion towards that, just networking in general. But we going to see some of the software transition on the enterprise side of the business too or will that stay really appliance based
So I think you'll start seeing on both. It was practically 0 on the enterprise side. And, but as we move more to the the cloud stuff. I think as earlier, Eric had the question on some of the impact on the growth in the past, was it related to people are not ready with virtualization and cloud stuff in the mainstream. And as those things are coming mainstream, I think there you'll see a lot of revenue on the software side, not only on the traditional on prem deployment, but definitely all the cloud stuff that we saw deal, Michael talked about is all software.
Got it. And then one last one for me. Gene, in the guide for the year, I wasn't sure if the I think you guys laid out $50,000,000 of kind of cost cuts that'll be layered in throughout the year. Does the bottom line guide and margins factor that in?
No, the bottom line guide does not factor the earnings per share does not factor in any of the activities that have not occurred yet. Including the divestiture of the Tools business and any other, cost management activities.
Okay. So, but we're expecting to realize some of these are the kind of planned and ready to be executed on? I guess the $50,000,000?
The divestiture of the tools business it's in process. And based on where at the moment, we would expect it would sometime probably be divested during the second quarter. That has about that has, as we had put in the script, about 4% of our revenue impact with about the same amount of costs in there. So it should be a negligible effect on earnings per share. The other, activities that we discussed related to, structure are going to be executed before the end of the second of the first quarter.
So at the end of our first quarter and in our earnings call for that, we'll update guidance appropriately.
Okay. Real quick, share count for the year, Jean, what should we use?
For the full year, I think it'll be right now, I assume it will be around 80,000,000 shares by the end of the 4th
quarter. That
will assume that the ASR is is completed sometime in the second, in our Q3. And at the share price it is today, at the share price fluctuates, we'll dated accordingly.
Perfect. Thanks much.
You're welcome.
We'll take our next question from James Fish with Piper Jaffray. Please go ahead.
Great. Thanks for the question. So the DDoS market is having a good growth environment, whether you want to talk about Akamai, cloudflare, IMper, or others, However, when normalizing for the pricing changes made last year, the growth at Arbor is still below the market despite even competitors admitting that Arbor is a great product. Have there been any discussions of possibly spinning out the business so that there can be more focus on it from a pure play perspective And also given the large breaches this past quarter or at least the memcache attacks, was there a bounce back in the revenue you could recognize that Arbor Networks at least?
So first thing is, we are the most focused company to own data. If you look at all other companies, it's just a simple plus one thing, whether you're all the names you talked about with the exception of you. And I think there is a effect of being we being the biggest player in the market. And I think there are challenges, but we are moving to a software based solution we are using some of the hardware technology to grow bigger than the and DDoS market is is good, but it's not as big as that one threat market. So with our focus in this area, we are going to release a product which is a superset of the DDoS product.
And it's in the advanced red space. And there is a packet shaper product I talked about. All this will be top about at our user group meeting and be available by theendofJune. And I think that's how we want to use the Arbor assets, continue to maintain our leadership, but not count on necessarily growth on the DDoS portion but grow our footprint overall in the security market and some of the enterprise growth expectation we have for this year. Is really because of that reason.
And a lot of our customers are very interested in this combination of technologies.
Got it. And then I think the big question here is if guidance is conservative enough given the last years of kind of initial guides being cut later on. What makes you confident that the business will not be declining worse than the low single digits you're you're guiding to. And also while all of your peers are actually getting a slight boost from profitability from ASC 606, you guys are actually guiding that you're not It only looks like you're guiding for about 15% 19% operating margins, which would be down year on year. Yet the business is not really growing.
Can you walk us through kind of these dynamics as to why it's going this way and that you're impacted this way and why you aren't further reducing costs beyond sort of the $50,000,000 run rate, given you're only growing flat to low single digit
Jean, you want to go over the ASC thing?
I can go over the ASC 600 effect. And then I know it can answer the other parts of your question. ASC 606, we had from the tech comps mostly projects, as we had talked about in the past there, approach to selling was to sell the product along with implementation, and milestones. And so basically in 606, the revenue recognition for those types of projects change So the $26,000,000 that we would have reported in Q in our fiscal year 2019 goes through retained earnings. And actually, the total amount is close to about $35,000,000.
So there's even a runoff in FY20 just based on the length of the project And then there's some associated, support models that are changing that will put those through our retained earnings also.
But the operating margin comment, our operating margin will be growing.
Operating margin would be growing on a, so five basis. Yes. Then obviously with a $26,000,000 revenue headwind, that is going to impact both through gross and operating margin reported results.
So adding to the, your comment about, we already mentioned that we have will be rather conservative in our guidance this year. And we we one of the reasons we want to talk about the long term growth is saying where we are spending, what do we see the impact? And if you look at the long term stats, for moving over the 4 year targets, that looks very impressive. And we think that doing more cuts than what we are looking at are really going to compromise that model. And if you find during the year that, those things are not panning out, then we'll make the adjustment And second is, we are making sufficient cuts, but unfortunately, because of the timing, they will not show an impact this year.
What you'll see an impact in the next year and moving forward.
Got it. Thanks for the clarity there.
We'll take our next question from Kevin Liu with B. Riley. Please go ahead. Your line is open.
Hi, good morning. Just as it relates to 5G, it seems like you guys have a little bit more of a positive outlook in terms of what that can do for your business. What's change there in terms of the opportunity that you see? And is the growth there really driven more by just the refresh cycle? Are you seeing kind of newer opportunities or network capabilities that you're looking to monitor?
So the items which Michael talked about are really in the predeployment, say is a calibration business. And that's not necessarily our core business, but that shows that if you become incumbent while we have reinvented ourselves and maintain our leadership despite some of the challenges we saw. But one of the but rewards of the incumbency is that you get to play in the next generation. It's not a refresh cycle in terms of in terms of replacing all of our instrumentation. I think the bigger refresh cycle is coming from the cloud.
And virtualization. But knowing that we are in the front of the line because of our incumbency and what we have done, allows us to participate in the 5G opportunities. It's not, as we mentioned, certainly this year, it's not going to be a big opportunity. But I think our incumbency makes us sticky when the 5G revenue comes along.
Got it. And then more broadly as you look to your longer term growth targets, obviously implies a bit of acceleration from this year. To what extent is that driven by enterprise versus service provider and how much of it hinges on some of the new products that you're introducing?
So it's a new technology and new products. So, yeah, we see higher growth on the enterprise side. Than on the service provider side. And the enterprise growth is a blend of service assurance and security. So we are announcing our, products related to 4, 5 products, which all combined together to deliver what we call smart data core, and which is a consolidation play with other security and monitoring tools.
As well as expansion to our bigger market beyond traditional NPM and DDoS in the enterprise space where we have had the leadership for many years.
All right.
Thanks for taking the question. Jeff?
We'll go next to Alex Kurtz with KeyBanc Capital Markets.
Yes, thanks guys. I just want to follow-up on that last question about the long term targets. I mean, we're talking about pretty strong reacceleration assumptions in the top line to get to mid single digit CAGR or better from the fiscal 'eighteen period to fiscal 'twenty, 'twenty two, Anil? What I mean, is it is that based on a recovery at some of your top SP accounts, I mean, that's an expectation of some really strong growth from 'eighteen to 'twenty two. So can you just walk us through kind of the step functions to get there?
Well, first of all, is that the one of the challenge we had some growth here and there in the last few couple of years, but because of the massive impact of those 2 providers, those those benefits were not seen, but we have been making a lot of progress. And we think that the dynamic, which is going to play out in service rider is the price per unit going down is going to be actually positively adjusted by the volume going up. And that's going to be the effect on the service provider side. We are the number one player and we saw the negative effect of that And then for the negative effect of a lower price because a software model, but those 2 effects are behind us. So the negative drag of the service provider will start we will basically stop starting with this year.
On the enterprise side, we have really not played in the security space, we have played in a narrow portion called DDoS. And people are looking for our solution for the security market. And so the wide data expertise we have is unique in the industry. And that made us a big player on the application performance and network performance side, but that technology has not been leveraged on the security side. By any company like us.
And that's what we are excited about. And then we have not done any joint selling of Arbor's products into NetScout account. So I think the positive stuff is coming that we could drive 5% to 10% growth. And we could have a big impact on EPS because all other starts are lining up, whether it's tax rate, whether it's share count, whether it's margins. And we yes, we still have to do that, but I think that's the target we can achieve.
The lower price points in the service provider segment will drive higher volume along with maybe along with some recovery and just sort of the core spending with those accounts from where they were, say 2 years ago?
That's right. And I think one of the other example I give to people is that people are spending more money on Uber. And then on taxes, even though price per ride is lower. And that's a digital transformation. But when you are the Uber and the taxi company, which we are, it causes disruption in the short term.
And that's what we have been managing through. So I see a lot of excitement with our customer base And I think we have to prove it to investors. And by this year, that we are on that trajectory.
Just last question here, Jean, for the fiscal 2019 assumptions, you're speaking to down modestly in the service provider segment for fiscal 2019 and your assumptions. The double digit mean, I don't know what modest means anymore for that segment. So, how would you is there a range you could give us, what that could look like?
Probably, at this time, we really don't give guidance out in detail that way. So I would not want to guide to that level at this time.
Clearly, do you feel orders that Alice, you mean you can have orders that end up skewing service providers just given the lumpiness of some of the opportunities that we're looking at. So. Okay.
All right. Fair enough. Thank you.
Thank you.
And we'll take today's final question from Matt Hedberg with RBC Capital Markets. Please go ahead.
Hey, guys. Thanks for taking my question. Just one for me. In the past, you've noted that enterprise sales cycles may have been lengthening. Some of that may have been to customers thinking through their cloud footprint software only deployments.
It sounds like you're having good success there, but I'm wondering Maybe I missed in the prepared remarks, but could you comment on how sales cycles trended in Q4? And is there anything that you guys can do operationally to shorten that curve and accelerate those sales cycles into this fiscal year?
I think this so one of the biggest things was in the past I think there are 2 at least 2 factors, which are new right now. One is that it's much easier We feel that we have the best technology for the advanced threat space, yet we have not leveraged that for the security market. And I think that has a shorter sales cycle more less scrutiny than our traditional market. So that's one change. And second is that we are we could potentially consolidate other tools in the security space with this package shaver product.
So we are less on a mission versus like we had in the past, but more on helping with the customer who already has a mission to spend. And I think that's the those are the 2 effects which is, which is getting us there. And third is, as we talked about with the WSCOUT win, we were never on certain parts of the infrastructure. We are not in the server forms. We were not in the remote sites And those are the markets we didn't couldn't address with the price points we have with the WISCOUT and some of the new things happening in the cloud.
We have access to those budgets now. So all these is creating a dynamic. Obviously, it required a couple of years of effort to get to this point. And I think this will have a effect on shortening the sales cycles.
Got it. Thanks a lot guys. Best of luck.
Thank you. Thank you.
And this will conclude today's Q And A session. I'd like to return the floor to Andrew Kramer for closing remarks.
Thank you, Keith. Thank you everybody for tuning in this morning. If you do have questions regarding the call today, feel free to reach out to Investor Relations. And we look forward to seeing our shareholders and analysts over the coming couple of months at a variety of investment conferences. Thank you very much.
And this will conclude today's program. Thanks for your participation.