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Ultimate Software Group (NASDAQ:ULTI)

Q3 2011 Earnings Call

October 25, 2011 5:00 pm ET

Executives

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

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

Analysts

Brian J. Schwartz - ThinkEquity LLC, Research Division

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

Mark R. Murphy - Piper Jaffray Companies, Research Division

Eric Lemus

Michael Huang - Needham & Company, LLC, Research Division

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

Brad Reback - Oppenheimer & Co. Inc., Research Division

Ilya Grozovsky - Morgan Joseph TriArtisan LLC, Research Division

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Unknown Analyst -

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

Michael B. Nemeroff - Morgan Keegan & Company, Inc., Research Division

Operator

Hello and welcome to Ultimate's Third Quarter 2011 Financial Results Conference Call. [Operator Instructions] As a reminder today's conference is being recorded. 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 will begin with comments from Mitchell Dauerman.

Mitchell K. Dauerman

Thank you, Kevin. 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 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 2011, and then I'll provide financial guidance for the fourth quarter and preliminary guidance for 2012. 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 when comparing to the same period in the prior year. 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 third quarter 2011, Ultimate reported recurring revenues of $54.7 million, representing 24% growth over the same quarter last year. Operating income was $8.6 million and our operating margin was 12.7% for the quarter. Non-GAAP net income was $4.9 million or $0.18 per diluted share compared with $3.5 million and $0.13 per diluted share for the same quarter last year.

Our third quarter recurring revenues of $54.7 million represent 81% of total revenues compared with 77% for the third quarter of last year. The recurring revenue gross margin of 70.4% was in line with our expectations. Service revenues were $12.8 million. The Services gross margin reflects our overall business strategy as we have invested and will continue to invest in our Partners for Life program. Operating expenses were $30.2 million for the quarter, slightly better than our expectations, and our operating margin for the third quarter was 12.7% compared with 10.1% last year due to a higher contribution from recurring SaaS revenues.

Our non-GAAP income tax rate for the quarter was 42.3%, bringing our expected annual tax rate up to 41.6% from 41%.

Turning to the balance sheet. Total cash and investments and marketable securities were $52.2 million. On a year-to-date basis, we generated $23.6 million in cash from operations, compared with $16.3 million for the same period last year, representing a 45% increase. We invested $13 million in capital expenditures on a year-to-date basis compared with $6.1 million last year. We used $9.4 million to acquire approximately 197,000 shares of our common stock during the quarter and $17.3 million to acquire approximately 347,000 shares for the year-to-date period. Today, we announced the expansion of our stock repurchase plan by 1 million shares. We have approximately 1,058,000 shares remaining authorized in our buyback program.

Accounts receivable increased to $46.6 million compared to $42.8 million at the end of September last year. DSOs were 63 days at the end of September 2011, compared with 69 days for the comparable period last year. Current deferred revenues were $75.6 million on September 30, compared with $63.8 million at September 30 of last year.

Long-term deferred revenues were $3.8 million at September 30, 2011, compared with $6.6 million last year, reflecting the elimination of onetime infrastructure fees in our SaaS contracts as a result of the introduction of the Partners for Life program.

Next, I'd like to frame our guidance for Q4 '11 and for 2012. For the third quarter in a row, our bookings growth was significantly higher than the prior year. This has been fueled in large part by an increasing percentage of our sales coming from large customers. With a higher concentration of larger deals in our backlog, we now have a significant amount of bookings that will go live in late 2012 and early 2013. The combination of these items allows us to attain our 2012 recurring revenue goal with a higher degree of visibility than in the past and also gives us enhanced confidence in our revenue growth potential in 2013.

In order to effectively support the acceleration of sales growth and maintain our world class service that our customers have always experienced, we need to make additional investments in our Services teams, tax filing services and infrastructure sooner than we originally anticipated. Accordingly, we have already made -- started making these investments, which will impact our fourth quarter operating margin. In addition, we have tweaked our Services revenue expectations for Q4. As a result of these changes, we are maintaining our recurring revenue growth target of 25% for 2011, while adjusting our total revenue growth target to 18% from 19%, and revising our 2011 operating margin guidance to 12% from 13%.

For 2012, our preliminary guidance is to grow recurring revenues by approximately 25%. We expect to see the related gross margin increase slightly from 2011. Total revenues are expected to grow by approximately 23%.

As a result of our strong sales growth in 2011, we are forecasting our 2012 Services revenues to increase for the first time since 2008, which will partially offset the additional investments in our business. We expect the Services gross margins to remain consistent with 2011, which should be in the 2% to 5% range. We expect to expand our operating margins by approximately 300 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.

We expect the operating margin for 2012 to be approximately 15%. Our non-GAAP tax rate for 2012 should be approximately 41.5% and diluted weighted average shares should be approximately $28 million. We expect that total capital expenditures in 2012 will be approximately $15 million. We expect depreciation and amortization to be approximately $14 million. We'll provide additional guidance on quarterly trends on our February call, along with our final 2012 guidance.

However, we want to remind you that our Q1 operating margin rate is likely to be consistent with the first quarter of this year due to the investments we discussed. And we expect to see meaningful ramp-up in the operating margin rate in the back half of the calendar year.

Finally, turning to our upcoming conference schedules. During the next quarter, I'll be at Piper Jaffray's Technology Conference in New York on November 8, Needham's SaaS Conference on November 15, and Baird's Tech Conference on November 29, both in San Francisco. If you're available at those conferences to meet, please let me know. And I'd like to turn the call over to Scott.

Scott Scherr

Thank you, Mitch, and thank you, everyone, for participating in our call this evening. In the third quarter, we again executed on our top 3 goals: growth in recurring revenues, growth in our operating margins and customer retention. Our third quarter's recurring revenues were $55 million, up 24% over those of last year's Q3 and slightly ahead of our projections.

Our operating margin was on the positive side of our 12% target at 12.7%, and our all-important customer retention rate was greater than 96%. Our Enterprise sales team delivered another quarter beyond our expectations. They brought in twice as many new customers in this year's Q3 than last year's third quarter. And the new customer attach rates continued to climb with our talent management rate coming in at 67% and Time Management at 63%.

Some of our new Enterprise SaaS customers in the quarter were: a healthcare organization with more than 7,000 employees has selected Onboarding [UltiPro Onboarding], Recruitment [UltiPro Recruitment], Performance Management, Salary Planning and Budgeting [UltiPro Salary Planning and Budgeting] and Time Management [UltiPro Time Management] in addition to Core UltiPro; a home improvement and hardware company with 6,000 employees that added Onboarding, Recruitment, Performance and Salary Planning and Budgeting; an archdiocese with 5,000 employees that added Onboarding, Recruitment, Performance Management and Salary Planning and Budgeting ; a senior housing and services organization with 5,000 employees that added Salary Planning and Budgeting ; and our largest Canadian-based company to date, an entertainment company with more than 10,000 employees that added Salary Planning and Budgeting to the core offering.

Turning to Workplace. Our team had another solid quarter and attach rates for new Workplace customers remain strong at approximately 70% for the talent management components and 80% for Time Management. Some new Workplace customers in the quarter were: an online grocer with 1,000 employees that selected Recruitment, Performance Management, Salary Planning and Budgeting and Time Management in addition to the core solution; an energy company with 950 employees that added Onboarding, Recruitment, Performance Management and Salary Planning and Budgeting ; a communications retailer with 900 employees that added Onboarding, Recruitment and Performance Management; a global trading company with 800 employees that added Recruitment, Performance Management, Salary Planning and Budgeting and Time Management; and 2 banks with 800 employees that both added the same 4 products as the global trading company; and finally, a foods manufacturer with 700 employees that added Onboarding, Recruitment, Performance Management and Time Management.

Both our Enterprise and Workplace sales teams are excited about prospects for the fourth quarter. They expect to deliver another strong quarter to close out this year and to continue the momentum into 2012.

Pipelines remain robust, and our market indicators show very healthy demands. In Q3 this year, we had the highest number of visitors ever in a third quarter to our website. One website metric we look at as an indicator of interest level is the number of materials downloaded from the site, and we had a 37% increase in downloads in Q3 this year over 2010. Views of our press releases were also up for the first 3 quarters of this year, nearly double the views we had for the same period in 2010. Plus, we had a 43% increase in our Twitter followers at Q3's close this year over the end of this year's Q2.

We completed our Fall customer survey in September, and had twice as many respondents as we did on our Spring 2011 survey, more than 2,000. Results indicated a high degree of satisfaction with our products and services, with 85% of total respondents being satisfied or extremely satisfied with UltiPro and 82% satisfied or extremely satisfied with our activation services.

Satisfaction with our add-on solutions was up for our Enterprise customers in all areas over our previous survey. We measured satisfaction with Onboarding for the first time in this Q3 survey and found 84% of respondents are satisfied or extremely satisfied.

For our Workplace customers, their satisfaction with our talent management solutions was up in all areas over the Spring 2011 survey as well. In the product development area, we unveiled our new multidimensional Succession Management solution in Q3, strengthening the strategic power of our unified talent management suite. UltiPro Succession Management goes beyond traditional succession management solutions by enabling companies to manage organizational change from multiple angles.

It gives company executives the flexibility to develop succession plans for specific jobs, talent pools or individuals. It also allows individual employees to participate in developing their own career pathing, and it functions as a unified piece of total talent management by leveraging relevant HR, payroll, salary, competency and performance data already stored in UltiPro to identify potential candidates and analyze critical succession factors.

In addition to our product suite depth and our service excellence, our customers tell us that Ultimate's leadership tenure as a SaaS solution provider is another compelling reason to buy from us. Drew Stafford, Vice President of Information Technology for Romano's Macaroni Grill, a restaurant chain with 13,000 employees, articulated what many customers have also told us when he said recently that Ultimate's 10 years as a leader in the development of cloud-based HCM solutions was a primary decision driver for Macaroni Grill to sign with Ultimate.

This month, Adam Rogers, our Chief Technology Officer and Senior Vice President of Product Development, participated in a webcast with Forrester's analyst, Mike Gualtieri, on the topic of the 7 most sought-after qualities of a SaaS solution.

We believe our UltiPro Solution ranks high in all 7 areas: user experience, performance, scalability, adaptability, security, ready availability of the solution over the Internet and the economics of cost benefit value.

Tracy Bargielski, the General Manager of Human Resources for Yamaha Corporation of America, explained why the musical instrument manufacturer bought UltiPro when she said, "Our previous system just looked like an integrated solution but it was not. UltiPro really is one solution." With Yamaha now live, she commented on UltiPro's ease-of-use and strategic value. In her words, "UltiPro is easy to use and helps us manage the entire employee life cycle, and we can report on almost anything we need."

Plus, Ultimate has a customer service to backup UltiPro so the selection of UltiPro was truly a no-brainer. HR can now contribute to the company's competitive position and support our revenue generators. P.F. Chang's, the restaurant chain with 27,000 employees and 360 locations is a customer that recently pointed out how important it is to have talented, experienced people in customer services, creating a positive customer experience in addition to product superiority.

Nancy Mailhot, Chief People Officer for P.F. Chang's, said recently, "I absolutely believe we chose the best HR technology provider, not just for the software but also for Ultimate's people."

It's clear that Ultimate's employees are committed to the customer. Change can be uncomfortable especially for a large, complex business like ours. But the talented people we have worked with at Ultimate have made a huge difference with our successful transition.

Our Partners for Life program has been operational for 4 quarters. It plays an important role in enriching our customers' experience. As our customers send more people to our training, they have a far better understanding of the full capabilities of UltiPro and greater satisfaction with the overall UltiPro experience simply because they become more skilled in using it.

Looking at the numbers, in the third quarter this year, we had a 67% increase in Enterprise students attending our UltiPro training over Q3 2010. And our Q4 projections for attendance are already above this year's Q3 numbers. The net result of this program is a significantly larger universe of accomplished, satisfied UltiPro users, and we believe that we have not yet seen the full cumulative effect that Partners for Life will have on customer satisfaction with the user experience and on the quality of customer recommendation to future buyers.

We are clearly the #1 SaaS provider of unified HR, payroll, talent management and time management in the market today. Over the last 5 years, we've grown our recurring revenue organically by $150 million annually. And we expect to grow it another $50 million next year.

Over the years, we have completely re-architected our solution and services to align with the newest technologies and our customers' evolving business needs. We have added new talent management and time management product components over the years and taken them to a maturity level far beyond that of first and second version innovation.

Our solutions have been proven effective in the day-to-day of our customers' businesses. Many of our SaaS customers have been with us more than 10 years. Over 1,000 SaaS customers have been with us for 5 years or more. Their longevity with us speaks to the business value of our UltiPro SaaS solution, and their willingness to recommend us to prospective buyers speaks to the overall excellence of the customer experience.

We are now reaping the benefits of our team's hard work to produce the most sought-after SaaS solution in HCM. New sales of our core solutions along with attach rates of our complementary products have exceeded our expectations.

A telling statistic is that 64% of our new sales bookings over the last 4 quarters are organizations with more than 3,000 employees. Very large companies are selecting us now routinely to manage their complex needs. It feels to me like a tipping point in our growth as a company. I'm not 100% sure of that. What I am sure of is that now is the time for us to increase our investment and infrastructure. We need to invest ahead of the increased revenue stream in order to keep our customer experiences at the level our current customers enjoy and our new customers expect.

We finished the quarter 1,268 strong. UltiPro now serves over 4 million employees worldwide. All of us at Ultimate are excited about what we have achieved and about our future. We are committed to positioning ourselves for accelerated growth in 2012 and 2013. Our most important goal is to keep our products, our services and the overall experience of our customers at the top of the industry. Delivering on this objective has always been the driver of our success, and we'll continue to implement our decision as we move forward. We thank you for your support. Let's go to the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Michael Nemeroff with Morgan Keegan.

Michael B. Nemeroff - Morgan Keegan & Company, Inc., Research Division

First for Scott, if you care to share what that bookings growth is this quarter, I'm sure we'd be very happy to receive that as it compares to last year. And then also just on the increase that you're expecting in the Services revenue, if you could tell us some of the reasons why that's happening. And based on my calculations, it's a pretty large increase in Services revenue. So just some commentary on that would be helpful.

Scott Scherr

I'll do it this once, Mike, for you, 47%. 47%. I'm not getting back into that to where we were before. We've had 4 really good quarters in a row. And as I mentioned, 64% of the businesses are over 3,000 pay [ph]. So yes, things are going good.

Michael B. Nemeroff - Morgan Keegan & Company, Inc., Research Division

And then on the Services revenue, obviously, it's something that we weren't expecting. And up until very recently, I don't think you've been telling anybody that the -- you expect the Services revenue to grow at the rate that it probably -- you're expecting it now. Any commentary on that would be helpful.

Mitchell K. Dauerman

Mike, I think when we go through the backlog of the deals that we have, I think it comes on the heels of large growth in bookings, larger deals. We do it -- we are based on this Partners for Life fixed-fee pricing, and we believe that's driving the -- it's going to drive the Services revenue growth.

Scott Scherr

We've also lapped it. Now, it's been 4 quarters in a row. I think we've lapped the initial rollout of it, and we feel more comfortable now that we have people on fixed prices.

Michael B. Nemeroff - Morgan Keegan & Company, Inc., Research Division

Are you changing how you're farming out some of that services to third parties? Are you doing more of the bigger -- I know that you signed 2 really large deals last quarter. Are you doing all the services for those 2 deals? And as the deals get larger, do you expect to do more services work around the largest deals?

Mitchell K. Dauerman

Mike, we're continuing to do as many of the deals ourselves as we can and using third parties for elasticity. One of the reasons we're having to increase the investment in the infrastructure is we want to continue to do that high percentage of the deals. On the large deals in particular, we are doing those ourselves.

Operator

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

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

Just a few of them. One, when you talk about the bookings growth of 47%, was that recurring revenue and professional services? What is that? If you could define the number a little bit, that would help.

Mitchell K. Dauerman

Laura, it's Mitch. The number Scott quoted is the annual recurring revenue back in, back before you were covering us.

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

Okay, wow. And just a related to question to that would be 47% growth, what does that tell us about recurring revenue growth above 25% and how long you could sustain that? I mean, before, it had been a couple of years. Is this now a growth rate you can expect for the next 5 years? I'm just trying to come to some sort of thought as to what that 47% means and what we can extrapolate from it.

Scott Scherr

I mean now, we feel really good about 2013.

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

All right. Moving on, can you talk a little bit about the competitive environment, how often you're seeing Workday and any initial thoughts you have on the new products that ADP announced? And I know you set up a call for us, that was very helpful. But now that you've kind of chewed over what they announced in HR check [ph], what you kind of think of it at a high level?

Scott Scherr

Competition, I've always said our competition is ourselves and we have to keep making the products better. And we have to keep making service better. We have to have reference-able customers. I think we're in control of our own destiny by what we do. And I think with the sales team we have, with the products we have, with the services we have, I feel good about our growth rates in the foreseeable future. So I don't see anything changing there. The landscape has remained pretty much the same as it's been through Q3, with about 65% of our business coming from service people, service bureaus. And about 10% from ERPs and the other 25% from various, kind of like a lot of homegrown systems and things like that.

Operator

And we'll go next to Brian Schwartz with ThinkEquity.

Brian J. Schwartz - ThinkEquity LLC, Research Division

Scott, I just wanted to ask you about the per employee per month long-term opportunity within the base, especially now that you have a new module, the Succession Planning module to feed into the install base. So I think you've given us a number in the past of about $20 per employee per month. Is that still the same target or are you thinking that, possibly, you can now increase the opportunity within the base with the new Succession Planning module? .

Scott Scherr

Do we see opportunities? I think if you look in the foreseeable future, $20 is a good goal to get in the Workplace market and Enterprise is less because we have breaks over certain amount of employees. And as I've said, we've been selling a number of large accounts over the last 4 quarters.

Brian J. Schwartz - ThinkEquity LLC, Research Division

Scott, also I just wanted to ask you a long-term possible sales distribution question, not necessarily increasing headcount in kind of the existing areas that you're selling into. Clearly, you're making some inroads up here into the enterprise market. But I'm wondering if there's an opportunity also below the Workplace market, kind of expanding the breadth of your distribution even further down market since your solution has been receiving so much success now in the upper market, if that's a thought or a possible long-term strategy for the business.

Scott Scherr

It's a thought and it is a long-term strategy.

Operator

We'll go next to Brad Reback with Oppenheimer.

Brad Reback - Oppenheimer & Co. Inc., Research Division

Okay so, Scott, on your comments around the visibility into '13 and as we think about the subscription line continuing, the mix there continuing to change with maintenance becoming less and less meaningful. What types of things outside from an economic calamity would actually cause revenue not to accelerate beyond 25% at least in '13 on the subscription side?

Scott Scherr

I don't see anything. I mean we grew pretty well in 2008 and 2009, so we replaced systems. And there are a lot of people looking for new systems in HRMS or if you want to say HCM, but I don't see anything out there. I mean, I feel usually confident that we're going to be able to achieve our goal of over $400 million in '13. If we keep going like we've been going in the last 4 quarters, then just logically, it would go into -- it would give us confidence for '14. I don't know what would change.

Operator

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

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

You've got a couple of quarters under your belt now working on the implementations, there's sort of mega-sized deals and that 50,000 and up headcount. Can you talk a little bit about your experiences there, whether they're ahead or behind where you felt they'd track to? Any sort of differences versus your normal implementations?

Mitchell K. Dauerman

Rich, right now, we're tracking where we expected to be, which is for full live on the very large deals towards the back half of 2012. The deals become a little more complex, but we have highly skilled consultants that have a lot of experience with us and with our products for a long time, working on them. And they work closely with the customer. So I think you learn every day by different things you do, but this is our business.

Scott Scherr

Rich, I met with senior management of one of those recently, and they were beyond thrilled that where they were and usually confident that they were going to hit their target the second half of '12.

Operator

We'll go next to Ilya Grozovsky from Morgan Joseph.

Ilya Grozovsky - Morgan Joseph TriArtisan LLC, Research Division

You had -- Scott, you had mentioned that you plan on spending money to sort of handle all of this growth. Where do you plan on spending additional money?

Scott Scherr

I think if you net out where we -- probably the last time we spoke where we thought we would be from there, when you net it out, it's additional $3 million in R&D, an additional $3 million in sales and marketing. Mostly in sales and marketing, mostly to generate more opportunities for our quota carrying salespeople. In R&D, to take advantage of what we have and keep going deeper in the products and use the latest technologies. So it's really that 3 on 3. And I think on the Services side, we have to invest, but at the end of the day, it will pay for itself. Our margins will come down to whatever, 2% to 5%, whatever that number is. And that's really it from when we spoke last or our last conference call.

Ilya Grozovsky - Morgan Joseph TriArtisan LLC, Research Division

And over what period of time?

Scott Scherr

What period of time?

Ilya Grozovsky - Morgan Joseph TriArtisan LLC, Research Division

Are you going to be spending these additional funds?

Scott Scherr

I think we have to measure as we go forward. I mean right now, this is the model we've built for 2012. It's based on that. And then when we get in, depending on how the business comes in, like any business, we'll move to where we believe it's in the best interest of our business.

Mitchell K. Dauerman

And, Ilya, obviously, I think your question is we're beginning to make those investments now. That's why [indiscernible] fourth quarter.

Scott Scherr

Oh, I see. Sorry, Ilya.

Ilya Grozovsky - Morgan Joseph TriArtisan LLC, Research Division

Okay. That's what I was trying to understand. And then, so the 15% guidance that you guys have put out there for 2012 includes these additional expenses, right?

Scott Scherr

Yes.

Operator

We'll go next to Richard Davis with Canaccord.

Unknown Analyst -

It's actually DJ [ph] on the line for Richard. So clearly, there's a lot of momentum with the new bookings and moving up market, but I guess the other lever of growth historically has been kind of the same-store sales-type growth. So maybe you could talk about hiring trends, I guess, within your install of customers? And then I guess adjacent to that is, with all the demand you see with new deals, do you have the sales in [ph] with the throwback in the install base effectively?

Mitchell K. Dauerman

DJ, on the same-store sales growth, most of our revenue growth rate comes from selling to new customers. We're selling products to existing customers. The impact of sales growth, attrition, et cetera, really is a very small percentage of the sales growth. But to answer your question, we're up a little bit this year, we're up modestly. But it's not a major factor in our -- it wasn't a major factor in our plans for this year, and it is not a major factor in our revenue growth goals for next year.

Unknown Analyst -

Got it. And then, Mitch, any way to wrap a range around how much training revenue you did with program, with the Partners for Life program over the last 4 quarters? And the reason I asked, if we could back into kind of a normalized service growth for this year, it might help us think about next year.

Mitchell K. Dauerman

Well, we've lapped the, essentially, pretraining. But I think we would've guessed before rolling out Partners for Life, we probably would've generated about $5 million of training revenue. Now with the additional sales, if you're trying to mirror 2012, it would have been higher.

Unknown Analyst -

Great. Okay. And then just a last clarification on the guidance. Did you say March operating margin is flat year-over-year with March 2011?

Mitchell K. Dauerman

We'll give more specific guidance on the next call, but the operating margin rate is probably, best guess is flat because again, we're making investments this quarter. So it's going to hit the first quarter and we'll pick up beginning of the year, employment-related expenses, FICA taxes, reversal of PTO, which normally happens. Those are things, just to kind of remind everybody, that Q1 typically is low and especially with Service revenues sequentially from Q4 to Q1 drop down, we do pick up some W-2 revenue, and then that W-2 revenue drops off in Q2. And again, I just wanted to mention it at this point more as a reminder for everybody.

Operator

We'll go next to Eric Lemus with Raymond James.

Eric Lemus

On the analytics front, you guys have a strong value prop there. And coming out of HR tech, there is a lot of chatter from many vendors around analytics. Anything you can do to further build that out such as areas like predictive analytics? And ultimately, be able to increase the per employee per month further into 2012 around the stronger analytics message you've seen [ph]?

Scott Scherr

Yes. I mean, I think it's been a big part of what we've been building out over the years and we're going to invest in it as we move forward. I've got nothing but huge positive responses from prospective clients and clients already with us on that. So yes, it's a part of our business that we think can grow and it's a differentiator that we have. So I don't know if that answers your question but...

Eric Lemus

Sure. Okay. And then just changing sides here. On the internationalizing the core offering, do you have any sort of development plans on that front, and how could that play out, if at all, in terms of increasing the per employee per month?

Scott Scherr

We have -- we track a lot of global employees for a lot of our customers, and that does impact the per employee per month on those customers that we do that for. So yes, it's another part of increasing the per employee per month that we've been doing. And we keep going deeper and deeper into that part of the business. It'll be international AR and tracking those people around the world. But that's something we're doing and we have a team that works on that.

Operator

We'll go next to Nathan Schneiderman with Roth Capital.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Scott, it was great to hear you reiterate your view for the $400 million plus. I was wondering if you could give us your current thoughts on how op margin might look like in that medium-term goal now?

Scott Scherr

Nate, the truth is it was like hard for us the last month when we go over the plan and what to invest for next year because we take seriously what we say. And so without the investments we made, we probably would've guided to 17% this year. It doesn't take us off track, but I just feel uncomfortable kind of like getting in that trap again, where we say a number without knowing exactly what we're going to invest in, in the future. I do know it's going to grow. And I think again, I'm so like -- I'm also afraid to get in this trap. But certainly, it'll grow where we grew this year, and I don't know, depending on it. You could model it out and you could go to '13 and put a plus 25% -- 25% plus growth on our recurring revenue line. You could bump Services a little. You could take some of the investments we've made and maybe make a few more investments, and you'll come to a good number. But I think it's better for us to manage the business and then give you guys information as we know it going forward. Maybe that will be Q1 or February in our guidance, maybe we'll see a little -- see what happens in Q4, and maybe it'll be Q3 this time next year. But I do know it's important to us to grow our operating margins as well as our growth, and especially to keep our retention rate above 96%. So we focus on all those things.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Okay. A question about the Q4 guidance. It looks like with the $72 million guidance, you're maybe a little bit light of where you thought you'd be in terms of revenues. I just wanted to make clear, is the little bit light in the Pro Services line or in the recurring, or do you expect it'll be split across those 2?

Scott Scherr

Nate, it's mostly in the Services line.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Okay, got it. And then a final question area for you. Scott, you're talking about how on the Enterprise side, the number of new customers that you were signing up doubled year-over-year. I was just curious, were you pacing at a similar kind of growth to that the past quarter or 2? And then also, how is Workplace tracking according to that new customer growth metric?

Scott Scherr

Well, I think Enterprise, as I've been saying the last 4 quarters, I don't have the exact number of units. I certainly have the dollars and it's a larger, much larger number than we thought for Enterprise. I think Workplace is going towards our expectation of what they would do this year. So I think the growth has been in Enterprise. And I guess the growth in excess of what we thought for our total sales come from Enterprise in a big way over the last 4 quarters, if that answers your question.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Yes, it does.

Operator

We'll go next to Michael Nemeroff with Morgan Keegan.

Michael B. Nemeroff - Morgan Keegan & Company, Inc., Research Division

My question has been answered.

Operator

We'll take our next question from Mark Murphy with Piper Jaffray.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Mitch, I was wondering what your assumption is for license revenue in 2012. Do you think it should continue to run around, roughly around $1.5 million?

Mitchell K. Dauerman

Yes. That's exactly what I have in my model.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Okay. And then also on the same-store sales employee metric, and I do understand it's not the major driver here, but I was just wondering, could you comment just directionally whether you think you saw employment grow or shrink across your customer base in Q3? I think you had kind of given us the year-to-date number and I'm just wondering what you think happened in Q3.

Mitchell K. Dauerman

If I remember right, I think it accelerated a little bit in Q3. And as far as, between large and small, I'm not sure. I would assume it's probably across the board.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Okay. And just one last one. Can you offer any high-level thoughts on operating cash flow or free cash flow for 2012?

Mitchell K. Dauerman

We typically stayed away from giving guidance in this area, but I would say that my guess is if you took free cash flow, you'd be free cash flow after adding back the excess tax benefits, which we talked about before, it's probably just a little bit trailing of pro forma earnings before tax.

Operator

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

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

I was wondering, can you talk a little bit about any differences in terms of the profile, in terms of the really large enterprise clients, how should we think about it in terms of margin potential, length of implementation, extra costs? How should we think about that?

Mitchell K. Dauerman

Well, I think what happened -- it was clear that on some of those very large ones, they take longer than the average deal would. And it's the way we would, we have modeled them. So what ends up happening is you do have some cost that's preceding the revenue coming in. I don't know that the margin profile after the customer goes live is that different than other customers. I'm not sure I could give any better information at this time.

Scott Scherr

Yes, it's not different. One of the large ones was a hospital, was just a large hospital with a lot of employees and a lot of different locations. And another large one was a similar business to P.F. Chang's. It's just had twice or 3x the amount of employees as P.F. Chang's, so they're similar businesses that we have in our client base. They're just larger number of employees. So our processes don't really change, it just, obviously, it takes a little more time to implement those because we had such a strong -- the last 4 quarters, we're still able to hit what -- and as we guided to, 25% recurring revenue growth next year, and that sets us up pretty good for '13. So if it keeps going like this, and like I said, I feel -- right now, I feel really good about '13 hitting the major goal of ours to get to, go to $400 million revenue in '13. And I feel really good about that. Does that answer it?

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

For any investments, that there is any sort of change in terms of the cost of servicing clients?

Mitchell K. Dauerman

With the servicing clients? I don't think so.

Scott Scherr

I don't think so.

Mitchell K. Dauerman

I don't think dramatically.

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

Okay. So just because I'm just trying to think through, you used to give us guidance for when we hit the $400 million mark. And you did get yourself into a bit of a trap. And now, it's nice to have that flexibility but it raises the question of, is there anything that's changed in terms of the underlying business? And it sounds like there isn't other than you just want flexibility in terms of the investments.

Scott Scherr

Yes, nothing's changed. Just you could imagine what we've been going through over the last month to decide our plans for 2012. And then weighing what could be. I mean it could be all positive. But what could be the disappointment that we didn't guide to 17% operating margin when it's 100% clear to us that we have to invest in these areas because of what's going on with us and it's a positive throughout. So we just don't want to get in that trap again going forward.

Operator

Our final question will come from Michael Huang with Needham & Company.

Michael Huang - Needham & Company, LLC, Research Division

Just a few quick ones for you. I apologize if this one was already asked, but could you clarify for the Q4 guidance why you trimmed services revenue expectations given the strength of bookings? And is this the timing of deployments or is it something else?

Mitchell K. Dauerman

Now, Mike, it's merely a shift of the time that's going to be spent bringing the customers live under our fixed-fee arrangements. And it tends to have the expense of kind of materials dealings we thought we would have to existing customers for Services. We pulled a little bit of those services into Q3 and some were moved into Q4. But the focus is customers are going live on time, they're going live well and they'll be set up to be supported in efficient, effective matter going forward.

Michael Huang - Needham & Company, LLC, Research Division

Okay. Now in terms of just overall kind of sales cycle length, I mean, so you're selling a broader array of products. You're probably selling more strategically to large organizations. Perhaps [Audio Gap] is offset by this differentiated Partners for Life program. Just curious, I mean what did you see in respect to sales cycles? And are you seeing acceleration? Are you seeing compression lengthening, staying the same? Any thoughts around that?

Scott Scherr

This has been built over a number of years with the quality sales team that has high tenure. I think that people are making decisions now at HCM. And I think we're in the right place, right time. And I think as long as we keep our products strong, as long as we keep our services strong, we're going to benefit from that as a business. So we're going to do everything we can to keep that going.

Michael Huang - Needham & Company, LLC, Research Division

Got you. And then just last question for you, just I think you highlighted some pretty terrific Web traffic volumes. So certainly, you're doing something right on the marketing front. Are you guys doing anything different from a marketing perspective or is this just a function of just increasing brand awareness, inviting acceptance of SaaS? And is there anything that you're doing different from a marketing standpoint?

Scott Scherr

Well, we've invested more in it and we're investing more in it. I think I mentioned most of the -- as I mentioned, the $6 million, $3 million of the operating was in really marketing to generate more lead. We got some added quality players on the team and we're doing more programs on the team, and we're generating more opportunities for the sales team, so it's working right now.

Operator

And ladies and gentlemen, that does conclude our question-and-answer session. I'd now like to turn the call back over to Mr. Scott Scherr for any additional or closing remarks.

Scott Scherr

Thank you, all. I appreciate the support and then, we'll probably speak to a lot of you soon. Good night.

Operator

And that does conclude today's conference. We do appreciate everyone's participation.

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