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The Ultimate Software Group (NASDAQ:ULTI)

Q3 2013 Earnings Call

October 29, 2013 5:00 pm ET

Executives

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

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

Analysts

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Justin A. Furby - William Blair & Company L.L.C., Research Division

Scott R. Berg - Northland Capital Markets, Research Division

Brad R. Reback - Stifel, Nicolaus & Co., Inc., Research Division

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

Bradley H. Sills - Maxim Group LLC, Research Division

Gregory Dunham - Goldman Sachs Group Inc., Research Division

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

Aleksandr J. Zukin - Stephens Inc., Research Division

Brian J. Schwartz - Oppenheimer & Co. Inc., Research Division

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

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Michael Huang - Needham & Company, LLC, Research Division

Operator

Hello and welcome to Ultimate's Third Quarter Financial Results 2013 Conference Call. [Operator Instructions] Today's conference is being recorded. Your presenters today will be: Mr. Scott Scherr, Chief Executive Officer, President and Founder of Ultimate; and Mr. Mitch Dauerman, Executive Vice President and Chief Financial Officer. We will begin with comments from Mitch Dauerman. Please go ahead, sir.

Mitchell K. Dauerman

Thank you, Farah, and good afternoon and thank you for all of your interest in Ultimate Software. Before we begin, please be aware that we will be discussing our business outlook and we'll 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 upon 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 expectations.

We assume no duty or obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

I'm going to begin by reviewing our financial results for the third quarter of 2013 and then I'll discuss our guidance. 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 quarter, total revenues grew by 24.8% to $103.1 million and recurring revenues grew by 26.3% to $85.2 million. Recurring revenues as a percentage of total revenues increased to 83% from 82% in the third quarter of 2012 and our customer retention remained in excess of 96%. Total gross margin was 60.7%, compared with 58.7% in the third quarter 2012.

Operating income increased to $20.2 million and the operating margins for the quarter expanded by 240 basis points to 19.6% compared with Q3 of last year. Net income grew to $11.7 million, compared with $8.2 million last year. The related net earnings per diluted share were $0.40 for Q3 of this year, compared with $0.29 per diluted share in the third quarter 2012. Our cash flows from operating activities, on a year-to-date basis, grew 67% to $54.3 million from $32.3 million in the prior year.

Our cash and marketable securities balance grew by $42 million to $111.4 million at September 30, as compared with $69.4 million at year end, and this excludes our payment services customer funds. The average daily float balance for our payment service business for this year was $418 million.

Our recurring revenue results were slightly above our expectations due to a combination of earlier product starts and our employee growth assumptions. The recurring gross -- recurring revenue gross margin of 73.8% was also slightly better than our expectations. This was driven by lower recurring costs, which were largely due to leveraging both our payment services and our cloud delivery operation.

Service revenues were $17.7 million and the related gross margin were in line with our expectation. The gross margin rate for the total -- for total revenues was 60.7%, compared to 58.7% in the third quarter of last year. The increase was a result of a revenue mix shift favoring higher margin-recurring revenues.

Operating expenses were $42.4 million for the quarter and were in line with our expectations. Operating income was $20.2 million and our operating margin was 19.6% for the quarter. Net income was $11.7 million or $0.40 per diluted share, compared with $8.2 million or $0.29 per diluted share for the same quarter last year. Our non-GAAP income tax rate was 42%.

Now turning to the balance sheet. Our capital expenditures for the first 9 months of 2013 were $20.9 million. This includes capitalized R&D costs of approximately $10.9 million and it compares with total costs of $12.4 million for the same period last year and those included $2.3 million of capitalized R&D costs.

We used $8.3 million for the year-to-date to acquire roughly 80,000 shares of our common stock to settle employees' tax withholding obligations associated with the restricted stock that vested during this period. We have 946,000 shares available for repurchase under our stock repurchase plan. Accounts receivable increased to $74.2 million, compared with $57.5 million at September 30, last year. DSOs were 64 days, which was consistent with last year.

Current deferred revenues were $94.5 million on September 30, compared to $83.3 million at September 30 last year. Long-term deferred revenues were $700,000 on September 30, compared with $1.7 million on September 30 last year, reflecting the continued impact of the elimination of onetime infrastructure fees in our cloud contract.

Next I'd like to turn to our guidance. We are reaffirming our full year guidance for 2013 for recurring revenue and total revenue.

Recurring revenues are expected to grow by approximately 25% and total revenues are expected to grow by approximately 23%. We are increasing our operating margin expectations to approximately 18%. For 2014, our preliminary guidance is to grow recurring revenues by approximately 25%. We expect to see the related gross margin increase slightly from 2013. Total revenues are expected to grow by approximately 23%.

We expect service margins to breakeven. We expect to expand our operating margins by about 100 basis points, while at the same time making the necessary investments to effectively support the strength of our past sales growth, as well as the increased revenue growth opportunity before us.

Our non-GAAP tax rate for 2014 should be approximately 42% and diluted weighted average shares to be approximately 30 million.

R&D costs expensed in the P&L should be close to $80 million. We expect capitalized R&D cost to be in excess of $20 million in 2014. We are still finalizing our 2014 budget for our major R&D project being capitalized and we will update you on our next earnings call.

Other capital expenditures in 2014 will be approximately $19 million and we expect depreciation and amortization to be the same, approximately $19 million.

We'll provide additional guidance on quarterly trends on our February 2014 call, along with our final 2014 guidance. However, we want to remind you that our Q1 operating margin rate is generally lower than Q4.

Turning to our upcoming conference schedule. During the next quarter, I'll be at the Goldman Sachs Growth Conference in New York on November 14, and the CSFB Technology Conference in Scottsdale on December 3. If you're available to meet at those conferences, 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 on our call this evening. We executed as planned in Q3 and are on track to achieve our 2013 goal. Recurring revenues increased by 26% over those in Q3 2012 to $85 million and total revenues rose to $103 million, an increase of 25%. At the same time, our customer retention rate continued to top the 96% mark for the trailing 12 months ending September 30. Our sales force delivered the finest sales results in our history. We are fully staffed for 2014 and confident in the team that's in place to achieve our goal.

In Enterprise, our attach rates for add-on solutions remained healthy with recruitment at 71%; on-boarding at 54%; performance management at 43%; and time management at 46%.

At the end of Q3, we announced publicly that Aetna Insurance has become an Enterprise customer and that they added our Canadian HR and payroll, time management and global functionality to their core UltiPro contract. We are excited to have them join us. Other new Enterprise customers in the third quarter were: a Canadian cooperative with 20,000 employees that added recruitment, performance management, salary planning and budgeting, position management and succession management; a 10,000-employee oil and gas company; a textiles company with 7,300 employees, that added recruitment, on-boarding and time management, and a convenience store chain with approximately 5,000 employees and had a recruitment, on-boarding, performance management, salary planning and budgeting and succession management.

We again had success in converting our legacy on-site customers to the cloud. Our maintenance revenue from these customers was down to 3% of our annual recurring revenues at quarter end, as we execute on our plan to be at 0 by the end of 2014. Some conversions in Q3 were: a software company with 8,500 employees that added Canadian HR and payroll with the move to our cloud. A staffing company with 6,500 employees and a restaurant chain with 6,000 employees.

Our Workplace team's attach rates were: performance management, 66%; on-boarding, 77%; recruitment 66%; and time management 81%.

Some new Workplace customers in the quarter were: an agricultural manufacturer with 1,000 employees that added recruitment, on-boarding, performance management, salary planning and budgeting and succession management to our core UltiPro solution; a television retailer with 1,000 employees that had a performance management, salary planning and budgeting and time management; a communications company with 1,000 employees that had a Canadian payroll and HR, as well as recruitment, on-boarding, performance management, salary planning and budgeting, succession management and time management; and a health care services company with 990 employees that added recruitment, on-boarding, performance management, salary planning and budgeting, succession management and time management.

Our pipelines continue to grow and our marketing metrics for Q3 2013 indicate very strong interest in our solutions. This year's Q3 was the strongest third quarter in our history for total number of responses from prospects looking to purchase within 12 months. This represents a 20% increase over 2012's Q3. Our website traffic was up 19% over 2012 like quarter for unique visitors to our site and was our highest Q3 ever. And the number of opportunities uncovered by our inside sales team was up 28% over 2012's Q3.

We showcased our new UltiPro Recruiting solution that is scheduled for general release in early 2014 at the HR Technology Conference in Las Vegas earlier this month. Our recruiting solution is unique in that it is candidate-centric as opposed to recruiter-focused and is designed like a consumer-interaction site to attract and keep top talent engaged with the technology.

In addition to a state-of-the-art complete redesign of the user interface that creates an appealing user experience, the new solution include: gamification, collaboration tool, mobility, and integration with popular social network.

Candidates can build an in-depth online presence that gives recruiters and hiring managers a more complete understanding of who they are, rather than restricting them to limited profile information and resumes typical of traditional solutions.

The room where we demoed the product in Las Vegas had capacity for 100 people. But we had more than 150 in attendance, with standing room only and the response of attendees was very enthusiastic.

Scott Berg from Northern Capital Markets attended. And in his industry update, he said that the market must pay attention to Ultimate Software's rewritten UI and user experience and that Ultimate is likely to have a sales benefit from the early product cycle in 2014. He added that our new recruiting solution, with its completely rewritten platform, is the most significant new product he reviewed from companies he covers. In his words, if the remainder of the new platform's UI looks anything like the recruiting module, we believe Ulti will likely have the most aesthetically appealing UI in the entire HRMS space.

We announced a second landmark product at the conference. Our acquisition of EmployTouch, a Toronto-based firm that developed TouchBase, a market-leading tablet-based time collection and employee self-service device that was named one of the Awesome New Technologies for HR at the HR Technology Conference in 2012.

With the acquisition of EmployTouch, we gain not only our own cutting-edge timeclock device to offer our customers, but a major-league development team who will help us to continue innovating as we grow UltiPro into all that it can be moving forward.

Alan Zukin (sic) (Alex Zukin) from Stephens, also attended the HR Technology Conference and said in his follow-up brief that several key themes from the show benefit Ultimate. Number one, that large organizations favor HR solutions that can offer a unified platform over those that offer more granular targeted functionality.

Number two, that potential customers are growing frustrated with legacy payroll solutions from big-name payroll service providers, and Ultimate is in a highly advantageous position with its own highly regarded payroll solution, whereas competing HCM vendors must rely on legacy payroll service providers.

And number 3, enterprises are increasingly transitioning to the cloud and Ultimate has a first-mover advantage in this regard.

We finished the quarter 1,803-strong as we continue to attract the most talented people in our industry. They delivered trailblazing technologies, products and services to our customers. Q3 was a milestone quarter for us as we passed the mark of $100 million in revenue for the quarter. It took a lot of hard work over a significant period of time to make that happen. We will continue to put our people first and they will continue to put our customers first.

We're all excited about what we have achieved and the bright future we all have together.

Thank you for your support. Let's go to the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] We'll hear first from Michael Nemeroff with Credit Suisse.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

So I get a lot of questions on the competitive landscape and just wondering how you can -- if you can maybe talk about who you're seeing, Workday comes up a lot, but -- especially at the low end, there are some smaller vendors that are growing pretty quickly, much smaller than you guys. But just wondering if that presents itself -- presents a problem that you see over the next couple of years.

Scott Scherr

Mike, I've always thought that our main competition is ourselves. I think if we execute on our product plan, if we can keep our customers happy and if we execute on the distribution plan, that there's plenty of space for us to hit our goal of going to $600 million in '15 and laying the foundation to become a billion-dollar company in '18. So I think it's on us to execute and I think if we don't achieve it, it won't be because of competition that's out there, it will be because somehow we didn't execute on what we need to execute on.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

That's very helpful, Scott. And if I may, with -- for Mitch. The long-standing practice is to not update the guidance, the full year guidance. And actually you did so on the margin for the year. Just trying to square away the Q4 implied guidance, especially on recurring revenue, is it just that you're over a very strong 4Q '12 compare that we should expect a little bit lower recurring revenue in the quarter? Or is it just a bit of conservative -- perhaps, conservatism on your part?

Mitchell K. Dauerman

I think, as we said throughout the year, Q4 will be a tough compare because, as you remember, Q4 of last year, we had 2 large customers that began, which was unusual for us. So the year-over-year growth rate 1 year ago was, I think, was around 28%. And right now probably the implied growth rate is probably down 22% to the inverse.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Okay. And then just one, if I may. Scott, you mentioned that you had the strongest quarter of -- in the company's history. Do you care to share how that ARR trended in the quarter or maybe give us a quantitative number?

Scott Scherr

No. You got me once on that, Mike. You'll not going to get me again. No, it was just -- it was a great quarter.

Operator

Next we'll hear from Justin Furby with William Blair.

Justin A. Furby - William Blair & Company L.L.C., Research Division

Just a couple questions. Scott, for you, on the development, in terms of the recurring application, I don't know if you continue to go on through on-boarding with some of the other apps. Do you think of this as more in terms of just improving the overall customer experience and perhaps bumping up attach rates in what are already very good attach rates across these applications? Or do you think this is something where you can actually become win deal because of like -- just take recruiting for example, do you think your already-good win rates could go up just based on improved UI with the HRIS?

Scott Scherr

Yes. I'm certainly hoping they go up. I mean that's one of the reasons we're doing it. I mean I think our future plans are to build other things that we don't have right now. So I think it's both. But clearly, we can grow our PEPM and the opportunity we have in the PEPM with developments we're doing and we'll continue to do it.

Justin A. Furby - William Blair & Company L.L.C., Research Division

Okay. So and maybe you're still thinking about the pricing for next year, but if you think about recruiting, I mean, what's the type of uplift to -- how should we be thinking about that as customers adopt that versus the current pricing?

Scott Scherr

I don't want to get into that.

Justin A. Furby - William Blair & Company L.L.C., Research Division

Okay, fair enough. On the global side, we're hearing very good things about some of the things you're doing out there with the partnership with Celergo and some of the other things. Can you talk about maybe how -- talk about where you envision this going over the longer term and how important is global to you versus kind of just North America, the opportunity you see there?

Scott Scherr

I think it's very important. We've made a significant investment last year. We're going to continue to make a significant investment in -- this year we made a significant investment. We're going to make a -- we're going to keep making a significant investment. We don't want to lose the deal because someone has a better global strategy than us with North American-based companies. So that means localizing as many companies as we -- as many countries as we can, as fast as we can and put as many languages as we can in products as fast as we can. And that's what we're doing.

Justin A. Furby - William Blair & Company L.L.C., Research Division

Okay. And then, Mitch, I don't know if you gave this, but the rep count at the -- the sales rep count at the end of the quarter, where did that stand? And I guess if you think about the guidance for next year, how much impact did the reps that you've been bringing on throughout the first half of the year, how impactful are they in terms of next year's revenue? Or is that more about driving next year's bookings, which drives '15's revenue?

Mitchell K. Dauerman

I don't know. I think they'll all have an impact in next year's number. I mean, the number now, I think is -- I think 75, 76 strong now. Probably by the first half, we'll get to 80 and then we're moving Workplace to 1,500, effective January 1. We're going to attack what we're going to call the strategic market from 1 to 500 with distribution partners and, conceivably, our own sales team, depending on how that moves forward. So I think -- and what we've done with our Enterprise sales team, what we've done with Workplace sales team, which we'll start calling next year the midmarket sales team and then we'll have the strategic initiative between 100 and 500, I think it gives us -- well, obviously, it gives us great confidence in being able to continue our streak of 25% recurring revenue growth for a 13th straight year.

Justin A. Furby - William Blair & Company L.L.C., Research Division

Okay. So -- are those partnerships already starting to be put in place in terms of that 100 to 500 space?

Mitchell K. Dauerman

Working on it.

Justin A. Furby - William Blair & Company L.L.C., Research Division

Okay. And then if I could sneak one more, Mitch, for the guidance for next year, what's the employment assumption? And do you expect recurring revenue growth to sort of steadily increase in terms of year-on-year growth, as you move throughout '14?

Mitchell K. Dauerman

The employment assumptions are pretty much the same as they were this year. Again, keep in mind that, that has a nominal effect on the growth rate during the year.

Justin A. Furby - William Blair & Company L.L.C., Research Division

Okay. And you expect the growth rate to progress though as you move -- accelerate as you move throughout next year?

Mitchell K. Dauerman

The growth rate in recurring revenue?

Justin A. Furby - William Blair & Company L.L.C., Research Division

Yes.

Mitchell K. Dauerman

Probably, but I'd rather wait until we give you final guidance.

Operator

Next we'll hear from Scott Berg with Northland Capital Markets.

Scott R. Berg - Northland Capital Markets, Research Division

I have 2 -- sorry, I have 2 for you, Scott, here. First of all, we've come across a number of recent checks that would seem to indicate that this particular space of payroll and core HR is going through the first of what will be considered a true replacement cycle in probably a decade or so. Would you concur with that with regards to what you've seen in your pipelines and the amount of replacement activity?

Scott Scherr

No. I mean, since I started, all our activity has been replacement activity since we've started Ultimate. Certainly, all our marketing numbers are up, our pipeline is up, so -- and I don't know if I would say exactly what you said, but it certainly gives us great confidence in our future and certainly great confidence in '14 and '15.

Scott R. Berg - Northland Capital Markets, Research Division

Great. And then the last question I have is around sales rep hirings following up Justin's questions. Are on you on plan with your hiring to-date through the year? Or are you maybe ahead or behind schedule to what you're planned...

Scott Scherr

We're on plan actually on our inside sales reps. I think I mentioned, I don't know if it was last quarter or the quarter before, we were going to go from 9 to 23 and we've actually hired up to the 23 count in that already. So they're already on board, we're training them and they'll have an impact next year in getting more quota-carrying sales reps in front of more prospects for us.

Operator

Moving on, we'll hear from Brad Reback with Stifel.

Brad R. Reback - Stifel, Nicolaus & Co., Inc., Research Division

Scott, so you did say you were staffed up through '14 on the sales side, does that mean you don't need to start hiring until the middle of '15 or would it be early -- I'm sorry, the middle of '14 or would it be earlier than that?

Scott Scherr

I'm not 100% sure now. I think a lot of it depends on the strategic initiative that we're going after in the 100 to 500. But if you put our own team down there, then I think it could be sooner. If we don't, then it will probably be the second half of next year to increase our middle market presence and our Enterprise presence.

Brad R. Reback - Stifel, Nicolaus & Co., Inc., Research Division

And on that strategic initiative, all the way down market, is that an either/or? So if you found a partner, they would have exclusivity and you wouldn't go direct or is there a situation where you could have both?

Scott Scherr

It's a situation that you could have both. I think if it was exclusive, obviously, will have to be a very good deal for us and, obviously, for the partner, will have to be a good deal for them. So it's conceivable, it could be both.

Operator

And now we'll take a question from Terry Tillman with Raymond James.

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

Scott, in terms of -- I know there has been a variety of questions, but we're all just really interested in that in terms of the 100 to 500 potential employee-size market, when do you think we could actually start seeing sales activity, sales cycles? I mean, obviously, you've got to get the a go-to-market strategy in place. But is this potentially something that could start percolating in sales cycles and activity in the latter part of '14? Or we should just avoid that and think about this as truly in the beginning of '15?

Scott Scherr

I think if it could start activity in the second half of '14 and then we could start expecting revenue from it in '15.

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

And in that market -- I mean, is some of that replacement of nothing, where it is more like paper or do you see service bureaus also in that market or just some sort of low-end tool?

Scott Scherr

I think it's service bureaus and low end tools. Remember, the bottom is 100 -- 100 to 500. So I think, in general, a large percentage of those people are going to be either service bureaus or some tool.

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

Okay. And then, Mitch, just a quick question in terms of -- for '14. Should we think about a similar relationship as we've seen in the past where OCF, or operating cash flow, is somewhat tracking the non-GAAP operating income?

Mitchell K. Dauerman

I'd like to do some more work on that, but I'd say, generally, we're not changing any of our typical billing or collection policies. Keep in mind, we have to adjust it for capitalized software costs that have to come out. I might be able to give you a little more direction at year end.

Operator

And our next question comes from Kirk [indiscernible] with Evercore.

Unknown Analyst

I have just one, I guess, clarification on the recruiting module. Have you guys talked about when that's going to be officially generally available for customers yet?

Scott Scherr

It will be sometime the first half of '14. I'm not sure exactly when. But it we will be ready in the first half of '14 for sure.

Unknown Analyst

Okay. And given the ramp up on inside sales, I think Scott mentioned that you guys have seen, I think, 28% more inbound calls as they start to bring out more opportunities. I guess, do you start seeing benefits from that perhaps in the first half of next year? And I guess when you look at the potential in that market, around inside sales, I guess what's just your general thought in terms of investment in that area for '14?

Mitchell K. Dauerman

Just so you understand, the 28% was -- it was 9 reps on 9 reps. So with the 10 reps creating 28% more value, more leads to the sales force. And now we're going to add -- we could add an additional 13 to that. So yes, I expect it to have a significant impact in our sales efforts.

Operator

Next we'll hear from Brad Sills with Maxim Group.

Bradley H. Sills - Maxim Group LLC, Research Division

Just one on the new platform. I know it's early but have you been getting any feedback on at least the beta version that's out there from partners or customers? It sounds like recruiting UI response has been very, very positive, but any color there will be very helpful, please.

Scott Scherr

Yes. I mean, I've sat in meetings I've been with customers, I don't know how that's -- in a scale of 1 to 10, it's an 11. I don't know -- I watch from the back of the room. I see certainly HR tech was great for us. I wasn't there personally, but I got a little feedback from it. So I believe our development team hit a home run with it and it's the foundation of everything we'll do moving forward at this point. So it's very exciting and we have the whole company excited.

Bradley H. Sills - Maxim Group LLC, Research Division

Great. Thanks, Scott. And then ADP Vantage, [indiscernible] they've been out now with their new version for the last year or 1.5 year or so. Any change there? Are they getting any traction either in the installed base or with new accounts that you guys are going after together?

Scott Scherr

I mean, I don't -- well, I'm not saying they can beat us. But if they can, then their sales guys beat our sales guys. I think we have a better culture, we have a better product and we have better service. So I believe we should win every deal against those guys.

Operator

And now we'll hear from Greg Dunham with Goldman Sachs.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

You did get asked on global capabilities and I know you had a big win in the quarter, that part of that was influenced by the improvements in the product from that perspective. Are you more confident to go after deals maybe you wouldn't have gone after 2 years ago with this new release? And how does that impact the pipeline of opportunities you may go after?

Mitchell K. Dauerman

No. I think we're confident in going against them. I think it's just -- if it wasn't payroll-centric, it wasn't North America, we had a decent chance of losing the deal. So everything we're doing is trying to make us more competitive in that environment. We hate losing. We put a lot of effort into it and I think we've made tremendous strides over the last couple of years in it. And I think when exiting customers see our roadmap and, obviously, when we get new customers in there, they like what we're doing. And we're making significant progress quarter-to-quarter localizing, I don't know the exact number of countries right now, but it's a significant amount that we've been doing. Yes, I'd say it's all part of the game of trying not to lose deals that you're -- you belong in and there can be deals we don't belong in, but the deals that we believe we belong in, we want to do everything we can to win those.

Operator

Our next question comes from Jeff Houston with Barrington Research.

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

Let's start off with the new Affordable Care Act being rolled out. I believe it requires workers that put more than 30 hours per week to be offered benefits. Have you seen more demand for the time management product and was this one of the drivers behind the EmployTouch acquisition?

Scott Scherr

No, it was not. I think we've been on top of that Act for a while now. We've been having seminars with our customers, giving information to our customers. It comes up on new business as well. But the EmployTouch acquisition, we were working with them on different deals. It was clear that they have built something exceptional that was leading edge. We knew the team there. They've been in this business for a long time. We have high respect for the leadership there. And quite frankly, we were lucky and the timing was right and we got a great product and we got a great team. The product will help us in the present and the team will help us in the future, so we're more than excited about it. But it had nothing to do with that Act.

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

Okay. And then have you seen more demand for the time management product?

Scott Scherr

No. I mean, in Workplace, we've been averaging probably -- we give our attach rates, but I would say we've been averaging about 80% attached on Workplace deals. And in enterprise, we've been averaging about 50% attached. So I haven't seen anything move -- I can't -- I do get involved in a decent amount of deals and I never -- I can't remember one time where that came up as a driver of the deal.

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

Got it. Okay. Then switching gears a bit. Looking at your overall pipeline, what is the mix of deals between Enterprise and Workplace? And could you talk about if there's any like a 75,000-plus employee deals perhaps in the pipeline?

Scott Scherr

In general it's 2/3 Enterprise and 1/3 Workplace. That's just the way the business drives. It's been that way for a while now. I think the pipeline reflects that going forward. I think when Workplace goes to 1,500, that could move a little, maybe 60-40 enterprise. We never talk about -- it's always nice to get a big deal, but it's not what makes it go. I mean it's about units and number of units. And the big deals are nice. I've said in the past, if we get one big deal, what is perceived as a big deal, which I would think it's over 50,000 employees, one a year, then that's good for us.

Operator

And next we'll hear from Alex Zukin with Stephens.

Aleksandr J. Zukin - Stephens Inc., Research Division

I wanted to ask you about the Aetna deal, just about -- who did you beat out and what led to the win?

Scott Scherr

I think we were competing against ERPs and service bureaus. And I think there was -- a big thing was our culture and, obviously, was our product and our support. I mean, they believe that we could do what they needed to have done. And they trusted us and had confidence in us. And after multiple visits down here, after bonding with our senior leadership team, I think it gave them the confidence to move forward with us. So in almost all deals, especially large deals, we're competing against ERPs and the service bureaus. Nothing specific about it, but that's what it is.

Aleksandr J. Zukin - Stephens Inc., Research Division

Got it. And then from -- that's helpful. From a competitive perspective, you guys have mentioned what percentage of your deals you see Workday and I wanted to ask the opposite question. First, I'd want to ask that question but a follow-up to that would also be do you feel like because of the marketing dollars they're spending in the space, you're actually getting more opportunities that you see in general?

Scott Scherr

I mean, I thought Salesforce helped us tremendously when they had their success. And I think Workday helps us. Yes, I think it does create more opportunities, more awareness of it. And I don't give the number, I always get asked the number, but it was 11% this quarter.

Operator

And moving on, we'll hear from Brian Schwartz with Oppenheimer.

Brian J. Schwartz - Oppenheimer & Co. Inc., Research Division

Congratulations on reaching that $100 million quarterly revenue mark, that must have been a championship quarter over there.

Scott Scherr

It was fun. Very rewarding.

Brian J. Schwartz - Oppenheimer & Co. Inc., Research Division

Right. Mitch, real quick one for you. Are you expecting any acquired revenue contribution next year from EmployTouch? Or was that mostly just a technology purchase?

Mitchell K. Dauerman

That's mostly just the technology.

Brian J. Schwartz - Oppenheimer & Co. Inc., Research Division

Okay. And then, Scott, just one follow-up question on move down market for the 100-employee, 500-employee segment. On the product side and the technology side, do you need to do any additional investment at that point to make the product ready for those types of businesses? Or is it just mostly just in the distribution side ready?

Scott Scherr

100% distribution. The product's ready, we've been selling -- Workplace started 200 to 600 then it moved to 200 to 700 and 200 to 1,000. Now they're going -- we're going to focus them on 500 to 1,500. But now the product is ready, it's 100% distribution, how we're going to do it.

Operator

Our next question today comes from Steve Koenig with Wedbush Securities.

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

The deals that closed this quarter, particularly the larger ones, well, when are they going to be implemented and having revenues be recognized? Are we talking about a Q4 sort of implementation before the pack is even...

Scott Scherr

Steve, generally speaking, our Enterprise deals take 8 to 9 months to go live. Workplace deals take, say, 5 to 6 months. Oftentimes they want to go live on a calendar quarter, so that makes it a little harder to pull it forward too much. In the case of Aetna, which is a super large deal, right now we expect that to go live in January 2015.

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

Okay. All right. Great. And then I want to switch to the new modules. Remind me, when would you have the new UI and architecture rolled out through the majority of your modules?

Scott Scherr

Well, we've been investing heavily in the UI of our existing product and we'll continue to do that. So I think that if you say when is everything going to be over for what the recruitment, which we call Version 14, is. It could be a couple or 3 years.

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

Okay. Okay. And on the financial side, Mitch, we should expect the capital base of R&D to continue as you go through the implementation of '14 across your product line?

Mitchell K. Dauerman

Correct. As I stated in the prepared comments, right now we're expecting that to be over $20 million for next year. So you can factor that into your cash flow.

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

Okay. And then I wanted to ask on the -- in terms of thinking about the market, how did you all think about the opportunity to replace service bureaus versus replacing legacy software in terms of the -- how far along each opportunity is and how penetrated each opportunity is? Is it possible to say one is further along the other? Or how should we think about those 2 opportunities?

Mitchell K. Dauerman

Well we get 65% of our business from the service bureaus and we get 35% of our business from others, mostly ERPs and others. So it's been pretty consistent.

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

Yes. Is it possible to say though that one is further penetrated than the other or one might mature first? I mean, how should we think about the remaining opportunity?

Mitchell K. Dauerman

Well, I think if you look to over 1,500 in the United States, we have 9% -- we're penetrated by 9%. If you go 500 to 1,500, we're penetrated 6%. If you go 1 to 500, we're penetrated 1%. That doesn't include Canada, where we're penetrated less than 1%. So I think there's a huge opportunity in all 3 markets, as well as Canada. Three in the United States and all of Canada is a huge opportunity for us.

Operator

Next up, we'll hear from Raghavan Sarathy with Dougherty & Company.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

You talked about a number of conversions from on-premise to cloud. Talk about the list you are getting in terms of recurring revenue and when you say conversion [indiscernible] on the cloud offering with add-on modules.

Mitchell K. Dauerman

Rag, this is Mitch. We've always said that the increase from converting somebody from on-premise to cloud is fairly small. What it does is create the opportunity to sell them the other products, such as recruitment, performance management, on-boarding and so on, tax filing, which we don't provide on-premise. And I think we make it -- it's a better relationship in terms of delivery, support and the customer getting the benefits of the cloud delivery product. Does that answer your question?

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Yes. And then my second question is -- so, Mitch, you talked about you had 2 large customers going live in the fourth quarter of last year in the sense that created tailwind for you for this year, the guidance for next year are contemplate to any larger customers going live?

Mitchell K. Dauerman

I think I said that the Aetna will go live in January '15.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Okay. So basically you don't have any larger customers going live next year?

Mitchell K. Dauerman

We don't have any customers over 50,000 employees going live next year.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

And just one final question. In terms of the maintenance, certainly, I think Scott mentioned that you're expecting that to be 3 -- 0 by the end of next year. How should we think about maintenance revenue for the year as a whole, from this year and next year?

Mitchell K. Dauerman

Maintenance revenue, I mean, it will continue to go down, but again it's less than 3% of the total recurring revenue. So I think we're talking about relatively small numbers.

Operator

And we'll take one more question today that will come from Michael Huang with Needham & Company.

Michael Huang - Needham & Company, LLC, Research Division

Just a couple quick ones for you guys. First of all, Scott, on your comfort about going down market, from a strategic standpoint I just wanted to dig in that a little bit. I mean, you had some great success in your core segments, your pushing out market, why is it important to go down market? Like what's your thinking behind that?

Scott Scherr

I think it's just -- it's an opportunity that's clear to us. I mean, $600 million is clear, how we're going to get there with what we have. But then you start looking at $1 billion in '18 and you look beyond that then I think you want to penetrate as many markets as you can. I mean, with our pricing, it's a $5 billion market. We're hitting the lower end of it, but we're certainly not attacking it. So I think it's pretty clear to me that, that's a huge opportunity for us in the future.

Michael Huang - Needham & Company, LLC, Research Division

Got it, okay. And just another follow-up on EmployTouch. I'm not sure if you kind of mentioned it, but you had talked about working together. I mean you guys have any shared customers now and, I guess, we're thinking about the addressable opportunity and kind of what this could do for ASPs? Could you just kind of walk us through a little bit in terms of kind of how this stands out as an opportunity for you guys?

Scott Scherr

Yes. We've sold shared customers together. That's what got us -- we knew the guys, but that's what got us closer when we saw this thing. And I think it's just like anything else that makes our product better, it makes our time and attendance solution better, and it gives us a very talented team to help us in the future. It wasn't that hard a decision.

Michael Huang - Needham & Company, LLC, Research Division

What has been historical pricing around that?

Scott Scherr

We're pricing it -- we're going to price it on a per-employee, per-device, per-month. Normally, in our current system, the way we do it, they pay for the clock. This is something that I think is another level than the clocks that we've been selling. And we're going to price it on a per-device, per-month, which we've already tested and clients like it because they're not letting out their money upfront for the clock. And obviously, it's good for us because it builds up our recurring revenue.

Michael Huang - Needham & Company, LLC, Research Division

Does this change at all kind of the type of customer that you sell to or not?

Scott Scherr

No, not at all.

Michael Huang - Needham & Company, LLC, Research Division

Okay. And then just one final question for you, Mitch. So in terms of your preliminary guidance for 2014, does that make any kind of assumptions -- are there any assumptions kind of what growth from kind of a new recruiting product being rolled out? I mean, is there any additional assumption around the tax rate for that kind of thing? Maybe you could kind of walk us through that.

Mitchell K. Dauerman

No. There's nothing specific around this.

Operator

And that concludes our question-and-answer session. Gentlemen, I'll turn the call back to you for any additional or closing remarks.

Scott Scherr

Thanks for your time. Mitch and I had 19 calls and now we're going to celebrate being a $100 million quarterly company. Thanks. Speak to you all next quarter, I guess.

Operator

And, ladies and gentlemen, that does conclude today's conference. We do thank you all for joining us.

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