Tangoe Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 7.13 | About: Tangoe (TNGO)

Tangoe (NASDAQ:TNGO)

Q2 2013 Earnings Call

August 07, 2013 5:00 pm ET

Executives

Gary R. Martino - Chief Financial Officer and Principal Accounting Officer

Albert R. Subbloie - Founder, Chairman of the Board, Chief Executive Officer and President

Analysts

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Nandan Amladi - Deutsche Bank AG, Research Division

Richard K. Baldry - Wunderlich Securities Inc., Research Division

Operator

Good afternoon, my name is Kevin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tangoe Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference call over to Mr. Gary Martino, Chief Financial Officer. Please go ahead.

Gary R. Martino

Thank you. Good afternoon, and welcome to the Tangoe Second Quarter 2013 Earnings Call. We will be discussing the results announced in our press release issued after the market close today. Again, I am Gary Martino, Chief Financial Officer of Tangoe. With me on the call today is Al Subbloie, Tangoe's Chief Executive Officer.

During the call, we will make statements related to our business that may be considered forward-looking statements under Federal Securities Laws. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date. These statements reflect our current views regarding the future and are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our most recent Annual Report on Form 10-K, which is on file with the SEC.

Also during the course of today's call, we will refer to certain non-GAAP financial measures. There's a reconciliation schedule showing GAAP versus non-GAAP results currently available on our press release issued after the close of the market today, which is located on our website at www.tangoe.com.

With that, I'll turn the call over to Al, and then I will come back a bit later to provide some further details regarding our financials and our forward-looking outlook. Al?

Albert R. Subbloie

Thanks, Gary. I'd like to thank everyone for joining us on the call today. We are very pleased with Tangoe's execution during the second quarter, as we were able to meet or exceed our expectations across all of our key reported operating metrics.

During the quarter, our sales performance continued to be driven by a combination of adding new logos, penetrating existing customers, leveraging our strategic alliance partners and expanding our global presence.

Taking a look at our results for the second quarter, we continued to see strong demand for our Communications Lifecycle Management solutions, as total revenues increased 28% to $46.4 million, which was above the high end of our guidance range.

From a profitability perspective, adjusted EBITDA of $7.3 million was at the high end of our guidance, and it represented an adjusted EBITDA margin of 15.7%, and year-over-year growth of 55%. In addition, we generated $4.8 million in operating cash flow during the second quarter, which was an increase of 20% year-over-year.

Now I'd like to provide an update on some of our key accomplishments during the second quarter. We increased total spend under management to $26 billion during the second quarter, which is up 40% year-over-year. The strong growth of our spend under management continues to be driven by a combination of moving deployments into production with both new and existing customers, along with our continued high retention rates.

During the second quarter, we added a record 49 new logos, significantly above our target range of adding 25 to 35 new customers per quarter. The momentum of our new logo wins and customer expansions continues to be fueled by the growing productivity of our increased investments in sales and marketing, as well as the ongoing traction of our strategic alliance partners. We achieved our goal of ending the first half of 2013 with 73 quota-carrying sales representatives and we will continue to add sales resources in the second half of the year, based on continued strong customer demand.

During the second quarter, we closed transactions with new and existing blue chip customers, such as Computer Associates, Applied Materials, Eaton Corporation, PricewaterhouseCoopers, Ascension Health, eBay, Clear Channel, Green Mountain Coffee, City of Fort Worth and Comcast, amongst others.

In addition to the transactions I just mentioned, I'm pleased to share that we continued to see increases in cross-sell and upsell activity with customers that have come to Tangoe through previous acquisitions.

While our integrated sales organization is indifferent with respect to how the customer originally came to Tangoe, it is nonetheless encouraging to see the expansion of all of our customers playing out as we expected. For example, during the second quarter, we expanded our relationship with UK Power, SAIC and Kaiser. It is also important to remember that in each of the customer expansion examples I just referenced, there remains additional opportunity to further expand our relationship as we continue to deliver value. It has been approximately 1 year since we completed the Symphony acquisition. And as we have shared in the past, we do not plan on making additional material acquisitions in the near-term. Our focus remains on driving growth and technology innovation. From time to time, we may pursue relatively small strategic opportunities that can add a complementary technology to our platform or expand our global reach.

During the second quarter, we acquired a small TEM-focused consulting firm for an upfront net cash payment of approximately $850,000 in order to enhance our presence in Germany. While this acquisition is immaterial to our financial performance, we gained domain expertise and resources in a major European economy to service the initial foundation for driving sales of Tangoe's industry-leading on-demand platform.

From an overall perspective, our global operations remain a priority for Tangoe, particularly given our estimate that international markets account for over half of the $425 billion in global telecom spend.

During the second quarter, International accounted for $6.4 billion of Tangoe's total $26 billion of spend under management and it grew 31% on a year-over-year basis. We continue to see strength in the Asia Pacific, EMEA and Latin American markets, which are being driven by the adoption of Mobility Management solutions in the enterprise in connection with the expanding BYOD trend.

Enterprises are demanding solutions that enable them to better manage their employees' mobile computing devices' access to the corporate network, while maintaining control and security of corporate data, applications and infrastructure. Tangoe is well-positioned to benefit from this trend, and has recently added employees based in Mexico City, Mexico, Santiago, Chile, and São Paulo, Brazil. In EMEA, we recently increased the size and capability of our operation centers in the U.K. and Netherlands, and as I mentioned, established an office in Germany.

We are also pleased to announce that we signed international base deals with Danaher, Sony EMEA, and additional countries for Atos, among others, which are on top of the large Nokia deal we mentioned on the last earnings call, where they're rolling out our mobile solution globally.

Given the investments we have made this past year, we believe we are in a position to benefit from the predominantly greenfield international opportunity. Another driver to our long-term growth is the expansion of our business with strategic alliance channel partners, which helped closed a number of bundled deals across our suite of solutions during the second quarter. We believe this continues to highlight Tangoe's value proposition as the white label CLM provider of choice for the world's largest outsourcers, systems integrators and carriers.

In addition, we were very excited to announce the collaboration agreement with SAP a few months ago, under which Tangoe is integrating its mobile TEM and MMS software suite with the SAP Mobile Secure portfolio, including SAP's MDM solution, Afaria. This expanded agreement will provide SAP with the ability to integrate with Tangoe's procurement, fulfillment, invoice processing, expense allocation, asset management and logistics, plan optimization, catalog management and carrier payment capabilities.

As a reminder, SAP originally came to Tangoe as a U.S.-based fixed telecom customer through one of our acquisitions. We later migrated SAP onto Tangoe's platform and signed a global multiyear multimillion dollar deal that covered our fixed and mobile CLM offerings. We believe the continued expansion of our relationship with SAP, again, highlights the value proposition of Tangoe's integrated CLM solution by one of the world's largest software companies.

Importantly, contributions from our overall partner channel continues to be highly diverse and not reliant on any particular partner. We also continue to expand our partner channel, most recently with Rogers Communications, Canada's leading wireless carrier with well over 9 million subscribers. They agreed to add Tangoe's Managed Mobility Services, or MMS offering, to its portfolio of solutions. This will enhance Rogers' ability to support mobile enterprise customers across Canada.

As a reminder, our MMS offering encompasses the entire communications life cycle, including strategic advice, full life cycle management, expense control, usage management and support. We continue to see demand for our complete turnkey solution as enterprises focus on their core businesses and turn to Tangoe to manage their entire mobility life cycle.

We also remain committed to product innovation to further extend our leadership in the industry and drive additional market share gains. Specifically, during the quarter, we announced the expansion of Tangoe's MMS offering to include forward and reverse logistics capabilities such as ordering, programming, application loading, device staging and testing, in addition to 24/7 global helpdesk support and device replacement and recycling. Furthermore, we recently announced the availability of our mobile life cycle advisory service, a vital component of Tangoe's comprehensive MMS suite, which helps enterprises maximize the return on their mobility investments.

In addition, we are very proud to be positioned in the leaders quadrant, in Gartner's new 2013 Magic Quadrant for MMS. In fact, Tangoe has the unique position as the white label CLM provider for approximately 1/3 of the companies listed.

During the second quarter, we also announced a new integrated version of our MDM and rTEM solutions, which allows enterprise customers to take advantage of new features, including a single mobile client, enhance geofencing policy enforcement capabilities and carrier optimization tools. Tangoe continues to have ongoing success selling MDM, as well as our rTEM solutions as a bundle with our mobile and fixed offerings. Further evidence that one our key strengths is the fact that we're the only provider to offer a complete integrated solution for enterprises.

As a reminder, MDM and rTEM still represent under 10% of revenue today due to the strong growth of our overall business, but we continue to believe they represent an attractive long-term opportunity due to the strong growth trends in connected devices and smartphone adoption. We also continue to make great progress on our new Matrix CLM architecture and are planning to make detailed announcements regarding our progress in the fourth quarter.

So in summary, we are pleased with the company's strong execution during the second quarter, particularly our ability to achieve record new logo additions, expand our relationship with SAP, the Rogers distribution deal and grow our international footprint. We believe that Tangoe remains well-positioned to gain market share and extend our leadership position as we continue to leverage our sales resources worldwide and enhance our integrated platform through increased product innovation.

With that, let me turn it over to Gary to provide more financial details.

Gary R. Martino

Thanks, Al. Our strong performance in the quarter and first half of the year reflects solid execution across our business. We are pleased to once again meet or exceed our expectations across each of our key operating metrics during the second quarter. In terms of my prepared remarks, I will first provide you with additional details on our second quarter financial performance and will then conclude with our outlook for the third quarter and full-year 2013.

Starting with the P&L. Total revenue was $46.4 million, up 28% year-over-year and exceeding the high end of our guidance range of $45.6 million to $46.1 million. Our recurring revenue was $41.4 million, an increase of 29% year-over-year and representing 89% of total revenue. Our non-recurring revenue represented the remaining $5 million of revenue for the second quarter, an increase of 20% year-over-year.

As we have said in the past, our non-recurring revenue can fluctuate on a quarter-to-quarter basis. When we look at the full year 2013, we continue to expect solid growth in both our recurring and non-recurring revenue.

And now, drilling down further into some of the drivers of revenue. Our spend under management for the quarter was $26 billion, which is approximately -- up approximately 40%, compared to the second quarter of 2012. As Al mentioned, we had a strong new logo quarter where we added a record 49 new customers, above our targeted range of 25 to 35 new customers per quarter.

While we continue to expect there to be variability in this metric quarter-to-quarter as we execute our land and expand sales strategy, we're very pleased with the productivity of our expanded sales infrastructure.

In addition to winning new customers, we also continue to do a good job retaining and expanding existing customers. Also in addition to customer expansions that Al highlighted earlier, our overall revenue retention rates remained above the 90% level during the second quarter.

And now, turning to expenses and profitability for the second quarter. Our GAAP gross profit was $25.6 million versus $19.7 million for the same period during the previous year. Our GAAP operating income for the quarter was approximately $800,000, compared to $500,000 during the second quarter of 2012. Our GAAP net income per share was $0.01 for the second quarter of 2013, based on 40.2 million fully diluted shares, compared to $0.01 per share results on 41.1 million fully diluted shares in the year-ago period.

Taking a look at our results on a non-GAAP basis, our gross margin percentage was 56.2%, which is up from 55.2% in the same quarter last year, and the highest since becoming a public company. This performance reflects the efficiencies we are achieving in our operations.

Our non-GAAP net income, which excludes stock-based compensation expense and the amortization of intangibles associated with acquisitions, among other things, was $6.4 million for the quarter, an increase of 52% on a year-over-year basis and representing 13.7% of revenue. Non-GAAP net income per share was $0.16 based on 40.2 million fully diluted shares and met our guidance. This is up 60% year-over-year compared to $0.10 per share, based on 41.1 million shares in the year-ago period.

Second quarter adjusted EBITDA was $7.3 million, which was at the high end of our guidance range of $7.1 million to $7.3 million. This represented an increase of 55% for the same quarter last year and an adjusted EBITDA margin of 15.7%.

And now turning to the balance sheet. We ended the quarter with $44.1 million in cash, up from $43.6 million at the end of the first quarter. We generated $4.8 million in cash flow from operations and $4.1 million in free cash flow, an increase compared to $4 million and $3.7 million, respectively, in the second quarter of 2012.

During the second quarter, we used $3 million as part of our share repurchase program. As of the end of the second quarter, we have used $8.9 million in cash to buy back stock against our 20 million share repurchase program. During the second quarter, we also used approximately $900,000 related to acquisitions.

I'd like to now finish with some thoughts regarding our financial outlook. Before getting into the details, I wanted to note that the small German acquisition that Al mentioned earlier is not expected to have a material impact on our revenue or profitability in the second half of the year. Their existing customer business might contribute a little over $100,000 per quarter in nonrecurring revenue and will have no impact on our recurring revenue.

With that, let me turn to our third quarter guidance. Total revenue is expected to be in the range of $47.5 million to $48 million. Adjusted EBITDA is expected to be in the range of $7.9 million to $8.2 million. Non-GAAP net income per share, which excludes stock-based compensation and amortization related to acquisitions, among other things, is expected to be approximately $0.17 based on approximately 40.9 million weighted-average diluted shares outstanding and a tax provision of approximately $400,000.

Based on the fact that we have half of the year behind us, and we have significant visibility into our second half performance, we are tightening our revenue guidance range for the full year 2013. We are targeting total revenue of $189 million to $191 million, which is a similar $190 million midpoint as our prior guidance and represents year-over-year growth of 22% to 24%.

From a profitability perspective, we continue to expect 2013 adjusted EBITDA of $31 million to $32 million, which represents an adjusted EBITDA margin of approximately 16.5% at the midpoint, and growth of 39% to 43% on a year-over-year basis.

We continue to expect full year 2013 non-GAAP net income per share, which excludes stock-based compensation and amortization related to acquisitions, among other things, to be in the range of $0.67 to $0.70, based on approximately 40.7 million weighted average diluted shares outstanding and a tax provision of approximately $1.5 million.

And finally, we continue to expect free cash flow to be in the range of $25 million to $26 million for the full year 2013, which represents a 13% free cash flow margin at the midpoint and growth of approximately 67% to 73% on a year-over-year basis.

So in summary, we are pleased with our continued strong execution, which contributed to a record number of new logos during the quarter. We are focused on continuing to extend Tangoe's leadership position in the CLM market by enhancing our technology, expanding our customer base, and continuing to expand our direct and indirect sales resources. We are optimistic about Tangoe's long-term outlook. And we would be happy to now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Raimo Lenschow with Barclays.

Unknown Analyst

This is actually Stephan [ph] in for Raimo. Just a couple of questions for you. On the increased capacity looking at the second half of the year, where do you guys see yourself adding capacity, what regions, are still planning on adding any additional headcount in North America or primarily in Europe and Asia?

Albert R. Subbloie

We're pretty well balanced across all the regions. We -- if you remember and follow our calls, we started EMEA certainly earlier and continue to add there. We started APAC about a year ago. We will continue to add there and have been adding, we just added Lat Am, we probably started 5 months ago or so. We're going to continue to add there. We're going to continue to add in North America as well. So pretty much across the board fairly evenly.

Unknown Analyst

Okay. And just a quick follow-up on the integration with Symphony. Where do you stand on that in terms of how many customers have migrated at this point? And have you seen any upsell from legacy since [indiscernible] customers or is it still too early?

Albert R. Subbloie

Well, it is early. Remind everybody the ebb and flow. We don't give the actual details of where we are, but we're on course, it's meeting expectations, but remember that it takes a good 12 to 18 months to get folks migrated. The first 3 or 4 months of owning that is the planning phase for that process, so we're in the process of doing it. So we tend to see upsell, cross-sells happen well after that period. Well after that 12 to 18-month period because we also have a little bit of a sales cycle certainly for upsell and cross-sell activity.

Operator

Our next question will come from Tom Roderick with Stifel.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

So when I look at the guidance and kind of run Q3 through the numbers and then what I get left with, with Q4 is at the midpoint of the range, something in the ballpark of call it 15% to 16% growth year-on-year, which is a nice clean number now that you've lapped Symphony as of that quarter and no major acquisitions through this year. Is that a reasonable framework for growth to think about going into next year? Or is it better to think about that type of growth rate accelerating when we look at these new logo wins coming in above expectations and some nice pickup sales with the likes of, well, channel partners, with Rogers and the SAP deal and some others? Maybe just an early framework, and I recognize it's not guidance, but I'm just trying to think about the pace of revenue growth as we start to lap on a true basis without any acquisitions?

Albert R. Subbloie

Thanks, Tom. With regard to the guidance, I think as we've been talking about all along, we definitely had seen a ramp in the growth throughout the year. So I think we've all talked about that. And so we shared that we see a growth in the back half of the year. And we see a consistency as we go into 2014. We're obviously not getting into specific numbers or a specific outlook, but we've always talked about an accelerated growth here a little bit in the back half. And as we've owned acquisitions for a while and grown the overall business, we've talked about that kind of moving forward into '14.

Tom M. Roderick - Stifel, Nicolaus & Co., Inc., Research Division

And maybe just to follow-up on one of earlier questions, which was with respect to Symphony in particular, about the integration and the movement of their customers on to your platform, can you talk a little bit about some of the other acquisitions, and particularly ProfitLine, how far along are those? And can you speak to any specific sort of upsells that have occurred across those transitions?

Albert R. Subbloie

Yes, Tom, again, I appreciate the questions, it's Al. A couple of things. I, on purpose, called out a few names in the last couple of calls and there were couple in that list that were ProfitLine actually. ProfitLine accounts. So we've definitely seen some upsell, cross-sell but we're well into the ProfitLine migrations, as you know, we're good at this at this point, but it does take time and we're not even at the -- we're just at the -- if you do the timeframe on that, we're probably in around the 18, 19th month level. We've shared with everybody that you don't get immediate uptick on cross-sells because, don't forget, we also have a sales cycle on those accounts in general. But that's going generally as planned. I think we're pleased with that, pretty consistent with the Telwares and HCL deals that we had, so we don't see a big change in that. And obviously, we're in an earlier stage with Symphony. I'm going to remind you also that while we call it the full lap in the fourth quarter, and using the conservative Street view that it's a 4 quarter that you just stop counting it, the reality and I'll share with everybody that a flat revenue stream, that fourth quarter we won't really see huge uptick in Symphony upsells and cross-sells. You probably take another 2 or 3 quarters. But putting that aside, we generally stated to see an accelerated growth throughout the year. And I think we'll see that continue into '14. Based on the increase in our sales organization, there's obviously a lag with that and we're obviously trying to provide guidance as that begins to have impact on the numbers going into '14. But I think we feel pretty good about that traction and we're going to continue to grow the sales force accordingly.

Operator

We'll take our next question from Terry Tillman with Raymond James.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

I guess, it's nice to see the new logo count being strong. I guess, can you just give us an update, and I apologize, I've been on -- switching around from calls, so I may have missed this, but commentary on ASPs, are they coming on at similar ASP levels in comparison to prior quarters?

Albert R. Subbloie

The ASPs are actually a little lower on new logo this quarter but we did better on the customer, the existing upsell, cross-sell. We actually had a number of large upsell, cross-sells this quarter. So we don't give the overall ASP for the overall, but let's just say that we were generally consistent across, so a little lower on the ASPs on the new. We didn't call out any big 7-figure deals this quarter but we had more new logos. And then, again, we did -- we had a very good existing upsell, cross-sell quarter.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Well, in some of these logos that are definitely an international flavor, it's maybe continental Europe or a U.K.-based company, what are they coming on at in terms of an ASP? Do they tend to be lower ASPs? Smaller initial footprint or anything you can say about an international customer versus a U.S. customer when they come on?

Albert R. Subbloie

Yes, and as I answer the question, I'll answer it with a greater degree of experience and maturity in EMEA. APAC will be next and Lat Am will be third because Lat Am is relatively new. So Lat Am is just going to be beginning to contribute because we've just had our resources there for 5 or 6 months. We're seeing consistency. I called out a couple of very large deals the last couple of quarters that were EMEA-based, so we're seeing the EMEA market be very consistent from an ASP perspective. And if you look at a couple of the names I also mentioned here, internationally based, we're seeing pretty healthy deal sizes. And by the way, I think a couple of those were existing customers that I mentioned with pretty good sizable upticks. APAC appears to be that way, might be early days for me to give a full readout and it's too early for Lat Am, but right now, it feels as if the ASPs will be fairly consistent across all geographical regions.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Okay. And I guess, if we just look over more of a trailing 12-month basis or just take these new logos you have been adding over the last 3 or 4 quarters, it does seem like the bookings business, and I know you don't really quote that business or give us details, it seems like it's been ramping. I guess, my question would be maybe more for Gary. In terms of how you recognize the revenue from a new recurring customer -- has it changed in terms of how much is -- you start recognizing revenue on signing as opposed to go live?

Gary R. Martino

I mean, Terry, I think we've shared in the past that new accounts, particularly new accounts that happen at the end of a quarter are very little contribution to that quarter's revenue, it's really a future dynamic. And especially the very large deals that we've called out in the past, we've talked about the fact that a lot of those will have an implementation period. They may even have a phased rollout if we're doing a worldwide deal. So deals can be slightly different but, I mean, I think, it's safe to say that the new deals that we closed in quarter are really more of a revenue contributor in the future.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Okay. And then, just my last question is on the model. Still, should we assume an expectation that on a steady basis, we see some gross margin expansion per annum? Any commentary on that?

Albert R. Subbloie

Yes, I think, we had shared that we expected to see an improvement this year over last year. We continue to expect that, obviously, Q2 was particularly strong, but I just think overall -- and we don't like to go quarter-to-quarter every quarter. But I think overall for the year, we've talked about an improvement from last year. And then we -- over the next several years, we continue to see that improving.

Operator

We'll take our next question from Nandan Amladi with Deutsche Bank.

Nandan Amladi - Deutsche Bank AG, Research Division

Of the 49 logos that you added, that's pretty impressive number, any characterization of what regions they came from, I know you cited a couple of international, but was it skewed more towards international because the ASPs, et cetera, were slightly lower?

Gary R. Martino

Nandan, thanks for the question, first of all. We're seeing a pretty good balance demand across all regions, as again, I'll remind everybody, we've been at EMEA longer than APAC, and at APAC longer than Lat Am. Lat Am barely contributing, looks like that's going to begin near back half of the year, but it feels pretty well balanced across the board. So that's why we're growing the sales organization fairly equally across all regions. Obviously, a unique situation like in Canada with Rogers, we think that will certainly help the penetration in the Canadian market, just given the size of their presence there as an example. But overall, pretty well balanced across all regions.

Albert R. Subbloie

We -- overall, it's probably worth commenting, we continue to see strong demand and new business from the domestic market. We obviously talk a lot about international because it's kind of a new greenfield, and they are contributing, but obviously, domestic is a big market. We have a lot of sales folks and contributes quite a bit to our overall new logos.

Nandan Amladi - Deutsche Bank AG, Research Division

Okay. And a quick follow-up. Since you're now in the Magic Quadrant for mobile device management. Is your sales approach going to change at all in terms of how you lead -- you've historically led with the TEM solution. Is there likely to be any change now?

Albert R. Subbloie

We -- and I think, the last call, I might have mentioned it, we -- customers buy for different reasons. We strategically created probably 5 to 8 sell points at this point and MMS has become a new one, and Gartner has done a good job shaping MMS, which is really the overall mobility life cycle. It's obviously, there's an addition of sort of the logistics piece, which is a relatively sort of new focus on that. But different customers may lead with different reasons. But once in a while, we will lead with MDM, so that may be a little different, but we pitch the uniqueness of the overall total solution all the time. That is really the value prop of Tangoe, it makes us quite unique. And we're seeing MMS become sort of a popular request out there, which is good news, I think, for the strength of our overall MMS suite and the fact we have all the points covered. So MDM is an important part of it, but I'll remind everybody, it's probably 1 of maybe 8 or 9 or 10 different function points of the overall suite. And we think it's an advantage of that, it's an integrated portion. Same thing with rTEM for us, you could argue rTEM is a standalone. But we've got some customers that really love rTEM. And again, that may get us in the door to talk about the overall mobility suite.

Operator

[Operator Instructions] We'll take our next question from Richard Baldry with Wunderlich Securities.

Richard K. Baldry - Wunderlich Securities Inc., Research Division

Again, not asking for guidance. So as we look out to 2014, by the second half of the year, do you think you'll be basically all on unified platform with most of the migrations done? Presumably, that would have a pretty good gross margin benefit, so maybe could you talk about some of the benefits once those people are cut over in terms of maybe the bandwidth you have from people who are migrating now existing sort of customers from platform to platform, who then can be moved onto strictly focusing on new customer adds, new revenue being put on the platform?

Albert R. Subbloie

Rich, good question, it's Al. Without doing the exact month in my head, I think the second half of next year we'll have the vast majority of all the migrations completed pretty generally comfortable with that. I always leave the door open for a straggler or 2, for whatever unique characteristics they may have, but the vast majority really should be complete. So I want to answer that question, maybe Gary can cover sort of the gross margin expansion that Rich is asking about.

Gary R. Martino

Yes. I mean, Rich, we've seen improvements in different areas as we've migrated customer sets or numbers of customers. And so we have kind of in our forecasting and budgeting, we kind of have additional efficiencies that we would see but we don't -- it's not a stair step function, it's kind of more gradual as we continue to move people over. And I think, we'll certainly see some of that this year and certainly into next year. And I think as we get into next year, we could probably give a better outlook on that, because as Al said, I think, certainly by the back half of next year, we should have a lot of the heavy lifting done.

Albert R. Subbloie

Rich, if I can add to that, I've been talking about the matrix architecture we'll see over the next couple of years also, the matrix architecture will put more innovation also into the automation of additional functions. So there's also technology efficiencies we'd be looking to gain over the next couple of years as well. So I don't want everyone to lose sight, it's one of the reasons why we're putting dollars into innovation.

Richard K. Baldry - Wunderlich Securities Inc., Research Division

Maybe another way to think about it would be how much of the deployment resources do you have do you think are dedicated currently to launching new customers versus migrations that would give us a feel for what type of resources will be moved out and into a more productive cycles behind us? And the other side would be, can you talk a bit about the sales productivity ramp you've been seeing in your new hires? Last year, you entered the year at about 35 sales guys, I think, average maybe that many deals per quarter but you have over double that number now. Is it fair to think that by year end, maybe those people could be up and productive and you'll see a doubling in your capacity?

Gary R. Martino

Yes, we certainly have -- without getting into specifics, we certainly have a dedicated team that's working on migrations and that is part of our cost structure within our COGS line. So certainly, as those people become available, they're experienced in our products and in customer rollouts so they can certainly move over to the new customer side. So that's helpful as we continue to kind of build a lot of the new names and have more and more implementations. That said, we do have a good-sized team that we continue to grow for the new customer business because we are generating a good amount of demand on the new customer side. So we're continuing to grow it. And as well, we'll move people over, but obviously, we'll gain some benefit from that.

Albert R. Subbloie

Rich, to your second question on the sales organization, you bring up a good point. And I think we've talked about this before but there's a ramp, obviously, in a new salesperson coming on board. There's both a ramp in their ability. And there's a sales cycle. Now it's not completely just sequential, you can probably roughly half parallel both of those ramps to some degree. But I think you could generally be dropped back roughly 6 to 9 months in our sales headcount, so we're 73 at the end of Q2, if you go 3 quarters back, I'm comfortable to say that, that rough headcount 3 quarters back would be the Q2 productive headcount. Again, it's not a perfect science but I want to give everyone some directional comments about that. So as you go forward, we'd be -- that 73 itself would be highly productive at roughly 2 to 3 quarters out. And as we grow in the third quarter and the fourth, which we plan on doing, you roughly just add 2 to 3 quarters to that to see the actual productive headcount that is the capacity to drive obviously the logos that we're posting.

Operator

[Operator Instructions] And at this time, there are no further questions. I'd like to turn the conference back over to your presenters for any additional or closing comments.

Albert R. Subbloie

Well, great. Well, listen, I'll take a minute to thank everybody for joining us on the call. We're excited about the way the year is progressing and about the long-term prospects of the business. Looking forward to updating everybody again, following the third quarter. So thanks, again, for joining.

Gary R. Martino

Thank you, everyone, for joining us today.

Operator

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.

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