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Datalink (NASDAQ:DTLK)

Q2 2012 Earnings Call

July 26, 2012 5:00 pm ET

Executives

Paul F. Lidsky - Chief Executive Officer, President, Director and Chairman of Merger & Acquisition Committee

Gregory T. Barnum - Chief Financial Officer, Vice President of Finance, Principal Accounting Officer and Secretary

Analysts

Shebly Seyrafi - FBN Securities, Inc., Research Division

Mark Kelleher - Dougherty & Company LLC, Research Division

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

Nick Halen - Sidoti & Company, LLC

Glenn Hanus - Needham & Company, LLC, Research Division

Operator

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Datalink Second Quarter Investor Call. [Operator Instructions]

Paul Lidsky, President and CEO of Datalink, you may begin your conference.

Paul F. Lidsky

Thank you, operator, and good afternoon, everyone. I'd like to welcome you to this afternoon's conference call, and thank you for joining us.

With me today is Greg Barnum, our Vice President of Finance and Chief Financial Officer. I'll now turn the call over to Greg to discuss our second quarter results, and then I will provide some additional perspectives on the quarter and our outlook for the third quarter of 2012.

Gregory T. Barnum

Thanks, Paul. But before we begin with the quarter results, let me first remind everyone that in today's conference call, we will be discussing our views regarding future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties. Actual future results and trends may differ materially from historical results or those anticipated, depending on a variety of factors. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of our new information, future developments or otherwise. I'd also remind you to please refer to our filings with the Securities and Exchange Commission for a full discussion of our company's risk factors.

Turning to the quarter end. Our revenues for the second quarter ended June 30, 2012 increased 34% to $120 million compared to $89.5 million for the prior year second quarter. Sequential results from Q1 to Q2 were flat, primarily because of lengthening sales cycles, as Paul will explain shortly. Our revenues for the 6 months ended June 30, 2012 increased 36% to $239.1 million compared to $175.2 million in the first 6 months of 2011.

On a GAAP basis, we reported net earnings of $3.2 million or $0.18 per share for the second quarter of 2012. This compares to net earnings of $2.2 million or $0.12 per share in the previous quarter and $2.7 million or $0.16 per share in the comparable quarter of 2011. For the first 6 months of 2012, we reported net earnings of $5.4 million or $0.31 per share, compared to net earnings of $4.4 million or $0.29 per share in the first 6 months of 2011.

The results for the first 2 quarters of 2012 include the results from operations from the acquisition of Midwave, which closed in October of 2011. And I'll remind everyone that since Midwave has been totally integrated into our operations, we are no longer able to accurately break out the contribution from this acquisition going forward.

For the rest of my comments on the income statement, I will be referring to non-GAAP amounts and percentages as reported in today's press release. A detailed reconciliation between GAAP and non-GAAP information is contained in the tables included in today's press release. I will remind you that the primary adjustments to GAAP results relate to stock-based compensation charges, the amortization of intangibles and integration and acquisition costs net of income tax.

So in the second quarter of 2012, our product revenues increased 37% to $77.3 million, and our service revenues increased 29% to $42.7 million compared to the second quarter of 2011. Within the service component of revenues, we saw customer support revenues increase 18% to $33.5 million, and professional services revenues doubled to $9.2 million, both are records for Datalink.

Revenue gains when compared to the first quarter were negligible, but for the first 6 months of 2012, we saw product revenues increase 40%, and service revenues increased 29%.

Our revenue mix for the quarter was 36% storage, 18% networking and servers, 8% software, 2% tape and 36% service. This mix represents a continual increase in our networking and server revenues, mainly driven by increased Cisco revenues from the second quarter of last year and from the first quarter of this year, when networking and servers comprised 14% and 16% of our total revenues, respectively.

Overall gross margin in the second quarter of 2012 was 23.4%, which is down from 24.3% in the second quarter of last year, however, up from 23% in the first quarter of this year. This year-over-year decrease is primarily due to the increase in our networking and server businesses, which historically have carried lower margins than storage. The uptick from the first quarter of this year is mainly due to product mix and a record level of professional services revenues, which carry our highest gross margin.

Operating income for the second quarter of 2012 was a record $6.8 million or 5.6% of revenue, compared to $4.9 million or 4.1% of revenue in the previous quarter. In addition, we saw a small decline in operating margin from the comparable quarter in 2011, when we had operating income of $5.3 million, which represented 5.9% of revenue. That slight decrease was mainly due to planned investments this year in infrastructure, including human resources, customer support and IT systems. For the 6 months, our operating income was a record $11.6 million or 4.9% of revenue, compared to $9.1 million or 5.2% in the first 6 months of last year.

Net earnings for the second quarter of 2012 were a record $4 million or $0.23 per share. This compares to net earnings of $2.9 million or $0.17 per share in the first quarter of 2012, or a 36% increase. For the 6-month period, we saw net earnings increase 25% to $6.9 million or $0.40 per share compared to $5.5 million or $0.36 per share in the first 6 months of last year.

During the quarter, we further strengthened our balance sheet. Our working capital position at the end of the quarter was $45.8 million compared to $41.6 million at the end of the first quarter. And our cash and investment balance at the end of June was $24.1 million, and our balance sheet remains debt-free.

And with that, let me now turn the call back over to Paul.

Paul F. Lidsky

Thanks, Greg. As you have just heard, Datalink's operating income as a percentage of revenues and earnings per share both increased quarter-over-quarter. This is in keeping with our projections and the strategies we have put in place to achieve them, including last October's acquisition of Midwave, the diversification of our product portfolio and the expansion of our services business. Notably, as Greg mentioned, we saw a record level of professional services revenues, which helped drive gross margins, as well as earnings gains over the previous quarter.

Our operating income for the second quarter of 2012 was a record $6.8 million or 5.6% of revenue, compared to $4.9 million or 4.1% of revenue in the previous quarter. These operating margins are consistent with the financial models we have shared with investors over the past 2 years.

Our favorable revenue mix and cost savings achieved through good management contributed to delivering our 13th consecutive quarter of non-GAAP net earnings and a 6% -- a $0.06 per share gain over the first quarter. Again, non-GAAP net earnings for the second quarter of 2012 were a record $4 million or $0.23 per share.

That's a 40% increase over the previous quarter and a 23% increase over the second quarter of 2011. These positive developments in operating income as a percentage of revenues and earnings during the second quarter occurred despite the fact that, as Greg indicated, our top line revenues were below our guidance for the quarter with very little change from Q1 to Q2.

Let me make several points about those revenue numbers. First, Datalink revenues increased 34% over the comparable quarter in 2011 and were up 36% for the first half of the year. We have made major gains because of the steps we have taken to expand and diversify our revenue stream.

Second, we are not seeing the cancellation of large projects that we experienced at the height of the recession nor a decrease in new projects in our pipeline. June was slower than expected, but orders picked up during the last week of the quarter. Sales cycles are lengthening because we are selling larger projects, in part because of our integrated data center strategy and because companies are requiring additional rounds of approval, given the current economic climate.

Third, our sales pipeline is strong and continuing to grow, with a 16% increase over the previous quarter in total value. This indicates that our customers are planning to spend even though they are scrutinizing large capital expenditures more carefully than in the past. The demand for a modernized data center infrastructure, including unified data centers and virtualization with all the associated business efficiency and agility benefits, has not abated. It is simply taking customers longer to complete their decisions.

Overall, our business remains healthy, our strategy is on course and we anticipate that revenue gains from the second quarter to the third quarter will be consistent with previous years.

The evolving change in our product mix continues to validate our move from our roots in selling siloed storage to providing entire data center infrastructures. As Greg mentioned, our networking and server revenues grew from 14% to 18% of total revenues between Q2 of 2011 and Q2 of 2012. That compares to a 9% of revenues coming from networking and server sales in Q1 of 2011. It shows a growing understanding in the marketplace that you gain efficiencies if you deploy newer technologies that integrate servers, storage, network and virtualized solutions.

Another bright spot, particularly from a profit perspective, is the rise in services from 33% to 36% of our total revenues from Q1 of 2012 to Q2 of 2012. Year-over-year, as the accompanying data shows, this translates into a doubling of Q2 revenues for professional services from $4.6 million to $9.2 million. The change is being driven by an increase in complex systems integration projects handled by our field engineering and consulting groups. We continue to work on our services strategy that we expect to increase these numbers along with higher gross margins associated with services. We expect to unfold additional new offerings over the next 4 quarters.

We also launched our new managed monitoring and managed backup services this quarter. These new offerings are part of our ongoing initiative to increase services revenues by adding new high touch programs designed to establish long-term customer relationships. We expect to announce the first contract in our new managed services portfolio shortly.

Part of the change in our product and services mix continues to involve unified or virtual data centers, or VDC for short, that are the key components of our growth strategy. These newer data center infrastructures unify network-computed storage platforms to help businesses achieve greater agility and efficiency while also taking advantage of cloud and virtualization technologies. They are marketed under brand names including FlexPod by NetApp with Cisco and VMware and VBlock and VCE by EMC with Cisco and VMware.

Our VDC business continued to grow in the second quarter. We closed 24 VDC sales valued at $21.7 million, up from 17 deals worth $16.6 million in the previous quarter. Many of these sales have included our OneCall unified support service, which streamlines problem resolution by providing a single support contact and support organization for these multiple vendor systems.

During the quarter, we also achieved 2 significant milestones related to VDCs or virtual data centers: first, we became the first North American channel partner to achieve a new FlexPod premium partner designation from Cisco and NetApp, based on our advanced competencies and providing solutions in the services supporting FlexPod architectures. Second, we became one of the first partners certified to sell, design, deploy, integrate and support EMC's new VSPEX reference data center architecture.

With the addition of VSPEX to our portfolio, we have extended our ability to customize unified data centers to meet the requirements of each particular customer. This is a key market strength for Datalink and -- that builds on the VDC expertise and integration capabilities we have been developing over the past several years to support the market shift towards this new data center model.

As a final note, before we discuss guidance, I want to mention that both our Cisco and EMC partnerships are playing an important role in executing our data center strategy and expanding our overall business. As you may remember, both of these partnerships are relatively new to Datalink.

In the case of Cisco, as we have discussed before, one of the big drivers is the Cisco Unified Computing or UCS system, which in simple terms is a plumbing of a modern data center. It's important because it reduces server, cabling, power, cooling and management needs through strategies like virtualization. Our second quarter Cisco revenues were up 11% over the previous quarter, and we expect a continued steady growth with this product offering and the remainder of our Cisco product line.

In the case of EMC, which is an even newer addition to our solutions portfolio, the partnership we established in August 2011 adds to the storage options we can offer our customers to best fit their technology environments. It also gives us access to clustered storage and Deduplication solutions offered by EMC divisions, Isilon Systems and Data Domain. Our second quarter EMC revenues were up 66% over the previous quarter, and we expect continued growth in this area.

Now let's look at what we expect for the third quarter of 2012. I've already discussed the elongated sales cycles that we experienced in Q2. We believe this phenomenon will continue for the remainder of this fiscal year. On the other hand, as I've also discussed, we have a strong growing sales pipeline. These 2 factors, combined with our backlog, are shaping our guidance.

Looking out to the third quarter of 2012, based on our backlog, current sales pipeline, current customer spending patterns, we expect reported revenues of between $117 million and $122 million for the upcoming quarter. This represents a 30% to 35% increase over revenues of $90.2 million in the third quarter of 2011, and is comparable to our typical second to third quarter trends. We expect third quarter 2012 net earnings to be between $0.16 and $0.21 per share on a GAAP basis and between $0.20 and $0.25 per share on a non-GAAP basis. We remain confident in our commitment to integrated data centers as the market continues to embrace the advanced capabilities of these new technologies.

With that, I'll turn the call back to the operator so that we can take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Shebly Seyrafi of FBN Securities.

Shebly Seyrafi - FBN Securities, Inc., Research Division

Paul and Greg, so you mentioned that the last week of June, you saw a stabilization or improvement. Can you talk about what happened since then? And we already have 3 or 4 weeks of July, did it steadily improve thereafter or you just more likely you saw the last week of June?

Gregory T. Barnum

It wasn't as strong as the last week of June, it was more of a traditional July. And so we're not -- we didn't see the strength in the second -- first, second and third week of July that we saw in the last week of June. It was more of our traditional early July.

Shebly Seyrafi - FBN Securities, Inc., Research Division

They're just normally weak, seasonally weaker and then it picks up toward the end. Okay. Also, I went through the components here. It looks like your storage segment declined more sequentially than, say, services and software, et cetera. So how broad is the weakness that you saw in storage? With respect to your customer base, is it more concentrated or are you seeing it across the board? Just talk about that.

Gregory T. Barnum

I think that the storage, like the remainder of the other components and the sale, I think we didn't so much -- what we saw is a decline that was caused by the longer sales cycles, which artificially create changes in the numbers. Given the amount of projects in the pipeline and the amount of work that the field teams are doing, those things don't suggest that there's a general decline in the interest in acquiring new storage platforms. And we don't expect that to see a decline in interest as we move through the quarters. We're simply seeing, I think, the effects of different approval cycles within our customers.

Shebly Seyrafi - FBN Securities, Inc., Research Division

Okay. And your gross margin came in better than I was modeling. I'm wondering, do you expect gross margins to not decline going forward, maybe even move higher as you undertake or manage the costs a little bit better?

Paul F. Lidsky

No, I think the gross margins will trend down. What we saw in the second quarter was a very strong professional service business. We're not projecting that, that kind -- it was 7.7% of our total revenue. It's always been around 6.8%, 6.9%, 6.5% even. And so that's what -- was the big -- that had the biggest impact on the overall gross margin. So I think gross margins will return more to third quarter -- first quarter, fourth quarter type level.

Shebly Seyrafi - FBN Securities, Inc., Research Division

Okay. And also, traditionally in the fourth quarter, you're usually up around 20% or so sequentially. Is there a reason why it might be different this time or -- just talk to that.

Gregory T. Barnum

At this point in time, I don't see any reason why we wouldn't see the traditional fourth quarter budget flush based off our third quarter numbers guidance that we're giving. I don't. Paul, do you see any reason why that wouldn't occur.

Paul F. Lidsky

Not at this time, no. That's been typical in most every year. And assuming that activity levels stay as they are, there'd be no reason to believe that fourth quarter wouldn't be very similar from a trending perspective.

Shebly Seyrafi - FBN Securities, Inc., Research Division

And just 2 more. Your OpEx, you managed that pretty well at 21.3%, it was down sequentially. Should we think about over the next few quarters, it staying around 21% to 22% or could it move above 23% at some point over the next few quarters?

Paul F. Lidsky

Well, what will happen in the third quarter is our operating expenses will actually go down as much as $600,000 to $700,000. And then I think that would fairly well hold steady for the fourth quarter, down slightly -- I mean, it will hold steady for the fourth quarter except for the growth in commission expense as we sell more product in the fourth quarter. But in the second quarter, we have higher expenses than we do in the third quarter because we have sales clubs, more people are into FICA and 401k match, those types of things.

Shebly Seyrafi - FBN Securities, Inc., Research Division

Okay. And last one for me is your free cash flow expectations going forward. It did go negative, apparently. I'm calculating negative $2.8 million from positive $4.4 million in Q1. How do you think your free cash flow trends over the next few quarters?

Gregory T. Barnum

Well, what we saw was so much business in the last week that we weren't able to collect that revenue, obviously. So I think assuming we had a more traditionally loaded third quarter, I think it'll trend back positive based on the net income from the third quarter at least.

Operator

Your next question is from the line of Mark Kelleher of Dougherty & Company.

Mark Kelleher - Dougherty & Company LLC, Research Division

Is there any particular vertical that you were seeing the extended sales cycles or was it across all verticals?

Gregory T. Barnum

I would say that it was generally across all verticals. As you know, we don't have a specific vertical team that goes after certain vertical markets. We use sort of a horizontal approach that cuts across the verticals. So we see many verticals except for the verticals we don't participate in, which is federal. We don't do the really big banks. But I would tell you that the general elongation of sales cycles was seen in all of the verticals that we participate in.

Mark Kelleher - Dougherty & Company LLC, Research Division

And I think you said it was across all products as well? It wasn't necessarily the VDCs, it was everything.

Paul F. Lidsky

Yes, I think it was more about data center infrastructure decisions. It certainly was not about, let's delay 1 product or 1 type of product for another. We did not see that. We saw -- because most of the solutions we sell are tightly integrated, so customers are really not picking and choosing, well, let's buy Cisco today and we'll do storage tomorrow. They're -- basically, what we just saw is that there were more rounds of approval within the final decision cycles, and that related basically to the business as a whole.

Mark Kelleher - Dougherty & Company LLC, Research Division

Okay. And I know you're not breaking out Midwave. But is there a way to get sort of an organic year-over-year growth rate? Maybe just a rough feel for that?

Gregory T. Barnum

No, there really isn't. I guess if you would look at what Midwave did a year ago or something. But I -- it's just a gut feel that without it, you'd still be in the high teens to low 20s. But that's just a guess, Mark. We're sharing accounts now. We've reassigned accounts. We're sharing engineers. It's just impossible to sort it out anymore.

Operator

Your next question comes from the line of Ryan Bergan of Craig-Hallum Capital.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

You talked about some new offerings you expect over the next 4 quarters. I was wondering if you can give some details on what that might be and perhaps any more specific detail on when you expect those to rollout?

Paul F. Lidsky

The new offerings have to do with our managed backup, managed monitoring and system administration offerings within our managed services group. I think that the earliest release of some of these new programs will be mid to late Q3, and there'll be some released in Q4.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

Okay. And speaking of kind of, you've already talked about the release of the managed monitoring service, the managed backup service. You talked about, I think it was about the managed monitoring service, announcing your first contract soon. What's been the reaction of customers and kind of is it what you've expected? Have you seen anything better than you expected as far as conversations you've had with customers?

Paul F. Lidsky

I would say that there's been a significant interest level among customers in the managed backup and monitoring offerings that we have taken to the market so far. I would say that what we've discovered is, those customers who have a strong reason to be concerned about the quality of their backups for, usually, compliance reasons are very interested in outsourcing to us their backup systems. So that becomes, sort of the, if anything, the -- one of the primary lessons learned is that the best prospect is one who has a compliance requirement for the quality of backups. So we have learned that. And we've signed some customers or as I said in previous -- previously, we'll -- we're getting close to making an announcement on a very important customer in the managed backup space, and we'll talk more about it then. But I would tell you that, that's what we see. And customers have been very receptive to us offering the services because we have the 24/7 customer support center, so they know that we have the infrastructure to look after their systems 24/7. And for most of our customers who we talk to, they also have OneCall support on any number of their products, so they're used to dealing with us, and that certainly helps to drive home the value proposition.

Ryan R. Bergan - Craig-Hallum Capital Group LLC, Research Division

Okay. And last one for me is, I wanted to get your thoughts on VMware's acquisition of Nicira, getting into the SDN market. What impact does that bring to Datalink, what opportunities does it have for you? You kind of highlighted your tight integration with Cisco and how that's increasing, but I'm wondering if -- do you see -- what's the ability of VMware to continue to play nicely with Cisco and what upside or downside it -- could that provide to Datalink over the long term?

Paul F. Lidsky

Well, I think that VMware's ability to play nicely with Cisco is something we would expect to continue. But when you think about the tight integration that Cisco has with NetApp and that Cisco has with EMC, and VMware is in the middle of all of that, it's unlikely that, that's going to come apart anytime soon. And there's none of us in the industry who are expecting that to happen at least in the short term. I can't speak for the longer-term. Myself, as well as many other people in the industry, I was just with senior executives from NetApp just yesterday, all of us are studying this latest acquisition and waiting for some comments from VMware and others as to what it can possibly mean to us and what it may mean to long-term relationships. And I don't think that any of us will have a really good bead on that until later in this quarter.

Operator

Your next question comes from the line of Nick Halen of Sidoti.

Nick Halen - Sidoti & Company, LLC

So the majority of what I had has actually been asked already, but just a quick follow-up. I know it's only been a quarter or so, in terms of the prolonged sales cycles as you guys mentioned. But I was just wondering if you could give us kind of I guess, I don't know, maybe your best estimate as -- about how long sales cycle has been extended. I mean, are we talking 3 months? 6 months? Something like that?

Paul F. Lidsky

I would say that on the short end, I would say that about 30 to 45 days. I think that's been about our experience. And we had a couple that extended, I would say, 60 days. We're not seeing "come and see me in 6 months" kind of thing. What's happened is that the deals are being approved, and then when they end up in the CFO's office or CEO's office, there is typically another round of "tell me again why we need to do this." So what happens is, is that the IT organizations work with us on some additional sets of justification. Those go back up to the CXOs, and then the order comes out. So I would gauge that somewhere between 30 and 45 days has been the average delay that we have seen and not much longer than that at this point.

Nick Halen - Sidoti & Company, LLC

Okay. And now, just in terms of the acquisition pipeline. I know you guys have spoken a lot about in the past. I'm just wondering if you've seen any changes in the pipeline in terms of valuations and things like that.

Gregory T. Barnum

No. I think we're still at that point now where they've gone up on us. I think it'll be interesting over the next couple quarters to see if they start to come down again. But no, as of right now, we've not seen any change. But they have gone up during the first half of this year.

Operator

Your next question comes from the line of Glenn Hanus of Needham & Company.

Glenn Hanus - Needham & Company, LLC, Research Division

I wondered if you could just add a little bit more color commentary in your conversations with customers. I understand what you just said about another round of approvals. What are customers attributing the additional approvals? Anything noteworthy there besides they're kind of being a little bit nervous reading the papers, et cetera? Any more just feedback from customers about what's sort of driving their delays and stuff?

Paul F. Lidsky

What I'm hearing when I weighed into different deals that have delayed for this reason is that the majority of times when I can speak with one of the CXO, what I'm just told is that the general concern over the economy is -- and most of our customers are U.S.-based customers, so they're reacting to sort of the trickle-down impact of the global economy. But most of them are simply saying that out of an abundance of caution, "While we budgeted for these capital expenditures early in the year, we just want a chance to make sure that we are spending our money wisely, so we are asking for more justification." I think certainly, there's been a lot of reports that CFOs are taking a hard look at how to hold on to their cash even with low interest rates, but to really, cash -- they accumulate cash rather than spend it. The good news for us is that they continue to spend it. They're just asking more questions. And I think that's an important distinction at this point in time is that they're not saying no. In fact, I'm quickly thinking through my head of a deal that we lost because the financing was canceled, and I really can't think of one. I think they're just simply saying, "Tell me again 1 more time why we're spending $1 million or $2 million, just explain it to me again." And that's what takes the extra time. And when I ask, "Did you learn anything new from this?" Oftentimes, the very answer that I get is "No, we just felt better about the decision."

Glenn Hanus - Needham & Company, LLC, Research Division

Okay. Yes, and then for the fourth quarter, it sounds like your answer to the first question there indicated you feel like there's a normal budget flush coming. People still have these budgets set for the year, and -- I don't want to put words in your mouth, but you still feel like basically the budgets will get spent.

Paul F. Lidsky

At this time, given what we see and given the influx of new projects into the pipeline that have Q4 dates on them, I would say, yes, we would expect a normal budget flush and a fourth quarter trend on top of whatever we report our Q3 number's on, pretty much in line with past years.

Glenn Hanus - Needham & Company, LLC, Research Division

What are you thinking about in terms of your headcount expansion for the year? And have -- has this impacted your plans for headcount expansion at all?

Paul F. Lidsky

I think that headcount expansion in non-field positions is pretty much at a standstill. But I suspect that field positions, especially account execs and field engineers, that we are looking to add approximately 5 to 10 AEs and probably half a dozen field engineers sometime between now and the end of the year, based on what we see today as part of a growth engine for 2013. And with our -- what I was going to say, with our expanded portfolio, products and services, what we're also finding is that our -- we've increased our AE productivity substantially over the past year. But there is a point where an account team is working as hard as an account team can work, and the next bit of growth comes from an additional account team. So that's what we're looking at right now.

Glenn Hanus - Needham & Company, LLC, Research Division

Right. So the sort of capacity utilization of your field force has gone up where you don't have sort of lots of extra capacity in effect, and so therefore, you want to keep adding so you have growth next year, is that how to think about it?

Paul F. Lidsky

Yes, I would tell you that we have plenty of capacity for the remainder of this year. And I would hazard to say that we have capacity for Q1 of next year. I think though, given the length of a normal sales cycle, even without the elongated approvals, there's a point in time where you want to add in some more capacity because the downstream effect won't be felt for a couple of quarters. But we certainly haven't run out of capacity. It's more of a long-term view of things. And again, based on the economy and the sales cycles we see, and I would tell you that the hiring -- there is no plan that says there has to be 10 of these and 6 of those, it is a general view of what we think can happen. I would tell you that the hiring is very pinpoint specific to different cities and different circumstances. So we're only hiring where we see that customers are continuing to buy in great amounts and where we might be understaffed in that market to begin with. So it's very surgical in its approach. It's not just, "Hey, let's get 10 more people."

Glenn Hanus - Needham & Company, LLC, Research Division

Sure. And this hiring plan, has this changed at all over the last 3 months in light of the slowdown?

Paul F. Lidsky

I would tell you that over the past 3 months, 4 months, we've held our hiring steady. And as we saw the pipeline fill up with new projects, which was an indicator for us, we began to then look at, "All right, when do we start to bring on some additional capacity?" Had we not seen the pipeline filling up with new opportunities, we would have given that a different thought. So we do use the size of our pipeline and the conversations with our OEM partners, discussions with our customers to gauge just how much work is likely going to be out there. And I can't tell you that it's scientific, but it's based on a lot of years of experience. So up until just recently and up until today, we've been holding our field team headcount at a stable rate and are just now beginning to answer the question about going forward to look at some hires as we head into the fourth quarter. And again, that's -- it's something that we can start and stop or start and continue at our discretion. There are no set rules as to how fast we move and how many. So we work our way through it based on how we feel about the business.

Glenn Hanus - Needham & Company, LLC, Research Division

And are there any noteworthy results of this that you're seeing in terms of the competitive landscape or pricing?

Paul F. Lidsky

Well, I think the landscape is extremely competitive. And the OEMs themselves are more than willing to discount heavily to win business. I think one of the things that's helped us also is that by expanding our product portfolio to include companies like EMC. There are times when we would have competed against them because they simply were not a partner, especially around Deduplication with their data demand products, where we would end up sometimes winning with another Deduplication product. But after the battle was over, EMC and their pricing left us with very little margin even though we won the deal. And NetApp does this and Cisco does this, they all do that. So what we found is that by having a little bit broader portfolio, oftentimes we are not fighting as hard as we were before and our margins are reflecting that. We've also added some wallet share opportunity because we have a lot of customers who, in the EMC case, have both EMC and, say, NetApp on their floor. And what we're beginning to see is customers looking at us saying, "Hey, I'm glad you decided to do EMC because I have questions about where to put this application or this type of architecture. Now, I'm comfortable asking you because you represent both." And so, I think that, that also helps alleviate some margin pressure because you're not fighting against 1 manufacturer and the next. And it gives us some additional wallet share expansion within our customers. But it's certainly a very competitive marketplace, there's no question.

Operator

[Operator Instructions] Your next question is from the line of George Bassford [ph], a private investor.

Unknown Attendee

Question regarding your deferred sales revenue, which climbed apparently in the past 6 months to $42.8 million range from $34.7 million. How do you sense that going in the future? Can that accelerate as you're moving forward or do you sense that it'll still be a slow uprise on deferred revenue stream?

Paul F. Lidsky

Well, there are 2 components on the balance sheet on deferred: there's current and long-term. And I think what you're referring to is the long-term revenue.

Unknown Attendee

Yes.

Paul F. Lidsky

But the answer to your question is, if you add those 2 together -- the long-term, the $42 million you're talking about is the question of whether we're going to sign more 3-year contracts or 1-year contracts. In total, if you add them together, we would expect our maintenance business to continue to grow as we sell more product every quarter and our install base increases. So it's a good sign if you compare June this year to June last year. So don't compare sequential necessary, but compare year-over-year. It should be growing. If not, it means our maintenance business is shrinking.

Unknown Attendee

All right. And then, how do you look at the overview for your company going forward? You've made an acquisition or 2 along the way, and you've got no long-term debt. You've got a reasonable cash position. Do you sense that you'll be looking -- when you talk about capacity needing to maybe be looked at more serious into 2013, do you see strategically the strategy to look toward another acquisition in your area of business or diversify, broaden it by way of acquisition?

Paul F. Lidsky

Well, I think that we have said on past calls and as we talk with investors that a big part of our growth strategy is continued acquisition. And that we'd like to do 1 every 12 to 18 months, assuming that the right opportunities are in front of us. So yes, we think that strong organic growth coupled with appropriate acquisitions is the combination, best way for us to continue to grow the company. A good acquisition gives us immediate increase in capacity. And -- but typically, it gives us that capacity in a market where we don't have a strong presence. We likely have some presence, but we don't own the market. And so, doing an acquisition gives us sales and engineering capacity, but evenly -- but as important, it also gives us access to a whole new set of customers that we can take our expanded portfolio to, and that creates positive synergies over time.

Unknown Attendee

I see, okay. What's your -- in terms of your employment situation, what percentage of employment is associated on the high-tech engineering area relative to manufacturing and sales on the other side?

Gregory T. Barnum

Well, we're a Value Added Reseller, so we have 0 people in manufacturing. But our engineering staff, including the field and corporate, is about 170 out of our 380 employees. And then, sales represents about 70 out of our 380 employees. So we're very skewed towards technical expertise here.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Paul F. Lidsky

All right. Well, I'd like to thank all of you for joining us today. We look forward to talking to you again in another quarter. Have a good afternoon. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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