Earnings Call Transcript - NTCT Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for joining us for NetScout's Fourth Quarter and Full Year 2020 Earnings Results Call. At this moment, all participants are in listen-only mode until we reach the question-and-answer segment. Please note that this call is being recorded. Tony Piazza, Vice President of Corporate Finance, along with his team at NetScout, is on the line with us today. I would now like to hand the call over to Tony Piazza to start the Company's prepared remarks.

Anthony Piazza, Vice President of Corporate Finance

Thank you, operator and good morning everyone. Welcome to NetScout's Fourth Quarter and Full Fiscal Year 2020 Conference Call for the period ended March 31, 2020. Joining me today are Anil Singhal, NetScout's President and CEO; Michael Szabados, NetScout's Chief Operating Officer; and Jean Bua, NetScout's Executive Vice President and Chief Financial Officer. There is a slide presentation that accompanies our prepared remarks. You can advance the slides in the webcast viewer to follow our commentary. Both the slides and the prepared remarks can be accessed in multiple areas within the Investor Relations section of our website at www.netscout.com, including the IR landing page under financial results, the webcast itself and under financial information on the quarterly results page. Moving on to Slide 3, today's conference call will include forward-looking statements. These statements may be prefaced by words such as anticipate, believe, and expect and will cover a range of topics that are not strictly historical facts such as financial guidance, our market opportunities and market share, key business initiatives and future product plans, along with their potential impact on our financial performance. These forward-looking statements involve risks and uncertainties, and actual results could differ materially from the forward-looking statements due to known and unknown risks, uncertainties, assumptions, and other factors, which are described on this slide and in today's financial results presentation as well as in the Company's Annual Report on Form 10-K for the year ended March 31, 2019 and subsequent Quarterly Reports on Form 10-Q on file with the Securities and Exchange Commission. NETSCOUT assumes no obligation to update any forward-looking information contained in this communication or with respect to the announcements described herein. Let's turn to slide 4, which involves non-GAAP metrics. While this slide presentation includes both GAAP and non-GAAP results unless otherwise stated, financial information discussed on today's conference call will be on a non-GAAP basis only. The rationale for providing the non-GAAP measures along with the limitations of relying solely on those measures is detailed on this slide and in today's press release. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Additionally, as a result of the sale of the HNT tools business, we will provide certain organic, non-GAAP performance trends, which will remove HNT tools revenue for comparability purposes. Reconciliations of the non-GAAP metrics with the applicable GAAP measures are provided in the appendix of the slide presentation in today's earnings press release and they are also on our website. I will now turn the call over to Anil for his prepared remarks.

Anil Singhal, President and CEO

Thank you, Tony. Good morning everyone and thank you for joining us. Let's begin on Slide number 6 with some introductory comments. As we are all aware, we are in unprecedented, uncertain, and challenging times as a result of the COVID-19 global pandemic. During these times, our purpose as guardians of the connected world has never been more important. Our customers depend on NetScout service assurance and security solutions to support and protect critical networks and infrastructure that connect people and support businesses around the globe. It is essential that these infrastructures continue to perform even as they are stressed with unparalleled demand as many of us now work remotely. Accordingly, we have been effectively operating our business throughout this crisis given the critical nature of what we provide to our customers. In line with our lean but not mean culture, our first priority has been the health and safety of our people, partners, customers, and the communities where we live and work. Early on in this crisis, we activated our contingency plans, which have allowed us to ensure the safety of our team while effectively operating the company with most of our employees working remotely. Finally, NetScout generates significant free cash flow as demonstrated in the fiscal year 2020 where we generated more than $200 million. Additionally, at the end of our fiscal year, we had approximately $390 million in cash, cash equivalents, and marketable securities, which represents approximately six months of our normal working capital requirements. We also have borrowing capacity on our $1 billion revolving credit facility, with only $450 million outstanding at our fiscal year end and no principal repayments due until the facility matures in January of 2023. Therefore, I believe that our solid balance sheet and strong financial position currently provide us the flexibility and liquidity required to weather this pandemic situation while we continue to invest in our technology and solutions to maintain our leadership position within the industry. Let's move on to our financial results and then I will provide more insight on our business outlook and the trends we are seeing. Let's begin on Slide number seven with a brief recap of our full-year 2020 non-GAAP financial results. For fiscal year 2020, revenue was $892 million and diluted earnings per share was $1.57. We delivered solid diluted earnings per share growth of 14% on essentially flat organic revenue, meaning excluding the divested HNT tools business compared with the prior fiscal year. Revenue in our verticals was essentially flat on a year-on-year basis as well. In the service provider vertical, revenue grew 1% while the enterprise vertical declined by 1.4%. During the fiscal year, our software-only product line grew approximately 35% compared with the prior year. Software-only revenue as a percentage of service provider product revenue was consistent with the prior year at approximately 30%. During the fiscal year, we saw software-only revenue grow to 30% of service assurance enterprise product revenue. Last fiscal year, this was only about 10%. Turning to Slide eight, I would like to briefly cover our fourth quarter financial results. For the fourth quarter, revenue was $229.4 million, and diluted earnings per share was $0.50. While revenue came in approximately 4% to 8% lower than expected due to disruption from the COVID-19 global pandemic, there were nevertheless some highlights in the quarter such as the second quarter of consecutive revenue growth in the enterprise vertical spurred by DDoS and our government, healthcare, and manufacturing customers. Michael will comment on some of these deals in his remarks. We also continue to see a decline in ancillary product lines such as Fluke systems. Without the Fluke system decline, the enterprise vertical would have grown approximately 5% in the quarter. Let's turn to Slide 9 for some remarks on our outlook and the trends we are seeing. Looking forward to our fiscal year 2021, we believe that our unique solutions set could assist our customers in dealing with some of the unexpected network and security capacity challenges in new ways throughout and after the global pandemic. Although we remain encouraged about the opportunities we see, we are also cautiously optimistic given the current uncertainty of the global economy. Accordingly, we will therefore be providing fiscal year 2021 guidance until there is greater visibility into the elements we do not control such as market trends, customer purchasing behavior, and the duration and magnitude of the effects of the COVID-19 pandemic. However, I would like to share some insights. Interest from our customers remains high; however, given the current economic environment, timing and funding of deals is challenging to predict. At this point, we have already received a large eight-figure deal from an international service provider. We also anticipate completing the prior year's radio propagation modeling project in the first half of this fiscal year. Given our robust functionality and the ability to sell solutions in many forms, we are collaborating with many of the service providers on a global basis. We are 5G ready and can support both standalone and non-standalone 5G networks, enabling us to support our customers regardless of where they are in their evolution. In the enterprise vertical, companies continue to advance their digital transformation and security initiatives as they work to address speed, agility, and cost. We see the potential for an acceleration of customers' digital transformation, cloud migration, and security initiatives given how companies are operating and some of the lessons being learned as they deal with the impact of the global pandemic. We have already seen multiple low seven-figure deals from some of our financial institution customers in late March and April. Michael will provide some insight on this deal during his remarks. Regarding 5G, we see this as not only a service provider opportunity but also as an enterprise opportunity. Enterprises and governments are focused on leveraging 5G public and private networks to operate their businesses with greater automation and precision. Our customers are offering new products and services utilizing this technology, which offers high speeds and lower latency. Some of the use cases for this technology are in manufacturing with automated factories, healthcare with telemedicine, transportation with smart vehicles, as well as other applications such as smart cities and homes, gaming, entertainment, and national defense. We also believe we are uniquely qualified and positioned to help our customers as we are one of the only companies to have both service provider scalability and enterprise functionality. Finally, regarding our Arbor DDoS business, which is part of both our service provider and enterprise vertical, we also believe that this area of the business would benefit as security becomes an even greater focus during the current pandemic as bad actors attempt to take advantage of distracted companies. We continue to combine elements of our service assurance and security technologies to provide enhanced capabilities to our customers that leverage the strength of our offerings. We believe this combination provides a unique and valuable offering in the marketplace. Turning now towards our cost structures, we remain committed to improving our operations and maintaining cost controls such that we should be able to once again provide leverage in our earnings per share. We plan to continue to innovate and invest in our technology and solutions to ensure that we maintain our industry leadership throughout this crisis and into the future. We believe that our solid balance sheet and financial position provide us with the liquidity and flexibility necessary to weather these challenging times. At this time, we also believe it is prudent to preserve capital and we will not implement a share repurchase program for our first fiscal quarter. Turning to our customer engagement, last week we hosted our annual technology and user summit, Engage, which was virtual for the first time. This allowed the opportunity for many more of our customers and partners to attend. We had approximately 3,500 people register for the event, which was approximately four times more than last year. We see this as an opportunity to increase visibility of our flexible solutions, including Commercial Off-The-Shelf hardware. Michael will elaborate on our Engage event during his remarks. Finally, I would like to thank all the first responders who are working tirelessly to keep us safe, my fellow guardians at NetScout for their commitment and dedication, as well as our customers and stakeholders for their continued support. I look forward to sharing our progress with you during fiscal year 2021. I will now turn the call over to Michael for his remarks.

Michael Szabados, Chief Operating Officer

Thank you, Anil, and good morning everyone. Slide 11 outlines the areas that I will cover. Starting with customer wins, we continue to make good progress with both new and existing customers. A new customer that we won during the quarter, a global leading manufacturer and marketer of beauty products, was advancing their digital transformation initiative including moving to the cloud. The customer was experiencing performance issues and they could not address issues with sources that were not based on smart data. The customer placed a low seven-figure order to gain the full complement of our solutions for global visibility to assist in resolving performance using our visibility information solutions. They are also utilizing our visibility as a service offering to accelerate and optimize the value of our solutions, demonstrating the value of packet-based visibility solutions and best offerings as customers advance in their digital transformation and cloud migration strategy. Within the public sector area, we also had some nice wins both domestically and internationally as we continue to assist these customers with their digital transformation initiatives. One of the largest cities in the United States decided to upgrade their education information infrastructure. They placed a low to mid-seven-figure order with us to deploy state-of-the-art service assurance and visibility as the foundation of those digital transformation initiatives. While not the initial trigger, this project is also enabled by this upgrade; this is only the start of a modernization effort as they have more than 1,800 schools to upgrade within the city. In the international government area, we had a mid-seven-figure win to provide system-wide augmentation and service assurance solutions at a large government agency that provides IT services to all the government agencies of that country. Both wins demonstrate the value of our incumbency with our customers and our ability to provide them with continued value as they adapt to changes in their operations and advance their infrastructure. In the service provider vertical, we work with our tier one North America carriers as they plan their 5G initial deployments. During the quarter, we delivered and recognized a significant portion of revenue from the radio frequency propagation modeling project to a tier one North American carrier. We also continue to work with our international carriers as they advance their networks to 4G, LTE, and in some cases to 5G. Finally, I want to provide some insight into the activity we have recently seen related to the COVID-19 global pandemic. Some of these deals occurred late in the quarter while others in early April. On the enterprise front, we have started to see some orders from large financial institution customers in both late March and early April as they enhance their visibility and security solutions by upgrading their infrastructure and adding DDoS capacity to manage higher traffic demands on their networks and elevated security needs. In our service provider vertical, we have seen interest in upgrading technology and adding DDoS capacity within their infrastructures. One European carrier placed a low seven-figure order to upgrade its DDoS mitigation infrastructure to the latest technology in one of the major countries operating, while others placed a six-figure order to increase their capacity as traffic spiked abruptly during the pandemic with more people working remotely. In terms of go-to-market initiatives, as Anil mentioned, last week we hosted our first virtual annual technology end-user forum, Engage. The event was an overwhelming success with a record interest with approximately 3,500 people registered versus approximately 900 last year, representing more than 1,000 organizations around the globe. Registrants represented the service provider, enterprise, and government verticals, as well as representation from our various partners. The event attracted strong global participation with more than half of the registrants being internationally based. We also noticed a broader range of functions within the event, with architects, application developers, and development and security operations represented in addition to network engineering and operations. During the event, we showcased our solutions that assist customers in digital transformation, security, business analytics, and 5G-related initiatives, all of which are even more critical given the recent global crisis. In addition to three days of technical presentations, we offered virtual hands-on training sessions covering approximately 30 different subjects. The delivery of these sessions to our customers spanned over a two-week period for a grand total of more than 4,000 seats. Our plan is to continue leveraging forums like this throughout the year to enhance our engagement with existing and prospective customers. I look forward to sharing additional news of our success in our go-to-market initiatives and customer wins in fiscal year 2020. That concludes my prepared remarks and I will now turn the call over to Jean.

Jean Bua, Executive Vice President and Chief Financial Officer

Thank you, Michael, and good morning everyone. I will review key metrics for our fourth quarter and full fiscal year 2020. As a reminder, this review focuses on our non-GAAP results unless otherwise stated, and all reconciliations with our GAAP results appear in the presentation appendix. In addition, due to the sale of the HNT tools business in mid-September of 2018, I will highlight certain revenue trends on an organic non-GAAP basis, which removes HNT tools revenue for the applicable period referenced. I will note the nature of any such comparisons. Slide number 13 details our results for our fourth quarter and full fiscal year 2020, focusing on the quarterly performance first. Revenue declined 2.5% over the same quarter in the prior year to $229.4 million. Product revenue declined 7.2% and service revenue grew 2.8% over the prior year's quarter. Our fourth-quarter fiscal year 2020 gross profit margin was 76%, down 3 percentage points over the same quarter last year. The lower margin was attributable to a higher volume of radio frequency propagation modeling revenue that has lower gross margins in the initial stages as well as increased variable compensation in the quarter. Quarterly operating expenses increased 7.3% from the prior year, primarily due to higher variable compensation costs and a one-time loss contingency. We reported an operating profit margin of 21.2% with diluted earnings per share of $0.50. For the full fiscal year 2020, revenue was $892 million, which was a decline of 2.1% over the prior year on a reported basis. Adjusting for the divested HNT tools business, revenue was relatively flat compared with the prior year despite the COVID-19 pandemic impact on our fourth quarter. Gross profit margin was 76.4%, which is consistent with the prior year. Strong software-only sales at 29% of service assurance product revenue were offset by lower margin radio frequency propagation modeling services and increased compensation costs. Annual operating expenses decreased 3% from the prior year, primarily due to the HNT tools divestiture, headcount management, and continued cost controls. We reported an operating profit margin of 18.3% with diluted earnings per share of $1.57, or a 13.8% increase compared with the prior year. Turning to Slide 14, I'd like to review key revenue trends, which exclude the divested HNT tools business for the fiscal year 2019 comparison. For fiscal year 2020, revenue for the service provider customer vertical grew 1%, while the enterprise vertical declined 1.4%. Approximately 52% of total revenue was generated from the service provider vertical with the remainder from the enterprise. Turning to Slide 15, this shows our geographic revenue mix on a GAAP basis, which includes $18 million of revenue from the divested HNT tools business in fiscal year 2019. The geographical split between international and domestic revenue was relatively consistent with the prior year. Additionally, there were no customers that represented 10% or more of revenue for the year. Slide 16 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 $389.1 million, which is an increase of $42.6 million since the end of the third quarter. This cash and marketable securities balance represents approximately six months of normal working capital requirements. Free cash flow generated in the quarter was $102.5 million as we had strong working capital during this quarter. During the quarter, we repurchased approximately 2 million shares of our common stock at a cost of $50 million or an average price of $25.62 per share. During fiscal year 2020, we returned approximately $175 million to our shareholders. Given the current economic conditions and uncertainties as a result of the COVID-19 global pandemic, our capital allocation priorities shifted to capital preservation in the near term and we do not anticipate implementing a share repurchase program in the first quarter of fiscal year 2021. From a debt perspective, as of the end of the fourth quarter, we had $450 million outstanding on our $1 billion revolving credit facility. We had approximately 1.5 times a cushion against our gross leverage covenant, which could provide borrowing capacity if required. Our revolving credit facility expires in January of 2023 and has no required principal repayments due until maturity. To briefly recap other balance sheet highlights, accounts receivable net was $213.5 million, down by $31.4 million since the end of December. DSO's were 73 days versus 88 days at the end of fiscal year 2019 and 77 days at the end of December 2019. Moving to slide 17, as Anil stated in his remarks, given the rapidly evolving COVID-19 situation, the company will defer providing full fiscal year 2021 guidance until there is a clear outlook on the duration and magnitude of the effects of the global pandemic. That said, I would like to comment on a few capital structure items related to our first quarter of fiscal year 2021. For the quarter, we expect the tax rate to be consistent with the first quarter of the prior year at approximately 23%. Additionally, we expect diluted shares outstanding for the quarter to be approximately 73 million shares. That concludes my formal review of our financial results. Before we transition to Q&A, I'd like to quickly note that our IR conference participation is listed on Slide 18 and now I'll turn the call over to the operator to start Q&A.

Operator, Operator

We ask that you limit yourself to one question and one follow-up for the sake of time. We will now go to Matt Hedberg with RBC Capital Markets.

Matthew Hedberg, Analyst

Hey guys, good morning, thanks for taking my questions. Anil, I wanted to start with you. Can you talk a little bit more about when you started to see disruptions in March and also whether or not those trends have begun to improve in April? I know you noted a few nice wins in the financial services vertical in March and April as well as an eight-figure international service provider transaction. I am just trying to get a sense of the timing of disruption and perhaps maybe some improvement that you're seeing in April.

Anil Singhal, President and CEO

We don't know the exact timing; it was ongoing depending on different parts of the business, different regions. I think the most important point is that because it is the end of the fiscal year, March is traditionally one of the very big quarters and so we saw some effect, but later in the month we started getting some other orders, which made up for this. As a result yearly, we were able to deliver flat year-over-year performance and are only down by about 1% from the guidance we provided a year ago. So overall I think we did quite well, and I think that different parts were impacted depending on where we could travel and what kinds of conditions were there, and at the same time, there were people who had additional demands including some projects that were called COVID-19 projects. So there is all kinds of a mixture; it is very hard to sift through that, Matt, and I think this quarter is where we will be able to see how this is impacting on the positive side versus the negative side given the importance of what we do.

Matthew Hedberg, Analyst

Got it, okay, and then something stood out to me in your prepared remarks. I think you noted that software-only revenue was about 30% of service assurance, which was a huge move higher on a year-on-year basis, which is great to hear. Can you talk a little bit more about the factors driving that mix and might we expect a similar mix shift over the next several years in terms of what the magnitude of improvement there?

Anil Singhal, President and CEO

I believe that the main factors driving this change are related to NetScout, and we have been encouraging our sales team to focus on it because it is a higher margin business that enhances our capabilities. Jean will provide more details on that. Our company plan primarily targets the service provider sector initially because that market has been quite challenging. Although we might have the best technology in the carrier space by a significant margin, the market has been very price-sensitive due to issues with OTT traffic and the 4G infrastructure. Our efforts in that area have made a notable impact, and this year we decided to apply the same approach to the enterprise segment. Now we are rolling out services related to DDoS through the integration of Arbor, which we completed last year. We can now provide solutions across all three areas of our business. I believe that this trend will continue to improve, although some of it has been offset by lower-margin propagation dealer operations. Once we address these issues, I remain confident that the overall trend aligns with our forecasts. While progress has been somewhat slower, I anticipate that at some point, the majority of our revenue will shift to being software-based.

Matt Hedberg, Analyst

Got it. That's great to hear. Thanks a lot, guys.

Operator, Operator

We will go next to Eric Martinuzzi with Lake Street.

Eric Martinuzzi, Analyst

Alright. Hopefully, I am live. I had a question with the onset of COVID and work from home, learn from home. Are you seeing, as far as bandwidth demand, is there a benefit to your service provider customers' increased bandwidth translating into revenue opportunity for NetScout?

Anil Singhal, President and CEO

Well, on the carrier side, if you look at the mobility provider, there is a different trend. But if you look at fixed line operators, then yes, there is a need for that. However, we are seeing a bigger short-term impact, Eric, on the DDoS part and the service assurance parts of the enterprise business. At the same time, carriers like Verizon and ATT, although they have their own operation, IT operation, which we have like enterprises. So for the short-term we are seeing an impact on that part of the business. And Jean, do you want to add?

Jean Bua, Executive Vice President and Chief Financial Officer

I would just say I was very excited about the virtual Engage and some of the new products like Edge monitoring that the company is looking at. I don't know if you want to go into more detail about the future.

Anil Singhal, President and CEO

Yeah. So I think that is what Jean is talking about, Eric, and we are looking at how we can provide some additional information in future calls about some of the directions we announced at Engage. One of the things was Edge monitoring, which allows you to monitor the performance on the provider side, even though you have outsourced a lot of your infrastructure, and that will be even more important in these times because I think one of the ways to do business continuity is to outsource some of the hardware stuff to providers. So I think cloud migration might increase or accelerate, and some of the things we announced, which is all software, I think it's going to make a big difference and we will be releasing those things in the next quarter.

Eric Martinuzzi, Analyst

Okay. And then from the personnel side it sounds like you're keeping an eye on the discretionary; your headcount was 2,517 at the end of December. Where did you finish out the fiscal year on headcount?

Jean Bua, Executive Vice President and Chief Financial Officer

Hi, Eric. This is Jean. We finished out the fiscal year relatively flat with that Q3 number around 2,500 people.

Eric Martinuzzi, Analyst

Okay. And then as far as the things that you can predict about your business, let's talk about the service revenue. I understand products are a little bit harder to get your arms around, but revenue elements is there any reason to believe that that is under threat from either retention issues or churn, because historically that has been able to hold up pretty well in circumstances like this.

Anil Singhal, President and CEO

Yeah, basically I feel that at a high level if at all it's further strengthened. When we talk to our customers and they see us in a very unique place, a company of decent size, strong financial position, invested in the last four years in a lot of things in R&D and support, they can upgrade many of the software. So the features, which we are adding are essentially free with renewals. I think that unless something really unexpected happens, our position in the renewal and service revenue is further solidified. It was already good in the past, but I think it may be even better.

Jean Bua, Executive Vice President and Chief Financial Officer

Yeah, the only other thing I would add to that, Eric, is in the year the service revenue, as you noted, grew 3% plus, and we have multiple offerings in there with the vast majority of it being like 85% to 90% maintenance. As Anil discussed, it is important that the unique offering that we have, where you continue to be supported, as well as to receive enhancements, keeps our customers wanting to pay that. We also have offered a visibility-as-a-service offering, which grew pretty well over that year, and then we also have on-site engineers, which have been growing as our customers really like the value that these people can provide. So I would say that service revenue growing 3% was very good this year, and it looks steady going into the future for FY 21.

Eric Martinuzzi, Analyst

Thanks for taking my questions.

Anthony Piazza, Vice President of Corporate Finance

Yeah. Great. Operator, we can move to the next question.

Operator, Operator

And we will go next to Chad Bennett with Craig-Hallum. Please go ahead.

Chad Bennett, Analyst

Thanks for taking my questions. So just on the software penetration of overall revenues, just following up on a prior question, I guess how should we think about the growth there this year or maybe even an exit kind of penetration rate, could that get to 40% to 50% when we exit the year this year?

Jean Bua, Executive Vice President and Chief Financial Officer

So the chronology of the timeline of the software-only was, as you remember, a few years ago, we introduced it into our international service provider markets based on their desire for full functionality and robust capability at a price that made sense for them. It has migrated towards domestic service providers also, and this year what was very interesting is that it's also started to migrate into the enterprise. So the enterprise is using software-only at approximately double in FY21. So when you take that as an exit rate, I think we have said in the past that probably our software-only could get to at least more than 50%. So I would see FY21, especially given the COVID-19 pandemic issues, having software-only being driven since it's a very good price point with excellent functionality, potentially stronger. So on a guesstimate, I would say it could get closer to 40% in FY21.

Chad Bennett, Analyst

Got it. Perfect. And then just on the enterprise side of the business, what are the puts and takes considering the majority of your enterprise business is still on-prem or data center related for an enterprise? During this pandemic, I think we've heard from a lot of customers that digital transformation or just flat out move to the cloud has been accelerated significantly even more than it already was beforehand. So if we see that acceleration to the cloud by your enterprise customers, is that a net positive to revenue at least over the next year or a net headwind to revenue? Any way you could answer that would be great.

Anil Singhal, President and CEO

So I think it's sort of a multi-part answer to this, and you mentioned one of the issues in the current time is new hardware deployment. So we have announced some software modules last week, which increase the functionality of existing deployment. Second thing as Jean mentioned earlier, we announced an initiative called Edge monitoring. We strongly feel that IT operations want to give the control back into visibility while they want to outsource some of the infrastructure to cloud providers, and if they do that, they can convert finger-pointing in case of issues because I'm still going to call my IT when I have a problem with Office 365 or any of the outsourced applications, yet they don't have access to what's happening in the cloud. So the monitoring solution we have announced is going to make a big difference. Now having said that, Equinix and providers like that, which provide high-speed links to cloud infrastructure, are the best option. Our solution, Edge monitoring solution, can be actually deployed in likes of Equinix, and it looks like we deployed it in the cloud; it is the extension of on-prem but it's really not on-prem infrastructure. So that's a very interesting development, and also our software can run on top of as needed, so we have made a lot of innovations in the last two years. I think just because infrastructure has moved to the cloud doesn't mean all the monitoring has to be on the cloud. Somebody has to make the cloud providers and SaaS application people accountable, and that's how our solutions will work. Having said that, there are a couple of other SaaS providers, big ones, which I cannot name right now; they are actually using our technology to actually support their customer. So all these combinations, I think, is a net positive because it extends our leadership into a bigger market, it increases our higher margin business further, and the visibility means that on-prem is a deployment option; it is not a requirement. So our solution works anywhere you want, and there are no excuses. Some people will put it on-prem, some people will put it in the cloud, and some people will put it in the intermediate side like Equinix.

Chad Bennett, Analyst

Got it, that's great color. Thanks. Great job managing the business and the balance sheet in these times. Thanks.

Anthony Piazza, Vice President of Corporate Finance

Thank you. Operator, we can take the next question.

Operator, Operator

We will go next to Kevin Liu with Kay & Company.

Kevin Liu, Analyst

Hey, good morning. First question here, just wanted to get a sense for the quarter-end disruption that you guys saw; was that primarily just on kind of new product sales or did you see any impact on maintenance renewal agreements and the like?

Jean Bua, Executive Vice President and Chief Financial Officer

I would say it was probably exclusively on product revenue.

Kevin Liu, Analyst

Got it. And then more generally, as you kind of work through this environment it sounds like the demand generation side of things in terms of going virtually. But curious as to what other impacts you are seeing on your general sales activities. For instance, are you still able to complete the kind of proof of concepts that you need to or deploy equipment on the client sites to the extent that is possible? I'm just wondering what sort of parts of the sales cycles are impacted.

Anil Singhal, President and CEO

We were still doing all proof of concepts remotely because our engineers, who are very involved, were not traveling to customer sites. So that's not impacted at all. Yes, there are issues with people not being able to meet customers, and that has some impact, but overall, and that's sort of balanced by the time people have to discuss the projects with us. Michael mentioned why did we get strong interest in some companies where we had ten to twenty people attending, and one company had fifty people attending. So I think we are getting the mind share of the people, and that's a positive side. The negative side is that we are not able to travel to customer sites and have a direct dialogue with people; I think that is sort of making good balance and the net effect will be I think neutral.

Kevin Liu, Analyst

Got it, and if I could just sneak one more in on the security side. So you guys acquired a company in early February. Anil, could you just talk about kind of the longer-term vision for your security platform here? Are you guys still primarily recognized as a DDoS player or do you see recognition out there in the market as being more on kind of advanced threat prevention side? Just wondering how this platform is evolving and what other gaps, if any, you plan on filling in over the coming years.

Anil Singhal, President and CEO

Sure. So I mean, because of the technology based on packets and visibility we provide, we could actually make security adjacency for us, which is a very strange word; how could security be adjacency to service assurance? But the way we handle it is that they are two sides of the same coin. So our current business DDoS is about 20% of the total business, and this year we announced some feeds from service assurance side to do Layer 7 monitoring on DDoS, and we coined the term smart DDoS, which we announced last week. So I think that's going to impact the DDoS business, but over the last year, we acquired two small technology companies; one was in the VDI-based security space and they had some encryption and some other features. Towards the end of the year, we are going to bring out that solution, which is based on some existing technology on the enterprise side of the house and with ASA technology combined with some of the things Eastwind was doing in the advanced security area plus some of the building blocks from the VDI acquisition. All three together will announce our entry into the advanced security space, which is very crowded, but because of our building blocks and incumbency in other areas, I think we're going to have a big impact in the next year. So we did allude to that announcement also last week during Engage, and we had a lot of interesting questions that came from the customers. So over time, I think security will be a much bigger portion of the business, and it will obviously include a big portion from DDoS, but advanced security will be another big portion in the next couple of years.

Kevin Liu, Analyst

Thanks for taking the question.

Anthony Piazza, Vice President of Corporate Finance

Okay. Operator, we'll take the next question.

Operator, Operator

We'll go next to James Fish with Piper Sandler.

James Fish, Analyst

Thanks for the question. Maybe going off of the last one, you guys have a pretty positive outlook on Arbor, but can we get a breakdown of growth rates across the business and within each vertical as well as the total percentage that Arbor now represents that you guys typically do annually? I get you just said DDoS but that's not the entire Arbor business.

Jean Bua, Executive Vice President and Chief Financial Officer

Since the sales force has been integrated, the way I would think about it is for the quarter, they did very well. They actually grew in enterprise in close to the mid-single digit, and so for the year, they were probably flat to slightly up. They also had a tremendous year and quarter in service provider. So this year Arbor did pretty well. They are still probably somewhere between 20% to 25%.

James Fish, Analyst

Yeah, that's helpful color. And then obviously a big catalyst for NetScout is the potential 5G core spending; a lot of debate around this. But what is NetScout seeing with 5G core timing, given the impact of COVID-19? Were there any pushouts from Tier 1 or international carriers?

Anil Singhal, President and CEO

What we are getting is that it is either going to be neutral, meaning coming at the same speed level as was forecasted in the past, or it might even accelerate. We see that one of the big car manufacturers is buying their own spectrum in Europe. We don't know the timing, but in terms of BOC and evaluations, there is a lot of interest; anywhere we talk amongst carriers, they want to know about the 5G story. All the investments we made in the last 12 months have made a big difference, and being the incumbent, we can share some of the assets we have already deployed in 4G. Their BOC timeline can be dramatically compressed because they don't need to check everything out; they just need to check incremental things we have done. So all in all, I think that the 5G growth is going to continue in keeping with our prior forecasts, or maybe even slightly faster.

James Fish, Analyst

Alright. Thanks. Thanks everyone.

Anil Singhal, President and CEO

Yes.

Jean Bua, Executive Vice President and Chief Financial Officer

Thank you.

Operator, Operator

And that concludes our question-and-answer session.

Anthony Piazza, Vice President of Corporate Finance

Great. Thank you everybody for joining us today. We appreciate that. This concludes our remarks. Have a great day and stay healthy and safe. Thank you.

Operator, Operator

This does conclude today's program. We appreciate your participation and you may now disconnect.