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Tangoe (NASDAQ:TNGO)

Q2 2014 Earnings Call

August 06, 2014 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

Nandan Amladi - Deutsche Bank AG, Research Division

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

Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division

Richard K. Baldry - Roth Capital Partners, LLC, Research Division

Neil Joseph Gagnon - Gagnon Securities LLC

Operator

Good afternoon. My name is Karina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tangoe Second Quarter 2014 Financial Results Conference Call. [Operator Instructions]

I would now like to turn the call over to Gary Martino, Chief Financial Officer. Please go ahead.

Gary R. Martino

Thank you. Good afternoon, and welcome to the Tangoe Second Quarter 2014 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 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 R. Subbloie

Thanks, Gary. I'd like to thank everyone for joining us on the call today. We are pleased with Tangoe's execution during the second quarter, which was highlighted by a continued high level of customer demand, ongoing success in driving additional business through our large and expanding customer base, as well as solid customer additions.

We expect to see an increase in growth of recurring revenue in the second half of 2014 due to this expansion from existing customers, as well as the addition of new customers, both direct and through new and existing partners, despite a higher mix of more complex deals impacting the timing of sales activity converting to revenue. Our confidence in this back-half growth is based first on our visibility into the business from our customer base, and second, on our expected rollout of new wins from prior quarters.

Longer term, we believe that the combination of a growing pipeline of opportunities, expansion in our global sales resources and rollout of our new and enhanced Matrix Connection Lifecycle Management suite, will position Tangoe to continue to gain market share.

With that background, let me review our summary level financial results for the second quarter. Total revenues increased 14% year-over-year to $52.7 million, and were in line with our guidance.

During the quarter, we continued to benefit from 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 high return on investment to our customers, and to offer innovative products that our customers and partners demand.

From a profitability perspective, we reported adjusted EBITDA of $8.4 million, representing an adjusted EBITDA margin of 15.9% and, non-GAAP EPS of $0.18 per share, both in line with our guidance.

Now I'd like to review some of our highlights and key accomplishments during the second quarter. To start, we increased total spend under management to $28.6 billion from $26 billion at the end of the second quarter of last year, and $28.1 billion at the end of last quarter. The 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 renewal rates that I just mentioned.

The growth rate of recurring revenue should continue to be higher than the growth rate of spend under management due to ongoing expansion within current customers and product mix.

We again experienced strong new customer activity, adding 45 new logos during the second quarter, driven by the combination of our direct sales efforts, as well as contribution from our strategic alliance partners. We are pleased to say that our new logos included 2 large 7-figure deals. The first with a global media company, and second with an international airline, both of which have approximately 6-month implementation timeframes.

I also wanted to highlight, as I have in the past, that our new logo performance doesn't include a number of smaller new logo customers that were added through our carrier channels, in order to be consistent with prior quarter new logos.

Our new customer add performance during the first 6 months of the year has consistently been above our target of 30 to 40 new customers per quarter. While this metric can vary based on the mix of business with new and existing customers during any given quarter, we believe our performance is reflecting the expansion in our sales resources and the ongoing market momentum.

During the quarter, we once again closed transactions with new and existing blue-chip customers such as BlackBerry, LinkedIn, GE, Amphenol, Morgan Stanley, Juniper, CareFusion, SunEdison, Adobe and Allegiant, among others. It is also important to remember that in each of the customer examples I just referenced, we believe that there remain additional opportunities to further expand our relationship as we continue to deliver value.

As a result, we expect the percentage of new annual recurring revenue booked with existing customers to increase in 2014 compared to last year, reflecting our ability to leverage our large and growing client base to cross-sell solutions.

By far, one of our most exciting events during the quarter was Tangoe's Global Summit, which focused on the concept of transformation and explored how technology is changing the way business is conducted. The summit featured our new Matrix platform, 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.

As a reminder, 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 and customers, through an advanced proprietary cloud-based architecture.

In addition to launching the Matrix suite at the end of last year, we continue to expect to release a number of additional Matrix components from now until the end of 2015. As we have mentioned in prior quarters, Matrix's advanced cloud-based architecture is designed to capitalize on many of the latest mobility trends, and is expected to result in approximately 30 software components and a number of bundled service components.

We expect that the software components we will 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.

New spend categories are planned in the areas of cloud application and infrastructure, IT assets and expenses, enterprise social communications management and machine-to-machine, referred to recently as the Internet of Things. We believe that these additional spend categories will create additional total addressable market opportunity for Tangoe over time, and allow us to capitalize on many of the current and expected trends in mobility.

During the second quarter, we added Tangoe's Cloud Advisory Service to our strategic consulting practice, which is designed to provide global enterprises the ability to assess and manage their cloud investments. As a key component of the company's upcoming MatrixCloud software solution, the Cloud Advisory Service is designed to provide organizations an objective assessment of their cloud environments, to help them make decisions around current and future investments, control costs and minimize risks.

The first version of MatrixCloud will be designed to provide organizations with a suite of comprehensive software modules and services to assist with the management of cloud contracts, licensing, expense and usage. We are planning future releases to add all aspects of these functions to enterprise cloud infrastructure.

In addition, we were very pleased that Tangoe's MatrixMobile was recognized as a leader in Forrester Research's Global BYOD Management Services report due to the solution's enhanced and ancillary services that focus on lifecycle management and optimization. We view this latest independent analysis as further confirmation of Tangoe's overall commitment to expansion in technology innovation, and positioning the company to further extend its product leadership position and fuel additional market share gains.

In regards to our strategic alliance channel partners, during the second quarter we continued to expand our business and closed a number of bundled deals across our entire suite of solutions. Specifically, during the quarter, we signed new resell partners, including a large carrier in Asia-Pac, a large India-based IT outsourcer and 2 small regional partners in the Middle East and the U.S.

During the second quarter, international spend was $7.1 billion, or approximately 25% of Tangoe's total $28.6 billion of spend under management, consistent with prior quarters.

In addition, we signed international-based deals with Wärtsilä, Munich Re, Air Liquide, all in EMEA; and AGL and Oreca in Asia-Pac, 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 momentum we are seeing on selling international-based logos globally and expanding strategic partnerships, which over time will add to international revenue.

Before I hand it over to Gary, I wanted to also mention that we are very proud to be positioned in the visionaries quadrant in Gartner's 2014 Magic Quadrant for Managed Mobility Services, otherwise known as MMS, based on the completeness of our vision and ability to execute, for the second consecutive year. We believe that this further confirms Tangoe's proven ability to provide organizations a comprehensive solution to manage the increasing complexities associated with mobile environments as the number of mobile devices and connection points expand across the enterprise.

So in summary, we are pleased with the company's execution during the second quarter. We remain optimistic about Tangoe's growth outlook, and are confident in our ability to continue growing market share due to our scale, integrated offering, global capabilities and commitment to innovation.

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

Gary R. Martino

Thanks, Al. Let me provide additional details on our second quarter performance, and then I will conclude with our outlook for the third quarter and the full year 2014.

And now turning to our second quarter results. Let me start with the P&L. Total revenue was $52.7 million, up 14% year-over-year and consistent with our guidance range. Recurring revenue was $47.1 million, up 14% year-over-year, while nonrecurring revenue represented the other $5.6 million of revenue for the second quarter, up from $5 million last year. As we have mentioned on previous earnings calls, our nonrecurring revenue can fluctuate from quarter-to-quarter.

And drilling down further into some of the drivers of revenue, we ended the quarter with $28.6 billion in spend under management, which is up compared to $26 billion at the end of the second quarter of 2013. As Al mentioned, we once again had a healthy new logo quarter with 45 new customers added during the second quarter.

In addition to winning new customers, we continue to see momentum in retaining and expanding existing customers, as our overall revenue retention rates remained above the 90% level during the second quarter.

And turning to expenses and profitability for the second quarter, our GAAP gross profit was $28.5 million versus $25.6 million from the same period during the previous year. Our GAAP operating income for the quarter was $200,000 compared to $800,000 during the second quarter of 2013. Our GAAP net loss per share was $0.01 for the second quarter of 2014 based on 38.7 million weighted average shares, compared to net income of $0.01 per share on 40.2 million fully diluted shares in the year-ago period.

Taking a look at our results on a non-GAAP basis, our second quarter gross margin percentage, which excludes stock-based compensation, was 56.3%, which is up from 56.2% in the same quarter last year. Non-GAAP operating income, which excludes stock-based compensation expense and the amortization of intangibles associated with acquisitions, among other things, was $7.8 million for the quarter, or 14.7% of revenue. Non-GAAP net income per share was $0.18 and in line with our guidance. Non-GAAP sales and marketing, which excludes stock-based compensation, represented 16.5% of revenue for the second quarter, which was up from 15.6% in the second quarter of 2013. This further reflects our focus on investing in sales and marketing to drive future growth.

As a result, our second quarter adjusted EBITDA was $8.4 million, up from $7.3 million during the same quarter last year, and in line with our guidance.

And now, if we turn to the balance sheet. We ended the quarter with $45.7 million in cash, down from $46.1 million at the end of the first quarter, due to the $2 million of common stock repurchase and reporting lower-than-expected free cash flow during the quarter.

During the second quarter, we generated $2.8 million in cash flow from operations, and $2 million in unlevered free cash flow, compared to $4.8 million and $4.1 million, respectively, in the second quarter of 2013.

As we have mentioned in the past, quarterly cash flow can have variability due to the number of moving parts, and our trend of strong and growing cash flow remains the same.

I'd like to now finish with some thoughts regarding our financial outlook, starting with the full year 2014. We are adjusting our total revenue range and expect revenues to be in the range of $217 million to $219 million, or growth of 15% to 16% year-over-year, compared to our previous guidance of $220 million to $224 million. While we are pleased with our execution during the first 6 months of the year, our updated revenue view is due primarily to the timing of some of our larger, more complex customer rollouts.

I think it's important to highlight that the updated full year guidance implies an increase in recurring revenue growth in Q3, and exiting the year at a growth rate of over 17% year-over-year.

As Al mentioned earlier, our confidence in our ability to increase recurring revenue in the second half of the year is based on our visibility into the business from our existing customer base and our expected rollout of new wins from prior quarters.

From a profitability perspective, we expect 2014 adjusted EBITDA of $35 million to $36 million, up approximately 20% year-over-year at the midpoint, and representing an annual adjusted EBITDA margin of 16.4% at the midpoint, and a 70 basis point 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 $0.73 to $0.75, based on approximately 41.4 million weighted average diluted shares outstanding, and a tax provision of approximately $2.1 million.

Finally, we expect free cash flow to be in the range of $21 million to $23 million for the full year 2014, compared to our previous guidance of $25 million to $27 million. This reflects the variability in working capital that I noted earlier, and our focus on achieving strong free cash flow during the second half of 2014.

In regards to the third quarter of 2014, total revenue for the third quarter is expected to be in the range of $55 million to $55.7 million, or growth of 16% at the midpoint year-over-year. Adjusted EBITDA is expected to be in the range of $9.1 million to $9.4 million, representing an adjusted EBITDA margin of approximately 16.7% at the midpoint.

Non-GAAP net income per share, which excludes stock-based compensation and amortization related to acquisitions, among other things, is expected to be in the range of $0.19 to $0.20 based on approximately 41.4 million weighted average diluted shares outstanding, and a tax provision of approximately $550,000.

So in summary, while we have made some adjustments to our guidance for the full year, we expect recurring revenue growth to increase in the second half of the year, while at the same time, continue to deliver attractive profit margins and cash flow.

Longer term, we believe the combination of recurring revenue momentum with existing customers, new logo growth, international expansion and continued momentum with strategic alliance partners positions Tangoe to gain market share globally.

With that, we'd be happy to take any of your questions, and I'll turn it over to the operator.

Question-and-Answer Session

Operator

[Operator Instructions] And first, we will go to Nandan Amladi with Deutsche Bank.

Nandan Amladi - Deutsche Bank AG, Research Division

Some of the delays that you discussed in deployments, which are causing this lag, I guess, in your recurring revenue growth. Are these caused by deployment capacity at your end? Or are they perhaps more customer-driven, where they're not ready to deploy quite yet?

Albert R. Subbloie

Nandan, it's Al. I'll talk through it. Hopefully, people can hear me. It's going away, which is good. Essentially, we are seeing a higher mix [indiscernible] for complex [indiscernible] if I gave you an example of some of our larger deals as an example, 7-figure deals that have much longer implementation timeframes [indiscernible] that would be less of a delay model and just a higher mix of more complex deals. Obviously, a positive element to that. While, as I have stated in the past, we could end up with some fluctuation based on the distance between a sale and a rollout. And that's really what we're seeing. It's less [indiscernible] last year for the fourth quarter.

Nandan Amladi - Deutsche Bank AG, Research Division

Yes, you're breaking up. I don't know if it's just me.

Albert R. Subbloie

This came on when we went to open up for the questions. I don't know if it's on Nandan's side or on the... Nandan were you able to hear the answer?

Nandan Amladi - Deutsche Bank AG, Research Division

No.

[Technical Difficulty]

Albert R. Subbloie

Okay. That seemed to work. So Nandan, appreciate the question. It's more -- we're seeing a higher mix of transactions that are just more complex on rollouts. I gave 2 examples of those in my -- when I spoke about the quarter, the 2 7-figure deals that have 6-month implementations that, obviously, if you look at the time of the year, will have a bigger impact next year certainly than this year. So we're just seeing a higher mix of transactions with just greater complexity right upfront, less of an issue of us having implementation capacity issues. I did want to remind everybody that was something we talked about a little less than a year ago. And that's less of the issue, more of just the mix of transactions we are seeing with greater complexity which, by the way, is not necessarily a bad thing.

Operator

And next we will go to Terry Tillman with Raymond James & Associates.

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

In terms of the full year rev guide lower, I mean, some of the deals in 2Q that you're signing, I wouldn't have thought that, that would have much impact, or a lot of impact for the full year anyway, could be more into '15 so. But maybe I'm wrong with that assumption, but I'm going to go with it until told otherwise. So if some of this business that you transacted late in '13, all the way through maybe the first quarter of '14, is some of that surprising you as you're rolling it out that it's taking longer? And if so, why? What are the issues? Are they requesting different things with the software? A little bit more color on that.

Albert R. Subbloie

Well, I mean, first of all, there is a difference in timing. Obviously, if you close a deal at the beginning of the second quarter versus the back end of the second quarter. So the timing within quarter at this point of the year does have some impact, obviously, towards the back end of the year. But I mean, in general, there's just a higher degree of complex deals. It's hard to actually know that going into the second quarter, but we see that trend happening more. And I think we expect that trend to generally continue. That said, I think we feel good about our performance out there. We feel good about our win rate across the board. So -- and we still, obviously, expect a higher growth rate, obviously, in Q3 and Q4 that we feel good about.

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

Okay. And I guess with the 2 7-figure deals that you transacted in the quarter. I guess for just comparison's sake, I know in the past you had a large Nokia deal, an SAP deal, as well. How often are you closing 7-figure transactions in a given quarter? Because you're calling out 2 in this quarter. I'm just trying to understand for comparative purposes, how that jibes with prior quarters and prior year activity.

Albert R. Subbloie

I think we're pretty pleased with having 2 in a quarter. That's not often that we have done 2 in a quarter. I can't remember back if we've had a quarter with 2. We've also had some quarters that we haven't had a 7-figure deal. I know most of the time, when we've had a 7-figure deal, we will usually call that out for folks. So it has not been every quarter. I -- it's been 1/2 to 3/4 of the quarters, I think, for the last several years that we've performed and done 7-figure deals. But having 2, we were pleased with that.

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

And Al, I know you definitely get involved in large sales cycles and strategic deals. I'm curious though, I mean, we've heard some vendors actually say some of the larger deals -- I mean, it's actually gone both ways. Sometimes it may be freeing up, and it's easier, but we've heard other vendors say that it's actually -- there's more sign-offs. There's more legal processes. What's it been like on these larger transactions? Does it feel like its a kind of normal course of business or do you see any kind of stagnation in some of the sale cycles for those larger complex transactions in terms of timing?

Albert R. Subbloie

As you know, Terry, I mean, I remain fairly close to activity. I don't feel it's much different than it's been over last several years. I do think, in general, the buying process has a lot of checkpoints in it. But I don't believe that's changed. And we -- we're good at being able to manage through that process. And you have multiple sign-offs. We also have security reviews that we go through. Now, since being public, we don't really go through financial reviews anymore. That step went away after being public. But I don't see it any different. I do see it pretty rigorous. I've always said that. I think I said it a couple of years ago. But I don't see it that it's change from what it was 3 -- 2 or 3 years ago.

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

Okay. And I know this question gets asked a lot. It has been in prior calls, and I guess I'll be the one to ask this time. And you did touch on it at your user conference. But in terms of thought process around M&A versus prioritizing organic growth, kind of can you balance the 2 and give us a sense on your appetite for M&A at this point? And I'll get back in the queue.

Albert R. Subbloie

Yes, thanks, Terry. No, we remain consistent with our view towards M&A, as we have been for probably, the last 1.5 years to 2 years. It's not a primary part of our strategy. Of course, I never rule it out as a possibility, but if you remember, upon going public, it was a primary part of our strategy, and we were quite active. We haven't done a material deal in approximately 2 years at this point. And again, it's not a primary part of our strategy. So we remain focused on organic growth, on our innovation around Matrix and our global expansion would be where our focus lies.

Operator

[Operator Instructions] We'll go to Tom Roderick with Stifel.

Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division

Al, I wanted to start with the first question to you, just talking about Matrix CLM. You mentioned a few of the newer modules that are going to be coming out in the coming months. But I wanted to talk about some of the modules that have been in the market since last winter. Maybe you could give us some details regarding what sort of customer adoption you've seen and transition to the new platform. And as you get customers to that new platform, what are the revenue opportunities attached to that upgrade cycle?

Albert R. Subbloie

Yes, Tom. Good question. I'm going to start out, I may take a minute to remind everybody the strategy with Matrix. We chose this strategy not to be a big bang, Matrix is available and everybody cuts to it. And it starts out with the concept of the Matrix portal, which is nothing more than an entry into the new architecture, of which we integrated to our current components. So it's a way to get into the current components. But once you get in through that portal, you begin to get access to some of the newer Matrix modules that come out as a current customer without having to migrate their core products that they're on today. That will happen in the future, but not today. So for example, by adding the MX Budgeting Forecast System, which is new, they get access to that. And that's been available now for just a couple of months. It's relatively new. Same thing with MX Benchmark and MX Insight. Insight is simply a new business intelligence product that allows you to do analytics with a much greater ability than you could do with our current product. Now, the current product supports that because it's now hooked up to the portal. So really, there's 3 components in Matrix: There's Insight, there's MX Forecast and MX Benchmark. The portal itself is simply a front end to that. So Tom, we have -- we're probably over 100 customers that are lined up with MX Portal that have access to Insight. Not Benchmark and Forecast, those are additional products that they would have to buy, as an example. And there's in the neighborhood, I'd say, of about 30 to 40 customers in the customer base that are actually beginning to use the MX Insight, which is analytics, today. Now you'll see new products come out. When MX Cloud comes out, that will be the first Matrix native, brand new from the ground floor up component on the architecture that does full asset management, expense management, auditing, allocations, integration to accounting. The full CLM lifecycle on MatrixCloud, which isn't that far off in the future. I don't want to give a date to it. We're aiming roughly within this year. That's going to be the first major component, Tom, which will have a nice price tag attached to it. So I wanted to explain that because I think there could have been confusion. We chose to do this as a total 2-year rollout, which right now we're about, let's call it, maybe 8 months into that rollout. We have about another year and 4 months left with the entire Matrix rollout. Did I answer that question and give you at least some metrics on some customers that are beginning to use it?

Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division

Yes. That's great detail. Gary, let me fire my second question at you. I think I heard you -- hopefully, I heard you correctly. But maybe you could clarify for me that the fourth quarter exit for recurring revenue, I think you're talking about greater than 17% revenue growth year-on-year. Is that right?

Gary R. Martino

Yes. I mean, I think the comment was generally about the revenue growth year-over-year. But as you know, because recurring is 90% of our revenue, that it more or less aligns with the revenue growth.

Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division

Got it. Okay. So it was a comment on total revenue growth, but understanding that recurring is aligned with that. So if I look at -- Q1 to Q2, it's about $1 million in absolute revenue -- recurring revenue increase. And to kind of get to that 17% mark, I think we'd need something in the ballpark of $4.5 million to $5 million in absolute level increase for that recurring level line. So in other words, a pretty sharp sequential pickup that, instead of gaining $1 million a quarter, we might have to gain $2 million to $2.5 million in any given quarter for Q3, Q4. Can you give us some sense as to what parameters are around that within your assumptions? In other words, do bookings need to continue to improve for that level to be hit? Or can you achieve that based upon the bookings you've put in the bank already? And if that number were to fall short of your 17% goal, what would be some of the ifs and buts of that, that could be sort of mitigating factors?

Gary R. Martino

So that was a multifaceted question. So obviously, a lot is packed into the question. But I'll start with the first piece, which is, obviously, to get to that kind of number in the fourth quarter, we would need nice increments in both Q3 and Q4 to basically move up from where we are right now to exit the year at that growth rate. So directionally, you're thinking about it the right way. Obviously, we don't get into specific guides on recurring or nonrecurring. But in general, you're thinking about it the right way. So that was, I think, the first part of your question. The next part, I think is something that we talked about, which was really a lot of our focus or understanding of the revenue ramp from the second half comes from -- and if we looked at it, we talked about customer elements that we're rolling out in the second half, which would bring additional revenue from current customers. We also talked about prior new logos rolling out in the second half. So, as you're aware, with our recurring model, while you can get some revenue impact from second half new sales, it obviously is not the material factor in the overall revenue ramp for the second half. So I think that's what you're interested in understanding.

Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division

Yes, no, that's very good. Last quick one for me is, it's a similar question, but on the vein of the cash flows. Looking for a really big jump in cash flows. So if we're at about $6 million in cash flow from ops in the first half and a free cash flow goal of $21 million to $23 million, are there any particular items you would call out? I mean, certainly, we saw a little bit of improvement on the deferred revenue line. Should that continue to be, or should that be a sharper driver of that increase in the second half? Or are there other elements that will really contribute to that second half jump? Because certainly, to get to $21 million to $23 million, you're going to need a big jump there.

Gary R. Martino

Yes, I mean, 2 things, we're not focused on a significant increase in deferred. I think, as you see in the first half, there was a nice increase or a modest increase, which is always -- we've always said that our deferred isn't going to have these very large or very significant increases from a business perspective. So while it might provide some, it's not going to necessarily drive the second half cash collections and cash forecasting. So it's really more driven from we've had a good level of buildup in the first half. As we've talked about in the past, it's not necessarily a specific quarterly thing, although based on where we are midyear, we expect Q3 and Q4 to be strong. And as evidence of that, July was a much stronger month from a cash perspective than April, for example. So it gives us some directional confidence that we continue to execute for the rest of the year, we can have a very strong second half.

Tom M. Roderick - Stifel, Nicolaus & Company, Incorporated, Research Division

Got it. Maybe more of a -- a bit of a more pointed question on that. The AR number was -- or I guess DSOs jumped a little bit this quarter. Is that one item that we ought to expect to reverse itself?

Gary R. Martino

Yes. I mean, I think -- and that's part of the sources, obviously, of collections, right? If you have that buildup, and we didn't necessarily collect maybe as much as we would have liked to in Q2. The flip side of that is it gives you the ability to collect more in the -- certainly, in Q3 and Q4, and kind of more normalize that AR growth for the year.

Operator

Moving on to Richard Baldry with Roth Capital Partners.

Richard K. Baldry - Roth Capital Partners, LLC, Research Division

You did significant hiring in the sales group for over the last 18 months. I wonder if you can go through and talk about your level of satisfaction with the sales productivity. The new customer logo has been in sort of the mid-40s for a couple of quarters. Do you see that sort of percolating to break through maybe in the second half and some of that productivity really start to kick in?

Albert R. Subbloie

Thanks, Rich. I'd like to -- my statements that I made, I want to talk a little bit further about that. We're actually seeing a higher mix than we thought out of the customer side of the business. And that's not against the new logos. We're happy about the new logos. I know that's a number that we disclose to everybody. But I did want to start to at least state that we expect the mix of business to move up to some degree on the customer up-sell side of the business. Part of the reason behind that is that we're really a portfolio -- we're moving to a portfolio sale to some degree, which is, obviously, what we've been trying to do for the last couple of years. I think that will continue to go up with Matrix. Matrix is a multi-point solution. And as we add spend categories going into 2015, we're going to see that trend continue, which again, is a positive. And we're pushing it in that direction. That said, from a sales force perspective, I think 6 months or a year ago, we were stating growing that sales force in general at a rate much higher than the, call it, long-term growth, organic growth rate on recurring revenue. I think right now, we're thinking on a move-forward basis is to grow that more in line with that organic growth rate and focus like a laser, again, on customer up-sell, alliance and new logo across the board. That's our strategy, Rich.

Operator

[Operator Instructions] Next we'll go to Neil Gagnon with Gagnon Securities.

Neil Joseph Gagnon - Gagnon Securities LLC

The 2 large deals that you mentioned, if they close late in the year, do I assume that they will have no revenue this year and that carries into next year?

Albert R. Subbloie

We closed those deals in the second quarter -- the larger deals. And with a 6-month implementation, they more than likely -- I mean, they'll definitely impact revenue in 2015. Unlikely, unless we're able to get that in, in a month or 2, they may have a little bit of impact into the second half of the year. And that's not always typical. We could do a deal with a 4-month implementation, et cetera, and you could have Q2 impact on Q4, as an example, maybe a little bit into Q3, but mostly Q4. In this case, I did want to give that example, they're large transactions. Both of them happen to have a longer tail on them. So timing-wise, I just wanted to give everybody a feel for that.

Operator

And we have no further questions in queue. I will now turn the conference back over to management for any additional or closing remarks.

Albert R. Subbloie

Great. Well, I just want to thank everybody for joining us on the call today, and we certainly look forward to addressing everybody at the end of the third quarter. Thank you.

Gary R. Martino

Thank you, everyone.

Operator

This does conclude today's conference. We do thank you all for your participation.

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Source: Tangoe's (TNGO) CEO Albert Subbloie on Q2 2014 Results - Earnings Call Transcript

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