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The Ultimate Software Group (NASDAQ:ULTI)

Q4 2011 Earnings Call

February 07, 2012 5:00 pm ET

Executives

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

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

Analysts

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

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

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

Michael Huang - Needham & Company, LLC, Research Division

Gregory Dunham - Goldman Sachs Group Inc., Research Division

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

David E. Hynes - Canaccord Genuity, Research Division

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Brian J. Schwartz - ThinkEquity LLC, Research Division

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Pinjalim Bora - Piper Jaffray Companies, Research Division

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

Operator

Hello, and welcome to Ultimate's Fourth Quarter and Year End 2011 Financial Results Conference Call. [Operator Instructions] Today's conference is being recorded. Your presenters today will be Mr. Scott Scherr, Chief Executive Officer, President and Founder of Ultimate; and Mitchell K. Dauerman, Executive Vice President and Chief Financial Officer. We will begin with comments from Mr. Dauerman.

Mitchell K. Dauerman

Thank you, Jill. 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 2011 and then I'll provide financial guidance for 2012. Unless otherwise noted, our discussion will be based on continuing operations and will be on a non-GAAP basis for all cost 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 the GAAP basis to that on the non-GAAP basis included in the press release published on our website.

For the year, recurring revenues grew by 25.1% to $213.8 million. Total revenues grew by 18.2% to $269.2 million. Recurring revenues as a percentage of total revenues increased to 79% from 75% last year. Total gross margin was 57.8% compared with 57.4% for 2010.

Operating income increased by 45% to $31.5 million, and the operating margins for 2011 expanded by 210 basis points to 11.7%. Net income grew by 42% to $18.1 million compared with $12.8 million last year. The related net earnings per diluted share grew by 38% to $0.65 compared with $0.47 per diluted share in 2010.

For the fourth quarter of 2011, Ultimate's recurring revenues were $57.1 million, representing 24.1% growth over the same quarter last year. The recurring revenue gross margin of 71.4% was in line with our expectations. Service revenues were $14.9 million and the Service's gross margin was 13.6%. The gross margin rate for total revenues was 59.6% in the quarter compared with 57.6% last year, and this was due to a higher contribution from recurring SaaS revenues.

Operating expenses were $31.9 million for the quarter and were slightly above our expectations, and as we began making the investments in R&D and marketing that we discussed last quarter. Operating income was $11.4 million and our operating margin was 15.7% for the quarter compared with $7.9 million and 13.1% last year.

Net income was $6.5 million or $0.24 per diluted share, and that compares with $4.6 million or $0.17 per diluted share for the same quarter last year. Our non-GAAP income tax rate for the quarter was 42.5%, bringing our tax rate for 2011 to 41.9%.

Now turning to the balance sheet. Total cash and investments in marketable securities were $55.3 million. In 2011, we generated $28.4 million in cash from operations compared with $25.4 million in 2010. Keep in mind that 2011 cash from operations reflects the impact of the elimination of the one-time infrastructure fees in our SaaS contracts as a result of the introduction of the Partners for Life program at the end of 2010.

We invested $16.7 million in capital expenditures this year compared to $8.9 million last year. We used $17.3 million to acquire approximately 347,000 shares during 2011. We have approximately 1.1 million shares remaining that are available for repurchase under our repurchase plan. In addition, we used $7.1 million for the quarter and $10.9 million for the year to repurchase shares required for settling employees' tax withholding obligations associated with the restricted stock units invested for the respective periods.

Accounts receivable increased to $58.2 million compared with $47.6 million at the end of last year. DSOs were 71 days at the end of 2011 compared to 72 days for the comparable period last year. Current deferred revenues were $83.4 million on December 31 compared to $71.8 million at December 31 last year. And long-term deferred revenues were $3.1 million at the end of this year compared with $6.3 million for the same period of 2010. And again, that reflects the elimination of a one-time infrastructure fees in our SaaS contracts.

Now I'd like to turn to our guidance for 2012. We are affirming the preliminary guidance we provided in October. To restate, we expect recurring revenues to grow by approximately 25%, and the related gross margin to increase slightly from 2011. We expect Services' gross margins to remain consistent with 2011, which should be 2% to 5%. Total revenues are expected to grow by approximately 23% this year.

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 cash sales growth, as well as the increased revenue growth opportunity before us.

We expect operating margin for 2012 to be approximately 15%. Our non-GAAP tax rate for 2012 should be approximately 42%, and diluted weighted average shares should be between 28 million and 28.5 million shares. We expect total capital expenditures in 2012 to increase from $17 million in 2011 to between $18 million and $19 million. We expect depreciation and amortization to be approximately $14 million. These expenditures include approximately $4 million to $5 million of R&D cost that we will be required to capitalize due to certain projects reaching technological feasibility.

Now turning to the quarterly outlook. For the first quarter of 2012, we expect recurring revenues to be approximately $60 million and total revenues to be approximately $76 million. We expect our operating margin to be approximately 6%.

I'd like to provide a few reminders about our quarterly trends. First, keep in mind that our recurring revenue year-over-year growth rate will begin in the low-20% range and end near 30%. This is a function of a difficult comparison to Q1 of last year, including the impact of the increase in the number of larger size deals and the expectation that 2 super large clients will go live with their full population in Q4 2012.

Second, when looking at our cost from a sequential quarter basis from Q4 '11 to Q1 '12, it's important to remember our usual pattern that we have higher costs mostly due to employment-related expenses, particularly higher benefits typical at the beginning of each year compared to the fourth quarter of each year as well.

Third, our Q1 expenses reflect the impact of the additional investments we began making in our services teams, tax filing services and infrastructure, including R&D personnel, which we discussed last quarter. From the labor side, we've been fortunate to find some top talent, and as a result, accelerated some of our hiring plans into Q1. Tomorrow, we have 121 new associates coming to our Weston headquarters for our new hire orientation.

Some of these associates are being added earlier in the year than previously expected, which results in the operating margin being approximately 6% for the quarter.

Next, turning to the second quarter of 2012. Services revenue typically stepped down from Q1 due to the seasonality of W-2 revenues. Additionally, sales and marketing expenses should be lower than Q1 for various reasons including the cost related to Connections, our National Customer Partner Conference, which will occur in Q1.

Finally, as I mentioned earlier, beginning in the second half of 2012, we expect certain R&D projects to reach technological feasibility, after which we will be required to capitalize related costs estimated at $4 million to $5 million. These amounts are included in the $18 million to $19 million of total capital expenditures that I mentioned earlier, but should be noted as they will reduce R&D expense in the second half of 2012 when compared to the first half of the year.

And now, turning to our upcoming conference schedule. During the next quarter, Scott and I will be at the Goldman Sachs Technology Conference in San Francisco on February 15. I will be at the UBS Smid Conference on February 28 and R.W. Baird's Business Solutions Conference on February 29, both in Boston. I'll also be at the Raymond James Orlando Investors Conference on March 6 and the Roth Capital Growth Conference in Dana Point, California on March 12.

If you're available to meet at those conferences, please let me know. Next, I'll turn the call over to Scott.

Scott Scherr

Thank you, Mitch, and thank you, everyone, for participating in our call this evening. 2011 was another good year for Ultimate. Our all-important recurring revenues increased 25% for the 2011 year over 2010.

In 2010, we achieved a milestone of total revenues exceeding $200 million. One short year later, our recurring revenues passed the $200 million milestone, reaching a record $213.8 million. Our 2011 total revenues climbed to a record high of $269 million, an 18% increase over the previous year. Our operating margin for 2011 was approximately 12% as expected and our customer retention rate was greater than 96%.

Sales performed as expected in the fourth quarter. We finished the 2011 year strong and laid the foundation for a strong 2012. Attach rates continued at a healthy pace. In Enterprise, for the year, our attach rate for Recruitment was 62%, for Onboarding, 70%, Performance Management, 60% and Time Management, 50%. In Workplace, for the year, our attach rate for Recruitment was 77%, Onboarding, 54%, Performance Management, 69%, and Time Management, 79%.

One standout for Workplace was Onboarding. Q3 of 2011 was the first quarter that Workplace offered Onboarding. And the attach rate for that quarter was 38%. In Q4, the second quarter Workplace offered Onboarding, the attach rate jumped to 70%.

Some of our new Enterprise SaaS customers in the fourth quarter were: an archdiocese with approximately 5,000 employees; a hospitality company with 3,000 employees, selected Performance Management and Time Management in addition to Core UltiPro; an energy services company with 2,600 employees that added Recruitment, Onboarding, Performance Management and Time Management; a healthcare company with 2,300 employees that added Recruitment, Onboarding, Performance Management, Salary Planning and Budgeting, Succession Management and Fund Management; and a Canadian-based co-operators group with 11,500 employees that added Recruitment, Performance, Salary Planning and Budgeting, Succession Management and Time Management.

The new Workplace customers in the fourth quarter were: a bank with 1,000 employees that selected Recruitment, Performance, Salary Planning and Budgeting and Time Management in addition to Core solutions; a metals company with 1,000 employees that added Recruitment, Onboarding, Performance Management and Succession Planning; a transportation and logistics company with more than 900 employees that added Recruitment, Performance Management, Salary Planning and Budgeting and Time Management; a shipping company with approximately 900 employees that added Performance Management and Time Management; and an education services company with 850 employees that added Recruitment, Onboarding, Succession Management and Time Management.

I attended the Annual Sales Meeting for Enterprise and Workplace teams in January. Both teams are fully staffed and enthusiastic about our prospects for 2012 and beyond. Our salespeople hear more and more frequently that prospects have learned about the strength of Ultimate solutions by word-of-mouth.

In 2011, nearly 40% of our new customers first heard about Ultimate from a friend or colleague or were a former customer. That's up from 30% in 2010. At the same time, our salespeople are seeing more brand awareness of Ultimate and they are seeing more intense demand for our solutions, driven by a desire for the unified HR payroll, talent management and time management experience UltiPro offers.

Our market indicators validate what our salespeople are seeing. In 2011, we had more traffic to our website than in any prior year. Q4 was an all-time record in Ultimate's history with the highest number of unique visitors to our site over any prior quarter with 317,300 visitors. This number is a 20% increase in traffic over Q4 2010.

We also had more total responses for our website collateral in 2011 than in any prior year, nearly double the number we had in 2010. At our HR workshops, we identified a record number of registrants who said they are looking for new solutions, a 78% increase for 2011 over 2010.

In our print and online advertising, we had a record high number of responders and a greater than 200% increase over 2010. In our services area, we earned our 13th consecutive certification from the Service Capability and Performance Standards.

SCP is the industry-leading measure for service excellence. They define best practices for the support standard, field service standard and professional service standard, and they evaluate more than 200 companies around the world. Our certification shows that our service people, processes and technology at Ultimate comply with proven service excellence standards and our 13-year track record reflects the consistent level of best practice services we have been delivering to our customers since 1998.

Our Partners for Life program has continued to be a factor in our customers sending more people to our training. For the 2011 year, we had a 48% increase in people attending our classes compared with 2010. Clearly, the larger the number of people we train, the wider our circle of influence is.

Our training courses give class attendees a far better understanding of UltiPro's functional breadth and depth, and it enriches their overall customer experience, making them much more effective references for us.

Another significant number in our Partners for Life program is the percentage of customers who have been with us more than 5 years that are sending people to our training.

In 2011, 53% of our 5-plus year customers sent people to train with us. We expect to have nearly 100% of our new customers send people for training. Such a high percentage of long-tenured customers sending trainees may be more indicative of the long-term value of our products to our customers.

Ultimate earned some recognition from third parties since we talked with you last quarter. In November, Ultimate had a 2011 Supernova Award win in the Advanced Analytics category. Our Director of Business Intelligence and his team worked collaboratively with an Ultimate customer to develop a predictive analytics tool that HR leaders can use to monitor and address employee retention, risks proactively.

Forrester, a leading research firm, selected Ultimate as a Groundswell Award winner. Ultimate won in the Business-To-Business Embracing category for our collaborative customer community called Ideas. Ultimate launched the Ideas community to help our customers share information, interact with each other and provide direct feedback on UltiPro to us.

The Groundswell Awards recognize excellence in achieving business and organizational goals through innovation and social technology applications. Previous winners of Forrester's Groundswell Awards include Microsoft, IBM, Starbucks and Salesforce.com.

And last, in our first year applying for Fortune's 100 Best Companies to Work For, we were ranked #25. Building on our 2 #1 rankings in the mid-sized company ranking from the Great Place to Work Institute. The Fortune ranking is a very big honor for us. We are the only human capital management provider on the list and we are the highest-ranked cloud vendor on the list.

We finished the year 1,328 strong. We've averaged more than 25% recurring revenue growth for the last 6 years. We've just guided to the 7th year in 2012 and feel really good about an 8th year in 2013. We continue to lead the cloud industry in numbers of customers, using a strategic and unified human resources payroll, talent and time management solution suite.

Our customers continue to support us with a passion that is unprecedented in our industry. Our new branding, which we released on January 23, has the new tagline, People First. And that clearly reflects who we are, a company that recognizes the power people have to create excellence in culture, products and service. We all look forward to the journey ahead.

We are confident we have the right culture and the right people in place to take advantage of the huge opportunity before us. We thank you for your continued support. Let's go to the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from Michael Nemeroff with Morgan Keegan.

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

Mitch, one for you, and then one for Scott. Just looking at the cash flow in Q4, focusing in on that, the cash flow from operations. In the past, I think Mitch you've said that the free cash flow should somewhat lag a little bit via earnings before taxes. And it came in quite a bit short of that number in Q4 and for the year. If you can comment on that, that would be helpful, because I see that there is a big spike in the AR. Is that where most of that cash is?

Mitchell K. Dauerman

The biggest thing is the fact that we stopped charging the one-time fees upfront. So that probably, I guess, was $8 million to $10 million of cash flow that, in a sense, we gave up. And there will be a little bit more as you look forward into next year, but that will be the rollout of the elimination of the one-time fees.

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

So in 2012, the free cash flow should more closely approximate or lag the...

Mitchell K. Dauerman

It will still lag the non-GAAP pretax earnings and it will lag for both reasons, one being the one-time fee effect and the other being the fact that CapEx will exceed depreciation and amortization a little bit.

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

So how much together are those? About $6 million to $7 million?

Mitchell K. Dauerman

I'm not sure exactly, Mike.

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

Okay. Then on Scott, on the product side, thanks for giving us the attach rates and that's helpful. Could you just give us a sense of how the renewal rate on those attached products has been in 2011? I understand that the core payroll product is highly sticky but are the other products sticky or as sticky as the core payroll products?

Scott Scherr

Yes, just as sticky. Very rarely do we see someone who took Recruitment or Performance and started it and then leaves us with it. It's rare.

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

And then just one last one, if I may. I just want to ask maybe you'll give it again. I'm fairly certainly you won't is, last quarter you gave us the ARR, the bookings growth rate year-over-year. If you can give that again, that would be extremely helpful.

Scott Scherr

I'm not going to, Mike. But thanks for asking.

Operator

And our next question comes from Richard Baldry with Wunderlich Securities.

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

This quarter is the first time we've seen the Services revenue start to trend higher after your Partners for Life program. So can you maybe talk about whether we should see that now and starting to approximate the overall growth rate as your new products go live and your overall critical mass increases year to year? Or will that still be fairly disconnected from the growth in the recurring revenue line?

Mitchell K. Dauerman

Rich, I think as we've said on the last call, this will be the first time since 2008 that we see Services revenue grow and we've recommitted to that. I forget what was the exact percentage. I know it's up about 20%. I'm not sure there's a correlation I could make but we will continue to grow as we go through those implementations.

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

And then can you maybe talk a little bit more about your experience ramping sort of the mega customers on the implementation side, you're starting to get midway through those projects from the sound of it? How has that been going? How different is that from your other projects? Anything you've learned along the way?

Scott Scherr

It's going well. And one of them I'm fairly close to, the other one somewhat close to. But some of the people are already up. We have taken the Executive Payroll up in one of them and had one of their executives down here a couple of weeks ago and that has gone very well. I don't think it's that different from our other accounts that we implement. We think the numbers are larger. They're both on track.

Operator

Our next question comes from Laura Lederman with William Blair.

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

Can you talk a little bit about the margin guidance for 2012 and how aggressive that is or non-aggressive it is? As always and rightly so, err on the side of taking care of the customer? I mean is that an easy to achieve, that 300 basis points? Hard to achieve? The most probable or a little aggressive? If you could just kind of put some wording around that to help us understand this a little bit better.

Mitchell K. Dauerman

Right. I would say that we prepared the model the same way we always do. We go into the accounts, what we know in terms of backlog, which gives us great visibility into the recurring revenue number, to a large extent in Services. Headcounts based on the feedback from our team. And it's the same model that we present to all of our associates as to what's our goal. So I would say it's consistent with what we've done in the past.

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

Another question related to process. I guess this is another one for you, Mitch, is if you look at the capitalization of software and the impact of R&D versus the amortization of that capitalized software. If you net those 2 out, was that in your guidance before in terms of any benefit to margin when you talked, that originally set the operating margin guidance for 2012, or is that new? I'm trying to get a sense if guidance for operating margin changed because of that change or if that was originally in guidance?

Mitchell K. Dauerman

No. That was absolutely in the original guidance.

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

Okay. And the question for you, I'll ask a different question, which is bookings. If you look at bookings in Enterprise and Bookings in Workplace and how they looked versus last quarter, they've been coming in quarter after quarter so incredibly strong and I was wondering if we're still seeing that type of momentum. I guess this one's for Scott.

Scott Scherr

We had a decent quarter in both. Our big quarters are typically Q2 and Q3. Q4 is 3rd and Q1 is 4th. That's typically how it goes. We do know we had a really good January, which gives us great confidence. We are finishing strong and we had a big January. And we had a big January even though we had our sales meetings and sales clubs in January. So we're feeling pretty good right now about this year and matter of fact, we're feeling good about '13 right now.

Operator

And we'll go next to Michael Huang with Needham & Company.

Michael Huang - Needham & Company, LLC, Research Division

Just a couple of quick ones for you. So first of all, in terms of your upcoming Connections User Conference, what's attendance looking like now relative to last year? And then if you can just throw in a little bit like what are you seeing in terms of larger organizations attending with over 5,000 employees? And how does that compare to last year?

Mitchell K. Dauerman

The attendance is up from last year, but again it's only our customers that are attending. And I think we have a good spread across all our customers.

Scott Scherr

It's 2 months away and we're close to where we were last year already. Being 2 months away, which is a really good spot for us and we have quite large customers. We had great attendance last year. I've seen kind of the lineup, the preliminary lineup of the customers who are speaking at the event. A lot of our large customers are speaking for us there.

Michael Huang - Needham & Company, LLC, Research Division

Great. And I apologize if I missed this. So it sounds like you have some nice wins with Succession Management. Can you share with us the attach rate? I know it's still a little early for this product but what did you see?

Scott Scherr

I noted in Workplace the first quarter out, excuse me, Succession. The first quarter out was Q3. I don't see the wrong number now. There were 38%. And then in Q4, which was the second quarter, we jumped to 70%. Excuse me, on Onboarding. We didn't give a number on Succession, sorry about that. Mitch is looking for a number on Succession.

Michael Huang - Needham & Company, LLC, Research Division

I guess while he's looking that up -- because it's the last question. With respect to the 2012 revenue targets you laid out for us, how much visibility do you have to that target? And how does that stack up relative to the same time last year for 2011?

Mitchell K. Dauerman

The visibility into recurring revenue for 2011 to 2012 is better than it was a year ago. Again, when you look at the rollout of this business, it's very, very high visibility up in the upper 90% range. Mike, I don't have with me the Succession Planning attach rate, I apologize for that.

Operator

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

Gregory Dunham - Goldman Sachs Group Inc., Research Division

You mentioned accelerated hiring here in Q1. What areas specifically are you kind of ramping up investments here early in the year?

Scott Scherr

That was really spread against support, activation and development. Mostly those 3.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Okay. And then in terms of Partners for Life, that's been out now over a year, how do you feel about kind of the management of that initiative from an efficiency standpoint and utilization? Are you still kind of optimizing the resourcing there? Or is there room for more improvement as you look forward?

Mitchell K. Dauerman

I think the Partners for Life program, when you take into account the fact that one was to get people to training so that they'd ensure they were using the product properly. That is, as Scott mentioned in his script, we've had incredibly high attendance so we achieved that purpose. And we talked before about the impact it has on the sales process because one of the other components was the fixed seat pricing for the implementation. And that has gone very well. So I think it's continuing.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

I guess, I'll reword it. Whenever you do fix the engagements in the Services business, there's risk of scope creep and things like that. And initially, when you do something that's a first-year thing, I'm assuming it's not fully optimized. Is that the wrong assumption? Or should we expect that to be optimized as it evolves?

Mitchell K. Dauerman

Greg, in the way you phrase it, yes, we experienced in the first year certain things that we learned some lessons on. But I would couch that with we guided to Services margins still being relatively consistent, which again is consistent with the philosophy we talked about for years, try to keep the Services revenue down low and invest in our customers and look at the annuity value of the recurring revenue stream.

Operator

And our next question comes from Brad Reback, Oppenheimer.

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

I just want to make sure I heard it right. As you talked about sort of the quarterly progression on the revenue side over the course of the year. Did I understand it correctly that it would be something north of 30% or approaching 30% by year end with these mega deals coming on?

Mitchell K. Dauerman

The recurring revenue. I think the recurring revenue growth probably starts around 20. So you can get that from the guidance and ends around 30.

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

And so building on that without getting specific about '13, are there any reasons to think that it wouldn't stay in that range for the better part of '13 or at least the first half?

Mitchell K. Dauerman

I haven't built out '13 yet. And last time, we said we're going to stay away from commenting on '13 and the future. We feel very confident we're continuing the recurring revenue growth rate of at least 25%.

Operator

We'll go next to Richard Davis with Canaccord.

David E. Hynes - Canaccord Genuity, Research Division

This is DJ on for Richard. Just one question, Mitch, on the guidance. Q1, the sequential recurring revenue growth from December to March, the last couple of years, it's been higher than what we're kind of going to see this year. I think it was 3.7 in March of '10, 3.9 in March of '11. And this year we're looking at 2.9. You guys had a solid bookings here, I understand, from the large deals ramping in the back half. But why is that number less than what we've seen in the last couple of years?

Mitchell K. Dauerman

DJ, I think the piece that you might have overlooked is not the super large deals that hit in Q4, but we did have a greater number of larger deals and those have a little bit longer time to live. So it's kind of not the small deals, not the average deals, but we did have a number of larger deals that are affecting the Q1 growth.

Operator

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

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

I'm just curious starting with the sales organization. Where did you end the year in terms of Enterprise and Workplace reps? And where do you see taking that number to by the end of 2012?

Scott Scherr

Well, right now Enterprise, we're at 30. To accomplish our goals for this year, the 30 that we have can do that. And we're at 32 in Workplace. And to accomplish our goals for this year, those 32 could do it. The question is, when do we add people to achieve our goals for '13. And I believe we can do that at the beginning of '13.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Okay, great. That's helpful. Last quarter, you shared with us the number of existing customers that left from on-premise to your SaaS solution. I was curious what that was this last quarter.

Scott Scherr

I know for the year, it was a little over 100 units. And then this quarter...

Mitchell K. Dauerman

Scott, I think it was around 30.

Scott Scherr

Around 30 in the quarter. 30 in the quarter, about 100 for the year.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

I was just curious with those lists. Are there any incentives, maybe carrots or sticks that you're using to encourage clients to move over to that model more quickly than they have historically? Or is this just the natural evolution?

Scott Scherr

I think it's the natural evolution and we're pointing out, which we've always said, for us to be a good partner, frankly they need to move to SaaS. That's where all our research and development is going. That's where our company is. So it's our revenue from, our maintenance from our on-site clients is down to 8% of our total recurring revenue. And that number is going to keep getting smaller and smaller as we go forward. So we have our people, people who are on-site, they can't take advantage of our talent management products. They can't take advantage of tax filing. So as a good partner, we want them to move. And we think it's in their best interest to move. So we spend a lot of effort on that, trying to educate them and we did it at Connections last year, and we'll do it this year at Connections.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Okay. Great. And Mitch, a question for you. In Q2, typically if I recall correctly, you have some unusual seasonality in your Services business. And I was hoping you could remind us just this year when you're looking at Q2, what's the sequential dollar decline you're expecting in Services revenue because of this issue?

Mitchell K. Dauerman

Well, it's the -- generally, you have the W-2 revenue that occurs in Q1 that doesn't occur in Q2. And then you have an increase in the implementation services revenue that partially offsets that change. Last year, it was down about $2 million. Sequentially, this year, my guess is it will not be $2 million. It may be, let's just say, somewhere between 1 and 2, but I'd rather wait until we get to guidance for Q2.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

And final question for you. I understand you're going to get further along with some R&D projects and start capitalizing R&D in the second half of this year. I'm just wondering if you could share with us what are those particular projects?

Scott Scherr

Yes. I'd rather not. I'll just say that we've always had a future innovations team that works on the future. I really don't want to say it for competitive reasons. I'll just leave it at that. When we roll out different things, you will learn about it at that point along with our competitors.

Operator

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

Brian J. Schwartz - ThinkEquity LLC, Research Division

I just wanted to ask one follow-up with Scott on the Partners for Life program that I really was curious about. Clearly, it's been a big success for you guys in terms of customer retention and satisfaction levels. I was wondering if it was possible to comment on what the program has meant to you in terms of your win-loss ratio on new deals. If you feel like it's helping you win new business out there and if there's any way of quantifying that magnitude?

Scott Scherr

I believe it definitely has. We were rolling along kind of right around our plans and things and before I rolled it out, I think it was 1.5 years ago. And then after I rolled it out, Enterprise wins, they went on a very good run, which they've continued through now. And I believe that the whole Partners for Life, including training, including taking away the one-time and including the fixed implementation, all of those made it easier for them to sell new business. So I believe it made a huge difference in new sales.

Operator

[Operator Instructions] We'll go next to Raghavan Sarathy with Dougherty & Company.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Question for Scott. Scott, you talked about you're off to a good start this year. You had a good January. Just looking at the pipeline overall, how does the pipeline look this year compared to last year. Maybe sort of the deals you have, you had a couple of mega deals last year. That's driving recurring revenue growth. I was wondering if you can give us some color on that.

Scott Scherr

Okay. Like I mentioned, the pipeline is strong and I mentioned some of the marketing things that are going on. It's stronger than it was a year ago as it should be. We get stronger every year so when you look at the pipeline, it gives you tremendous confidence that we can achieve our goals for this year. And as I said, going to '13 strong.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

I've got a couple of follow-ups, actually for Mitch. I was kind of wondering what is your license revenue function for the first quarter and for the full year? It seems that that has rebounded compared to '11?

Mitchell K. Dauerman

I would imagine license probably in that $2 million range, maybe a little bit under as we've converted customers, but we've seen some employment growth. As far as the first quarter, it's really baked in with that, if you will, the difference between total and the recurring. But you probably get to $0.5 million to $1 million.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

And a couple of a bookkeeping questions. How many employees you have live on interest. And then I know, Mitch, you disclosed the SaaS revenue growth in your Q. I was wondering if you have that information handy for the fourth quarter and the full year?

Mitchell K. Dauerman

Employees live, over 2 million. I don't know the exact number of employees live, but clearly, it's over 2 million, probably coming closer to 2.5 million. Is that the answer, was that the answer you were looking for?

Raghavan Sarathy - Dougherty & Company LLC, Research Division

I'm looking for the number of employees. And then the second question is the SaaS revenue growth. I think Mitch disclosed it in the Q and I'm just wondering if you have that handy.

Scott Scherr

The SaaS revenue growth.

Mitchell K. Dauerman

The SaaS revenue growth excluding the maintenance. I don't have that handy, but I would imagine, it's still got to be close to 30%.

Operator

Our next question comes from Mark Murphy with Piper Jaffray.

Pinjalim Bora - Piper Jaffray Companies, Research Division

Pinjalim on behalf of Mark, I have just one last one on competition. Are you seeing any competition from Workday? And I guess as you are moving more towards Talent Management, are you seeing competition from the other staff management vendors out there?

Scott Scherr

I think on the Talent Management side, no, because we have a unified HR payroll. And Workday, you see Workday around 10% of the time, you see Workday.

Operator

And we'll take one more question today. It comes from Mark Marcon with Robert W. Baird.

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

My question is also related to competition then I have a follow-up. On the competition side, you've obviously gained the attention of several incumbent players out there. And they've tried to respond. Have you seen any sort of change in the competitive behavior that's out there and any sort of change in terms of your win rate based on the new rollout from your former employer, Scott?

Scott Scherr

No. That was 21 years ago, believe it or not.

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

I know.

Scott Scherr

But no, I really haven't seen any change of percentages or where our business comes from. Pretty steady. We're getting about 65% of our business from the Service bureaus. That was consistent in Q4 in Enterprise. And in Workplace, it's closer to 80% from Service bureaus, so no. I think if we get the opportunity and we can run our process, and someone's out there looking for unified payroll, HRMS talent and time when it comes in, I think we're hard to beat.

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

Great. And then in terms of the sales that you ended up getting this quarter, particularly the most recent one, are those continuing the trend from the prior quarter in terms of being skewed more towards the really big players and, or are they more towards your usual mix? And the reason I'm asking is I'm trying to figure out how that ends up impacting 2013 just in terms of when some of the larger clients would go live.

Scott Scherr

I would say Q4 is more a regular mix.

Operator

This concludes our Q&A section.

Scott Scherr

Okay. Thanks for your time. I appreciate it. Take care.

Operator

This concludes today's call. Have a wonderful day.

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