Tangoe's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Nov. 6.12 | About: Tangoe (TNGO)

Tangoe, Inc. (NASDAQ:TNGO)

Q3 2012 Earnings Call

November 6, 2012 05:00 pm ET

Executives

Albert Subbloie Jr. – Chief Executive Officer

Gary Martino – Chief Financial Officer

Analysts

Tom Ernst – Deutsche Bank

Tom Roderick – Stifel Nicolaus

Terry Tillman – Raymond James

Richard Baldry – Wunderlich Securities

Operator

Good afternoon. My name is Erin and I will be your conference operator today. At this time, I would like to welcome everyone to the Tangoe’s Third Quarter 2012 Earnings Conference Call. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

Now I’d now like to turn the call over to Gary Martino, Chief Financial Officer. Please go ahead sir.

Gary Martino

Thank you. Good afternoon and welcome to the Tangoe’s third quarter 2012 earnings call. We’ll 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 maybe 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 discussion of material risks and other important factors that could affect our results, please refer to those contained that our most recent quarterly report on Form 10-Q which is on file with the SEC.

Also during today’s call, we’ll refer to certain non-GAAP financial measures. There is 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’ll come back a bit later to provide some further details regarding our financials and our forward-looking outlook. Al?

Albert Subbloie Jr.

Thanks Gary. I’d like to thank everyone for joining us on the call today. We’re very pleased with our company’s continued high level of execution, which led the strong third quarter results that again exceeded our expectations across each of our key operating metrics.

Tangoe continues to expand it’s market share leadership through the combination of new account wins, expansion with existing customers, traction with our strategic alliance partners and solid execution of our M&A strategy. Taking a look at our results for the third quarter, we continued to see strong demand for our Communications Lifecycle Management solutions, as total revenues increased 47% to $40.1 million, with our recurring revenue growing 48% year-over-year. Some of key enablers of our strong recurring revenue were the expansion in our sales resources, the strengthening of our market leadership position and our high renewal rates, which remained in the mid-90% range.

Our strong renewal rates continue to be driven by our ability to deliver a significant ROI to our customers and to offer innovative products that our customers and partners demand.

From a profitability perspective, adjusted EBITDA increased 82% year-over-year to $6 million. In addition, strong cash flows from operations contributed to un-levered free cash flow growth of 157% on a year-over-year basis and an un-levered free cash flow margin of 14%.

Now, I’d like to provide an update on some of our key accomplishments during the third quarter. We increased total spend under management to $22.6 billion during the third quarter, which was up 48% year-over-year. The strong growth of our spend under management was driven by a combination of moving deployments into production with both new and existing customers, the acquisition of Symphony TEM business and the high renewal rates I just referenced.

The momentum in Q3 was also due to the growing awareness of Tangoe’s ability to deliver a compelling return on investment and value proposition for our customers, evidenced by the attendance and excitement from Tangoe’s user conference in Orlando a few weeks ago, where we had a great reception to our long-term product roadmap.

Among the highlights of the conference, we announced matrix CLM our next generation Communications Lifecycle Management solution suite which we plan to fulfill through a series of incremental and integrated product releases over the next several years as part of our expanded innovation program moving forward. It is expected to be purpose bill to embrace the latest trends impacting large enterprises including the mobile device revolution including Tablets and smart devices, new alternative expense models like bring your own device, hybrid liability and pay as you go, IT Cloud services of lifecycle management, increase use of social networks in the enterprise, shipping complex global carrier dynamics and support for SIM enabled devices or machine to machine rapidly entering every facet of our lives at work and at home.

We expect the strategic technology vision will lead to innovations in Tangoe’s technology that range from incremental technology enhancements in most of our planned releases moving forward to new integrated add-on products. In doing so, we will remain true to Tangoe’s legacy of helping our customers drive cost savings while gaining visibility and control over their communication assets.

We also intend to expand support for security, policy, individual productivity and predicted analytics associated with all types of individual communications transactions. We believe that our core technology components combined with our strategic acquisitions provide the foundation for Tangoe to execute this exciting vision.

User and partner feedback about matrix CLM has been strongly supportive, indicating alignment with our customer’s future needs. We believe our vision will further extend Tangoe’s product leadership position and fill additional market share gains.

During the third quarter, we again experience strong new customer activity adding 34 new logos from the combination of our direct sales efforts as well as contribution from our strategic alliance partners. Our customer adds performance during the first nine months of the year has been above our target of 20 to 30 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 the expansion in our sales resources and market momentum warrants an increase in our quarterly customer add target range to 25 to 35 new logos per quarter.

We had 30 sales reps at the time of our ITO last July and we’ve expanded our sales force by approximately 60% since that time. As we look ahead, we plan on increasing our direct sales force by approximately 50% between now and mid 2013 based on the high level of demand we are seeing from large global organizations.

During the quarter, we close transactions with new and existing blue chip customers such as the American Cancer Society, Baker Hughes, Chub, Clarion, CoreLogic, Eli Lilly, Office Depot and ThyssenKrupp among others.

We are also very excited today to announce that we signed a global multiyear multimillion dollar deal with SAP for both fixed and mobile CLM during Q3. SAP was originally a US fixed 10 customer of one of our previously acquired companies that we migrated on to our platform over the course of past 18 months.

While we don’t anticipate any material amount of revenues being recognized until next year, due to the face role out schedule, we do believe that this deal highlights the value of Tangoe’s suite of integrated CLM solutions and the up sell opportunity that exists with many of the large global enterprise customers that we’ve gained from acquired companies.

In addition to SAP, we closed several other customer up sell deals from our acquired base, including Unisys, New York City Housing Authority and AmerisourceBergen. As we’ve shared in the past, it isn’t until after we have completed the migration process over to Tangoe’s platform that we typically begin our up sell cross sell efforts as that is the point in time where customers can really benefit from our broad integrated suite of solutions.

During the third quarter, we also continue to make progress on customer migrations from profit line over to Tangoe’s CLM platform. This is proceeding according to plan and we continue to expect that we will complete the migration process over the course of 2013.

As we have discussed in the past, there is a lot of heavy lifting upfront associated with the migration process but it is an important step in setting the foundation for Tangoe to expand our customer relationships down the road, similar to the SAP and other up sell deals I just mentioned.

In regard to the international opportunity, we have accelerated the process of expanding our global foot print which represented approximately $5.5 billion or 24% of Tangoe’s total $22.6 billion has spend under management. I think it’s important to highlight that our presence in EMEA with instrumental in winning the SAP deal I mentioned earlier.

During Q3, we also added several new logos outside the US and EMEA including Siemens which was our first direct deal sold by our recently hired sales team in Asia-Pacific. The previously discussed addition of Symphony TEM which was one of the largest independent providers of TEM Solutions outside of Tangoe were helped to further expand our global operational presence in Asia-Pacific once fully integrated over the next 12 to 18 months.

We also currently planned to add direct sales resources in Latin America by the end of the first quarter of 2013 in order to expand our presence in that region. As we have stated in the past, our M&A strategy has always been to focus on opportunities that can improve our scale expand our global reach or add a complimentary technology to our platform. We shared over the course of this past quarter that we would plan to slow our pace of acquisitions for at least the near term. We feel very good about what we’ve been able to accomplish with respect to our acquisition strategy since we have gone public.

Over this period of time, we’ve increased our penetration into the $425 billion annual telecommunication spend that we estimate is available in our target market. From $14.5 billion under management which represented a market penetration up 3.4% when Tangoe went public, through a presence spend under management of $22.6 billion which represent a market penetration of 5.3%. This is a market share increase of 56%.

We believe that we have a strong global lead and good momentum in the market place but we are now focused on leveraging our greater scale, continuing our market share gains with new customers through organic expansion of our sales and marketing teams and driving significant growth from our greatly expanded customer base as we complete their migration processes.

An important component of our overall growth strategy is to continue gaining traction with our strategic alliance channel partners. We had a notable strong quarter with IBM in Q3 and we are very pleased to see our joint pipeline continue to build as we closed a few large long-term five plus year deals through IBM with Fortune 500 companies during the quarter. We do these deals as evidenced that IBM continues to be Tangoe as an important partner. Our partner channel is not reliant on any one partner though.

Over the course of the last 12 to 24 months, we have established strong relationships with AT&T, HP, Dell and Xerox all of which continue to make solid contributions as distribution and implementation partners for Tangoe.

As a reminder, we significantly strengthened our relationship with AT&T due to the strategic alliance we announced on our Q2 earnings call. Our relationship with AT&T as well as HP strengthened through our acquisition of Symphony’s TEM business.

Finally, I’d like to take a few minutes to highlight our progress in capitalizing on the mobile device revolution. Tangoe continues to be the only provider that is recognized as a market leader in Telecom Expense Management as well as Mobile Device Management and Real Time Expense Management or tram, which is an important component in the elimination of Bill Shock or the unexpected receipt of large mobile services bills for individuals and organizations of all sizes.

We continue to be pleased with the traction we’re having with rTEM and our ability to leverage the technology into complimentary markets, evidenced by our recently introduced FamZee product focused on managing of family’s mobile activity.

While MDM and rTEM represent 110% of our revenue today, they represent attractive long-term upside considering the explosive growth in connected devices Smartphone and Tablet adoption. We’ve had ongoing success selling our MDM and rTEM solutions as the bundle with our mobile and fixed TEM offerings further evidenced that one of our key strength is the fact that we’re the only provider to offer a complete integrated solution for enterprises.

During the third quarter, we announced that our MDM solution added support for Apple’s IOS6 devices including the iPhone 5. In addition, we recently announced the newest version of our MDM suite which includes security and policy enforcement, mobile application management, the tier enterprise content management and integration with our rTEM portal all via a centralized and redesigned user interface.

So in summary, we are very pleased with our third quarter results and our ability to once again exceed our expectations across all of our key metrics. Our high level of execution combined with momentum in the CLM market continue to drive strong performance from the revenue and profitability perspective. We’re optimistic about Tangoe’s growth outlook and our confident and our ability to continue growth market share due to our scale integrated offering and global capabilities.

In addition to again increasing our expectations for 2012, we are also initiating 2013 guidance which calls for solid revenue growth and continued margin expansion. Based on the combination of our momentum and business model that provides us with a very high level of visibility into our future financial performance.

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

Gary Martino

Thanks, Al. Our strong performance in the quarter reflects solid execution across our business and continued demand for Tangoe’s integrated CLM solution. I will first provide you with additional details on our third quarter performance and then will conclude with our outlook for the fourth quarter full year 2012 and full year 2013.

Now, turning to our third quarter results starting with the P&L, total revenue was $40.1 million up 47% year-over-year exceeding the high end of our guidance range of $39.2 to $39.7 million. The driver to revenue upside in the quarter was our recurring revenue which was 48% year-over-year to $36.1 million. We thought it would be helpful to mention that the Symphony acquisition contributed $2.9 million to total recurring revenue during the quarter.

Our non-recurring revenue generated the remaining $4 million of revenue for the third quarter including approximately 600,000 from acquired Symphony customers. It is worth pointing out that we used Tangoe’s services professionals to help drive the third quarter non-recurring revenue performance is allocated to customers that came to us from Symphony.

As we’ve mentioned on previous earnings calls, our non-recurring revenue can fluctuate from quarter-to-quarter. We currently expect a fairly strong non-recurring revenue performance in the fourth quarter which is included in our overall guidance.

Moving down further into some of the drivers of revenue, we ended the quarter with $22.6 billion in spend under management, which is up approximately 48% compared to the end of the third quarter of 2011. We again thought would be helpful to point out that Symphony added approximately $2.6 billion in total global spend. As Al mentioned, we had a strong new logo quarter where we added 34 new customers and given the organic growth in our sales force an increase in overall scale, we now expect to add 25 to 35 new customers per quarter compared to our previous target of 20 to 30 per quarter.

And now turning to expenses and profitability for the third quarter, our GAAP gross profit was $21.9 million versus $14.2 million from the same period during the previous year. Our GAAP operating income for the quarter was 936,000 compared to an operating loss of 373,000 during the third quarter of 2011. Our GAAP net income per share was $0.01 for the third quarter of 2012 based on $41 million fully diluted shares compared to a net loss of $0.10 per share on $22.8 million in the year ago period.

Taking a look at our results on a non-GAAP basis, our gross margin percentage was 55.3% which is up from 52.8% in the same quarter last year and 55.2% during the second quarter of 2012. While we did realize some cost synergies during the quarter due to the migrations of the majority of the remaining HCL Telwares customers, our gross margins were impacted by the addition of Symphony which had a lower overall margins than Tangoe. Given this dynamic, we’re very pleased with our ability to maintain our overall gross margins compared to Q2.

Non-GAAP operating income which exclude stock based compensation expense and amortization of intangibles associated with acquisitions among other things was $5.7 million for the quarter, an increase of 84% on a year-over-year basis and representing 14.3% of revenues. Non-GAAP net income per share was $0.13 based on $41 million fully diluted shares and exceeded our guidance of approximately $0.12 per share. This compares to $0.08 per share based on $35.1 million shares in the year ago period.

Third quarter adjusted EBITDA was $6 million above our guidance of $5.6 million to $5.8 million. This represented an increase of 82% compared to the same quarter last year and a record adjusted EBITDA margin of 15%.

And now if we turn to the balance sheet, we ended the quarter with $55.7 million in cash, which is down from $78.4 million at the end of last quarter due primarily to the closing of the Symphony Teleca TEM acquisition.

As a reminder, on August 8th we closed the acquisition with a cash purchase price of approximately $40.2 million less certain adjustments up which approximately $29.2 million was paid up on closing less certain adjustments, with $4.5 million to be paid in six months and the remaining $6.5 million in 12 months, in each case less certain adjustments.

As part of the transaction, Tangoe acquired a balance sheet with the TEM business which included net positive assets of approximately $5.4 million which resulted in a net purchase price of approximately $35 million for the Symphony TEM business.

Cash flow was strong for the quarter as we generated $6 million in cash flow from operations and $5.4 million in un-levered free cash flow up 253% and a 157% on a year-over-year basis respectively.

As a reminder, un-levered free cash flow metric adds back net interest payments and IPO expense payments for 2011 only. While, subtracting capital expenditures with our debt pay down at the time of the IPO will no longer of prudent un-levered free cash flow metric once we get into 2013, at that time we’ll simply focus on free cash flow.

I’d like to now finish with some thoughts regarding our financial outlook, starting with the full year 2012, which we are increasing. Total revenues expected to be in the range of $152.6 million to $153.1 million or growth of 45% to 46% year-over-year up from prior guidance of a $151 million to $152.5 million. We expect 2012 adjusted EBITDA of $22 million to $22.4 million which represents a record annual adjusted EBITDA margin of 14.5% at the midpoint. At the same time we continue to increase our investments in growth initiatives.

Non-GAAP net income per share is expected to be in the range of $0.48 to $0.49 up 85% to 88% on a year-over-year basis and based on approximately $39.9 million weighted average diluted share as outstanding up from our previous guidance of $0.45 to $0.46.

Finally, we continue to expect un-levered free cash flow to be in the range of $17 million to $17.7 million for the full year 2012 which represents growth of 60% to 66% on a year-over-year basis.

And now, turning to the fourth quarter, total revenue is expected to be in the range of $42.1 million to $42.6 million or growth of 44% to 46% year-over-year. Adjusted EBITDA is expected to be in the range of $7.2 million to $7.6 million representing an adjusted EBITDA margin of 17.5% 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 $0.15 to $0.16 based on approximately $41 million weighted average diluted shares outstanding and a tax provision of approximately 200,000.

As we look beyond this year, we wanted to provide some preliminary thoughts on 2013 due to the high degree of visibility we have into our business. While we have not yet completed all of our planning processes, we are comfortable setting revenue expectations in the range of $188 million to $191 million, which represents an increase of 23% to 25% compared to our just raised 2012 guidance.

Within our 2013 total revenue guidance, we currently expect to generate recurring revenue in the range of $171 million to $173 million which includes an assumption of approximately $18.5 million in recurring revenue related to Symphony acquisition. Strategic consulting, software license and other onetime services revenue is expected to be in the range of $17 to $18 million.

There are number of different ways in which companies and analysts can calculate organic growth, that’s said, if we take the most narrowly defined definition that includes acquisitions after an acquisition has been with the company for four full quarters then our guidance would imply organic recurring revenue growth of 16% to 18% for the full year 2013.

This growth will be slightly higher using a longer term time frame that takes into consideration the fact that it takes time to migrate customers post are consolidation acquisitions. Due to the impact from lowering in our acquisitions except Symphony starting in Q1 2013, we expect to start the year at a calculated organic growth rate slightly below the 16% to 18% range and end the year above this range which we believe is most indicative level of our long-term recurring organic revenue growth model of 20%.

We believe this represents a solid growth outlook particularly considering the global economic environment and the fact that we’re still a few months away from beginning the year. Also, there is no change to our multi-year goal of targeting 20% organic recurring revenue growth which we believe we’re well position to achieve based on the growth and continued execution of our sales force, growing momentum of up-selling and cross-selling with existing customers and continued traction with our strategic alliance partners.

From a profitability perspective, we expect adjusted EBITDA to be in the range of $31 million to $32 million representing an adjusted EBITDA margin of approximately 16.6% at the midpoint. This would represent over 200 basis points of margin expansion on a year-over-year basis compared to raise adjusted EBITDA guidance for 2012.

So in summary, we’re pleased with our continued strong execution in our core business evidenced by continued strong recurring growth and healthy cash generation. In addition, we expect to see increasing leverage as we scale our business and extend our leadership position in CLM market by enhancing our technology, expanding our customer base in addition to introducing new channel partnerships, all of which also enhance our long-term organic growth opportunity.

With that, we’d be happy to take any of your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will go first to Tom Ernst of Deutsche Bank.

Tom Ernst – Deutsche Bank

Good afternoon guys. Thanks for taking my questions.

Gary Martino

Sure Tom.

Albert Subbloie Jr.

Good afternoon Tom.

Tom Ernst – Deutsche Bank

Good afternoon. So first question for you, first thanks for giving the additional detail on the organic calculations situation that’s helpful, I think looking at the guidance, the first question we would have would be, as you look back at the deals before Symphony, the three bigger ones I should say, HCL, Telwares and ProfitLine. What has the trajectory of those businesses then? So you told us when you acquired them they were declining. Did those continue to decline and then stabilize and have you – in other words, are you beginning to inflect those businesses?

Gary Martino

Yeah, I mean I think that would be the correct way to characterize it. That there was some decline and I think we chaired at the time of the acquisition they were declining and there were some decline that was already in process so to speak. So there was some decline in the businesses as a generalized statement and I’d say at this point it’s stabilized.

And I think as Al shared with some cross-sell and up-sell we have the ability to now grow some of that revenue.

Albert Subbloie Jr.

And Tom to be clear, good example and anecdotal example, the SAP deal, it was a customer that was a fixed U.S. customer that we bought. We migrated them over to the Tangoe technology that’s a classic example of a very large up-sell after migration. We, obviously the up-sell we consider an organic up-sell as we look more.

Tom Ernst – Deutsche Bank

Right. And so this is true for all three including ProfitLine, which is more recent. Is that stabilized already as well?

Albert Subbloie Jr.

Yeah. I mean I would characterize that ProfitLine was actually probably a little more stable and I think we shared the other two were declining at a quicker rate. ProfitLine was a little bit more stable coming in, but I think it’s safe to say that – that had some slight decline, but then this probably stabilize at this point.

Gary Martino

In the migration we’re headlong into them now, Tom, and they’re going well.

Tom Ernst – Deutsche Bank

Okay, perfect. Yeah I think you mentioned that on the call. So I was just looking for it. Let me switch gears a little bit because one thing that surprised me on the call, you mentioned that you got a goal of increasing your sales force by about 50% from now to mid-2013 that’s a big number. Are you just trying to front-end load ‘13 or what’s behind such a big number relative to your revenue growth would think you’re adding a lot of capacity?

Gary Martino

We are. I wanted to tell everybody. We see a big opportunity out there. As you know the $425 billion Greenfield opportunity, we want to go after it. We’re obviously putting some of those increases outside the U.S. I think I’ve mentioned before, it’s harder for us to completely predict the timing on return for some of those especially in markets like Asia-Pac, Latin America, even South Africa as an example. In EMEA we’ve got a little more traction. So we’re going to go after this marketplace and we built that into our estimates and we’re excited about it. We’re getting – we’re really getting good return. We’re still being successful bringing experienced sales people in from some of the competition as well, which is helpful.

Albert Subbloie Jr.

And obviously our objective is to continue that growth on a much larger customer base that we’ve, since the time going public obviously we’ve increased significantly.

Gary Martino

Right.

Tom Ernst – Deutsche Bank

Okay. Let me ask one more question and then I’ll turn it over. I could keep it all afternoon, but I’m, I wrote recently about IBM and their business. They acquired Rivermine via the Emptoris, so that business seem to have gone, undergone a lot of change and it looks like they had a big down year in terms of new AR bookings in that business. But they have replaced some of the turned over people. So they’ve hired some sales people. I’m curious what you see in tactically in the field. Are they actively selling or are they making their self aware in the competitive process?

I guess couple of questions first, how often do you see them and what’s their tactics that they’re taking to market? Are they changing pricing, changing strategy, anything you can observe?

Albert Subbloie Jr.

Well, probably two responses. From the time they were acquired, which I would say, still had a lot of the core Rivermine culture and more of the entrepreneurial spirit. I’d say that their presence has declined in the market globally. That said, they will show up from time-to-time in certain deals, so they haven’t completely disappeared.

And I would say that IBM and their acquisitions take on the IBM strategy and IBM is a good partner of ours, but they go after deals the IBM way not the Rivermine way. If that’s for what it’s worth, but I can’t comment on IBM’s total timeframe for integration, but we seem them less than we saw them before in the marketplace.

Gary Martino

And again we had good traction with IBM in Q3, was a good with IBM which is obviously indicative of our relationship remaining strong with them.

Albert Subbloie Jr.

I mean as we share that IBM is a large company, they have many divisions and so that there is lot of opportunities to work with different business units within IBM, so.

Tom Ernst – Deutsche Bank

All right, great. Thank you. I’ll let others ask.

Albert Subbloie Jr.

Thank Tom.

Operator

And we’ll go next to Tom Roderick of Stifel Nicolaus.

Tom Roderick – Stifel Nicolaus

Hey guys, good afternoon. So let me build-off of Tom’s question he used a second ago in terms of, in some of the comparison year-on-year to these acquired businesses and maybe if I kind of look at HCL and tell where is, I’m curious if those businesses at this point has begun sort of a renewed growth pattern. If you look at those businesses combined year-on-year, and if there is any further commentary you can add around other businesses that you’ve acquired particularly ProfitLine and as we get into early stages of Symphony.

What is the transition process looking like to where the challenges in converting those customers over on to your platform? Thanks.

Albert Subbloie Jr.

Yeah. So I’ll just remind everybody of the process. I know we’ve covered this we typically take what’s called 12 to 18 months to migrate what maybe 50 customers, 80 customers or 100 customers depending on the acquired party. And we focus as you would expect us to on getting them migrated to the Tangoe platform, during that timeframe, the focus is to get them successfully migrated that’s like doing an implementation for each customer. And typically we don’t get the up-sell cross-sell opportunity until some amount of time post-migration. And I remind everybody with the sales cycle that could range anywhere from three to nine months you’ve got post-timeframe. So even a deal like SAP while we close the deal, we expect revenue contribution in 2013.

So we said before that business dynamic is a process and it’s a process we’re comfortable with. All of them have gone very well. We’re comfortable with the ProfitLine processes that were headlong into and we’re just beginning the Symphony process given that we just closed the deal in August.

Tom Roderick – Stifel Nicolaus

Okay good.

Gary Martino

The uptick, Tom, you’d expect to see that roughly I’d say like in the eight quarter. If you look back overtime, we’ll start to see that contribution from the older ones really beginning to hit us in the beginning of 2013. We tried to provide some transparency a little bit early in our guidance because we’re comfortable obviously given where we are in the year.

Tom Roderick – Stifel Nicolaus

Okay, very nice. Thanks. Gary, in looking at the gross margins, you held up flat quarter-on-quarter and I guess you disclosed within the 8-K during the quarter just that Symphony had gross margins that were trending more towards 40% level historically. So I know you didn’t have a full quarter to absorb that, you will this quarter. How do gross margins trend and over what time period does it take to get those Symphony margins up or above where yours are today.

Gary Martino

So at a high level I think generalized made the comment, the gross margins in the core business did improve Q2 to Q3 based on some of those synergies. As you said, the gross margins related to Symphony were slightly lower which is why the gross margin didn’t go up. Now that’s, it didn’t go up significantly quarter-to-quarter, that said, we’re pretty happy maintaining these kinds of gross margins even with that acquired base and again over time, as we migrate more customers both with ProfitLine and Symphony, we expect that to help as we continue to look to grow our margins.

So, on a generalized basis, that’s what I would say. In Q4, again we expect some synergies, obviously we’ll have a full quarter of Symphony so that might viewed a little bit any increases, significant increases in gross margin, but I think it puts in good shape to continue to grow them next year. Obviously this year, we essentially grew them 200 basis points to 300 basis points even with some additional acquisition. So we look to continue to expand them next year.

Tom Roderick – Stifel Nicolaus

Great. Last quick one from me, Al if you don’t mind taking this on the MDM product line, so you released 12.2 this summer, you mentioned a few of the features around that of how we catching some traction. Can you give us a little bit of an update as to just generally speaking where MDM is as to kind of percentage of overall revenue and what the growth rates look like for that line of business?

Albert Subbloie Jr.

Well yeah, couple of comments. We stated that the contribution of revenue of MDM and rTEM together are less than 10% and it remains there. Keep in mind, all of our business segments are growing. And we see them continuing to grow a fixed mobile TEM as well as MDM and rTEM. We are seeing great activity in MDM. There is no doubt with our new product releases we’re getting really good reception. Keep in mind our primary objective is to bundle our MDM, rTEM products into our TEM products and we’re seeing, I just say, that too all of you that we’re getting really ramping it to some degree. We’re seeing much greater activity in the marketplace and expect that going into 2013. It’s all part of also our sales person headcount growth.

Tom Roderick – Stifel Nicolaus

That’s great. Thank you, guys.

Albert Subbloie Jr.

You bet.

Gary Martino

Thanks.

Operator

And we’ll move next to Terry Tillman of Raymond James.

Terry Tillman – Raymond James

Hey good afternoon guys. Hopefully you’ll can hear me. Can you hear me?

Albert Subbloie Jr.

Yeah, we can hear you fine Terry.

Terry Tillman – Raymond James

Okay, all right. Thanks. In terms of the new logo business, is the CLM market gets more mainstream and your branding continues to expand globally. But what is the like in terms of the ASP for your new logo business? What I’m getting at is, given the maturity in the market, are you seeing bigger deals because they’re buying new fixed mobile at the same time or they’re buying more models within each family or is it more a matter of you’re just sounding more logos, but its same kind of ASP as you saw in the past.

Albert Subbloie Jr.

Couple answers I want to remind everybody, the range of an ASP could be significant. We mentioned the SAP deal, which is obviously a much larger deal, but you can do a smaller transaction. I’d say the ASPs – I wouldn’t change the range moving forward. I will say that the range was quite healthy in the third quarter.

Terry Tillman – Raymond James

Okay. And then what about…

Albert Subbloie Jr.

The average ASP was also…

Gary Martino

To be sure in the past that it can vary slightly quarter-to-quarter just given a certain mix of deals. So it wasn’t so definitive that we would change our view of our average ASP although Q3 was up from Q2.

Terry Tillman – Raymond James

Okay. Well I guess what about the renewing business? I mean, assuming this is really sticky so then I kind of like turn it off. We know your unit renewal rates strong, but what about like a dollar renewal rate basis for these three-year contract sort of longer more mature customers. What are you seeing with your ARR when they actually renew the contracts?

Gary Martino

I mean I think as we’ve shared in the past, to-date our strategy has not been significant price increases at the point of renewal. We typically use that as a time when we talk to them about cross-sell and up-sell. So historically at least to-date we haven’t had big price increases on renewal. The objective has been to add and grow that customer overall and maybe in that scenario we keep pricing for their current set of products and spend. But I think as things go forward we’ll obviously keep people up to date.

Terry Tillman – Raymond James

Okay. And thank you for that. And I guess, Gary, as it relates to the gross margin, building on Tom’s question earlier. Given a some flavor for next year, how should we think more specifically on the gross margin expansion next year? Anything you can provide specifically and then just a quick follow-up on that?

Gary Martino

I mean I think we’ll probably get more specific on our next call and maybe give a little bit more granularity. That said, I think it’s safe to say that we directionally would look to increase next year. I think as we’ve shared as we moved towards our long-term, but I think we can give more specific guidance after the fourth quarter and we fill out some of the other items. We thought it would be helpful for people to have the primary drivers of revenue and adjusted EBITDA.

Terry Tillman – Raymond James

Okay. That directionally help, okay. Well and I guess Al or Gary, in terms of this more extensive product strategy around matrix CLM and then cloud services. Does this seem a lot more expensive beyond just them? And I guess is this starts to evolve, does this change the gross margin profile? Maybe it’s more software, there is less labor. How do we think about this broader matrix feel and then kind of cloud services strategy in terms of effecting gross margins outcomes? Thank you.

Albert Subbloie Jr.

It’s a good question. I don’t think Gary and I are ready to change our long-term gross margin target of the early ‘60s when we went public we stated that clearly we, I think we still feel consistent about that as our long-term goal. And I think all of you know our style which is we begin to see a definitive change in something than we may – we could predict differently. We’re excited about division. We think that there is trends in the marketplace driven by the mobile revolution that are sort of changing the way communications are being used and therefore the expenses that are being incurred in the way hit the P&L unless we’re innovator we want to be ahead of that curve and we’re going to invest. It’s all part of our plan to do so for our desire to go after that Greenfield market opportunity. Right now, I don’t believe we want to change our gross margin outlook. Obviously that potential exists over the next couple of years, but if that’s plays out we’ll keep people informed.

Terry Tillman – Raymond James

Great, thanks.

Operator

(Operator Instructions) We’ll go to Richard Baldry of Wunderlich Securities.

Richard Baldry – Wunderlich Securities

Thanks. Few narrow ones sequentially stepped up pretty solidly like raise fund if it relates to the acquisition. Can you talk a little bit about the speed at which you expect to realize synergies if that’s absorbed and where maybe directionally that are by magnitude the leverage is the fact to get out to the G&A as we go forward in the ‘13? Thanks.

Albert Subbloie Jr.

Rich just repeat.

Gary Martino

Part of that question just we missed it. It broke up.

Richard Baldry – Wunderlich Securities

The G&A line on a sequential basis stepped up pretty solidly due to the acquisition kind of connect. I’m just curious about the synergies you’d expect in the pace to realize those over the year-end.

Gary Martino

Yeah, it was definitely associated with the acquisitions. I think as we share typically what happens is we’re able to bring, we bring the companies in and we basically have a set of costs and then over time we’re able to get efficiencies there. So that said I think what we would say is, we expect G&A to kind of flatten at this point and over time trend down as we go toward our longer-term business model but some of that we have to gain some of our synergies which come not right upfront but over time.

Richard Baldry – Wunderlich Securities

Thanks.

Operator

And we’ll take a follow-up question from Tom Ernst of Deutsche Bank.

Tom Ernst – Deutsche Bank

Hey guys, just one follow-up question. One of the big takeaways I had from usual conference was the fuzz about the upcoming enterprise portal product. There was a lot of customers kind of swarming and talking about it, so I think you highlighted at user conference that was coming next year. When is that coming and what does that mean for the business model?

And then as a follow-up to that as well, you highlighted in the longer term roadmap of benchmarking product. So I didn’t hear you mentioned on that cal. And you also didn’t talk about the timeframe for that. Could you tell us a little bit about what you’re planning around benchmarking?

Gary Martino

Yeah that’s there. So the enterprise portal if you, in my prepared remarks, I mentioned a series of incremental product releases. You’ll see the enterprise portal as probably one of the larger sort of the new architecture. But given that we have so many customers, we’re not going to use the big bang theory and that product will be introduced, but will be frankly backwards compatible to our existing platform and what we’ll begin to do in the matrix CLM model is that new components within that enterprise portal architecture because we want our customers to gain some benefit from these products as we introduce them. So we’re pretty pleased with our architectural strategy, it doesn’t present risk given that obviously we have a lot of customers that depend on us every day but it also gives them innovation on an interim basis and frequently. So we’re targeting the first half of next year for the enterprise portal.

And the point you made about benchmarking, I’ll try to articulate what specifically you meant by that and although there was a lot of buzz about it. Having $22.6 billion in what you would consider intelligent data within our platform gives us the ability to be able to provide certain benchmarks to customers. So we’re targeting to try to have some of that benchmark available. We haven’t exactly determined what benchmarks will be available. Obviously there are some confidentiality of the data that exist. Within that we want to make sure that we’re well focused on that.

So we’re hoping to have some of that available and as the product rolls out without getting specifics to which data specifically we’re going to offer.

Tom Ernst – Deutsche Bank

Okay, thanks again.

Albert Subbloie Jr.

Thanks Tom.

Operator

And at this point, there are no further questions. I’ll turn things back over to Mr. Subbloie for any closing or additional remarks.

Albert Subbloie Jr.

Okay, great. Well I just want to take a minute to thank everybody. I know its Election Day and we’re all busy, but we appreciate everybody joining us for the call here today and we’re obviously excited about the quarter. We’re excited about the business going into 2013 and we’ll look forward to chatting with everybody more formally in the beginning of next year. Thanks for joining us.

Gary Martino

Thank you everyone for joining us.

Operator

And again that concludes our conference. Thank you all for your participation.

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