We're kicking things off. Thanks, everybody. Hopefully, I don't spill my water up here. This is actually we need like little tables up here because it can be a little precarious. But thanks for joining us. My name is Matt Hedberg. We have NetScout with us this morning. And this is, I don't know, you guys have been coming for, I forget how long, 10 years to this point.
Yeah.
Yeah, I appreciate you guys joining us. We have Jean Bua, the CFO. Vic, from your seat in the CTO office, but you spend a lot of your time on, well, the whole technology, but also service providers. Yeah. We'll get into it here. So, you know, maybe with you, you guys reported results. You guys were one of the first numbers.
It feels like you guys were really early this season. Yeah. And it was like, I don't remember what I had for lunch yesterday, let alone, you know, when you guys reported a couple of weeks ago. But let's talk about macro that you saw coming out of the quarter and just think about the balance of the fiscal year.
Sure. By 3/31 year end, we finished our second quarter in September. And we reaffirmed our guidance as of the day of our earnings release. So we're on target, which is between $780 and $830 million in revenue.
Yeah.
And then we're very profitable. What we saw is a continuation of the trends that we planned, which is service provider is, was the 4G waiting for 5G. We can talk about in detail. And in enterprise, we see success in DDoS. We see success in the digital transformation in enterprise.
And we also are moving into cybersecurity. We introduced a product called OCI years ago, which is continuing to gain traction, and we're continuing to develop that. So we were very comfortable and reaffirmed our guidance at that point and see the macro being consistent with prior years.
You know, one question that I've been asking people. It does seem like there's more from a, pardon me, from a macro perspective. Do you have any sense, like, do you think the worst is behind us from a demand perspective? I'm just talking like overall macros and demand. Is that behind us or do you still feel like it's, you know, too hard to know?
I guess I would say I think it's settled down, probably that the demand is. I'm going to use the term consistent.
Consistent.
Yeah.
What about your perspective? I mean, you spend your time in the CTO office, but you also talk to a lot of customers as well. What are you sort of hearing?
Yeah. So I think on the service provider side, I'll start with that. You know, 5G has been slow to roll out.
We've been talking about 5G forever. When's 7G coming out?
I know. There's a lot of talk about 6G now, but anyway, I think it's taken a while, but you know, I've always said that, you know, without a real driving killer application, it's hard to, you know, keep investing in 5G, so you know, the credit they did build out a pretty good footprint. It slowed down because, you know, other than mobile phones, there was nothing new.
You know, there was a lot of talk about and so on, but more recently, since the last six months to a year, this fixed wireless has been a nice surprise for service because they're offering, since they deployed C-band, which is a mid-band spectrum, it's turning out to be ideal for fixed wireless because it's stable. It doesn't have the same interference problems as millimeter wave.
It has enough bandwidth, you know, consumers as well as small and medium business. So all the three carriers in the U.S. are making inroads into fixed wireless and, you know, fairly well competing against the cable guys. So that's been, I think the numbers are showing that they are growing, they've grown pretty fast and they now have at least single digit millions, which in terms of traffic is because each home has a lot more traffic than a mobile subscriber.
So all the capacity that they built out in the network has, you know, most of it has been used. So now they're talking about, you know, growing the network and adding capacity and so on. So I think that's a bright spot on the enterprise side. You know, I think it's been a tough goal mainly because there were a lot of things during the pandemic.
The sensors and the supply chain was not there. Network slicing was not implemented, but now network slicing is being rolled out, which is a key driver for serving enterprises on their mobile network. So I think we'll see some action on enterprise services a little bit down the road as network slicing gets fully deployed and 5G step deployed.
But, you know, I think fixed wireless is promising and again, as it needs to grow our footprint in the service providers. On the enterprise side, I think this move towards hybrid cloud has been, you know, quite, it's been going on for a while. Hybrid cloud, the DDoS problem gets very much exacerbated because things are not, but in colos and public clouds and so on.
The application layer attacks, which is more on targeting specific applications, are getting fairly dominant as opposed to the volumetric attacks where more targeted towards data centers because they wanted to bring down the internal infrastructure. In cloud, the focus is more on attacking specific applications which are sensitive, carry sensitive data.
That's where I think our new, that we rolled out recently, Adaptive DDoS is having a good impact on that market. We are seeing traction there, both on the service provider side as well as the enterprise side. Adaptive DDoS is proving out to be a good thing for us. I think eventually we have plans to couple that with our DPI technology as well.
So, what I'm hearing is there's a lot of, I mean, I'm thinking about fixed wireless, I'm thinking about DDoS, some of the cyber angles. You know, it seems like we're interested in that could be incrementally better.
Yes. Yes. I think both service providers and enterprise with cloud and edge monitoring, which is also important because as they're expanding their footprint, customer experience for hybrid cloud deployments is becoming very critical. Most of these deployments are not self-monitoring by the cloud provider. So you have to be able to monitor from the edge, the user experience. So that is getting traction. So I, yes, there are good.
I wanted to double click on the fixed wireless opportunity. Where are we in, like, you know, how far along that are we from a progression standpoint, and, you know, are there some carriers that are, you know, sort of progressing further along?
Fixed wireless. Yeah. T-Mobile is certainly the most ahead because they had the mid-band spectrum even way before AT&T and Verizon got it because they had it from the Sprint acquisition, the 2.5 gigahertz. So their deployment of mid-band spectrum was about a year ahead of other carriers. And they started going after fixed wireless much sooner. So they are, they have the most subscribers. I believe the numbers are probably high single digits on their side.
As a high subscribers. Are you talking as a percentage of subscribers or?
No, are you talking actual numbers?
Millions.
Yeah, millions. Yeah.
Okay.
Yeah. Yeah. Single digit million. You know, so if they have, the mobile subscribers are always around, you know, 70-80 million. And, but this one is, even if you have like, let's say six or seven million, that's equivalent to, you know, multiply by five at least, you know, 35 million mobile subscribers because of the traffic coming from each home. So I think it's generating a good amount of traffic and they are, you know, getting good, good revenue. So I think they are accelerating their deployment because they've had that success.
How does that benefit you guys?
Yeah, so one of the key things in fixed wireless is, again, user experience because they're competing with cable. Remember, cable guys have, you know, coax and fiber in many places.
Which seems to be like, in my neighborhood, we're getting, you know, fiber rolled out and.
Rolled out, right, so they have great speeds and bandwidth. To be able to compete with those guys is around giving consistent and predictable user experience because wireless always has some interference issues, so they need to monitor, you know, the control plane and the user plane for fixed wireless more proactively to make sure that the customers are not having problems.
Because once a customer leaves them and goes back to cable, it's very difficult to bring them back. You know, so they are very focused, so that's where our play comes in is that, you know, they need our technology to be able to monitor fixed wireless for user experience.
To maintain that consistency so you get cable or fiber-like.
That's right.
An experience.
Performance. Yes.
Okay. I'm going to pause there for a second, Jean. Well, actually for either of you, you know, I wanted to, you know, now that we're past the election, you know, reflecting back on the first Trump administration, was there anything that benefited you guys from a regulatory perspective or from, you know, a spending perspective?
And, you know, because I think people are thinking, you know, it's not, tariffs don't, aren't going to impact you as much. But is there anything that could, you know, get sort of better than the Biden administration based off kind of knowing what Trump did his first four years for you guys?
The first thing that comes to mind is in our government business with the federal government. We've always had a lot of projects that the users have wanted, but it's always been an issue with funding. So given where the world is today, we would be hopeful that the funding that, you know, the users and the Department of Defense are asking for would come through this time in the Trump administration.
Okay. So more on the defense side of the house. Is there anything like, you know, the other question that we've been asking folks is the Department of Government Efficiency, the DOGE and Elon Musk. And I think some people are curious if Elon Musk can last through 2025, but does that mean anything to you guys?
Yeah. I think one thing, if Elon stays long enough, like you said, he's a big proponent of AI. And I think, you know, and self-driving cars and AI and all this technology. So, you know, if he has a say, I think the investments and growth in AI-related technologies, especially because they want to stay ahead of China and other countries, right, in that space, I think that's going to help everybody overall because one thing AI does is generates a lot of traffic.
Sure.
A lot of traffic, both on the fixed line and the mobile subscribers because if Apple comes out with, I mean, they already have on the new iPhone and it can get more sophisticated. So now handsets are going to generate AI traffic into the network. And, you know, these are all interactive. So they need a quick response time from the network. So that'll help us because we can monitor the response time of AI traffic and make sure that, you know, the user experience is correct.
Okay. Interesting, so sort of.
So AI will help us. And there are many other angles to AI, which I think will play in our favor.
What are some of the other angles?
So, you know, both enterprise and service providers are looking for, you know, this thing called AIOps. You know, if you've heard the term AI operations. So that's a way for them to automate a lot of their operations, which was spread out across multiple systems, very, you know, manually intensive and both in break -fix and in predicting things and so on.
So they are looking to use AI to be able to predict and avoid failures and things like that in the network. And so we, the metrics that we provide can be used because they tell you everything that's going on in the network because we use DPI. So they can use the data to be able to make their services or their software more predictive and then be able to automate around that.
So I think AIOps is a big initiative both in service providers and in, you know, in enterprises which are very critically dependent on AI-based applications, you know. So, so anybody who's benefiting from AI, I think, you know,
we are on a path to build both partnerships with companies that are leading the AI as well as building the use cases which could benefit solely from our data. So, you know, those are all in play, but it'll take some time to roll them out. And if the government helps in somehow in driving these things, then I think that would be a benefit for us.
We have Cloudflare here later today and they've been big on edge compute and inferencing at the edge.
Yes.
I mean, as that continues to ramp and we move further down the Gen AI path, I have to imagine that could, you know, the more edge compute that's happening, that has to.
That will help us. Yes. Absolutely. Yeah.
I mean, it's probably hard. I mean, that's obviously going to take a while to play out as well. So a lot of these things could be multi-year.
Yes. Anything that has high volume traffic with low latency requirements, which many of these AI applications do, that'll help, that'll drive our business because using our tools is exactly in the right sweet spot for that.
So like the carriers, I have to imagine they have to be, you know, you have to be a bit proactive in how you spend in anticipation of some of these trends.
Yeah.
I mean, are you getting any signals from some of the larger carriers that, you know, they're starting to build CapEx spending requirements and any sort of demand signals there?
Yeah. I think what has happened with carriers is that, you know, the disappointment with 5G was, you know, made them overly cautious.
Yeah. I suppose.
Yeah. So they stopped expanding. But if they get one or two applications, let's say fixed wireless and network slicing to take off, and I think then they will become more confident in building out their networks, right? So they just needed a push because, you know, they didn't expect that 5G will take so long. So, but I think if a couple of these triggers or drivers actually take off, I think they will start to open up their wallet. Yeah. Yeah.
I mean, again, like we've been chatting for 10 years. It feels like, I don't know when we started first mentioning 5G, but it seems like a long time.
It's been a while.
I mean, is there a thought that this could still benefit the kind of the network or is it like that kind of ship sailed and we're moving on to some other?
5G, you mean?
Yeah. Yeah.
No, I think 5G has still a lot of room to run. And, you know, and the enhancements are coming through. And, you know, most of why it didn't happen was dependent on external factors, external to the service providers, like sensors. If the sensors are not there, there's not much they can do, right? So, so the devices and the software ecosystem has to be there for them to provide the service over the network.
So it has been a catch-22, you know, you build a network, but there are no applications and devices. Then they come on and you build the network. So it kind of, like in the olden days, you know, computing and network kind of reinforced each other. When computing got powerful, networks became powerful. And when networks became powerful, more computing horsepower was put in.
I think the same thing is going to happen now with devices and the network. The more devices, the more power, more applications like AI, the more they get widely deployed, then that will drive investments in the network also.
That's, no, that's helpful. On the large deal front, you guys had a large eight-figure deal earlier this year. It was a large, an ELA that seemed like it was in the works for quite some time. What is the, you know, it's always hard to call some of those deals and the timings of when those close. Is there any thought on, you know, what you guys can, and some of it's dependent on the customer, obviously, but is there anything that you guys can do or doing from like a sales ops perspective to drive, you know, better linearity on some of these large deals?
Sure. Yeah. That deal is a multi-year deal. It was with a prominent service provider, and as you said, it is dependent on the customer, so what we have done is we have multiple pricing mechanisms. They can do an ELA. They could do subscription if they wanted. A lot of them still do perpetual, so what we try to do is obviously lock in customers for the longer term, so we negotiate with them their maintenance over a three-to-five-year period,
their product sales, what they can buy with minimums that they have to purchase in given years, minimums over the whole term, and then additional products that would be of interest to them, so products, as Vikram mentioned, that are more in the cutting-edge areas like AI ops or cyber, they sometimes are not in there.
So the core products are in there with the incentive as they grow and start to implement these new technologies, they can buy more. So we do push this a lot for a lot of reasons. Obviously, it locks in the revenue of the customer, but it is dependent on what the customer wants and how the customer wants to purchase.
Yeah. Okay. You mentioned cybersecurity and Vikram, you mentioned that a bit ago. I think you guys had some backlog related headwinds on the cyber business this year. What, you know, what unlocks some of that spending? Are there, you know, you started off the conversation, Vikram mentioning DDoS and,
I mean, are there things that, whether it's a product perspective or, you know, leading-edge customer interests that you think could unlock some additional cyber spending? Because you talked about getting back to like double-digit cyber growth. I guess I'm wondering what are some of the key building blocks to get back there?
Yeah. Yeah. I mean, certainly, like I said, adaptive DDoS is a big driver for us. As there are more and more cloud deployments, application layer DDoS becomes more dominant than the traditional DDoS. And that confluence of, you know, more cloud migration coupled with more application layer attacks will help NetScout drive because it differentiates us.
Because we are the only company that has a DDoS product and a DPI, deep packet inspection product. And you need DPI to identify applications. So if we can identify the applications that are being attacked in conjunction with our DDoS technology, that gives us a unique edge because most of the other players are either DDoS companies or they have some level of DPI technology,
but nobody has both of them in an equally strong way. So that should, over time, unlock the potential for us given these trends in the industry on hybrid cloud as well as application layer attacks that become dominant.
And then like from a future product innovation, is there anything that we should be keeping our eye on for the next 12 months that maybe is not as well understood from an investor perspective?
I think you should keep an eye on, you know, how well we do on adaptive DDoS because I think that has a lot of innovations in terms of identifying and mitigating these attacks. That's clearly an area coupled with DPI technology. The other one which will roll out over time is the AI-related initiatives.
Okay.
You know, AIOps, both on the enterprise and service provider side. Because, you know, if you look at AI, you're hearing now murmurs in the industry that, you know, it might be challenging to get the return on investment, you know, because people are buying, you know, huge amounts of capacity, you know, which NVIDIA benefits. But where are the use cases?
Totally.
Yeah. And the applications to drive AI. And a lot of it has to do with AI can be only as good as the data it works on.
Yeah.
Right? If the data is not that granular and sophisticated, then you may have the best AI algorithms from Sam Altman, but they will not produce the right kind of results. So we feel that we have a critical piece of data that would help drive AI use cases because we understand everything in terms of what's going on with the subscribers, with the network and the applications.
Yeah.
That whole combination using DPI. And if we can figure out how to leverage our data in a more effective way to drive the monetary benefit of AI for our customers, I think that'll unlock a lot of potential for us.
Yeah. Interesting.
That's a longer-term play. I think it'll unfold over time as we figure out, because we are also trying to figure out where, you know, what use cases should we go after and who do we partner with? Do we go alone? You know, there are a lot of moving parts there. It's a big industry. But I think the nugget here is that having good data that can provide valuable insight is going to be key to driving the return on investment on all the AI software that the people are putting in.
Is there ever any benefit from like the data center buildout? Like you mentioned, like, you know, everybody seems like you can't find GPUs these days.
Yes.
I mean, it's maybe a byproduct of additional data, but is there any benefit to all the GPU buildout, all the data center buildout that the hyperscalers and others are doing? Does that benefit you in some way?
It will only if it creates traffic and applications. You know, if the data centers are sitting there with GPUs, but there's no use.
Unused traffic.
It doesn't help us, so I think it goes back to the thing that drives our business is really the newer applications because, you know, if you deploy something new that nobody knows how it's going to behave, then you need to have visibility into it.
Yeah. That makes sense.
Right? And so I think the more applications are driven, and I think AI will be a driver for many new applications. And I think that's going to, if it uses up all the GPUs, yes, that'll benefit us.
Okay. From a, we talked about large deals. I guess I'm curious, you guys are not at December year-end, as you noted earlier. Do you historically see a December budget flush? Do you see dollars that are sort of, you know, waiting to be spent? Has that ever benefited you in the past? And, you know, is there any thought that that could maybe be a benefit this December quarter for you guys?
Sure. In Q3, which is the December year-end, we have in the past years, and we'll go back over our history, 10 years, you know, we've seen sometimes significant budget flushes and sometimes just a couple of million. So generally, you don't really even know those budget flushes are coming until December and probably sometime in the third or fourth week in that. So it's possible, but we don't really.
You haven't assumed any of that. Historically, do you have any sense for what has driven some of that?
Usually the service providers.
It's coming from the service providers.
Usually it was the service providers in 4G having extra budget that they wanted to spend. It was in the post-pandemic, the supply chain issues where they had money they wanted to spend and they spent it on software. So it's usually companies that want to be able to use their budgets at the end of the year and decide to spend it with NetScout.
I don't recall, did you see much of a benefit last December from any of that spending?
Probably minimal last year.
Okay. So it seems like if it happens, it's upside to kind of.
Yeah.
It seems like that's a common answer.
The only other thing I would say also is sometimes people, where we think a project will close in our fourth quarter, so the first calendar quarter, sometimes because of a customer's budgeting, they will pull it forward into the December quarter. So we have seen that in the past also.
Okay. If we look out over the second half of your fiscal year and we're sitting here in six months and you outperform kind of the high end of your revenue guidance, what could be the most likely reasons for outperformance? It could be for both of you guys.
I would say probably two things. One, service provider, just because they spend, you know, they have the largest deals every time they do that. Or the other thing would be continuing traction in our cyber, the newer product, the OCI product would be the two that would probably, I would come to mind, that would drive significant upside.
These are generally like renewals and upsells?
In service provider, probably newer projects.
Newer projects.
Like if the use cases for 5G ever started to materialize or in cyber, it's just continuing traction in OCI.
What sort of visibility do you have on large deals?
Pretty big.
Pretty, yeah.
Yeah. I mean, our customers generally, we know our customers, we're generally embedded in there and we generally understand what they're going to be doing for the entire calendar year. So we have pretty good visibility because they're major purchases that they're making with us.
I guess relative to like the second half of last year, do you think there's more opportunities for some larger renewals and upsells this year versus last year? Or is that still hard? It's probably hard to tell on the timing. Could they slide into?
It's hard to tell. Like the deal that we closed recently, that one took a little longer than we would have wanted and anticipated, and it was a good thing because it actually came in larger.
Yeah.
There's a lot of negotiation that goes on when you're doing large deals like that.
Yeah. There's just a couple of minutes left. Is there any questions from, yeah, go ahead.
Thanks for the question. Has AI changed the DDoS landscape at all, the way you're being attacked? Or not you, but companies that you're protecting being attacked. And has your technology changed to, I don't know, to adapt to that? And as it relates to it, has a competitive landscape changed at all? Any new entrants in DDoS? Thank you.
I think the question was, does AI change the DDoS and kind of the cyber landscape? And is there any new changing competitive dynamics in that market?
Yeah. I mean, AI is going to change everything, including DDoS. And so exactly how it's going to do it, it's hard for me to say right now. But I think AI will certainly introduce more of a newer attack paradigm, I think, just like application layer attacks came about because of hybrid cloud deployment.
I think AI will create a different kind of attack vectors because when you're automating things in your network, you know, there is a potential that you could disrupt that automation. And if carriers continue to depend on machines to do all the work and reduce their staff, you know, and if you try to bring down that infrastructure, then there's nobody there to protect that.
As machines and applications become smarter, as they take over more and more from humans, then I think the attack landscape will be more threatening to, you know, to bring down these things.
Yeah.
But I think it'll take a while. You know, if there's a lot of effort on regulating the damage that AI can do. So, you know, but I think there will be threat actors who will be looking to, you know, disrupt the AI deployment.
Does that bring in more competitors? I mean, does that?
Oh, it will. It will bring in more competitors. Yeah.
Have you seen any change there?
Not yet. Yeah. Not yet. I think it's still too early to say. I mean, there's not that much AI out there yet.
Yeah.
So yeah.
Thank you. Thank you for the question. We got about 30 seconds left. So I don't know, maybe for the sake of just wrapping up a little bit of a softball, but, you know, kind of gets back to like maybe Vikram, what are you most optimistic for? We've talked about a lot of things today. Seems like there are some interesting irons in the fire here.
Yeah. So I think it's a combination of all of the things I mentioned. I think we are excited about fixed wireless and its growth. We are excited about network slicing on the service provider side. We are excited about adaptive DDoS and in conjunction with our DPI technology. And then finally, AI ops and everything that we can do with AI. So there are a number of, you know, things on the horizon that could help our company, you know, drive forward and with some growth. So they're all exciting to me.
Yeah. Yeah. Well, I'm going to squeeze one last in for Jean. Margins, thoughts on kind of then, you know, margin expansion?
Sure. As you know, we did do a voluntary separation program. So it's $20-$25 million worth of cost reduction. I guess the way I look at it is the company has significant investments in technology in its personnel. And as these, and they're poised to be able to grow. So continuing use cases coming out would help the margins. Barring that, there's also flexibility in how we look at the cost structure.
Okay. Cool. Listen, from all of us, thank you for coming, and hopefully we're here a year from now. We're talking about fixed wireless. We're talking about increased AI attacks, and yeah. Thanks again, guys.
Thank you.