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The Ultimate Software Group (NASDAQ:ULTI)

Q4 2012 Earnings Call

February 05, 2013 5:00 pm ET

Executives

Mitchell K. Dauerman - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Scott Scherr - Founder, Chairman of the Board, Chief Executive Officer, President and Chairman of Executive Committee

Analysts

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Laura Lederman - William Blair & Company L.L.C., Research Division

Gregory Dunham - Goldman Sachs Group Inc., Research Division

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

Mark R. Murphy - Piper Jaffray Companies, Research Division

Frederick T. Grieb - Nomura Securities Co. Ltd., Research Division

Scott R. Berg - Northland Capital Markets, Research Division

Rayna Kumar - Evercore Partners Inc., Research Division

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Bradley H. Sills - Maxim Group LLC, Research Division

Steven R. Koenig - Wedbush Securities Inc., Research Division

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Operator

Hello and welcome to Ultimate's Fourth Quarter and Year-End Financial Results 2012 Conference Call. [Operator Instructions] Today's conference is being recorded. Your presenters for today will be Mr. Scott Scherr, Chief Executive Officer, President and Founder of Ultimate; and Mitchell K. Dauerman, Executive Vice President and Chief Financial Officer. We will begin with comments from Mitchell Dauerman.

Mitchell K. Dauerman

Thank you, Melanie. Good afternoon, and thank you for your interest in Ultimate Software. Before we begin, please be aware that we will be discussing our business outlook and will be making other forward-looking statements regarding our current expectations of future events and the future financial performance of the company. These forward-looking statements are based on information available to us as of today's date and are subject to risks and uncertainties. We encourage you to review our filings with the SEC for additional information on risk factors that could cause actual results to differ materially from our current expectation. We assume no duty or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

I'm going to begin by reviewing our financial results for 2012, and then I'll provide financial guidance for 2013. Unless otherwise noted, our discussion will be on a non-GAAP basis for all costs, gross margins, operating and net income, as well as EPS. The primary difference between GAAP and non-GAAP financial information is noncash stock-based compensation. Please refer to the reconciliation of our financial information on a GAAP basis to that on a non-GAAP basis included in the press release published on our website.

For the year, total revenues grew by 23.4% to $332.3 million, and recurring revenues grew by 24.6% to $266.4 million. Recurring revenues as a percentage of total revenues increased to 80% from 79% last year, and our customer retention remains in excess of 96%. The total gross margin was 58.1% compared with 57.8% for 2011. Operating income increased by 57.1% to $49.5 million, and the operating margins for 2012 expanded by 320 basis points to 14.9%. Net income grew by 57.2% to $28.5 million compared with $18.1 million last year. The related net earnings per diluted share grew by 54% to $1 compared to $0.65 per diluted share in 2011.

Our cash flows from operating activities for 2012 grew by 46.6% to $41.7 million from $28.4 million in the prior year. Our cash and marketable securities balance at year end was $69.4 million. The average daily float balance of our tax filing business was $265 million for 2012.

For the fourth quarter of 2012, our recurring revenues were $73.4 million, representing a 28.5% growth rate over the same quarter last year. The clients we expected to go live did so as we expected. The recurring revenue gross margin of 73.2% was slightly better than our expectations.

Service revenues for the quarter were $18.4 million, and the services gross margin was 5.6%. Our services revenues were about $1 million higher than our internal expectation. However, the services gross margin was below our expectations. The additional service costs were mostly labor-related and higher third-party implementation partner costs. The gross margin rate for total revenues for the quarter was 59.7%, slightly better than last year. And our operating expenses were $36.3 million for the quarter, which were in line with our expectations.

Operating income was $18.7 million, and our operating margin was 20.3% for the quarter. Net income was $10.8 million or 38 -- sorry, $0.38 per diluted share compared with $6.6 million or $0.24 per diluted share for the same quarter last year. Our non-GAAP income tax rate for 2012 was 42%.

Turning to the balance sheet. Our capital expenditures for 2012 were $17.3 million. This included capitalized R&D costs of approximately $5 million, and these costs compared to $13.7 million for the same period last year.

We used $9.8 million to acquire approximately 112,000 shares during 2012. We have 946,000 shares remaining that are available for repurchase under our plan. In addition, we used $20.4 million for the year to acquire shares of our common stock to settle employees' tax withholding obligations associated with the restricted stock that vested for the respective periods.

Accounts receivable increased to $70.8 million from $56.2 million at the end of last year. DSOs were 71 days at the end of 2012. This was consistent with last year.

Current deferred revenues were $90.7 million on December 31 compared with $83.4 million at December 31 last year. Long-term deferred revenues were $1.3 million at the end of 2012 compared to $3.1 million for the same period last year. Keep in mind this reflects the elimination of the onetime infrastructure fees in our staff's contracts.

Now before I discuss our guidance, I want to remind you of the methodology we use for giving guidance. First and foremost, our guidance reflects the same plan that all of our Ultimate associates strive to achieve. Secondly, we consistently provided guidance using the word approximately to indicate a $1 million straddling range when referring to a specific number or a 1% straddling range if we are referring to a percentage.

Turning to the guidance for 2013, we expect our annual recurring revenues to grow by approximately 25%. We made a slight adjustment from our preliminary guidance as a result of changes in our model assumptions. These included reducing the estimate of recurring revenues from employment and seasonal growth of our existing customers since it turned out our assumptions for the second half of 2012 were just too aggressive.

Our visibility into our recurring revenue goal for 2013 is over 97%. As a result of this change, total revenues are expected to grow by approximately 23%. We expect the recurring revenue gross margins to expand modestly, the service margins to break even and license revenues to be no more than $500,000. We expect to expand our operating margins by approximately 200 basis points to approximately 17%. Our non-GAAP tax rate for 2013 should stay at 42%, and our diluted weighted average shares should go up a little bit and should be approximately 29.5 million.

We expect capitalized R&D cost to be approximately $12 million to $13 million during 2013. The R&D cost expense in the P&L will end up being between $67 million and $68 million. In addition, our other capital expenditures in 2013 will be approximately $17 million, and this will match our depreciation and amortization. If capitalized R&D costs were expensed in both 2012 and 2013, our operating margin would be approximately 14% in 2013, and it would reflect a modest increase from presenting 2012 on the same basis.

Now a few reminders about the quarterly patterns. In the first quarter, we expect recurring revenues to be $77 million or about 27% growth over the same quarter last year. And we expect total revenues to be approximately $98 million, and this would be about 25% growth over the same quarter last year. We expect our non-GAAP operating margins as reported to be approximately 13%. When you look at the costs going from Q4 of '12 to Q1, keep in mind that it's our usual pattern that we have higher costs in Q1 mostly due to employment-related expenses, particularly higher benefits typical of the beginning of each year compared with the fourth quarter of each year. But in addition, in Q1, we have costs in sales and marketing, both in Connections, our national customer partner conference, but also higher sales costs that relate to the sales team's annual kickoff meetings. When you go to the second quarter, keep in mind that service revenues will typically step down from Q1 due to the seasonality of W-2 revenues. And obviously, the sales and marketing expenses that we incurred in Q1, we don't expect to occur -- incur again in Q2, so there should be some step down there.

Turning to our upcoming conference schedule. During the next quarter, Scott and I will be in San Francisco at the Goldman Sachs Technology Conference on February 12. In addition, I will be in San Francisco at the Stifel, Nicolaus conference this Thursday and the Morgan Stanley conference on February 25. I'll also be at the R.W. Baird Business Solutions Conference on February 27 in New York; the Raymond James Orlando conference on March 4; Piper Jaffray's tech conference on March 12 in New York; and the Roth Capital Growth Conference in Dana Point, California on March 18. If you're available at those conferences to meet, please let me know.

And now I'll turn the call over to Scott.

Scott Scherr

Thank you, Mitch, and thank you, everyone, for participating in our call this evening. 2012 was another good year for Ultimate. We continue to grow the business successfully and executed as we expected on our plan. Our all-important recurring revenues increased by approximately 25% for the 2012 year over those in 2011, surpassing the milestone of a $0.25 billion in annual recurring revenue at $266 million. Our total revenues passed the $300 million milestone in 2012, reaching a record high of $332 million, an increase of more than 23%. Our 2012 operating margin was 15%, and our customer retention rate was greater than 96%.

In January, I attended the annual meetings of our Enterprise and Workplace sales teams. They delivered in Q4, and both teams are very excited about our opportunities in 2013 and beyond. They see the increasing market demand for our solutions and appreciate the consistent customer support when they request references and site visits.

Our Enterprise team's attach rates for 2012's fourth quarter were recruitment, 83%, our highest quarterly percentage ever for Enterprise recruitment; onboarding, 74%; performance management, 57%; and time management, 39%. The attach rates for the year were: recruitment 61%; onboarding, 65%; performance management, 54%; and time management, 51%.

Some of our new Enterprise customers in the fourth quarter were: an insurance company with approximately 5,000 employees that added recruitment and performance management; a health care technology company with 4,000 employees added onboarding, salary planning and budgeting and time management; a restaurant chain with 3,200 employees that added recruitment, onboarding and time management; and a computer chip maker with approximately 3,000 employees that selected recruitment, onboarding, time management, performance management, succession management and our global feature set.

Workplace's attach rates were also strong. For the quarter, recruitment was 80%; onboarding, 84%; performance management, 61%; and time management, 93%. For the 2012 year, recruitment was 80%; onboarding, 89%; performance management, 68%; and time management, 84%. Some new Workplace customers in the fourth quarter were: a medical company with 1,000 employees that added recruitment, onboarding, time management, performance management, salary planning and budgeting and succession management in addition to core UltiPro Workplace Solution; a media services firm with 950 employees that selected recruitment, onboarding, time management, performance management and succession management; a technology integrator with 900 employees that added recruitment, onboarding, time management, performance management, salary planning and budgeting and succession management; and a casino with 900 employees that selected recruitment, onboarding and time management.

We also had continued success in the fourth quarter with our customers adding new products to their suites and others moving from on-premise to the cloud. For example, P.F. Chang's, the restaurant chain with 25,000 employees, has been our customer for 4 years. They contracted for UltiPro Recruitment in the fourth quarter of 2012 and just had a kickoff meeting for UltiPro Onboarding in January. Regal Entertainment, the national movie theater chain with approximately 20,000 employees, has been a customer for nearly 12 years. And they have made the move to a cloud contract in Q4. Another long-term customer, a fresh market grocery store chain with approximately 10,000 employees, has been with us 11 years and also decided to move to a cloud contract this last quarter.

At the end of Q4, our maintenance revenue from our on-site customers was down to 5% of our annual recurring revenues. Our marketing metrics confirm what our sales teams are seeing in terms of market demand. In Q4 2012, our number of responders to marketing campaigns who are looking to purchase within 12 months increased by 60%. For the 2012 year, we had a 34% increase in total looking-to-buy responders. That was a record high for us and a 2% increase over our previous annual high. We had a 77% increase in total social media leads compared with 2011. On our website, the number of unique visitors increased by 69% over 2011, and responses to our webcast generated by website traffic increased by 224%.

We completed a customer survey in the fourth quarter, and the results show a strengthening in our already strong customer relationships. We have the largest percentage ever of customers selecting the highest rating on the satisfaction scale to describe the relationship with us. More than 85% said they would recommend Ultimate to their colleagues, and 86% said they are satisfied or very satisfied with our solutions. Our customers remain powerful allies for us in the sales cycle and the HR community at large.

The quality of our UltiPro products remains the single most important factor in our customer satisfaction. Increasingly, our customers are using and talking about the benefits of UltiPro's global functionality. Western Asset Management Company, one of the world's leading fixed-income management companies with offices in Pasadena, Hong Kong, London, Melbourne, New York, Singapore, Tokyo and Dubai, has roughly 25% of its company's workforce based outside of the United States. As a consequence, according to their manager of compensation and benefits, nearly all of their reporting has to be done on a global level, and they use UltiPro as their single system of record to meet their global HR reporting requirements.

Ideal Innovations, a leader in biometric and forensic services, has approximately 30% of its employees overseas. They too have been using UltiPro global as their single source of truth for employee data since early 2010. Ideal innovations HR Vice President said that she likes the detailed visibility into critical employee information with UltiPro and the ability to slice and dice the data however needed.

Flow International, the world's leading developer and manufacturer of industrial waterjet machines, handled its global HCM operations with more than a dozen systems before UltiPro and had no visibility into the data as a whole. Now with UltiPro, they have 1 secure centralized solution with single sign-on and configurable reporting for regional users. Flow International's HR business analyst has said that their HR managers are very excited about how UltiPro's analytics are improving their ability to strategically manage their teams. The company's vice president of global services said, "Exchanging information and communicating with our global teams in Asia and Europe used to be so difficult. UltiPro now makes this easy, which is a huge advantage for us."

For the last few years, we have heard our customers talk so often about the strategic value of our business intelligence analytics, the completeness of our talent management product suite and our cloud technology. And yet, I want to point out that we continue to have customers who rave about our core feature set for payroll and HR. One example is Pep Boys, a retail of 20,000 employees and 730 locations in the U.S. and Puerto Rico that has been live on UltiPro for 1.5 years. Their HRIS Director recently talked about the challenge of frequent employee turnover so prevalent in retail businesses and how UltiPro has helped Pep Boys to increase their efficiencies dramatically in dealing with large numbers of people, improving manager and employee communications, meaningful reports on workforce metrics and accuracy of records. At the end, he said, "Personally, my favorite thing about UltiPro is that we can calculate payroll in 15 minutes for our 20,000-person workforce, a fraction of the time it took with our previous provider." We're happy to see that the power of our payroll engine at the center of UltiPro remains a very effective differentiator for us at Ultimate.

Our Partners for Life program continues to be effective in increasing our circle of influence in the market, and it is an important contributing factor in keeping our customer satisfaction so high. In 2011, shortly after introducing our Partners for Life program, we had a 48% increase in people attending our classes over 2010. That's a significant jump, and yet we continued to see an upward climb in numbers of people participating in our product courses since then. In 2012, we had a 21% increase over 2011. That translates to nearly 24,000 students in our classes in 2012.

In our services area, we earned our 14th consecutive certification from the Service Capability & Performance Standards, the industry-leading measure for service excellence that defines best practices for customer support. SCP evaluates 200-plus companies worldwide. Our 14-year track record reflects the consistent level of service excellence that we deliver to our customers.

Last month, Ultimate was ranked #9 on Fortune Magazine's 2013 list of best companies to work for. This was our second year to be evaluated for the list, and our #9 rank builds on our #25 ranking on last year's list and our 2 #1 rankings on the medium best company to work for list in 2008 and 2009. We are again the only human capital management provider on the list and the highest-ranked cloud vendor on the list. We are extremely honored to earn a spot on this prestigious list. It includes some of the country's best-known and most successful companies: Google, Starbucks, Microsoft and DreamWorks. We congratulate our customers who also made the list: Baker Donelson, Camden Property Trust, The Container Store, Google, JM Family Enterprises, NuStar Energies, Perkins Coie and Quicken Loans, with a special congratulations to Google for ranking #1 for the last 2 years.

We finished the 2012 year 1,614 strong. We have more than 10 million employee records in the cloud, leading the cloud industry in numbers of customers using a strategic unified human resources, payroll, talent and time management solution suite. We have a leading cloud-based human capital management product set and an expanding HCM partner ecosystem for our customers. We have many long-tenured loyal customers who support us in our growth initiatives. We have an 11% share in our Enterprise market space and a long tenured experienced Enterprise sales team ready to continue growing that share. We have a highly talented Workplace team that has proven themselves in the 200 to 1,000-employee market. We have a 3% share in that space, and we are well-positioned to continue executing on that opportunity.

We entered 2013 confident in our goal to exceed $400 million of revenues. That will put us on the track to achieve our next goal of greater than $600 million in 2015. We'll stick together, take care of our people, who will take care of our customers by delivering the highest quality products and services. That formula has served as well to the present, and we expect it to do the same for our future.

This is Mitch's and my 60th conference call together. We want to thank you for your support over that time, and look forward to your continued support in the future. Let's now go to the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Michael Nemeroff with Credit Suisse.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

I got 2 quick ones and then just 1 for Scott. So just Mitch, on the lowered expectations on existing employee headcount growth, just want to understand, what was your expectation previously? I know it's been a couple of quarters that that expectation is coming down. Then also if you could just maybe give us a sense of what the Enterprise workforce billing split was in the ARR? You don't have to give us the numbers. I know you won't give us that, but maybe the split. And then for Scott, if you could just -- you've been capitalizing some software expenses for the last couple of years now, just wondering when we're going to see that big new product platform coming out to the market and what we can expect to that?

Mitchell K. Dauerman

Okay, Mike, 3 questions. 65-35 is the split as Enterprise ARR, keeping in mind that big deals and Enterprise can grow that up. Secondly, in terms of the model, we basically, if you look to the second half of the year, we miss what we thought by about 1.8 million. In next year's model, based on the way we did it, we probably had about, give or take, say about $2 million additional relating to that stuff that we took out of the model. And your last question was...

Scott Scherr

I think capitalizing. We're expecting the first half of 2014 for us to come out with our first products that we call our next generation.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

And then what new features and/or functionalities should we be expecting with the new product line?

Scott Scherr

I just think we're taking some of our modules like recruitment, onboarding to another level, rewriting them. That's going to be the first thing that people see out there.

Operator

We'll go next to Laura Lederman with William Blair.

Laura Lederman - William Blair & Company L.L.C., Research Division

Can you talk a little bit about big deals, and are there still some of those in the pipeline, would you expect to do 1 to 2 a year? And then competition, are you seeing -- how often do you see Workday? How often do you see Dayforce? And then I had just -- can you just let -- anyway cash filing, sorry. So big deal, tight competition [indiscernible]

Scott Scherr

I think we've said in the past that we call like a big deal of something over 50,000 employees [ph], and we think maybe we get 1 a year. So I mean there is deals in the pipeline that would accomplish that goal, but we don't know. The staff and I are worrying about if we're going to get that or not. I think it's more based on the number of units we get, the salespeople we have out there. What was number two again?

Laura Lederman - William Blair & Company L.L.C., Research Division

Number two is competition. Are you seeing any more Dayforce or Workday?

Scott Scherr

Very little Dayforce. Workday, I think it was like 10%. I think we got -- it's like around 13% on the Enterprise side, much less on the Workplace side.

Laura Lederman - William Blair & Company L.L.C., Research Division

And can you talk a little bit about your win rate vis-a-vis Workday and what that kind of looks like?

Scott Scherr

Just with the sales force, and I said in the past, if we're in the right place, we're against them, we normally do good. If we're in the wrong place, they do good. But I believe if we do our homework and we get into the right opportunities that we should win. And I'm sure they believe the same as they get in the right opportunities, they should win.

Laura Lederman - William Blair & Company L.L.C., Research Division

And just the last one is tax filing, how that's done?

Mitchell K. Dauerman

Okay. So on tax filing, we continue to have 100% attach rate on new deals in Workplace. Our attach rate in Enterprise went from 76% in 2011 to 80% on new deals in 2012. The impact on the gross margin, I'd say between 440 and 450 basis points because, again, this is still a start-up business. We ran $265 million

[Audio Gap]

of the average daily float balance. But I think as we all know, the yields on that is next to nothing. From an operational perspective, it's going extremely well.

Operator

And we'll go next to Greg Dunham with Goldman Sachs.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

For the first for you, Scott, you mentioned a number of deals you won that involved global capabilities. And I know you've been investing there, and I think you have more coming in the platform or at least with some of the investments you're making. Could you talk about where you are today in global capabilities and where kind of the end phase is, where you want to go? And then a follow-up question is little bit separate is the recruiting attached in Enterprise was a lot higher this quarter. Is that due to maybe avoiding competition in that space? Or what do you attribute the strength in recruiting within the Enterprise this quarter?

Scott Scherr

I mean, I would say it was really just execution of our sales team. So the whole suite, we think it's a strong message when we sell it. So I would say they executed on it. On the global side, we're committed to adding 28 additional countries for localization in 2013 and then go from there. But we've been localizing countries as fast as we can. On the payroll side, we have partnered with Solergo [ph]. So we have that going on interface with them. So if someone wants global payroll, we have an answer for that. So again, we believe that we're in the right place, and it's North American payroll with global HR. And now we're going to say we want global payroll that we're in a good position to win the business.

Operator

We'll go next to Richard Baldry with Wunderlich Securities.

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

Can you talk about the recover in sales hiring? And of course for 2013, sort of your outlook for the year, maybe contrast that to any hiring you did in 2012?

Scott Scherr

Yes, I mean, one of the -- for me, it's always Q4. We look at our team at the end of Q3 and then we decide like how we want to go into Q4. And of 7 new hires, the new hire orientation tomorrow. So we're -- I feel really good about the strength of the sales team. I feel good about the hires we've made during the year and I feel good about the 7 new to come, the new hire orientation tomorrow. And I believe right now, we'll end the year somewhere little 80-ish, let's say 80 quota carriers and maybe a few more at the end of the year.

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

Then on the maintenance revenue side, now it is around the 5% of recurring revs, you talked a little about the ongoing costs you have to keep that consumer base up and running versus the revenues they contribute? And when you might think yield -- or what year you could see that you might force those -- or turn over to your new model or just terminate the program?

Scott Scherr

Our goal is to -- if you go into 2015 and hopefully have the remaining -- our remaining 5% move to SaaS, or thankfully if they don't want to move to SaaS, then we're not the fit for them because all our development -- everything we do is based on SaaS. So we've been getting that message out there. My guess is that going into '15, we won't have any maintenance from license at that point in time, of the whole '15, Rich.

Operator

We'll go next to Mark Murphy with Piper Jaffray.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Scott, in the press release, you mentioned some significant advances in payroll processing fees for very large organizations. And I think you alluded to that again on the conference call. Could you maybe describe what the technology enhancement is? And maybe what speed and scale you've achieved and what you're targeting?

Scott Scherr

I wish I could say that, but no. I could just tell you, like I mentioned on Pep Boys, you do a 20,000-person payroll and you go gross to net in 15 minutes. I just know we've made tremendous progress in the speed of doing it. But how they do the magic, you'd have -- we'd have to get you with that on Rogers [ph].

Mitchell K. Dauerman

Yes, Mark, we probably couldn't tell after 60 quarters, we're not technologists. So the best thing is we'll get you in touch with the person who can give you the full explanation. And if anyone among all of you is interested, just let us know.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Mitch, as a follow-up, I wanted to ask you, you're -- looking at your services revenue line, it's up 22% sequentially. I think that's the fastest rate in the last 4 years. And it looks like the services revenue growth is going to be above seasonal norms in Q1 as well. Can you remind us what is driving that? Is that project milestones, on materials, is it related to the couple of big deployments or something else?

Mitchell K. Dauerman

Sure. As you remember, 2012 was the first year that we really accelerated services growth based on the strength of sales growth. So we added a lot of consultants. But in addition, when we hit Q1 of each year, we pick up W-2 revenue, which only occurs on the 1 year, so you get a little bit of a spike there as well. So I think it's a combination of the continued strength in sales and work that everybody's doing on that along with the W-2s that occur in the first quarter.

Mark R. Murphy - Piper Jaffray Companies, Research Division

And then Mitch, just one last one. You commented on the employment growth not meeting your expectations, did you get a sense that it's actually deteriorated incrementally in Q4 versus Q3? Or was it just kind of a consistent trend?

Mitchell K. Dauerman

I think what it gets down to is, one, we have an estimate in there for seasonal behavior. So you have employment growth. You have seasonal behavior of clients that will ramp up at different periods. And we missed that estimate. I think the other thing to keep in mind in our contracts is we do have minimums. So probably in our estimation of how much of employment growth would translate into revenue meaning going above those minimums, we -- well, I know we were too aggressive. I would say if you're looking for a broad data point, I would say employment activity was relatively constant with Q3, but that was low compared to the first half of the year. I hope that answers your question.

Operator

We'll go next to Fred Grieb with Nomura.

Frederick T. Grieb - Nomura Securities Co. Ltd., Research Division

I think in the past, you guys hosted like 20 HR workshops per year in the U.S. and Canada. Can you give us an idea of how many of those workshops you plan on running in 2013 and if there's any other kind of newer areas of marketing spend that you plan to kind of start in 2013?

Scott Scherr

I think -- I want to say the number is 28. It could be a little more than that, but I seem to recall 28. I don't have it in front of me. And there's a lot of -- we're doing a lot of online seminars now. We increased our marketing expense in -- significantly in 2013. And I don't know the exact number, but I know it was significant.

Mitchell K. Dauerman

Fred, why don't I get you together with Jody Kaminsky. She can give you some color on what the plans are. Anyone else on the call who's interested in that, just email me, and we can help you out, but she'll know the details of what she's thinking about doing.

Operator

We'll go next to Scott Berg with Northland Capital Markets.

Scott R. Berg - Northland Capital Markets, Research Division

I guess I only have one question at the moment. It surrounds your sales pipelines funnels and the cycles. As you look at the sales funnel today, how would you characterize that funnel relative to the same point in time a year ago? I assume that's up year-over-year from your general commentary, but can you qualify that a little bit more? And then can you talk about sales cycles? Have they changed at all over the last 90 to 120 days relative to maybe this summer?

Scott Scherr

Yes, first, the sales cycles have not changed in Workplace. It's typically 3 to 9 months. And in Enterprise, it's typically 6 to 12 months. As far as the pipeline, just one, because of the tenure of our sales force, we had 10% turnover in Enterprise over the year, we have 15% turnover in Workplace, plus we added people. So you have a tenured workforce, sales force and then you add people to it, it would naturally go up. But to just say we're -- I mean, I'm happy with the pipeline. It's kind of like double what we -- yes, I always look at if we can -- if our pipeline is double what we need to expect at any point in time, and then I feel pretty good. It's out there. And right now, it's at a double.

Scott R. Berg - Northland Capital Markets, Research Division

Great. I'm sorry, I got one follow-up question probably for Mitch. On the higher services usage in the quarter, and you talked about higher third-party usage as well, I assume that's what drove maybe the margins a little bit lower than expected in the business. Is that something that you expect to kind of trickle in not necessarily to Q1 in '13 but at any other part during the year? Or are you staffed appropriately, do you think, to handle the current business in your pipeline today?

Mitchell K. Dauerman

Well, I think we found a good mix of having qualified implementation partners that provide us with elasticity. Particularly in Q4, we used them -- because our goal is to get new customers live in the quality ways as best as we can. The initial thought is in the beginning of the year we'll continue to use maybe a little bit higher percentage than we had before as we continue to ramp up our new hires that we brought onboard. So probably tail off during the second half of the year. But they did great in providing elasticity for us.

Operator

We'll go next to Rayna Kumar with Evercore Partners.

Rayna Kumar - Evercore Partners Inc., Research Division

I'm calling in for David Togut. Could you describe the head-to-head win rates for UltiPro and Workplace versus ADP and Ceridian for the quarter?

Scott Scherr

You mean our Workplace sales force against ADP and Ceridian?

Rayna Kumar - Evercore Partners Inc., Research Division

Yes.

Scott Scherr

I don't know the exact number, but it's a very high number. When something gets in our pipeline, where we get it where we believe will they let us run their process, it's got to be 80%, 90%.

Rayna Kumar - Evercore Partners Inc., Research Division

And can you tell us what the retention, the client retention rate was for the fourth quarter and also the end-of-period share count?

Scott Scherr

Retention rate was over 96%, and the share count was 28.4 million.

Operator

And we'll go next to Jeff Houston with Barrington Research.

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

You touched on this a bit already earlier. But within your talent management suite for both the Enterprise and Workplace, were there any individual products like Performance Management or onboarding that significantly exceeded or underperformed your expectations?

Scott Scherr

No. I mean, initially, our expectations were 25% attach rate on complementary products. We raised our expectations to 50%. So I'm okay that we're almost exceeding our expectations now. So certainly the number for recruitment was very high for Enterprise, so that certainly exceeded our expectation. I think Workplace has been running very high with onboarding, with time management being in the 90s on there. So I think now we're kind of expecting it, that they come in general, time management suite over 60%. If you mean the time management suite in around 60% combined, and the talent management suite probably over 70% combined.

Operator

We'll take our next question from Nathan Schneiderman with Roth Capital.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

I have a question as well on your attach products on the talent management side. So when you look at your overall customer base, how do you -- how can you describe to us what your existing customer opportunity is for these attach products? Because I gather a lot of the customers may choose to buy attach products on the initial deal. I think you still have a pretty big existing customer opportunity there. So just how big is it and how are you going after that?

Mitchell K. Dauerman

Nathan, I don't have an exact number as to what that is. But I think we've said in the past, when you take our 25% growth rate, probably about 20% or so comes from a new customer, which include those attach rates. So what's left on the table for selling these additional products as well as converting the customer from on-premise to SaaS is probably in the 2% to 4% range. So it's smaller, but I don't have an exact number for you.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Got it. And then I was curious, you've -- on these attach products, the talent management products, how frequently have you had the experience of a customer that adopts the product and then decides to switch to more of a point solution vendor like Cornerstone? How commonplace is that?

Scott Scherr

I don't think it's commonplace at all. Remember, with us it's a unified system that the cost might be $1 per employee per month.

Mitchell K. Dauerman

Nathan, I can tell you from looking at the specific terminations and the revenue that falls off, the amount that comes from product separately is very small.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Okay. Final question for you. I was just curious if you're considering change in the upper-end employee target of the Workplace script this year. If you're planning that at some point in the future, do you have a sense of when that might be?

Scott Scherr

Yes, we're not changing it in 2013. The plan is to change it in 2014.

Operator

We'll go next to Brad Sills with Maxim Group.

Bradley H. Sills - Maxim Group LLC, Research Division

Just a quick one on pipeline in the verticals. Are you seeing any momentum shift this quarter in any one or 2 verticals, both in Enterprise and Workplace?

Scott Scherr

It's horizontal. I mean, we've had tremendous success in restaurants. So I think we have more restaurants in the pipeline just normally because all our salespeople know we're doing really well on that, the same as hospitals. I can't think -- retail, we do really well. But I think it's having a tenured sales team, good marketing team. And if you're a restaurant, we could throw 10 references at you, satisfy customers of ours, will help sell it. So just like normal business to do that if you're one of our salespeople.

Bradley H. Sills - Maxim Group LLC, Research Division

Got you. Great, that's helpful. And then just last one on the larger Enterprise deals. Where are you seeing those wins come from? Who are you replacing? Who are you going head-to-head against?

Scott Scherr

For the year, it was still the same. About 65% of our business comes from service bureaus, about -- in Enterprise.

Bradley H. Sills - Maxim Group LLC, Research Division

That's still unchanged?

Scott Scherr

We got -- I think it was 5. I'll give you the exact number, so [indiscernible]. So in Enterprise, 58% came from service bureaus, another 5% came from PeopleSoft/Oracle, another 3% from Lawson. In Workplace, 72% came from service bureau.

Bradley H. Sills - Maxim Group LLC, Research Division

And that's relatively unchanged?

Scott Scherr

Relatively unchanged.

Operator

We'll go next to Steve Koenig with Wedbush Securities.

Steven R. Koenig - Wedbush Securities Inc., Research Division

So just a few questions here. One is in your guidance, Q1 versus the full year, is the implied revenue deceleration, is that just a function of visibility or what factors are behind that?

Mitchell K. Dauerman

I think it's a factor of Q4 being a strong year. And so you'll see it maybe tail a little bit in Q4, so you start higher and you just drift a little bit lower. But it's pretty close to that 25%.

Steven R. Koenig - Wedbush Securities Inc., Research Division

Okay, all right. And then I'm wondering in Enterprise software, certainly we've seen real deceleration in Q4 generally from buyers being cautious. And I'm wondering, how are you executing around that? Are you seeing that, and how -- and if so, how are you executing in the face of that?

Scott Scherr

In our business, our best quarter has always been Q2, and second best is always Q3, then comes Q4 and then comes Q1. I think when you start in the payroll business, some people are thinking about when they're going to start a payroll. Their cycle is you go through a year end, and then if something goes wrong, maybe they get in the pipe. Or maybe they've been in the pipe and something goes wrong, and then they try and start Q2 for a January 1 start or maybe even they want us to get them on and take care of their W-2s at the end of that year and try it for a Q4 start. So you have to give it in the first. I think Q4 and then Q1, people are -- especially in the payroll business, they're tied to year end and getting ready for it in Q4 and they're in it in Q1. So I don't see any real change in our business. We've been doing this for a long time, I just think that Q2 is typically our best, Q3 second, sometimes it may flip, and then comes Q4, then Q1.

Steven R. Koenig - Wedbush Securities Inc., Research Division

Okay, great. And then I got one last one for you guys and then I'll pass it on. On the services work in Q4, faster paced than you expected. You brought on some of the outside contractors. Did Time to Live decrease or was it relatively constant, and what are your expectations for Time to Live next year?

Mitchell K. Dauerman

It was relatively constant. I said in the script, if customers are expected to go live, they go live. And those assumptions remain consistent with next year -- in the next year revenue.

Operator

We'll go next to Mark Marcon with Robert W. Baird.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

You mentioned the recurring gross margin was higher than your internal expectations. It was certainly higher than ours and quite impressive. I didn't quite get the exact -- what the exact driver was. Can you talk a little bit about that and what's the potential for continued margin expansion? Or how should we think about that in terms of the recurring?

Mitchell K. Dauerman

Well, Mark, you didn't get it because I didn't say it, but it was marginal in terms of compared to our models. So it might be your model, it might have been a little bit lower. I don't think there was anything in particular that's unusual. And going into next year, our first cut at the model is just for a modest increase. We're continuing to invest in the tax filing business. We're continuing to invest in customer service for bringing on new customers. So I don't think there was anything noteworthy.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

180 basis points year-over-year and 93 bps sequentially is pretty good while you've been investing. So just wondering, is that something that we should expect to continue?

Mitchell K. Dauerman

Mark, I think the problem is with the way our quarters go, again you hit the beginning of the year, you're going to have higher employment cost and new hires. So note, like I said, our first cut at the model for next year is to finish the year just modestly higher. If you're asking specifically about first quarter, well, I'm about 100 basis points higher. But that could be right. It could be off a little bit.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Your guess is better than mine, so...

Mitchell K. Dauerman

I don't know about that.

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Along those lines, how should we be thinking about the per-employee per-month pricing on a go-forward basis, and particularly with some of the new products, solutions and enhanced global opportunity, et cetera?

Scott Scherr

Well, Mark, if someone bought our whole suite now, we're up to $26 per employee per month. That's our opportunity now. So we've been driving it up going forward. And as I said, within over the next couple of years, to get that to $30. I'm happy that we are at $26, and we grew the PEPM in both the Workplace and Enterprise for the year. I'd rather not give the numbers, but we did grow it in the year what we actually did get. We have more opportunity to get more.

Operator

And we'll take one more question from Raghavan Sarathy with Dougherty & Company.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

The first question is can you talk about the time line for any larger customer going live this year? For instance, I think you added 70,000 restaurant customers in the second quarter of last year. I was wondering when we should expect that customer to go live?

Scott Scherr

Yes. I don't -- I mean, it's in our model, Rag. It's no different than -- we said the other 2, when they were in Q4 because Q4 spiked so much, so we gave that as an example about the 2 we're going live in Q4. This one's just a pretty normal one that's just in our model. So I don't know the exact date, but it's in our model.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Okay. But you expect them to go live this year?

Scott Scherr

I'm not even 100% sure on that, what's going on. I know some of it is live, but the whole thing, not sure.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Okay. And then in terms of R&D expenses, so you mentioned that you're expecting the new platform to go live in the first half of 2014. So Mitch, I was kind of wondering, how should we think about for the incremental expenses once the platform goes live? And then so the amortization of this [indiscernible] expenses?

Mitchell K. Dauerman

Yes, I mean, I think it's an evolutionary process. And a number of people have asked us at different times about new gen and kind of describe what we're going to do with it. And it's a whole new platform, and it's rolling out certain modules, if you will, from the outside in. It's a multiyear project. We're required under the accounting rules to begin cap in the middle of 2012. And we've been extremely clear about what the results are, both as capitalized and as expense. With that being said, and understanding our estimates post this year are premature, it's my guess that the project lasts another 2, 3 years. So maybe we get up to $35 million to $40 million in investments. We think that right now, we could release some of the modules in the beginning of 2014. That would begin the amortization with respect to those. And at this point, we think it's reasonable that the amortization will be over 5 years. So again, let's take the extreme. Let's say you spent $40 million and you're expensing $800,000 -- $8 million, $10 million a year. At that time, our revenues are probably somewhere between $600 million and $1 billion. So hopefully, that gives you some framework to work with.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Okay, just one final question. So you guided on roughly 27%, that current revenue growth for the first quarter, and your full year ARR growth is 25%. So this implies roughly 22% recurring revenue growth exiting fourth quarter. So I do recognize that you have tough comparison for the fourth quarter. But my question is, how could you actuate the ARR that growth as you exit this year? What factors are in play to reactuate the ARR growth as you exit 2013?

Mitchell K. Dauerman

For the benefit of everybody listening, I would reemphasize the point I made in my comments. That approximates mean 0.5% to 0.5%. So we don't see it exiting at 22%, although we're not too far off from you. You're in that neighborhood. And remember, Q4 would be a strong compare. There were -- as everybody knew, there were 2 larger deals that commenced in Q4 that in this year it was unusual. And we had pointed that out, and that's the reason why we explained to everybody that although we expect it to hit approximately 25% for the year, we would start out low and work our way up. And in fact, that's what happened. Now as we go into 2013, we get a little bit of the benefit in Q1. But by the time we hit Q4, we're getting hit just a little bit. So you're pretty close right there.

Operator

That will conclude our question-and-answer session for today. I'd like to turn the conference back over to Scott Scherr for any additional or closing remarks.

Scott Scherr

No, just thank you, Melanie, and I appreciate everyone's time. Good night.

Operator

And that does conclude today's conference. We thank you for your participation.

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