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Ultimate Software Group (NASDAQ:ULTI)

Q1 2014 Earnings Conference Call

April 29, 2014 05:00 p.m. ET

Executives

Scott Scherr - Chief Executive Officer, President and Founder

Mitchell Dauerman - Executive Vice President & Chief Financial Officer

Analysts

Richard Baldry - Roth Capital Partners

Justin Furby - William Blair & Company

Scott Berg - Northland Capital Market

Greg Dunham - Goldman Sachs

Mark Murphy - Piper Jaffray

Michael Nemeroff - Credit Suisse

Pat Walravens - JMP Securities

Jeff Houston - Barrington Research

Steve Koenig - Wedbush Securities

Matt Williams - Evercore

Mark Marcon - RW Baird

Operator

Hello and welcome to Ultimate's First Quarter Financial Results 2014 Conference Call. At this time, all participants are in a listen-only mode. Today's conference is being recorded. Your presenters today will be Mr. Scott Scherr, Chief Executive Officer, President and Founder at Ultimate; and Mitchell K. Dauerman, Executive Vice President and Chief Financial Officer.

We will begin with comments from Mitchell Dauerman.

Mitchell Dauerman

Okay. Thank you, Travis. 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 we'll be making other forward-looking statements regarding our current expectations or 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 review 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 first quarter of 2014 and then I'll provide financial guidance for the second quarter. 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 non-cash stock-based compensation and the amortization of acquired intangible assets. Please refer to the reconciliation of our financial information on a GAAP basis to that on a non-GAAP basis include in the press release published on our website.

For the quarter, total revenues grew by 23.7% to $121.1 million and recurring revenues grew by 24.8% to $97.4 million. Customer retention remained an excess of 96%. Total gross margin was 61.3% compared to 59.3% for the first quarter of 2013. Operating income increased to $23.5 million and the operating margins for the quarter expanded to 19.4%. Net income grew to $13.8 million compared with $9.2 million last year and the related net earnings per diluted share were $0.47 for Q1 of this year compared with $0.32 for the first quarter of 2013.

Our cash flows from operating activities grew 41.5% to $25.6 million from $18.1 million in the prior year. Our cash and marketable securities balance was $101.7 million at the end of the quarter compared with $90.2 million as the year end.

The average daily float balance for our payment service business was $660 million in Q1. For the first quarter of '14, Ultimate's recurring revenue were $97.4 million representing 24.8% growth over the same quarter last year. We exceeded our estimates by about 1% due to earlier product starts and do the modelling assumptions around employment trend.

The majority of our early product starts were pulled forward a couple of months. As a result, the recurring revenue gross margin is 73.6%. It was slightly better than our expectations.

Service revenues were $23.2 million and the services gross margin was 9.4%. Productions revenues were a little bit higher than we expected while costs were a little bit lower. Both of these items contributed to a higher gross margin.

The total gross margin rate for total revenues was 61.3% compared to 59.3% in the first quarter of last year. The increase was a result of higher recurring revenues and better than expected margins on services revenues.

Operating expenses were $50.8 million for the quarter and were slightly less than our expectations. Operating income was $23.5 million and our operating margin was 19.4% for the quarter. Net income was $13.8 million or $0.47 per diluted share compared with $9.2 million and $0.32 per diluted share for the same quarter last year. Our non-GAAP income tax rate was 41.5%.

I'll now turn into the balance sheet. Our capital expenditures for the first quarter of '14 were $11.2 million, and this included capitalized R&D cost of about $6.7 million. This compares to CapEx of $6.2 million in the first quarter of last year, and that number included $2.9 million of capitalized R&D cost.

We used $10.2 million of cash for the quarter to acquire roughly 62,000 shares of our common stock, to settle employee's tax withholding obligations associated with the restricted stock that vested in the quarter.

We have 946,000 shares available for repurchase under our stock repurchase program. Accounts receivable increased to $82.3 million compared with $70.1 million at March 31st of last year. DSOs were 61 days at March 31st compared with 64 days at the comparable point last year.

Current deferred revenues were $103.5 million at March 31st and that's compared to $91.9 million on March 31st of a year ago. Long-term deferred revenues were down to $300,000 and this compares for a million for the same period last year and reflects the elimination of the one-time infrastructure fees in our cloud contracts.

Finally, I'd like to talk about our guidance. We're recurring our full year guidance for 2014. Recurring revenues are expected to grow by approximately 25%. Total revenues are expected to grow by approximately 23% and our operating margin is expected to be approximately 20%.

It didn't change the recurring revenue guidance of the year because it's difficult to predict employment trends and there are always glitches involved in the expected live days for product sold. We're also now reprising the full year operating margin and guidance at this time. To the extent, some of the cost savings in Q1 turned out to be permanent. We then have the opportunity to accelerate investment in our business.

For the second quarter of 2014, we expect recurring revenues to be approximately $100 million. We expect total revenues to be approximately $120 million. As a reminder, services revenue in the second quarter typically sat down because Q1 reflects revenues from W2s, which were approximately $4 million in Q1 of this year. In addition, we expect less license revenue compared to Q1. And Q2 will also reflects power investment in our annual customer user conference connections.

In prior years, connections was held in Q1. As a result of these first to second quarter variances, we expect our operating margins for the second quarter of this year to be approximately 18%.

Turning to our upcoming investor conference schedule, during the next quarter, I'll be at the Jefferies PMC Conference on May in Miami, this season's spring conference in New York on June 4. Scott and I will be at the William Blair Growth Stock Conference in Chicago on June 11th. If any of you are available at those conferences to meet, please let me know.

And now I'll turn it over to Scott.

Scott Scherr

Thank you Mitch and thank you everyone for participating in our call this evening.

Results for our key metrics in the first quarter this year exceeded our expectations and position us well for achieving our 2014 objectives. We increase recurring revenues to a record of $97.4 million of 25% over last year's first quarter and we increase our total revenues to $121 million.

At the same time, our operating margin was greater than 19% for the quarter and our customer retention rate was once again greater than 96%. Our sales teams are fully staffed and we completed the transition of our enterprise teams selling exclusively to companies with more than 1500 employees and our mid-market team to companies with between 500 and 1500 employees.

We continue to have success converting our on-sight legacy customers to the cloud and the support revenues tied to our existing on-sight base now stands at 1.2% of our recurring revenues. We can now clearly see (indiscernible) tracking to zero by yearend.

Our cash rates for our new enterprise customers in the first quarter were recruitment 62%, on boarding 54%, performance management 54% and time management 62%. Some of the new enterprise businesses to join us in the first quarter were YMCA with 3800 employees in recruitment and on boarding, a law firm with 3300 employees in on boarding, employee relations and salary planning and budgeting and the manufacture with 2600 employees that's in performance management.

Some of our on-sight legacy enterprise customers that elected to move to our cloud environment in Q1 were (indiscernible) HR with 36,000 employees. Omni Hotel with 20,000 employees. M&T Bank with 16,500 employees and Ashley Furniture with 1300 employees -- excuse me, cash referrals here with 13,000 employees.

The cash rates for new mid-market customers in the quarter was strong. Recruitment was 85%, on boarding 90%, performance management 80% and time management 88%. Some of our new mid-market customers to join us in the first quarter were an engineering services company with 930 employees that enter recruitment on boarding performance management, salary planning and budgeting succession management, time management and global for the court solution.

A respected trademark and litigation law firm also with 530 employees that entered recruitment, on boarding, performance management, succession management and time management and a non-profit with 850 employees that entered recruitment, on boarding and time management. Our marketing metrics indicates a market interest in Ultimate is continuing to increase at a healthy phase.

Q1 this year was Ultimate's tough quarter ever in our company's history for web traffic. Unique visitors were up 55% over Q4 of 2013 and up 21% over Q1 of 2013. This is the third year in a row that the first quarter have led a rolling 12-month traffic results and we attribute this pattern to a ranking on Fortune Magazine 100 best companies to work for list.

Q1 this year once again has had a record for a highest quarter ever for total responses from companies with more than 400 employees indicating that they're looking to purchase a new ATM solution in 12 months or less. It was a 34% increase over Q1 2013 and 5% increase over the previous quarter. We also had our highest ever for number of people viewing our product tours online of 78% over Q1 of 2013.

Our insight sales team had a 15% increase in Q1 2014 versus Q1 2013 for leads generated. At the same time, we had 25% increase in social media leads, Q1 2014 versus Q1 2013 and 56% increase in unique social media visitors to open this website. Q1 2014 versus Q1 2013, again, largely attributable to our Fortune ranking.

Last week, we held our 100 HR workshops in Coral Gables, Florida at the Del Mar Hotel. We started our workshop program in 2008 as a strategic collaborative way to bring together leaders in human resources, talent management, recruitment, compliance and employee development. Since the program's inception, we have assembled 8,000 HR professionals at these events.

Another effective thought leadership resource we offer to HR community to extend our partnership relationship with them is our HCM online academy. We introduce the online academy in the first quarter last year to share videos from HR leaders on topics with strategic importance along with videos of our UltiPro solutions and hundreds of white papers.

At the end of Q1 this year, we have more than 2400 participants. The majority of whom represent companies with more than 500 employees. Earlier this month, we held our seventh annual connections conference. Our forum we're updating our customers, industry analyst and business leaders and our production innovation, strategic vision going forward and industry trends. We have just scene 173 attendees.

An increase of 27% over last year's event and compares to our 18% increase in 2013 over 2012. Six hundred and thirty-six of our customers were represented at the conference. At the conference, we showcase our expanded UltiPro's Global HCM capabilities including global payroll integration and additional language support and our new UltiPro recruiting solution. We began early customer deployment of UltiPro recruiting in December 2013, and these customers can give candidates the ability to securely submit applications in a manner of seconds using their LinkedIn profile feature moving their professional details and job history from LinkedIn to UltiPro in one simple click.

Among the business advantages are ease, convenience and accuracy saving the candidate from having to navigate multiple systems for having to copy and paste information from the existing profile in order to complete an application. We also shared our new interactive mobile time clock device in space and introduce a new managed services and provider of customers within expanded customized service approach.

Fifteen industry analysts representing ten firms at the conference at 3.6 on a 4 point scale were four represented valuable. Recording the overall strength of our relationships (indiscernible) according to our recent survey has been to the top HCM analyst with Gartner, Forester, IDC and seven other firms. Every analyst have responded said that they are frequently recommending Ultimate Solutions. There was a 56% increase over six months ago. The server result also indicate that analyst's overall perceptions of Ultimate's business strategy, product differentiation, innovation investment and market momentum have all increased over the last six months. And 100% of the analyst indicated that they are more likely to refer Ultimate today than 12 months ago.

On April 1st, InformationWeek announced its Elite 100, a list of the top business technology innovators in the United States and Ultimate ranked number 50 on the list. In 2013, our development team created UCloud, a platform service offerings that connects IT development and IT operations for faster delivery of reliable code. As a result, we have dramatically enabled our internal operations to become more self-sufficient and have improved the quality of products and services delivers a thousand of Ultimate's customers.

Since the inception of UCloud, Ultimate has increased a number of product sales per day from 600 to 1800. Increase quality of our build to 98% successful, delivered 20% more features per release and enabled our customers to receive new features on an on-demand basis.

In addition to Ultimate, other companies on this list were Boeing, Cisco, Dell, FedEx and Pfizer. We want to offer a special congratulations to our customer, First Horizon, a premier financial services organization who ranked number 21 on the list.

Our partners for light program continues to be influential in generating goodwill with our customers in widening our circle of influence. In the first quarter this year, we saw a total of 5731 attendees in our customer education classes, an increase of 24% over the same timeframe last year. According to our most recent survey, 86% were satisfied or very satisfied with the experience.

Q1 this year was clearly a good opening quarter for us. Our method of people first resonated at our connections conference with both customers and analyst reinforcing the values that we share in our relationships with them. We added more than 100 new Ulti teach in the quarter, and they will all be here in less than (indiscernible) Thursday of this week for our new hire orientation.

Our success has always been driven by a passion for putting our people first and counting on their passion to produce the finest product and services in the HCM industry. We finished the quarter 2010 strong, approximately 50% of that number is in services and approximately 35% in development. We are walking the clock and investing and making UltiPro all that it can be.

Our plan is to extend our leadership role in HCM by continuing to deliver the most innovative people solutions in the cloud. The future has never looked brighter for us. We appreciate your on-going support and look forward to your continued support in the future.

Let's go to the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from David Ross, Stifel Inc. David, please go ahead.

Richard Baldry - Roth Capital Partners

Good morning. Looking at the recurring growth sequentially, it's about $7.1 million. Last year, your past result was 5.1. The best we've ever seen was 59 in Q4 '12 when you had two major customers (indiscernible). Can you talk about whether there's any disproportionately large customers go live in Q1 or whether that was just a real breath of launches that you can be with more sustainable on a sequential basis for quarter to quarter.

Scott Scherr

Rich, the sure answer is there were no exceptionally large customers that went live in Q1. This is normal business for us.

Richard Baldry - Roth Capital Partners

And if we look at the guidance for Q2 for $100 million and we look at how it drop to a level below what we thought last year or even second quarter of 2012, that's just overly conservative or do you think some of the (indiscernible) out of Q2 or it should be for the proper comparison sequentially?

Scott Scherr

We put our model that same way from the bottom update from the best information we have. But it's probably a little bit of a pull forward that would explain the sequential change. Yet again, we used an approximation.

Richard Baldry - Roth Capital Partners

Okay. I'm wondering if there's any update on (indiscernible) market, strategic market either decisions moving forward both internally or partner or anything you can comment on those type of things.

Scott Scherr

Yeah. We'll definitely let it out by the end of this quarter. I think we've positioned the whole sales force or our sales force. The (indiscernible) positions to either do it ourselves or to go with a partner for it. We want to have another earnings call where you won't know the answer to that.

Richard Baldry - Roth Capital Partners

All right. Thanks. Congrats for a great quarter.

Scott Scherr

Thanks, Rich.

Operator

Our next question comes from Justin Furby with William Blair & Company.

Justin Furby - William Blair & Company

Hey guys. Congrats.

I just want to follow up on your favourite topic on strategic channel. Has the odd change in the last quarter where it occurred about (indiscernible). Has anything changed in your view there?

Scott Scherr

Yes, as soon as I said those (indiscernible) like I wanted to take it back out of my mouth. No, I'm not giving odds. I just know that has become clearer everyday and I think either way we'll be successful there and I think we'll just have to make that decision. And as I said we won't have another earnings call where you will know it.

Justin Furby - William Blair & Company

Okay. I'm just curious, how are you handling those yields today? Are they just going to your middle market team? I'm assuming…

Scott Scherr

Correct. We sell them. They go to our marketing.

Justin Furby - William Blair & Company

Okay.

Global was something that showed up a lot in this quarter in terms of talking to some of your partners. Do you have a little bit how it opened new opportunities for you guys? And any type of attached information you can give on global with some of these enterprise fields you're saying?

Scott Scherr

I think we were always strong globally and I think lately we've just been localizing a large number of countries based on our clients who had people in those countries. So I think maybe we've done a better job of communicating our global strategy and also what we've achieved globally. But I don't think there's anything that's driving sales from global because we always have the global functionality and we're just making it better.

Justin Furby - William Blair & Company

And then last one for me. I love your thoughts on kind of big deal pipeline. What do you think you close the big deal in few quarters?

Scott Scherr

I've always said that big deals do not drive openness. They've never driven Ultimate, but I always believe that we should play a big deal with over 50,000 employees. I believe there's a good chance we would get one a year and I believe that there's a good chance. We'll get at least one this year.

Justin Furby - William Blair & Company

Okay. Great. Thanks.

Operator

Our next question comes from Scott Berg with Northland Capital Market.

Scott Berg - Northland Capital Market

Hey, Scott and Mitch. Congratulations on another well-executed quarter.

Scott Scherr

Thank you.

Mitchell Dauerman

Thank you.

Scott Berg - Northland Capital Market

My first question for you, Scott, is on the marketing metrics. They've been consistently improving, although last year fourth quarter from a channel trending perspective. (indiscernible) your sales coverage today. I know you're adding out, let me say, (indiscernible) your sales teams. But I think it's strong enough to handle that pipelines. There's still opportunities there that maybe are on that and you might need to accelerate with investment.

Scott Scherr

No, I think it's strong enough for every January productivity for sales people continues to go up. The average size of every yields continues to go up. I think if we couldn't handle it, we would hire more which obviously as you grow, you have to hire more. But sure we have the payment place that can handle these that are being generated.

Scott Berg - Northland Capital Market

Great. And Mitch, my second question would be on the operating expenses that were slightly lower than expected. Can you maybe comment of some of those cost (indiscernible) more consistent or having serious investment on other areas. But can you comment on what areas kind of came on a little bit later than expected in OpEx?

Mitchell Dauerman

Sure. It's typical once we have in the beginning of the year to spend on third-party consultant in our development organization and some other parts of the business from what they originally forecast to when they actually spend it maybe in the business. It's typically one. We're also a little bit favourable on payroll taxes against our estimates.

Scott Berg - Northland Capital Market

Okay. So nothing major. Just (indiscernible).

Mitchell Dauerman

Yeah.

Scott Berg - Northland Capital Market

Okay. And then lastly, Scott, any change on the competitive environment that you saw in the quarter relatively to maybe Q4 on a year-over-year basis in Q1?

Scott Scherr

No, it was pretty consistent. We do look at those numbers because we know we get asked those questions, which is consistent with Q4 and was consistent with last year.

Scott Berg - Northland Capital Market

Great. That's all I have. I'm jump off the queue.

Scott Scherr

Okay. Thanks, Scott.

Operator

Our next question comes (indiscernible).

Unidentified Analyst

Hi. Good afternoon. Thanks for taking the question. So all of this industry Accolades that you're getting the Fortune 100, how does that translate (indiscernible) traffic on your website is long, but how about translating to sales cycles being perhaps shorter. Do you have -- presumably, if it does mean that it sign up more customers quickly, are you comfortable with the resources you have to implement for your customers and could we see a slight acceleration with the product (indiscernible)?

Scott Scherr

I'm not sure it translates. But surely in the cycle we still have to go to sales process which in the mid-market is typically three to nine months and in the enterprise market it's typically six to twelve months. And so what the Accolades do is they create confidence which we're always trying to create confidence, get trust from prospects who are looking at us that they're making the right choice with ultimate software and we do have the resources implement with our sales team themselves.

Unidentified Analyst

Okay. Thank you.

Operator

Our next question comes from Greg Dunham with Goldman Sachs.

Greg Dunham - Goldman Sachs

Hi. Yes, thanks for taking my question.

I know you've got a competitive question, but I guess maybe ask another way. Some investors that we speak with, there's this perception that it's getting more competitive because they've seen maybe new companies come to market in the HR space. Can you just address that concern in terms of -- are you seeing really any change in the competitive landscape and perhaps maybe comment on the investor perception that it feels it's getting more competitive. Thanks.

Scott Scherr

Yeah. I would say that -- so the places we get business, we get them from service bureaus which is a little over 50% of our business comes from service bureaus. That hasn't really changed. And then we have the ERPs where we probably get 15% of our business and then we compete against them the same way. The remainder, the whole legacy systems (indiscernible) system, service crews that you might not hear from.

So for us, it really hasn't changed. We really don't compete with -- we call them the (indiscernible). They're on the very low end of our midmarket. So as of yet, we have not seen them. I can understand where it's coming from because of the recent IPO. But we didn't see them that much before the IPOs and they were obviously there and we just don't see them that much after. I believe it's a different market and what we try to address.

Greg Dunham - Goldman Sachs

Thanks guys.

Operator

Our next question comes Mark Murphy with Piper Jaffray.

Mark Murphy - Piper Jaffray

Thank you. I will add my congratulations.

I wanted to ask you, you rattled off some large logos in terms of onsite legacy customers that migrated over to your cloud environment. Could you remind us, if they're moving tons of thousands of employees to the cloud environment, by how much does their monthly recurring revenue change? In other words, they're transitioning from maintenance to a subscription. What kind of change is that?

Scott Scherr

In general, the maintenance remains the same (indiscernible) subscription fee based on the deal. It fluctuates. But it is incremental revenue to us.

Mark Murphy - Piper Jaffray

Significant and small incremental revenue?

Scott Scherr

Small is a strong word. More than small.

Mark Murphy - Piper Jaffray

Okay. So Mitch, I wanted to ask you as well, how was your pace of hiring in the quarter? I don't think you provide a headcount of (indiscernible) but in general were you on track? Did the pace change one way or another? And part of reason of my question is that I know that you comment that our sales teams are fully staffed, but I'm not sure exactly what you mean by that.

Mitchell Dauerman

Yeah. We said we ended the quarter 2010, we have tomorrow and Thursday. We have 111 new hires, which was the largest new hire class we ever had, which was -- so our hiring is on track for the year. It just meant -- almost every year by the end of Q1, the sales team is completely staffed because we come up with a plan in previous October of what we want to look like to achieve our goals for this following year.

So yeah, we hired 111 people. It was on track. I believe we're getting the best of the best out there and we'll continue to do that.

Mark Murphy - Piper Jaffray

Thank you for that. And Scott, I wanted to ask you. My last question, in cases where you are seeing and where you're beating and working head to head in competitive situations, what are the specific workday shortcomings in, I guess, remaining to the payroll arena that are presenting hurdles? Are there specific elements of functionality or other kinds of shortcomings that you think are holding them back?

Scott Scherr

I'm not going there. I'll just say when we deal we have to convince people's culture and trust in us. We have to convince people that we are the best product out there and that we have the best service out there. And as they go with us, they can trust then and we're going to keep making the product better. We're going to keep making service better and we're going to stick together and do a pretty good job. It's cultured product service. And if we can win those three areas, then typically we won the deal.

Mark Murphy - Piper Jaffray

Thank you.

Operator

Our next question comes from (indiscernible).

Unidentified Analyst

Hey guys. I just called to say congratulations on a very strong quarter. I want to ask you, last quarter, I think as you look at the (indiscernible) as you look at this transition of the sales force, can you talk about the deals that change in business is coming from deals for employees, companies with employs over 1,000 or 15000 for the high end of the mid-market team?

Scott Scherr

Yeah, I think it just happened. In January they just got it and then we had holdouts for the quarter to the enterprise team for any holdout or deals they were working on. But I could say that I know in the first quarter we had our sales meeting in January, annual sales meeting we have. But then I met with -- we have six sales teams in the mid-market. I met with each one during the quarter individually with the team.

For a while now, we've been talking about going up a thousand employees and now you got -- in the first quarter, as hard as you can, we have to attack that because that's their high end, the 1500 where before it was the enterprise low end to go there. And when I look at the prospects that are out there in the pipeline, like 75% of it now is above 500 and almost 30% is above a thousand. So I think we're going to see -- well, I believe we're going to see.

If you'll ask me that question a year from now, I think I'm going to have results to back up the move (indiscernible) could go 1000 to 1500 because I think we're going to penetrate in a much bigger way than we have in the past.

Unidentified Analyst

Got it. That's helpful. And then Mitch, one for you, if you look at the kind of strategic 500 category, should we assume that no matter which direction you're going to choose to go, is there a potential downsize to earnings if you do have to build out or if you go without a partner?

Mitchell Dauerman

No. I think the question (indiscernible) quarter as well. The answer is the same.

Unidentified Analyst

All right. Thanks guys.

Operator

Our next question comes from (indiscernible).

Unidentified Analyst

Hey guys, nice job in the quarter. I just had one question and my question would be, (indiscernible) attendance there. Was there any particular module or a new functionality like the global payroll that generate more interest for customers that prospects another area?

Scott Scherr

I mean from my vantage point, it's obviously there. But it seems like recruitment on boarding predictive analytics and global and mobile. Those were the things that seems to have and I think it could go to holds a break out or anything like that. That's in line with our strategic direction and I think just in general that's what everyone is interested in.

Unidentified Analyst

Okay. Thank you.

Scott Scherr

Okay.

Operator

We'll take our next question from Michael Nemeroff from the Credit Suisse. Mr. Nemeroff, your line is open.

Michael Nemeroff - Credit Suisse

Yeah, thanks guys for taking my question. Sorry about that. Most of my questions have been answered. Sorry (indiscernible) on the strategic question. But could you give us a sense of what the contemplation is for partner versus doing it alone?

Scott Scherr

I think it has to be perfect for the partner and it has to be perfect for us and perfect is a strong word. I think if we can, then we don't want to do it and I'm sure the partner wouldn't want to do it. So I think if we can get it perfect through due diligence which has been going on to the contract phase, which has been going on, then we'll do it ourselves. We don't want to do that and I'm sure wouldn't want to do that.

Michael Nemeroff - Credit Suisse

Is it fair to say that you're circling in on one specific partner that you'd like to work with that could be perfect or are there multiple partners that you're talking to still currently?

Scott Scherr

No, one partner.

Michael Nemeroff - Credit Suisse

Okay. And then just on the recent acquisition, if you could just maybe give us an update on how the time management product has been received by the customers, if you can give us an information about the uptake to be attached specifically to the acquired product, that would be helpful.

Scott Scherr

Actually, it's very well received by our sales team. We kind of rolled it out at the January meeting and actually there are customers who are buying it and it's very high rating. I don't know that particular attached rate.

Mitchell Dauerman

We've seen a number of customers now take touch based as our client solutions as opposed to the alternatives and financially the flip that was a one-time would sometimes a low maintenance cost and now it's a perfect way for month fee.

But again, it depends on how the customer receives the needs. But so far, I'm really pleased with the production.

Michael Nemeroff - Credit Suisse

Sounds great. Thanks very much. Fantastic work guys.

Scott Scherr

Thank you.

Operator

We will take our next question from Pat Walravens with JMP Securities.

Pat Walravens - JMP Securities

So Scott, in terms of sort of the sales force quota, was this the best you won in 10 years?

Scott Scherr

No, I thought the mid market has the best in their history but overall no I don’t think so.

Pat Walravens - JMP Securities

Second question, these legacy enterprises that are moving, so Checkpoint [indiscernible], I mean why now? Why are they planning to do it now?

Scott Scherr

Well we started a year ago and we said we’re going to support it to after year end 2015. Kind of like now or never. End of 2014, right. So we have been working on it, when we started years ago trying to move people, 750 clients were down to less than 70 right now. I believe that will be cut in well below 50. But time is running out. You either have to make a move with us which obviously we would like, we think it’s a good solution, we think we are being fair about it. Or you have to find another solution.

Operator

We will take our next question from Jeff Houston with Barrington Research.

Jeff Houston - Barrington Research

Following up on the acquisition theme, with the 102 million of cash, could you talk a bit about areas that you are most interested in for acquisitions and how big of a deal would you consider?

Scott Scherr

We are not looking at anything right now. There is nothing that interests us, not to say that can’t change, we’ve never been an acquisitive company, the two deals that we did at the end of the year happened to be partners we were working with, both of them are growing, both of them needed capital, through conservations which – it seemed like they were close to be an ultimate family and – now they’re really ultimate family. But right now we are not dealing with anything out there.

Operator

We will take our next question from Steve Koenig with Wedbush Securities.

Steve Koenig - Wedbush Securities

So there was a key metric that you didn’t give us, so I have to ask you how many quarters since you’re doing that?

Scott Scherr

65 odds.

Steve Koenig - Wedbush Securities

So I do want to ask, the employment trend, so you had the positive employment upside this quarter, maybe can you give a little color on that, was it wide spread, was it across many customers in verticals, or more concentrated, and how much of does help and what are you thinking for next quarter in terms of that trend?

Scott Scherr

Steve, the reason I said, we were over by about 1% was really the minimized impact of that excess. Yeah we expect the employment trends this year to be a little better than last year but it’s a lot of slicing and dicing in that number. It’s still pretty minimal growth.

Steve Koenig - Wedbush Securities

You mention any sense of how that – how much of it would be from that versus earlier go live?

Scott Scherr

Again the numbers are very small, if it was guessing I’d take half and half.

Steve Koenig - Wedbush Securities

And then just maybe a one follow up here. I am curious on the low end, [indiscernible] with half additions, that’s more of us investors for the IPO, we also see them, would you expect to see some of those folks in the low end and you talked about by accounts as just the low end, is your product strategy going to be your mid market products or something new, and if you have already discussed, my apologies just a reminder on that?

Scott Scherr

And in the whole, right, we’ve had one source code, it’s just any market, we have – last year about $410 million in revenue, 60 million was companies under 500 phase, so it’s not like we are not – we haven’t sold them, we are not servicing them and it’s not working. So there is no real change there for us.

Steve Koenig - Wedbush Securities

Sorry, Scott, I was just wondering you talked about product and then, there is more – seems to be more fragmentation in the low end market, so just wondering in terms of your competitive strategy and how you differentiate there, what would be key for you?

Scott Scherr

As I said before, I think we have the key mega support better. Our retention rate actually went up over a year ago in that we were north of 96% and now we are further north of 96%, than we were a year ago. So I think if we stick together, you’re making the product better, you’re making support better, culture product service, that will be our differentiator with whatever market we are in. So [multiple speakers] achieve our goal.

Operator

We will take our next question from Matt Williams with Evercore.

Matt Williams - Evercore

Just a quick one for me, a lot of this has already been covered. Just wondering if you could provide a brief update around Excel [ph] and some of the managed services offerings and any response you’re seeing in the customer base, or any uptick around that managed services offering?

Scott Scherr

[indiscernible] which we call managed services has done well. What we expected they are integrating more with our sales force, it’s in the past, it was used probably more defensively, now it’s more in – available the people that are involved in more deals and actually we’re very optimistic about it being a great fit for those customers who choose to want to outsource certain services.

Mitchell Dauerman

Yeah, I couldn’t be more pleased with everything that’s talked more about, the culture that they have, how they fit into Ultimate, it’s assimilated with our services teams and our sales teams, and we had a successful. On every measurement we have, we had a very successful Q1 with them. So I think it’s a great fit and it’s going to make a difference as we move forward.

Operator

We will take one more question. Our last question comes from Mark Marcon with Robert Baird.

Mark Marcon - RW Baird

Couple of questions, one with regards to the services gross margins, how should we think about that going forward, was better than what we expected, had a couple of quarters… it’s better than expected, how should we think that?

Mitchell Dauerman

I think when we get to service gross margins, we will probably end up for the full year the low single digits, sometimes they ebb and flow during the year. So I wouldn’t – I probably wouldn’t read too much in the better than expected results in Q1.

Mark Marcon - RW Baird

So low single digits is a good guess. All right. Great, and then with regards to the strategic question, it doesn’t turn out to be a perfect situation for both of the parties and you decide to go it alone, should we – would the margin guidance still work under those circumstances?

Mitchell Dauerman

Yes.

Mark Marcon - RW Baird

And then with regard to recruiting, can you talk a little bit more about that just in terms of how much further that can – you can penetrate the existing client base that doesn’t have the recruiting module?

Scott Scherr

I don’t know the exact number. We have high big sales team, that’s falling into our client base, obviously lot of our clients with connections, we look – I don’t know the exact numbers but the more good stuff we make, and the more they like, the better it is for us. Clearly everyone really likes the recruitment product.

Mark Marcon - RW Baird

I was just trying to think about what your penetration rate was – was it on a –

Scott Scherr

I don’t have it but I will get it for next quarter.

Operator

That concludes today’s question and question session. Mr. Scott Scherr, at this time I will turn the conference back to you for any additional or closing remarks.

Scott Scherr

I would just say it was a great start to the year. Appreciate all your support. Take care everybody. Talk to you next quarter or right after this call.

Operator

That concludes today’s presentation. Thank you for your participation.

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