Ultimate Software Group's CEO Discusses Q4 2010 Results - Earnings Call Transcript

Feb. 9.11 | About: Ultimate Software (ULTI)

Ultimate Software Group (NASDAQ:ULTI)

Q4 2010 Earnings Call

February 08, 2011 5:00 pm ET

Executives

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

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

Analysts

Richard Davis - Canaccord Genuity

Laura Lederman - William Blair & Company L.L.C.

Michael Nemeroff - Wedbush Securities Inc.

Ilya Grozovsky - Morgan Joseph LLC

Brad Reback - Oppenheimer & Co. Inc.

Nathan Schneiderman - Roth Capital Partners, LLC

Richard Baldry - First Albany Capital

AjayKumar Kasargod

Mark Marcon - Robert W. Baird & Co. Incorporated

Operator

Hello, and welcome to Ultimate's Fourth Quarter and Year End 2010 Financial Results Conference Call. [Operator Instructions] Your presenters 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'll begin with comments from Mitchell Dauerman. Please go ahead, sir.

Mitchell Dauerman

Thank you, Jamie. 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 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 at www.sec.gov 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 statements, whether as a result of new information, future events or otherwise.

I'm going to begin by reviewing our financial results for 2010 and then I'll provide financial guidance for 2011. Unless otherwise noted, our discussion will be based on continuing operations and will be on a non-GAAP basis for all costs, gross margins, operating and net income, as well as EPS, when comparing to the same period in the prior year.

The primary difference between GAAP and non-GAAP financial information is non-cash 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, recurring revenues grew 28.3% to $170.9 million. Total revenues grew by 16.1% to $227.8 million. Recurring revenues as a percentage of total revenues increased to 75% from 68% last year.

Total gross margin was 57.4% compared with 56.3% for 2009. We managed our operating expense growth to 12.1% over 2009, and this was less than 50% of our recurring revenue growth rate. Operating income was $21.8 million, and the operating margin for 2010 was 9.6%.

Excluding the impact of perpetual license sales, operating margins expanded by over 400 basis points. Total cash and investments in marketable securities were $50.2 million at December 31. Non-GAAP net income was $12.8 million or $0.47 per diluted share compared with $7.5 million or $0.29 per diluted share in 2009.

From a financial goals perspective, we exceeded our recurring revenue growth target of 27%, and we attained our goal of ending the year with $50 million of cash on the balance sheet. Along with our continued strong cash flow, we were able to introduce our Partners for Life program during the year and still achieve our operating margin objective of approximately 10%.

Before I discuss the quarter's result and guidance, I wanted to expand our prior discussion about Partners for Life and also discuss our Tax Filing business.

Last quarter, we discussed the Partners for Life program we implemented as it relates to training. Keep in mind that services revenues do not represent a significant driver of our model, and for competitive reasons, we need to limit our comments. We're going to give you some detail on the implementation side of the Partners for Life program.

Based upon the success we have had in the Workplace model, we changed our billing practices for Enterprise implementation services from a time and materials basis to essentially, a fixed fee per employee. As a result, payments earned were impacted, which will have some impact on our accounts receivable and deferred revenue balances. We don't expect that this change will have a material impact on our overall services revenue but could result in some quarter-to-quarter volatility.

With respect to our Tax Filing business, we've seen it grow nicely, as evidenced by our 100% attach rates in Workplace and a high attach rate in Enterprise. Recently, we hired a seasoned veteran in the industry to head this business for us, and we intend to expand our operational presence in Southern California. This will include additional labor costs and capital expenditures.

Our focus for this business is to enhance our customer satisfaction as opposed to maximizing the float balances to us. However, it is important that we have clean funds when transmitting to government jurisdictions, so float balances do occur.

To give you some perspective, we have seen our average daily float balances go from $2 million in 2008 to $77 million in 2010. And while it's difficult to forecast, we see the average daily balance nearing $200 million in 2011 and growing to over $600 million in 2013.

Now turning to the quarterly results. For the fourth quarter of 2010, we recorded recurring revenues of $46 million, representing a 29% growth rate over the same quarter last year. Total gross margin was 57.6%, up from 55.2% for the same quarter of 2009. Customer retention exceeded 96% for our recurring revenue customer base.

Operating expenses grew 10.6% over the same quarter last year. Non-GAAP net income for the fourth quarter of 2010 was $4.6 million or $0.17 per diluted share compared with $2.5 million or $0.10 per diluted share for the same quarter last year.

Our fourth quarter recurring revenues were $46 million and represents 76% of total revenues compared with 68% for the fourth quarter of last year. The recurring revenue gross margin of 72.1% was slightly ahead of our expectations, mostly due to lower expenses.

Service revenues were $14 million, and the services gross margin was 9.4%, both slightly under our expectations. This is attributable to higher-than-expected performance-based bonuses for our consultants and to a lesser extent, lower-than-expected training revenues resulting from the transition to our Partners for Life program. In 2011, our bonus plans have been modified to reflect the impact of the Partners for Life program. Our non-GAAP income tax rate for the quarter and the full year was 41.4%.

Turning to the balance sheet. Total cash and investments in marketable securities were $50.2 million at December 31. For the year, we generated $25.4 million in cash from operations, excluding $6.7 million in excess tax benefits, which are required by accounting rules to be reflected with financing activities in the cash flow statement. We invested $8.9 million in total capital expenditures.

2010 cash flows from operations are not comparable to 2009, because in 2010, we were required to reflect the $6.7 million of excess tax benefits that relate to the utilization of net operating losses as cash flows from financing as opposed to cash flow from operations. The comparable amount in 2009 was only $500,000. This reclassification is pursuant to ASC 718, formerly FAS 123R and relates to the cash flow benefits from the use of net operating losses that were represented by stock-based compensation deductions.

As part of our stock repurchase program, we used $19.8 million to acquire 609,400 shares of our common stock. As of today, we have 405,175 shares authorized and available for repurchase.

Accounts receivable increased to $47.6 million compared to $38.5 million at the end of last year. DSOs were 72 days at the end of December of 2010 compared to 68 days at the end of last year. Deferred revenues were $78.1 million on December 31, up from $68.6 million at December 31 last year.

Now turning to guidance. The key drivers of our business model are: one, growing recurring revenue by 25% year-over-year; two, maintaining customer retention over 95%; and three, managing operating expenses at 50% of our recurring revenue growth rate.

For 2011, we expect recurring revenue growth of approximately 25%. We expect services revenues to remain relatively flat, and we expect license revenues associated with customers to decline to about $500,000. Total revenues should grow by approximately 19%.

As I mentioned earlier, we are increasing our investment in our Tax Filing business from our prior guidance, as well as continuing to make investments in our customer experience. Accordingly, we do not expect gross margins for recurring revenues to expand in 2010. We expect service margins to be approximately 10%.

We expect the operating expenses to grow at about 50% of the recurring revenue growth rate. Operating margins of approximately 13% should be produced for 2011. Our non-GAAP tax rate for 2011 should be approximately 41%, and diluted weighted average shares should be approximately 27.9 million.

We expect that capital expenditures will be approximately $15 million, including the cost related to additional leased office space as we accommodate the growth in our business. We expect depreciation and amortization to be approximately $12 million, and we expect stock-based comp to be approximately $15 million.

For the first quarter of 2011, we expect recurring revenues to be approximately $49 million and total revenues to be approximately $64 million. Looking at our cost from a sequential quarter basis, Q1 '11 versus Q4 '10 will have higher cost. And this is the usual pattern each year, mostly due to employment-related expenses, particularly higher benefits typical at the beginning of each year compared to the fourth quarter of each year.

We expect the operating margins to be approximately 7% for the quarter. The investing in Tax Filing and the Partners for Life program in 2011 will impact the service margin by approximately $1.5 million when compared to the same quarter of last year. Excluding these investments and taking the timing of discrete expenses into consideration, our operating margin in Q1 would be approximately 10%.

Turning to our upcoming conference schedule. During the next quarter, I will be at the R.W. Baird Annual Business Solutions Conference on February 24 in Boston, the Raymond James Annual Institutional Investors Conference on March 7 in Orlando, Signal Hill's First Annual Cloud Conference on March 9 and the Wedbush Technology Conference on March 10, both in New York. Finally, I will be at the Roth OC Growth Stock Conference in Dana Point, California on March 14. 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

Thanks, Mitch. Thank you, everyone for participating in our call this evening. 2010 was a good year for Ultimate. Our total revenues were an all-time high of nearly $228 million, and our recurring revenues climbed to a record $171 million for the year. Recurring revenues were 75% of our total revenue in 2010. Our 2010 fourth quarter recurring revenue was up 29%, and our total revenue was up 16% over last year's fourth quarter.

Our Enterprise sales team had our best quarter ever. The average deal size was up, and we sold the largest deal in our history, 90,000 employees. Our attach rates remained strong. 2010 attach rates for our Talent Management products were 54% and for Time and Attendance, 42%.

Looking at our Enterprise sales for the quarter, some of the new customers we signed were a 90,000-employee organization that selected Performance Management and Salary Planning and Budgeting, along with Core UltiPro; a hotel management company with 6,500 employees that signed up for Recruitment, Onboarding, Performance Management, Learning Management and Time Management in addition to Core UltiPro; an insurance company with more than 5,000 employees that added Recruitment, Onboarding and Performance Management to the Core solution; a real estate company with 4,000 employees that added Recruitment, Onboarding and Performance Management; a supermarket chain with 4,500 employees that signed up for Recruitment, Onboarding, Performance Management, Learning Management and Salary Planning and Budgeting; and a logistics and supply chain management company with 3,000 employees that selected Core UltiPro, Recruitment, Onboarding, Performance Management, Learning Management, Salary Planning and Budgeting and Time Management.

Two Canadian organizations that joined us were a seniors housing organization with more than 11,000 employees, our largest Canadian-based customer to date, selected Recruitment, Performance and Salary Planning and Budgeting, along with UltiPro Canada; and an entertainment company with approximately 1,500 employees that signed up for Recruitment, Performance Management, Salary Planning and Time Management in addition to UltiPro Canada.

The team has opened 2011 with tremendous momentum, and I believe we're in the best position we've ever been in.

In Workplace, attach rates also remain strong. For 2010, Benefits Enrollment was more than 80%. Recruitment and Performance Management were approximately 70%, and Time Management was 75%. We had 53% growth in total number of new units sold, and the average employee size of our new customers was up 15%.

Some new Workplace customers in Q4 were a gentle technology company with 1,000 employees that added Recruitment, Benefits Enrollment, Performance Management and Time Management to their UltiPro Workplace package; a global manufactured technologies company in the energy business with 1,000 employees that added Performance Management, Benefits Enrollment and Time Management; an energy systems company with 1,000 employees that added Recruitment, Benefits Enrollment, Performance Management and Salary Planning and Budgeting; a family services organization with 850 employees that added Recruitment, Benefits Enrollment, Performance Management and Time Management; and a fiber optics company with 700 employees that added Recruitment, Benefits Enrollment, Performance Management and Time Management.

Market demand for our solutions continues to grow. In 2010's fourth quarter, we had a 20% increase over 2009's fourth quarter in the number of campaign respondents who indicated they are looking to buy an HCM solution within the next 24 months, the highest number ever of potential buyers in a fourth quarter.

We had the most visits to our website of any prior fourth quarter and a 24% increase over 2009's Q4. In December, we had the second highest performing webcast in our history, with approximately 2,400 registrants. We had another record with our looking-to-buy responders for the 2010 year. The increase was 40% more than in 2009.

Return on investment continues to be a value driver for our solutions. Our customers recognize that UltiPro's product strength, product breadth and unity of functional areas makes significant ROI a reality. Allegiance Health, for example, a Michigan-based health system manages its human capital function with multiple on-premise applications, databases and spreadsheets that were not unified before they signed up for UltiPro in December 2009. Allegiance Health's UltiPro package includes Recruitment, Onboarding and Performance Management in addition to Core UltiPro, and they are now on pace for an annual core savings of $500,000 a year. They are reducing tasks associated with new employee onboarding by 67% and managing their recruiting and talent acquisition process with 76% less data entries.

First Horizon, a financial organization with 5,400 employees streamlined its HCM processes by adding Onboarding to its UltiPro suite and decreased its employee voluntary turnover rate by nearly 10%, reducing the large cost associated with turnover.

And Laird Technologies, a global company with 13,000 multinational employees in 14 countries, had 10 payroll service bureau accounts and several disparate systems to store HR information before UltiPro. When Laird moved to UltiPro, they cut their HCM-related headcount by several full-time equivalents, and they can now generate reports with strategic metrics on their global workforce through UltiPro's executive dashboard in about 10 seconds compared to the weeks it used to take them to collect and consolidate reporting data from multiple sources.

Ultimate received more accolades in the fourth quarter of 2010. Aberdeen Group, a research firm focused on performance benchmarks of global businesses, conducted research on hundreds of organizations to determine best practices for managing core HR functions. Aberdeen found that Ultimate's users performed better in key HR metrics than users from best-in-class companies and defined best-in-class companies as the top 20% of aggregate performers. Quoting Aberdeen, compared to best-in-class organizations, companies using Ultimate solutions have experienced 13% greater improvement in employee satisfaction, twice the reduction in the cost of HR administration and 30% greater decrease in the number of manual transactions handled by HR personnel. Aberdeen published a paper on these results in December 2010, and it's available on our website.

Also in Q4, Ultimate won an Optimas Award from Workforce Management magazine for innovative human capital management practices. Other 2010 Optimas winners included Microsoft, IBM and Infosys Technologies.

Ultimate's theft security structure was re-certified in December 2010 for ISO/IEC 27001. Ultimate was commended for its superior technology controls and its focus on optimal security processes. Ultimate was the first HR staff vendor to earn this certification and has been certified since 2008. It is a global industry standard created by the International Organization for Standardization and the International Electrotechnical Commission that validates organizations that have implemented a secure and sound security management system.

Ultimate's Customer Support Center was awarded Service Capability & Performance Certification for best practices for the 12th consecutive year at the end of 2010. The SCP standards represent the global benchmark for service excellence and are recognized by leading technology companies around the world.

Our customers continue to be our best advocates, and that's why we created the Partners for Life program we discussed on our last call. Our existing customers not only influence new customers to select Ultimate, they provide us valuable strategic insight on where the HR and talent markets are going and how we can best continue innovating with our UltiPro solutions.

In addition to our regional and special interest online forums, we introduced a new community forum in 2010 called Ultimate Ideas, where our customers can collaborate in online discussions with our Ultimate associates and other customers and propose new solution enhancements and ideas. Customers help us to prioritize by commenting on the business value of proposed ideas and voting ideas up or down and may contribute to formulating our strategic HCM vision.

Our year end UltiPro training took place in Q4, and we had record attendance for those sessions. So far, in this year's Q1, we have a 50% increase in enrollments over Q1 of 2010. Partners for Life is definitely making a difference.

In closing, we said last year that 2010 would be a pivotal time for Ultimate. We needed to achieve our three major objectives to put us in a position to continue executing the same goals in 2011. We did just that. We grew our recurring revenue by more than 25%. We kept our operating expense growth at half that, and we kept our client retention rate higher than 95%.

We have the foundation and the momentum to achieve those goals again in 2011. We ended the year 1,134 strong, lots of new faces, lots of new talent to complement our existing talent. We're all looking forward to executing on our business plan. We appreciate the support all of you have given us over the years. Let's go to the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Laura Lederman with William Blair & Company.

Laura Lederman - William Blair & Company L.L.C.

Can you talk a little bit about any changes in the competitive environment, specifically with Workday? And then I've got a couple of follow-ups.

Scott Scherr

For us, on the Enterprise for the year, 65% of our business came from service bureaus. On Workplace, 80% of our business came from service bureaus. We see Workday on the Enterprise side about 5% of the time.

Laura Lederman - William Blair & Company L.L.C.

Any change in terms of which service bureaus you're getting share from? Or is the vast majority still ADP?

Scott Scherr

Vast majority, ADP and then Ceridian, second.

Laura Lederman - William Blair & Company L.L.C.

On the Tax Filing, and I apologize if you already addressed this, but the four after the call was just a little muddy. But can you talk a little bit about the revenue opportunity there that you're investing in and also what it is specifically that you're doing that you haven't done before that takes better advantage of that opportunity? Or is it more really customer satisfaction, which is one of the things you mentioned? So trying to understand the revenue opportunity versus customer satisfaction.

Scott Scherr

Laura, we added in 2008. We began adding Tax Filings and so it's included -- it was an additional revenue opportunity in the PEPM. We saw very high attach rates in Workplace. We rolled it out over the last year or so through Enterprise and seen very high attach rates there. So I think it's something that I would say straight up the middle in terms of what a customer is looking for in an end-to-end solution. So as we sort through and we saw the opportunity to hire a seasoned veteran in this area, we felt that this was the time to put in place an even stronger infrastructure for the future. So the opportunity is really continued additional business, generating PEPM. And as I mentioned in the prepared comments, a side benefit will be interest on the float balance at the time that interest rates start to move up.

Laura Lederman - William Blair & Company L.L.C.

Besides adding a seasoned veteran, are there additional people below that? I'm just trying to understand the added expense a little better.

Mitchell Dauerman

It's people. It was a decision that we made during the last quarter that we felt it was time to build some infrastructure, lease space in Southern California in addition to our location in Atlanta, add people and build the foundation there to support that organization.

Laura Lederman - William Blair & Company L.L.C.

If you look at the drivers of the business in the Enterprise side, how much of it is the improving economy versus you're marketing more effectively, versus your having more events if you look at the increased interest you're seeing in the business and increased customer signings?

Scott Scherr

They've been doing well the last -- I don't remember when they weren't doing well. I mean Q4, they had an exceptional quarter.

Laura Lederman - William Blair & Company L.L.C.

I was trying to find out why was it exceptional, simply put.

Scott Scherr

Well, I think we have a thing here where everyone, everyday, and I think that they've been working everyday and everyone of them culminated in an unbelievable fourth quarter. I talked about the largest deal we ever got, but there were a lot of large deals in the quarter. I just think it was a culmination of the hard work that they've been constantly doing over time.

Laura Lederman - William Blair & Company L.L.C.

So less the economy then, that really wasn't a factor in terms of that improving over time?

Scott Scherr

Seeing the team that we have -- and having a great fourth quarter is what they did six months ago or 12 months ago or nine months ago.

Operator

And we'll take our next question from Michael Wong [ph] (0:29:15) with Needham & Company.

Unidentified Analyst

So just with respect to the large megadeal that you guys did, could talk about who you replaced there? And who did you compete with? And maybe, if you could characterize the sales cycle there? It's certainly very impressive.

Scott Scherr

Yes. They were using -- it was a national company, national location using multiple some service bureaus, some in-house. The sales cycle, I think we've been on it for years to tell you the truth. I think we have a very seasoned person as we do around the country in Enterprise, and he's working for years. And it culminated -- Q4 is when it closed.

Unidentified Analyst

Just with respect to the pipeline, as you look at the cross section there, is there anything that's different from what you see this year versus kind of how you entered in 2009? And obviously, it seems like you're seeing some bigger deals, and you're seeing some nice set of attach rates, but maybe you could just help us understand what you're seeing in terms of the cross section versus what you're seeing last year.

Scott Scherr

Again, I think an evolution of the business -- if we have a really good team, and they're going to work everyday, and they're not having a lot of turnover so pipeline grows, along with as Ultimate grows, more people know about us, as we talked about, the lead generation from our marketing department. I just think it's an evolution, where more people know you, and you get more opportunities. The pipe grows. The funnel grows, and we have high close rates when we can run our process. The size also goes up. Our size has gone up in Workplace, which was part of our plan that the average unit size would go up, and the size has gone up in Enterprise. Did I answer it?

Unidentified Analyst

Yes.

Operator

And we'll turn next to Richard Davis with Canaccord.

Richard Davis - Canaccord Genuity

So I think you've about tripled the full menu, full bore, per employee per month number to, I think, around -- I think it's $15 over the past eight years or so that I've known you guys. So what I'm trying to figure out is how high is up? Will this number continue to go up? Will it go down, I hope not, or flat? I have my own opinions, and I've tried to call customers, and others, to kind of gauge that. But in your opinion, where do you think the fully loaded per employee per month number will go and why? And I realize not everyone's on that, but the point is if it's a higher number then that gives you more upside, a chance to kind of grow same-store sales.

Scott Scherr

Yes. I think if you ask me over the next two years, what I could see is we should be able to provide value for a $20 number. And that doesn't mean everyone take the $20, but there are companies -- I think we could provide $20 worth of value for that company.

Richard Davis - Canaccord Genuity

And the reason that -- so you would be, obviously, will be adding new features and functionality. That's the key driver, I take it.

Scott Scherr

We're always adding new features, functionality. We added global this year, so yes. We're also averaging somewhat close to that in Workplace now at a value. When you talk about the attach rates we have in Time and Performance and Recruitment and open enrollment, we're not too far away from that number.

Operator

And we'll go next to Ajay Kasargod with Morgan Keegan.

AjayKumar Kasargod

Two quick questions. One is for incremental spend and looking at 2011 and maybe even reflecting on Q4. Mitch, you made a comment, just kind of highlight Partners for Life and the California build-out for tax as incremental spend for 2011 that'll impact margin. And so it seems like you're at the lower end of your prior guidance range of 13% to 14% property margin. Is there also some other incremental growth investments in an improving economy? Can you just discuss that? And I have one follow-up.

Mitchell Dauerman

Ajay, I think the majority of it is the decision to invest more in Tax Filing. As you go through your final budgeting, detailed budgeting process, there is some tweaking about investments that are prudent to make.

AjayKumar Kasargod

And then the second question has to do with business generation. And I don't have all the exact numbers, but it looks like your deferred revenue balances, especially recurring balances, grew at a very healthy rate this past quarter. And Scott, you highlighted in your comments that the pipeline of activity has picked up. So can you talk to us in a little bit more detail about bookings growth and the expectations for business bookings in 2011?

Scott Scherr

I think our bookings growth has given us the confidence that we're going to grow our recurring revenues by 25%, and it gives me the confidence that we can keep that going through 2012, right now.

AjayKumar Kasargod

And I guess, Scott, is there anything with the economy and in terms of how things are trending that there might be some leverage points where you might decide to make some increased investments in 2011 to capture some additional growth?

Scott Scherr

I think I have the team in place. I think we have the strongest team in place that we ever had as far as tenured people, people we feel great about. So I think if there is growth, that the team I have in place can get that growth by selling more units, by selling higher employee count, so no. If you said I'm going to grow the sales force this year, I have no plans to do that.

Operator

And we'll take our next question from Michael Nemeroff with Wedbush.

Michael Nemeroff - Wedbush Securities Inc.

Mitch, one for you and then actually, I think a couple for you. Just on the margin, I know that you commented about what the margin would have looked like in Q1 were it not for the increased investment on the new tax product. I was wondering if you could tell us what that would be for the year? Have you thought about it in that respect?

Mitchell Dauerman

I haven't thought about it in -- well, the effect on the year will be going from 13% to 14% operating margins to approximately 13%, not to oversimplify it. I think that's the whole difference, and I think we're just trying to point out that in this case, there is an acceleration of expense into that first quarter. Again, if somebody's trying to do a comparable quarter-over-quarter operating margin contribution, and I think it would have stood out as saying with the growth in revenues, why didn't more drop to the bottom line. So we wanted just to point that out as it affects the first quarter.

Michael Nemeroff - Wedbush Securities Inc.

And then also I know for the year, the guide for 2010 was around 10% and the guide for 2011 around 13%. Under what circumstances do you think you could beat that 13%? What has to happen? Or should we kind of be thinking in the 12.5% to 13% range for 2011 operating margin?

Scott Scherr

Well, I think it'll be by getting clients up faster. It's really getting clients up faster then you can manage expenses. I think the key is to get the clients up faster and time alive.

Michael Nemeroff - Wedbush Securities Inc.

And how is that times alive been trending over the last couple of quarters? Is it improving?

Mitchell Dauerman

Well, I think what we said before is we've seen Enterprise accelerate a little a bit. Jury's still out on the complimentary products. And then in Workplace, we saw the shift from where we thought that they could move a little bit shorter going to start months within a quarter to moving back to a quarter start, so either move forward or back. So I would say now we're going to next year with Workplace, knowing what we think is going to happen. And Enterprise, I think they're well incented to try to make it as quick as they can, but it has to be a quality implementation.

Michael Nemeroff - Wedbush Securities Inc.

And then just lastly on the recurring revenue margin. What's the optimal level there? What's the endgame? And where do you think you can get that recurring revenue margin up to in, let's say, two to three years? What's your target there?

Mitchell Dauerman

Right now, we see a growth in recurring revenues about 25% year-over-year. I think you go, let's say, relatively flat for 2010 and then you start going up about, let's say, 700 to 100 basis points a year. By 2013, you're sitting at probably around a reported 73% gross margin and an incremental gross margin between 76% and 80%.

Michael Nemeroff - Wedbush Securities Inc.

Just one more final one on the services revenue. I know that it's not an area of focus, but should we be thinking about that actually trending down over time? Or is this kind of the level where you think it might just kind of flatline for the next couple of years?

Mitchell Dauerman

Our goal is to flatten it.

Operator

We'll take our next question from Richard Baldry with Signal Hill Capital.

Richard Baldry - First Albany Capital

Can you maybe talk a little in detail about the complexities of deploying something like a 90,000-seat deal? Because even if we assume that on that scale, there is a pretty significant discount, it moves the dial on a quarterly revenue pretty meaningfully. So is a deal like that really take upwards of a year to get out? Or is it -- can it still fall in line with the durations that we've seen the in Enterprise before?

Mitchell Dauerman

Rich, the way -- I mean, in this case, we're going to start seeing revenue in the beginning of 2012 from it. There were, obviously, a lot of people involved in a multi-location organization of that size, and we worked together with the customer to come up with a implementation program that initially would show revenue coming up in the beginning of '12 and then hitting, I think, the full rate probably around the middle of '12. But everyone's incented to, if they can, to move it sooner.

Scott Scherr

Also, Rich, we have many companies that are multi-location throughout the United States and Canada and the world where we track HR. And if one location has 1,000 employees and another location has 15,000 employees, that's the same process that goes on. So there's nothing extraordinary about the implementation process or the training process.

Richard Baldry - First Albany Capital

And on the sequential guide for the recurring revs, it looks like it's up about $3 million. Your prior is still $3.7 million. Was there anything unusual in Q1 '10 that would skew that comparison on a year-over-year basis?

Scott Scherr

Rich, give me your question again. You lost me.

Richard Baldry - First Albany Capital

If we look at the year ago sequential Q1 recurring revenue growth, it's just a little short of $4 million. And your guide is for a sequential of about $3 million. So just looking at -- was there anything unusual in the Q1 '10 number that's skewing that comparison?

Mitchell Dauerman

Nothing that comes to mind. It's got to be just the timing of which customers are going live at that time. I don't think it's -- last year probably got hit with a little bit of employment shrinkage in the beginning of the year before that turned around and became positive for the year. And in this year, going from Q4 to Q1, we're not anticipating employment shrinkage. So maybe that's a part of it.

Richard Baldry - First Albany Capital

Then could you talk about your intentions on the buyback? It seems like cash actually stepped up pretty markedly for the first time in quite a while, so just curious about your intentions there.

Mitchell Dauerman

Our goal is by the end of this year, to try to put $75 million on the balance sheet. So we'll manage the buyback around that. But in addition, we do use cash to settle taxes related to divesting of restricted stock units. So we'll have some spend there and some shares that are "bought back" through that program.

Operator

And we'll go next Nathan Schneiderman with Roth Capital.

Nathan Schneiderman - Roth Capital Partners, LLC

Given the new guidance for a 13% operating margin, how confident do you all feel in your 2013 goal of 23%, which would imply about 500 basis points of improvement the next two years?

Mitchell Dauerman

Nate, I think we'd give you the same answer as the last time. I think we're still confident. Scott would tell you 25%. I would tell you 23%. And it's based on the 25% recurring revenue growth, which is the driver. As I mentioned before to an earlier question, it's based on where we see the gross margin or recurring expanding, keeping services flat, keeping the gross margin on services flat and then seeing operating expenses grow in that, roughly, 50% of the recurring revenue growth rate.

Nathan Schneiderman - Roth Capital Partners, LLC

And can you -- just a few questions on some of the cost structure changes in Q1. Can you explain the shift in Partners for Life from the time and material basis to a fee per employee and what, if any, impact that's having on the cost and margin structure in Q1? And maybe the same kind of question on the Tax Filing. If you could just share with us what's the incremental sequential cost for each of those items, Q1 relative to Q4?

Mitchell Dauerman

I mean, I think when you look at the services in Q1, say over Q1 of last year, you're really looking at your training revenue dropping down materially. Because we had a significant amount of training revenue in Q1 of last year, and we're going to have a small amount, if any, in this year. In Tax Filing, we're picking up the expenses relating to labor. I mentioned to $1.5 million of the combination of those two items. The Tax Filing incremental labor, again, moving from Q4 to Q1 this year versus last year, probably makes up a little bit more than half of the variance.

Nathan Schneiderman - Roth Capital Partners, LLC

And then just to clarify, does that $1.5 million of sequential increase effectively stay at that level going forward? Or is that a one-time blip that then drops down the following quarter?

Mitchell Dauerman

Well, I don't think it could drop down to the extent of the labor and Tax Filing. And I think it depends on prices, this movement of labor in the first half of the year, but as of right now, there is some shifting of expenses between quarters. I don't know if I answered your question.

Nathan Schneiderman - Roth Capital Partners, LLC

I was curious where you ended on the number of Enterprise quarter revs and Workplace quarter revs. I believe that was $30 million last quarter and then $32 million for the Workplace.

Scott Scherr

That's where we ended, and that's where we started.

Operator

And we'll take our next question from Brad Reback with Oppenheimer.

Brad Reback - Oppenheimer & Co. Inc.

As we think about the progression of the operating margin, Mitch, over the course of the year, is it more back-end loaded? Should it be fairly linear? How should we assess that?

Mitchell Dauerman

I think you're going to see a step-up in the middle quarters and then it will step-up again in Q4 like it did this year, and that will be driven in the fourth quarter by similar factors as this quarter. The fact that we have certain national meetings in Q3 and we don't in Q4, that PTO gets -- 50% gets written off in Q4, so you get that credit. And then also, based on backlogged sales already, we do see more sequential recurring revenue occurring in Q4 this year than we did last year. And again, that's based on the customers that we've sold and where we're modeling that out based on input from the field or prior experience.

Brad Reback - Oppenheimer & Co. Inc.

So based on that last comment, would recurring revenue growth likely be higher than in 4Q for the year?

Mitchell Dauerman

Say that again?

Brad Reback - Oppenheimer & Co. Inc.

Based on your last comment around some recurring revenue, will the growth rate be highest in 4Q of '11? Or will that also be fairly linear?

Mitchell Dauerman

The growth rate in recurring revenue?

Brad Reback - Oppenheimer & Co. Inc.

Yes.

Mitchell Dauerman

Yes. Quarter-over-quarter, it'll go up a little bit.

Operator

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

Mark Marcon - Robert W. Baird & Co. Incorporated

I was wondering, could you talk -- aside from the shift with regards to Partners for Life and services, what are you seeing in terms of pricing? How should we think about that, both on the Enterprise side as well as in Workforce?

Scott Scherr

Our pacing has been consistent. We really don't give out our pricing, but it's been consistent over the years.

Mark Marcon - Robert W. Baird & Co. Incorporated

So no real change in terms of what you're getting per module or anything like that?

Scott Scherr

No.

Mark Marcon - Robert W. Baird & Co. Incorporated

And would you expect price increases to come through this year or next? Or how should we think about it on a go-forward basis?

Scott Scherr

We're on a three-year cycle with price increases. We've always been since 2002. So in every three years from new accounts, we raise the price. And in existing clients, is a two-year contract in general then we price increase after two years.

Mark Marcon - Robert W. Baird & Co. Incorporated

And then with regards to this large national account that came on -- I'm sorry if I missed it. How many modules did they sign on for? And what was the main reason why they selected you?

Scott Scherr

Like many companies, they were -- they did a search. They wanted to unify their organizations throughout the country, and they were looking for someone -- HR, payroll, Performance Management, Salary Planning and Budgeting was what they took. They were looking. We were there, and they chose us.

Mark Marcon - Robert W. Baird & Co. Incorporated

Do you have a sense for who else you competed with or anything along those lines?

Scott Scherr

Of course.

Mark Marcon - Robert W. Baird & Co. Incorporated

Can you share it, or...

Scott Scherr

Like I said, in general, we compete against the service bureaus 65% of the time and then different in-house solutions the other 35% of the time.

Mark Marcon - Robert W. Baird & Co. Incorporated

And then going back to the prior question with regards to both Workforce and Enterprise, how should we think about the full year in terms of where we should end up by the time we end this year in terms of Enterprise and Workforce? And I know that that's, to a large extent, driven by the types of people that you see and whether or not they're qualified, but if everything goes ideally.

Scott Scherr

It's Workplace, not Workforce. And you're right, this is Workplace. We expect to end the year at 62%, full-time equivalent. That makes that a big difference, full-time equivalent, because there are people -- in that 62%, some are freshmen, some are sophomores, some are juniors. But hopefully, we'll end the year at 62% full-time equivalent and then we'll grow from there in '11, in '12.

Operator

And we'll take a question from Ajay Kasargod with Morgan Keegan.

AjayKumar Kasargod

Scott, one of the things that we learned from talking to your customers is when they select UltiPro, it saves heads. It saves cost. It's efficient. And so my question to you is coming out of the recession, what have you've been seeing or learning from your customers or prospects in terms of accelerated interest in your solution? Because it is more efficient, and it can save -- it does provide tangible cost savings. Can you just speak to that? Because that's what we learned when we talked to customers in the market.

Scott Scherr

I guess, we've been saying that forever. You're probably talking to customers that might have signed up with us five, 10 years ago. We're always pitching the value other than -- I hate to use the word saving heads, more reallocating heads to other places. But it definitely makes the HR, payroll and talent management position, it makes them -- you need less people in those positions. It makes it more valuable for the organization to have a unified product like UltiPro.

AjayKumar Kasargod

And Scott, just to clarify, what specifically I was asking is have you seen that interest accelerate now that people have gone through the pains of the recession? And how do we exit that, because of the pain that people went through? That was what I wanted to get your perspective on.

Scott Scherr

Ajay, we've been growing over these last few years with over 25% recurring revenue. The sales team has been doing their job. We're in a business. Obviously, if business is good -- it's better, everybody feels better. But recession or not, people change their HR payroll system, and they're looking for better ways to handle their talent. So I think in good times and bad, UltiPro is something that sells.

Operator

And we'll take one more question that comes from Ilya Grozovsky with Morgan Joseph.

Ilya Grozovsky - Morgan Joseph LLC

Scott, so my question is this. In 2010, you guys added an incremental $40 million or so in revenues, and in 2009 -- and the projection for 2011 is also essentially a $40 million increase in revenue. What is the barrier to really break through and to -- I mean, it seems like you guys win contracts when you compete pretty successfully. So I'm just trying to understand what's the barrier to really break through and have a significant step function beyond what you've done in 2010?

Scott Scherr

Yes, I think it's -- the first thing, when you said that, that came in my mind was it's our business model. It's what we do. We're trying to grow the business effectively. We're trying to increase our operating margin. I imagine someone else would say double the sales force and you would get there, and obviously, that would hit the operating margin. But I think we have had a business plan of 25% recurring revenue growth, trying to keep our operating expenses at half of that and really take care of our customers and keep our retention rate at over 95%. So we had a goal to get over $200 million. We reached that. Our goal is $400 million in '13. We think that's a good goal. We think that's a good business model. I guess we don't want to risk it for the things that -- because that's what you're asking for would be put in a different business model, but what you would consider rapid growth above the 25% recurring revenue growth, which we think is a good number.

Operator

That does conclude our question-and-answer session. At this time, I'd like to turn the call back to management for any additional or closing remarks.

Scott Scherr

Okay. Thanks, Jamie, and thank you all for participating. Have a good night.

Operator

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

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