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Tangoe, Inc. (NASDAQ:TNGO)

Q4 2013 Earnings Conference Call

February 12, 2014 5:00 pm ET

Executives

Albert Subbloie - Founder, President and Chief Executive Officer

Gary Martino - Chief Financial Officer

Analysts

Nandan Amladi - Deutsche Bank

Tom Roderick - Stifel Nicolaus

Terry Tillman - Raymond James

Christopher Hogan - Barclays

Richard Baldry - ROTH Capital Partners

Operator

Good afternoon. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tangoe Fourth Quarter and Full Year 2013 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you. I would now like to turn the call over to Gary Martino, Chief Financial Officer. Please go ahead.

Gary Martino

Thank you. Good afternoon, and welcome to the Tangoe fourth quarter and full year 2013 earnings call. We will be discussing the results announced in our press release issued after the market closed today. Again, I'm Gary Martino, Chief Financial Officer of Tangoe. With me on the call 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 material risks and other important factors that could affect our actual results, please refer to those contained in our most recent quarterly report on Form 10-Q, 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 in 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 Subbloie

Thanks, Gary. I'd like to thank everyone for joining us on the call today. During the fourth quarter, we continued to generate strong new customer growth and we delivered revenues that were in line with our guidance. During 2013, we further validated the strength of our business strategy which was focused on new customer additions, upselling our integrated offering into our installed base, strategic alliance and geographic expansion as well as extending our leadership position through innovation.

Looking ahead in 2014, we believe Tangoe is well-positioned to continue gaining market share. We have a growing global pipeline of opportunities, a meaningful expansion in our global sales resources, and we are rolling out our new and enhanced Matrix Connection Lifecycle Management suite. As Gary will detail in a moment, we continue to expect Tangoe to deliver a combination of solid revenue growth and margin expansion during 2014 and we are maintaining our preliminary 2014 revenue guidance we shared on our last call.

With that background, let me review our summary level financial results for the fourth quarter. Total revenues increased 14% year-over-year to $50 million and were in line with our guidance. Recurring revenue was also up 14% year-over-year due in part to the ongoing expansion in our sales resources, the strengthening of our market leadership position, our expanded customer base and our high renewal rates which remained above 90%. Our strong renewal rates continue to be driven by our ability to deliver a significant return on investment to our customers and to offer innovative products that our customers and partners demand.

From a profitability perspective, adjusted EBITDA for the fourth quarter was $8.4 million or 16.8% of revenue. We were pleased to deliver a strong adjusted EBITDA margin that was also within our guidance range considering our increased investments in sales and marketing.

Now, I would like to review some of our highlights and key accomplishments during the fourth quarter. To start, we increased total spend under management to $27.5 billion which was up 16% compared to $23.8 billion at the end of the fourth quarter of last year and $26.8 billion at the end of last quarter. 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.

We again experienced strong new customer activity adding 43 new logos during the fourth quarter compared to 39 during the same quarter, the same period last year. In addition, for the full year 2013, we added 174 new logos, an increase of 20% compared to the 145 added during 2012. During the quarter, we did see some improvement on the implementation timing for new customers and our position to maintain the momentum during 2014.

As a reminder, last quarter we increased our customer add performance goal to a range of 30 to 40 from our previous range of 25 to 35, primarily due to the expansion of sales resources and market momentum we mentioned on the Q3 call. In addition, our new logo performance doesn't include a number of smaller new logo customers that were added through our newer carrier channel in order to be consistent with prior quarter new logos. The increase in our customer adds is positive for the long-term as Tangoe has a proven history of expanding customer relationships through additional products and expansion across additional business units and geographies.

During the fourth quarter, we once again closed transactions with new and existing blue chip customers such as 3M, Amgen, Sempra Utilities, [SimPlant] (ph), Charter Communications, Dick's Sporting Goods, [Hertz] (ph), Hughes, Kellogg's and Western Energy among others. Overall in 2013, our record sales performance continues to demonstrate the success of our go-to-market strategy and our ability to deliver significant ROI to our customers.

Another key driver of our growth is our ability to increase cross-sell and upsell activity with customers that have come to Tangoe through previous acquisitions. For example, during the fourth quarter we expanded our relationship with Invensys, McAfee and Northern Gas. 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.

By far one of our most exciting announcements during the fourth quarter was the official launch of Matrix, Tangoe's next-generation CLM solution suite comprised of software and services to address the entire connection lifecycle of an enterprise's mobile, fixed, machine, cloud, IT and social communications. Through an advanced proprietary cloud-based architecture, Matrix enables organizations to turn on, manage, secure and support various connections and their associated assets across the entire enterprise and throughout the ecosystem including carriers, suppliers, partners, customers and employees.

There are several key takeaways from the Matrix announcements. Several Matrix components are available today and Tangoe expects to release several additional Matrix components each quarter from now until the end of 2015. The announced Matrix suite is comprised of an advanced cloud-based architecture to capitalize on many of the latest mobility trends and is expected to result in approximately 30 software components and in a number of bundled service components.

The software components that we expect to release over time will be made up of replacement components to our existing products created in the new architecture, new components for our current targeted markets, and several new software components in new adjacent target markets. The new spend categories our planned in the area of cloud application spend management, IT assets and expenses, enterprise social communications management and machine-to-machine referred to recently as the Internet of things. These additional spend categories should create additional total addressable market opportunity for Tangoe over time and should allow us to capitalize on many of the current and expected trends in mobility.

While Tangoe's target market is expanding, we remain focused on our core and we expect that Matrix will expand and modernize the core components to capitalize on new market opportunities. Tangoe will continue to focus on helping our customers manage their assets, expenses, usage and analytics around fixed and mobile connection types as well as the additional connection types mentioned above.

The concept of connections replaces the generic term 'communications' given the recent trends brought about by the cloud, social and mobile revolutions that are upon us. The acronym of CLM will remain intact signifying our commitment to our core marketplace.

In addition, I wanted to point out that our investment in software innovation is presently a multiple larger than any time in the Company's history and we are pleased with our ability to invest in the future while at the same time increasing profitability. As we mentioned in our launch announcement in December, Matrix Mobile and Matrix Fixed are currently available with planned additional modules and solution lines expected to be released quarterly throughout 2014. We are anticipating announcing the next round of Matrix components soon after this call. We believe the launch and our overall commitment to expansion and technology innovation will further extend Tangoe's product leadership position and fuel additional market share gains.

In regard to the progress we are making with our international expansion, during the fourth quarter Tangoe established a new entity in Brazil and the availability of our Managed Mobility Solution, MMS, to local organizations as well as enterprises looking to expand in the region. This combined with our existing presence in Mexico and Chile highlights the ongoing focus on Latin America which is targeted to benefit from the growth of enterprise connected mobile devices in the region and a high demand for fixed and mobile communications management solutions.

During the fourth quarter, international spend was $6.7 billion of Tangoe's total $27.5 billion of spend under management and it grew 14% on a year-over-year basis. In addition, we signed international base deals with Arcos Dorados who operates McDonald's in Brazil, [indiscernible], [Dumex] (ph) in Mexico, ConocoPhillips and Procter & Gamble in EMEA among others. As a reminder, the majority of our international spend under management and revenue continues to come from international locations of U.S. domiciled companies. However, we are pleased with the ramp we are seeing on selling international-based logos globally which over time will add to international revenue.

We also continued to expand our business with our strategic alliance channel partners during the fourth quarter as we closed a number of bundled deals across our entire suite of solutions including wins with IBM, AT&T, Rogers, HP, Xerox and others. During 2013, our strategic alliances contributed 23% of our new annual recurring revenue booked, though this may vary on a quarterly basis. As a reminder, on our third quarter earnings call we announced that our strategic alliance with AT&T resulted in securing a multiyear multimillion dollar deal with Computer Sciences Corporation, CSC, a global leader of next generation IT services and solutions. During the quarter, we were pleased with the implementation progress for Tangoe's fixed and mobile capabilities within CSC's internal global operations.

In addition, during Q4 we announced that the Company has joined the Cisco Developer Network as a registered developer within the security and policy management category and that Tangoe's MDM 13.2 release have successfully completed interoperability verification testing. We believe that this new relationship will help to further expand our market share as enterprises demand more integrated solutions that work seamlessly together.

Before handing it over to Gary, I wanted to mention that we were very pleased to be ranked the highest for overall use case in Gartner's Critical Capabilities for Telecom Expense Management. Gartner evaluated the effectiveness of providers and their approaches to addressing users' needs across the use cases, of resource and cost visibility and control, fixed and mobile outsourcing and sourcing management. We believe that the ranking highlights Tangoe's ability to provide continuous innovation and expand value-added services for our customers.

So in summary, the Company delivered solid revenue growth during 2013 which was consistent with the preliminary guidance that we shared dating back to the later portion of 2012. As we look ahead, we remain confident in our ability to continue growing market share due to our scale, integrated offering, commitment to innovation and expanding global capabilities. We believe that we are still in the early stages of growth in a multibillion dollar market opportunity and Tangoe continues to expand its leadership position.

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

Gary Martino

Thanks Al. Our performance in the quarter reflects continued demand for Tangoe's integrated CLM solution highlighted by strong growth and new customer additions along with existing customer upsells. I will first provide you with additional details on our fourth quarter and full year performance and will then conclude with our outlook for the first quarter and full year 2014.

Now turning to our fourth quarter results and starting with the P&L. Before I begin, let me provide a reminder that the fourth quarter represents the first quarter that all previous material acquisitions are in both the prior year and the current year period for the full quarter. Will that background, total revenue was $50 million, up 14% year-over-year, consistent with our guidance range. Recurring revenue was $44.4 million, up 14% year-over-year, while nonrecurring revenue represented the other $5.6 million of revenue for the fourth quarter, up from $5 million last year. As we have mentioned on previous earnings calls, our nonrecurring revenue can fluctuate from quarter to quarter.

Going down further into some of the drivers of revenue, we ended the quarter with $27.5 billion in spend under management which is up approximately 16% compared to the end of the fourth quarter of 2012. As Al mentioned, we once again had a strong new logo quarter with 43 new customers added during the fourth quarter. In addition to winning new customers, we continue to see momentum in retaining and expanding existing customers.

In addition to the customer expansions that Al highlighted earlier, our overall revenue retention rate remained above the 90% level during the fourth quarter. Overall, during 2013, 38% of new annual recurring revenue booked was with existing customers which reflects our ability to leverage our large and growing client base to cross-sell solutions. In addition, as Al mentioned, our channel partners accounted for 23% of new annual recurring revenue booked which reflects our ability to leverage external sales resources to drive growth and market share gains in a cost-effective manner.

Coming to expenses and profitability for the fourth quarter, our GAAP gross profit was $28 million versus $24 million for the same period during the previous year. Our GAAP operating income for the quarter was $2 million compared to $2.3 million during the fourth quarter of 2012. Our GAAP net income per share was $0.04 for the fourth quarter of 2013 based on 41.3 million fully diluted shares compared to net income of $0.05 per share on 40.7 million fully diluted shares in the year ago period.

And now taking a look at the results on a non-GAAP basis, our fourth quarter gross margin percentage which excluded stock-based compensation was 57.1%, which is up from 55.5% in the same period last year, which continues to reflect the efficiencies we are achieving in our operations. Non-GAAP operating income which excludes stock-based compensation expense and the amortization of intangibles associated with acquisitions among other things was $7.6 million for the quarter or 15.2% of revenue.

Non-GAAP net income per share was $0.18, and as Al mentioned earlier, we are pleased with our ability to come within our guidance considering our increased investments in sales and marketing. Non-GAAP sales and marketing which excludes stock-based compensation represented 16.2% of revenue for the fourth quarter which was up from 15.8% in the third quarter and 14.6% in the same period last year. This further reflects our focus on investing in sales and marketing to drive future growth. As a result, fourth quarter adjusted EBITDA was $8.4 million, up from $7.5 million during the same quarter last year and consistent with our guidance range.

And now let me run through summary level financial results for the full year. Total revenue for 2013 was $188.9 million, up 22% year-over-year. Non-GAAP gross margin which excludes stock-based compensation was 56.1% and contributed to non-GAAP operating income of $27.3 million, which was up 35% year-over-year. Adjusted EBITDA during 2013 was $29.7 million, an increase of 33% compared to last year. Non-GAAP diluted net income per share was $0.65 for the year, an increase of 30% compared to $0.50 per share in 2012. During 2013, GAAP diluted net income per share was $0.12 compared to net income of $0.08 for 2012.

And now turning to the balance sheet, we ended the quarter with $43.2 million in cash, up from $42.3 million at the end of third quarter due to positive cash flow from operations which was partially offset by $2.4 million to repurchase common stock and $1.3 million of cash payment on deferred purchase price obligations for acquisitions. We ended the year with a deferred purchase price obligation balance of approximately $1.6 million.

Overall, during the fourth quarter we generated $4.8 million in cash flow from operations and $4 million in unlevered free cash flow compared to $3.2 million and $2.7 million respectively in the fourth quarter of 2012. As we have mentioned in the past, quarterly cash flow can have variability due to a number of moving parts and our trend of strong in growing cash flow remains the same. On a full year basis, we generated $21.4 million in cash flow from operations, up 28% over 2012. Unlevered free cash flow was $18.9 million, up 26% over 2012. However, it was below our guidance.

I'd like to now finish with some thoughts regarding the financial outlook for 2014. Starting with the full year, we are maintaining our revenue guidance range of $220 million to $224 million for the full year 2014 which represents growth of 16% to 19% year-over-year. From a profitability perspective, we are also maintaining our 2014 adjusted EBITDA range of $37 million to $39 million, up 25% to 31% on a year-over-year basis and representing an annual adjusted EBITDA margin of 17% at the midpoint and 140 basis points of margin expansion on a year-over-year basis compared to 2013.

We expect full year 2014 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 $0.77 to $0.82, up 18% to 26% on a year-over-year basis based on approximately 42 million weighted-average diluted shares outstanding and a tax provision of approximately $1.6 million. And finally we expect free cash flow to be in the range of $25 million to $27 million for the full year of 2014 which represents growth of 33% to 43% on a year-over-year basis.

Turning to the first quarter of 2014, total revenue for the first quarter is expected to be in the range of $50.7 million to $51.4 million, or growth of 13% to 15% year-over-year. While we are not guiding specific line items, similar to last year we directionally expect nonrecurring revenues to decline sequentially after a strong fourth quarter. Adjusted EBITDA is expected to be in the range of $7.6 million to $7.9 million representing an adjusted EBITDA margin of approximately 15.2% at the midpoint. The sequential decline in adjusted EBITDA margin in Q1 compared to Q4 reflects our typical increasing cost early in the year associated with payroll taxes, sales kickoff and higher marketing budgets. Similar to 2013, we expect Q1 to be the low point and we expect to ramp throughout the year.

Non-GAAP net income per share, which excludes stock-based compensation and amortization related to acquisition among other things, is expected to be approximately $0.17 based on approximately 41.5 million weighted-average diluted shares outstanding and a tax provision of approximately $400,000.

So in summary, we are pleased with the Company's business momentum which is evidenced by the strong new logo growth and customer upsells we experienced in the fourth quarter and the full year 2013. This momentum is also reflected in the 2014 growth guidance that I just provided. As we move ahead, we expect to continue seeing leverage in our business as we scale. We also are focused on extending our leadership position in the CLM market by enhancing our technology, expanding our new customer base, increasing the spend of our existing customer base, in addition to introducing new channel partnerships, all of which will also enhance our long-term growth opportunity.

With that, we'd be happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll go to Nandan Amladi from Deutsche Bank.

Nandan Amladi - Deutsche Bank

You've obviously had very strong customer adds all through 2013 but the recurring revenue growth all through the year was fairly modest. So my question is, as these new customers go live, what should we expect the cadence of the recurring revenue growth to be because you're also guiding pretty modestly for next year?

Gary Martino

Thanks Nandan. I think as we said in the discussion that we expect obviously the ramp throughout the year. I mean overall the guidance growth rate is 16% to 19% which we think is pretty strong obviously given the size of the business and the scale of the business. So I think we feel good about the customer growth in 2013. Obviously a lot of that helps drive growth in 2014 which I think is why we're comfortable with the guidance that we've provided.

Nandan Amladi - Deutsche Bank

So a related question then, do you feel like you have enough capacity to deploy these new customers that were brought in during 2013? And then on the sales side, did you achieve the total number of reps that you wanted to hire by the end of 2013?

Albert Subbloie

It's Al. I'll answer the second one first. We did achieve the goal that we set out at the end of the year with sales force expansion and we will continue to expand the sales organization through 2014 and we feel good about our ability to attract and hire folks, we've done well there, and we'll continue – we'll certainly continue to do so. I did make a comment in my remarks, we made some progress on the deployment capacity. We're going to continue to make progress through 2014. I'll remind everybody hiring folks is one thing and certainly ramping and educating, there's some lead time involved, and we made good progress, I was pleased with that in the fourth quarter and we'll continue to make progress throughout 2014 on the deployment side.

Nandan Amladi - Deutsche Bank

Thank you.

Operator

And we'll now go to Tom Roderick from Stifel.

Tom Roderick - Stifel Nicolaus

So let me start with the gross margins, this is certainly the highest that we've seen here in a long time and it seems as though that means you're going higher but I want to understand a little bit more the drivers underneath the 57.1% gross margin this quarter, are any of those one-time or nonrecurring items that are replicable and is it possible that we sort of still see a similar progression in gross margin expansion as we go through the remainder of this year?

Gary Martino

I mean I think one of the key points underpinning obviously of that expansion was actually on the recurring side. I think if you look at it, you'll see steady growth throughout the year in the fourth quarter, on a non-GAAP basis was over 56% on recurring which was up. The fourth quarter of last year was just over 54%. And the underpinning is we are making progress with our efficiencies in recurring, our nonrecurring is strong, but I think on a year-over-year basis it was actually even slightly lower on the nonrecurring side. So the main driver is the recurring and that's where we'll continue to focus and continue to kind of make slow and steady expansion and progress.

Tom Roderick - Stifel Nicolaus

Okay, good. And Gary, talking about the recurring-nonrecurring mix, I think you hinted at the likelihood that strategic consulting and services, or strategic consulting as a nonrecurring piece would be down quarter-on-quarter, I don't know if you can be any more specific with how we ought to think about that the next year in Q1 but is that just a one quarter dynamic with professional services and then you get a snapback back to say the Q4 level or what's a good way to think about the strategic consulting piece as we get past Q1 and then into the rest of the year?

Gary Martino

I think we are just trying to give some insight into similar to last year, we had a strong fourth quarter last year based on the run rate that we were and then we tend to step down a little bit in Q1 and then kind of build up through the year. The fourth quarter does tend to be a little bit stronger in that area. So I think we're just trying to give some insight that it may step down a little bit and then build through the year. And we think it will be fairly consistent but as we said, on a quarter-to-quarter basis that can fluctuate to hundreds of thousands.

Tom Roderick - Stifel Nicolaus

Okay. Last one for me, Al, I want to go back to your commentary that you've expanded some deployment capacity, if we listen to your commentary about bookings and a number of logo wins and things of that nature, it seems as though you've got some level of confidence in your back pocket where you can see a line of sight towards revenues accelerating, but in the context of your guidance, this is somewhat backend loaded guidance, you certainly need an acceleration. How much of the things from a deployment and implementation capacity have you already accomplished that give you the sense that the revenues will indeed start showing up as you expect without the delays versus how much of that is you need to add more people, you need to add more processes and hope a few things break in your favor?

Albert Subbloie

It's a big question. We always need to add more people. If you look at the growth curve of the business, we're going to continue to grow the front line, which is the sales organization, but we did do a catch-up on hiring, we were out to do that but I want to remind everybody the lead time of ramping hires in the domain that we're in has some of a lead time, but we understand what that is for the most part and that's why I made the comment that we'll continue to progress that through 2014. We're on it, I feel good about our progress, I did make a comment that there's continued progress that will happen through 2014, in addition to the growth that we anticipate obviously in the sales organization and obviously the logos moving forward. So, I think we are on top of it, but again good progress and we'll continue to focus on that.

Tom Roderick - Stifel Nicolaus

Okay, thank you guys.

Operator

We'll now move to Terry Tillman from Raymond James.

Terry Tillman - Raymond James

So my first question just relates to I think, Gary, you said for the full year that the alliances is 23% of ARR booked.

Gary Martino

Right.

Terry Tillman - Raymond James

I would like some commentary that as the year progressed, because of all these partnerships you [bring in] (ph), particularly more recently in the telecom or carrier side, did the percentage of ARR from partners increase as the year progressed and how do you all think about their contribution in 2014, could it notable change from that percentage?

Albert Subbloie

Terry, it's Al. Let me try to take that. We were pleased with the alliance performance in 2013. We added a couple of alliances, obviously AT&T was an alliance we added the prior year and there's always a lead time in any alliance that we do. Rogers was a relatively new add for us, as was Orange as an example which we expect will have a bigger impact here in 2014 in terms of contributing to the bookings themselves. We've been saying all along that roughly a quarter of the business comes out of alliances. I don't see that drastically changing.

When you look at the three sources of bookings that we get, one is customer, one is new business and one is alliances, you're going to – you may see a several point fluctuation here just based on the other three pistons obviously. But we feel like going into this year we're going to keep ramping all three categories aggressively and we feel good about it. And again we'll continue to add new channels, I've said that all along. I've said all along we won't probably do it every single quarter but we will add more channels in 2014.

Gary Martino

And I think we had shared at the end of 2012 we were at 24% and I think we shared that our objective is to grow across the whole business so we're not dependent on any one segment.

Albert Subbloie

Yes, we did see a little more strength obviously in the customer upsell side. Keep in mind, we have a strong strategy of bundling and strengthening all the core with additional bundle. The bundle is a great strategy, we've been pursuing it for a number of years, and you could see with the Matrix we're widening that bundling strategy and we believe that strengthens everything that we do, not unlike the ERP guys did 10 years ago as an example. So, we're picking adjacent markets that we think have value and integration capability as we're moving forward and we'll continue to pursue that strategy.

Terry Tillman - Raymond James

Okay. Al, you must be reading my mind because my next question was going then to the idea that Matrix is now expanding the potential spend category, you talked about IT asset management, social, machine and cloud, I guess first maybe a little bit of perspective on what are their addressable markets, like a relationship with telecom, like you used to talk about when we just characterized your business' TAM? And then secondly, I mean this is a different person you're selling into or is it not and how are you going to go to market trying to cap into those other spend categories when historically it was telecom expense management?

Albert Subbloie

Let's take them one at a time. So the answer to the question specifically, there is additional TAM for these incremental markets. We would plan on providing some view to that this year on what that TAM is. Some of these TAMs are relatively new, so maybe not as much third party data but we're certainly gathering that, but there is additional TAM. And it's meaningful, it's meaningful to us in terms of what we're going after.

A couple of the new markets, they are relatively new, the adoption of cloud applications by enterprises in last five to seven years has seen a huge increase in expense in that area. If you think about what Tangoe does, we have mobility technology that can actually monitor usage right on devices. By adding the laptop and the desktop for IT expense management, we're now able to gain visibility into the employee's use of everything including the use of these cloud apps, so we can tie that back to the cloud expense and we can help companies manage those licenses more effectively which leads to an ROI that is not dissimilar to our telecom ROI. So it's a great adjacent market for us.

So there is additional TAM, we'll give it a little more visibility to that in 2014 to everybody. Obviously these products are new, they won't have a huge impact at all on revenue in 2014, we do expect to have some sales this year but obviously given our recurring revenue model we think that has a bigger impact on 2015, and as we learn more we'll give more clarity to that.

Gary Martino

And Terry, just to follow-up, the sales area or the area that we would focus on is typically within the CIO organization, as we shared that telecom was right there, so in a lot of cases the senior executives within that CIO organization kind of cover the whole spectrum so it's an easy dialog to cross over.

Albert Subbloie

Correct.

Terry Tillman - Raymond James

Okay. And Gary, just one clarification or just making sure I got the sum right, it has impacted the cash flow over the last couple of years in terms of these deferred purchase price obligations. Are we now at the point that you only have $1.6 million balance left or did I write that down wrong?

Gary Martino

No, you wrote that down right. So obviously we paid down a considerable amount this year out of cash flow and we're now in a strong position with only $1.6 million remaining.

Terry Tillman - Raymond James

Okay, alright, thank you.

Operator

We'll now go to Raimo Lenschow from Barclays.

Christopher Hogan - Barclays

It's actually Chris Hogan on for Raimo. I just wanted to just stay on Matrix, I think the mobility space in general there's a lot going on, a lot of decisions that organizations are kind of being forced to make right now. When you're going to sell it, I mean how – it seems like it's such a busy environment right now, I mean how do you get your contact to the organization to really focus on the problems that you're going – that you're trying to solve given how much they are trying to – all the issues that they are dealing with right now?

Albert Subbloie

Let me answer it with our core offering. If you think about mobility, the challenges it's presenting, we probably have the widest breadth of what I would just consider basic solution to manage that environment, getting the asset in someone's hands, getting the carrier portion of it turned on, getting the enterprise absent security onto that device in a very seamless manner all the way through the expense, the bill, the optimization of it and the debt of that device and ultimate replacement, including all the support around that. So we call that MMS and there's a number of components that we've added over the last couple of years to have a full suite of MMS capabilities.

So it's probably one of the most challenging infrastructures that the IT organization has faced and we sell a total solution for that. So we were able to get their attention because they're sitting there with a problem, they have employees sometimes screaming and people are unhappy with the productivity of being connected.

The other thing that's done is I think it's driven the enterprise to be connected all the time and being connected all the time, if you lose your device, you break your device, it creates a problem and a bigger problem over time. So we think we are in the right place at the right time, we're happy about the market dynamics, we keep increasing our sales force with a benefit of getting in front of more CIOs throughout the world and we keep hitting them with our message obviously. So I think we feel good about where we are in this marketplace.

If you look at the adjacent spaces that we've added, we think those adjacent spaces strengthen the core but also stand up on themselves as another sell-in to really break into a new account for the benefit of upsell, cross-sell which has been our strategy for the last couple of years.

Christopher Hogan - Barclays

Great. And then you touched on it a little bit, I realize you guys are going to continue to adding core capacity this year, are you in a position to say how much have been added as far as not necessarily the gross number of reps but a range of growth and capacity that you plan on adding during 2014?

Albert Subbloie

The philosophy we've had, because in our business there's a lag on everything, right, you hire a new rep, you got a lead time to get them up the curve, we will add more capacity than the targeted growth rate that we have in the business. Don't forget we're also adding new products to the mix, we've got a lot more customers to cover. So we will add a higher percent of core carrying capacity than the targeted growth rate of the business and we'll continue to do that certainly the 2014 and we'll look at 2015 as we get closer to it.

Christopher Hogan - Barclays

Okay. And then I just want to try to just [indiscernible] on the gross margin question again, you added about – spent about 90 bps year-over-year in 2013, is that a fair expectation going forward in 2014 to expect that kind of year-over-year gross margin expansion?

Gary Martino

Yes, I mean I think overall that kind of annual steady growth that we would look for. If you go to the detailed numbers, you'd actually see a little higher growth in the recurring line which is obviously the highest level of focus and maybe somewhat consistent or slightly lower on the nonrecurring line that we had last year, but actually where it is.

Christopher Hogan - Barclays

Okay, that's helpful. Thanks guys.

Operator

(Operator Instructions) We'll now go to Richard Baldry from ROTH Capital Partners.

Richard Baldry - ROTH Capital Partners

You guys have talked in the past about your acquisition integration being pretty much complete by second half of 2014, can you talk about whether that's still on track and what customer cut-overs on your platform and what kind of cost savings you might realize in the second half if [that work] (ph) finishes up?

Albert Subbloie

We are on course for that. Obviously some of the increase in gross margin is based on our progress there and we'll continue to certainly work on that through 2014. I do think it will go into the beginning of 2015 with really the last acquisition we did which is Symphony. Keep in mind we've made it probably more beneficial with the Matrix offering coming into play. So the migration opportunity adds to potential of a couple of components that weren't available before. So I think it's a net positive for the customer. So I haven't been as focused necessarily on the completion of that by the end of this year as we look at the Matrix rolling out into 2015, but overall we feel good about it and certainly made good progress on synergy, and one of the areas of gross margin pickup that we've had was through our progress there.

Richard Baldry - ROTH Capital Partners

And when you look at adjusted op margin really this quarter, over 15%, you [indiscernible] more confident on the [tax] (ph) base but the growth rate is a little bit slower. Can you [indiscernible] your strategy on the growth versus profitability balance? A lot of others in this space would prefer sort of flat-line earnings really focusing on I mean the top line growth rate and you've taken a more balanced approach, where do you see that sort of intermediate or long-term in your overall thinking?

Albert Subbloie

It's a good question, Rich. Since going public we've been pretty consistent with our strategy from the time we started talking to the marketplace, and we have not come off of that. And by the way, during that time I think the market might have changed twice which seems like with the priority of growth versus profitability, we have not. We have been believers in growing both the top line and the bottom line and we continue to have that as our philosophy moving forward and we've been pleased with the expansion in sales and marketing, certainly hired quite a few people, we continue to do it. We've also during this time I've been pleased with the increase in the innovation R&D budget on the software components within Matrix. Now we've been able to accomplish some of that. The Symphony acquisition gave us the ability to have a higher leverage on the dollar there which we're capitalizing on. So we're able to do an awful lot more without really drastically changing the profitability strategy. So you'll see us continue with that philosophy moving forward.

Gary Martino

And I think as we shared, we have increased sales and marketing as a percent of revenue probably at a more gradual basis than you may see in some other companies, but we consistently increased that investment over the last several years and I think we've stated that's the area we'll continue to – if anything, expense category is going to grow faster than the revenue growth, that's the one while we are bringing the other ones down as a percentage of revenue. So it's kind of our balanced approach which we'll continue to look at and evaluate on a quarterly basis as we move forward.

Richard Baldry - ROTH Capital Partners

Last thing on [indiscernible], about $20 million in debt down in the last 12 months with cash not really budging much and you did too I think a minor buyback, so in 2014 as you move out of having to pay off the debt, where do you think about or what is your sensitivity to buybacks or other uses of cash, could you get back on for about a mild M&A stance again which you acquired through all of 2013?

Albert Subbloie

It's a good point. We are pleased, we did what we said we were going to do. We had planned on having a good cash flow year to pay down the debt, we did. We added the buyback of which there's still more available in the buyback, so that will remain open. I can't comment exactly when and what we'll do but it's certainly one of the uses although the buyback has a limit on it for public information. But other than that, there's no real big use of cash this year. We are planning on good cash flow and we'll be adding cash to the balance sheet because we don't have that debt to pay down.

As far as the M&A question goes, I think our stance remains consistent with the last couple of quarters. While I would not call out any possibility right now, I think we're focused on the organic business, we don't have any real big plans to do active M&A, we have a lot going on organically in the company, growth in sales organization, growth in innovation, expanding the deployment resources across the board and expanding globally. So we're busy and I'm glad because we're well-focused to make good progress across the board and that's where we're going to stay for awhile.

Operator

There are no further questions. I'll turn the conference back over to management for any additional or closing remarks.

Albert Subbloie

Great. I'd like to again thank everybody for joining us on the call. We are excited about 2014, we certainly have a lot of good things in motion and we're going to look forward to speaking to everybody on the Q1 call. Thanks for joining us today.

Gary Martino

Thank you, everyone.

Operator

This concludes today's presentation. Thank you for your participation.

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