The Ultimate Software Group, Inc. (NASDAQ:ULTI)
Q4 2015 Results Earnings Conference Call
February 02, 2016 05:00 PM ET
Scott Scherr - CEO, President and Founder
Mitchell K. Dauerman - EVP and CFO
Michael Nemeroff - Credit Suisse
Justin Furby - William Blair & Company
Scott Berg - Needham and Company
Rich Baldry - Roth Capital Partners
Brad Reback - Stifel
Brian Peterson - Raymond James
Nandan Amladi - Deutsche Bank
Ross MacMillan - RBC Capital Markets
Jeff Houston - Northland Securities
Steve Koenig - Wedbush Securities
Hello and welcome to The Ultimate Software’s Fourth Quarter Year End Financial Results 2015 Conference Call. At this time, all participants are in a listen-only mode. Today’s conference is being recorded. Your presenters today will be Mr. Scott Scherr, Chief Executive Officer, President and Founder 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, Ravi. Good afternoon. Thank you for your interest in Ultimate Software. Before we begin, please be aware that we will be discussing our business outlook, and will 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. Please review our filings with the SEC for additional information on risk factors that could cause actual results to differ materially from our current expectations.
We assume no duty or obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. Unless otherwise noted, our discussion will be on a non-GAAP basis for all costs, gross margins, operating and net income, as well as EPS. The primary differences between GAAP and non-GAAP financial information are non-cash, stock-based compensation and the amortization of acquired intangible assets. Please refer to the reconciliation of our financial information, on a GAAP basis to that on a non-GAAP basis, included in the press release that is published on our website.
I am going to begin by reviewing our 2015 financial results and then will provide guidance for the first quarter 2016 and the full year of 2016. Our financial goals for 2015 were to grow recurring revenue by approximately 23% over 2014, to grow total revenue by approximately 22%, and receive an operating margin exceeding 20%. We’re pleased to report that we have met all of our financial goals. Recurring revenues grew by 23.1% to $516.2 million, representing 84% of total revenues. Customer retention increased to greater than 97%. Total revenues grew by 22.2% to $618.1 million. Our operating margin expanded to 20.5%, operating income increased by 24.7% to $126.8 million. Net income was $78.8 million and the related net earnings per diluted share were $2.65 for the year. Our cash flows from operating activities for 2015 grew by 37.5% to $110.8 million, and the average daily float balance for our tax filing business was $633 million.
Taking a further look at the fourth quarter. Total revenues grew by 26% to $170.7 million. Recurring revenues grew by 25.6% to $141.1 million, and it was slightly better than our expectations. Higher recurring revenues also resulted in a related gross margin of 75.3% exceeding our forecast. Service revenues were $29.5 million for the quarter, exceeding our estimates, which were driven by stronger sales and more clients going live in January 2016 than previously expected. The related gross margin rate of 13.1% was better than our expectations, mostly as a result of the higher services revenue. The gross margin rate for total revenues expanded 170 basis points to 64.5% from 62.8% in the fourth quarter of last year, as a result of higher total revenues.
Operating expenses were $72.9 million for the quarter and reflect additional investments primarily in the sales and marketing areas. Operating income increased 23.8% to $37.2 million and the operating margin for the quarter was 21.8%. Both were better than our expectations, mostly due to higher revenues, partially offset by more investments in the sales and marketing area. Net income was $24.7 million and the related net earnings per diluted share were $0.83. Our non-GAAP income tax rate for the year was 37.7% and for the quarter 33.6%. The lower tax rate reflects the R&D income tax credit, resulting from recently enacted legislation.
Turning to the balance sheet. Our cash and marketable securities balance was $129.4 million compared with $118.5 million at December 31, 2014. And it reflects a total of $78.1 million used to purchase shares of our common stock in the open market through our stock buyback plan and also shares acquired to settle employee tax withholding liabilities associated with the restricted stock that vested. We have 532,000 shares available for repurchase under our stock repurchase plan.
Operating cash flow for the year grew by 37.5% to $110.8 million compared $80.6 million in 2014. Our capital expenditures during the year were $50.6 [ph] million including capitalized R&D cost of approximately $23.3 million. This is in comparison to 2014 CapEx of $38.1 million, which [indiscernible].
We are increasing our financial guidance for 2016. Recurring revenues are expected to grow by approximately 26% compared with 25% in our preliminary guidance. We are more than 97% visible into that target. Total revenues are expected to grow by approximately 25% compared with approximately 23% in our preliminary guidance and we now expect our operating margins to be approximately 21%.
Our non-GAAP tax rate for 2016 should be approximately 39.5% and diluted weighted average shares to be approximately 30 million. We expect capitalized R&D cost to be approximately $30 million. Other capital expenditures in 2016 are expected to be approximately $24 million for normal CapEx and $27 million related to increased lease space [ph] to accommodate our continued growth. We expect depreciation and amortization to be approximately $29 million.
And finally, turning to the financial outlook for Q1 of ‘16. We expect recurring revenues to be approximately $150 million and total revenues to be approximately $180 million, and the operating margin to be approximately 18%.
Turning to our upcoming conference schedule. During the next quarter, I will be at the JMC Tech Conference in San Francisco on March 1st; and Scott and I will be at the ROTH Capital Growth Conference in Dana Point on March 15th. If you’re available at those conferences to meet, please let me know. And now, we’ll turn the call over to Scott.
Thank you, Mitch, and thank you everyone for participating in our call this evening. We closed our 25th year with the best overall performance in our history. Sales produced the greatest quarter in our history in Q4; our services and development teams increased our year-over-year customer retention rates at greater than 97%; we hired more than 700 new Ulti peeps in 2015, and we raised our retention rate for Ulti peeps to 94%. Last week, Fortune named us the number one best large workplace in technology. All are proof positive that if you put your people first, you give yourself the opportunity to build something that everyone can be proud of.
Last month, I attended the annual meetings of our enterprise mid-market and strategic sales teams, and there was confidence and momentum in the air. Many of our sales people are long term veterans, highly skilled in building relationships and communicating the value propositions of our HCM solutions. We also have quite a few new sales people who have joined us recently, and they have begun to generate some impressive results.
We will end Q1 this year with 120 quota carriers, up from 92 quota carriers at the beginning of 2015. We continue to expand our infrastructure to support our growth initiatives and we are eager to execute on our 2016 plans and beyond. Our enterprise team’s attach rates for 2015 were on-boarding 74%, recruitment 62%, time management 59%, and performance management 50%. Some of our new enterprise customers in the fourth quarter were an aviation, electronics and technology company with more than 30,000 employees that selected our UltiPro payroll solution. One of the nation's margin restaurant chains with 22,000 employees have signed up the recruiting, on-boarding performance management compensation management and succession management in addition to core HR payroll solution; a Canadian non-profit with 13,000 employees that added time management to the core; a utilities company with 8,600 employees that added a recruiting on boarding performance compensation management and fixation management and a services company with 5,600 employees that added on-boarding and compensation management.
Our mid-market and strategic sales team’s attach rates for the year were time management 85%, on-boarding 84%, recruitment 75%, and performance management 74%. Some of our new mid-market customers in the fourth quarter were a healthcare organization with 1,500 employees that added recruiting, on-boarding, performance management, comp management and succession management to the core solution; a retirement community organization with approximately 1,500 employees that added recruiting, on-boarding, time management and performance management; a healthcare organization with approximately 1,500 employees that added on-boarding and time management; a services company with approximately 1,500 employees that added all our key supplemental products, recruiting, on-boarding, time management, performance management, comp management and succession management; and a manufacturer with 1,450 employees that all so signed up for all our items, recruiting, on-boarding, time management, performance management, comp management, and succession management.
Our marketing metrics for both the fourth quarter of 2015 and the 2015 full year indicate that our solutions continue to inspire market desire. In Q4 2015, we had the highest fourth quarter ever of campaign respondents from companies with more than 300 employees telling us that they are looking to purchase a new HCM solution within 12 months or less. It was the 41% increase over Q4 2014. For the 2015 year, we had the highest number ever in the year of responders looking to buy within 12 months, a 48% increase over 2014.
For the quarter, we had a 55% increase in closed deals, originating from our inside sales team compared with Q4 2014 and for the year, a 57% increase in closed deals initiated by this team. All of our event programs such as HR workshops, seminars, trade shows and the HCM online academy had increases in Q4 2015 compared with Q4 2014. The number of unique visitors to our Company website is one of the strongest indicators of market demand for our solutions. And in Q4 2015, our unique-visitors number was up 75% compared with Q4 2014, the largest fourth quarter year-over-year gain in our history. For the 2015 year, our unique-visitors number was up 53% compared with 2014.
We continue to see our UltiPro product suite as the gold standard in the HCM industry and apparently many buyers agree. Looking at the survey results of our new buyers over the last 18 months, the top three reasons they gave for buying from Ultimate over our competitors were all products related with unified HCM as a number one reason, strength of functionality number two, and improved reporting number three. Once again, third-party studies validate what our customer surveys are saying.
G2 crowd, an independent website that collects and analyzes thousands of software reviews from end users produces a real time performance grade [ph] for best HR management software suites in 2016. And last Friday, the Grid showed UltiPro to be the highest ranked of all solutions overall and highest rated in customer satisfaction.
UltiPro also had a highest G2 score for best score HR in 2016, more than 20 points higher than the vendors tied for second place and the highest G2 score for best payroll software in 2016, nearly 20 points higher than the largest payroll service provider. G2 Crowd also named UltiPro to several of its end of the year best of 2015 users’ choice lists. In the enterprise category where winners come from many different markets and are based upon reviews from companies with more than 1,000 employees, G2 Crowd named UltiPro shortest time to return on investment in this market space. G2 Crowd also recognized UltiPro as best of 2015 highest rated satisfaction for both performance management and for HR.
A number of other business publications and research analysts recognized Ultimate in 2015 and already in 2016. Last week Ultimate was ranked number one on Fortune’s best large workplaces in tech and in 2015 Fortune also ranked Ultimate number six on the 2015 100 best workplaces for millennials; number one workplace for Hispanics and Latinos; number three for African Americans; number four for Diversity; number two for Camaraderie; and 23 for women.
In March 2015, Ultimate was ranked number 21 on Fortune magazine’s 100 best companies to work for list. Forbes magazine ranked Ultimate number seven on its 2015 list of the most innovative growth companies. Information Week named Ultimate to its elite 100 list to top 100 business technology innovators in 2015. Bloomberg Business reported in November 2015 that from universe of approximately 445,000 companies, Ultimate received the number one rating for positive performance outlook from its employees on Glassdoor. Our employees gave Ultimate a greater than 90% positive business outlook, more than double the Glassdoor company average of 43%. Nucleus Research named Ultimate a leader in the safety and technology value metrics, second half of 2015.
These honors align with one of our core beliefs that engaged in people create a high performance, innovative culture and produce industry leading products and services. At the close of 2015, we were 2,880 strong, and we were supporting more than 25 million people records in our cloud. We obtained our fourth championship goal of surpassing the $600 million mark in total revenues for the year. And we continued we believe to lead the cloud industry in number of customers using a unified human resources, payroll, talent, and time and labor management solutions suite.
The continuing demand we see in our enterprise mid markets and strategic markets as well as strong culture of long tenured leadership, and highly talented workforce, all give us confidence in achieving our 2016 goals and our longer range goal of breaking through $1 billion in total revenue in 2018. We have the people, the cultural trust, and the products and services to execute our vision. We also have many long tenured customers who advocate for us, supporting us proactively in our growth and development objectives. Our strategic approach remains the same as it has always been; focus on people first, care for them like family, and trust in them to take care of our customers by delivering the highest quality products and services.
This is Mitch’s and my 72nd conference call together. We want to thank you for your support over the years, and we look forward to your continued support in the future. Let’s go to the Q&A.
[Operator Instructions] And we’ll take our first question from Michael Nemeroff with Credit Suisse.
Congratulations and thanks for taking my questions. I’m kind of running out of superlatives when you put up quarters like this. But Scott, it sounded like you more than achieved all your sales goals in Q4 and 2015 as it’s been a few years since you provided. I was wondering if you would maybe share with us some kind of bookings growth for Q4 or for the full year 2015. And if you don’t want to answer that, I’ve got a couple for Mitch.
You got me on that last time, like a few years ago, right?
I think it's been more than three years.
So, this is where all the Ulti peeps out there, the customers out there and ecosystem [indiscernible] about winning 2015 was the 25th year and it just seemed like it was a perfect storm in Q4 and I couldn’t be proud of that. But the number is 56%, Mike.
That’s for the full year or for Q4?
And then one for Mitch, if I may. So Mitch, if I look at the deferred in the quarter, really strong number, same -- actually stronger than was in Q3. Since calculated billings since you said in the past that it's not a really great proxy for the bookings in the quarter. How should we take that number in relation to that 56% bookings or ARR that Scott just mentioned?
I would say that with that caution, we ask you not to focus on the billings number. But like I said last quarter, when you do have strong sales quarter, it is going to inflate that percentage. I shouldn’t say inflate -- it can be reflected in that. So the bottom line is your billings calculation does reflect the strong billings Scott talked to -- strong bookings Scott referred to in this quarter, and during the quarter.
Okay, and then just one follow up for Mitch. Just on the operating margin, I think that is about 50 basis-point improvement in 2015? What are the puts and takes to that with only the 50 basis points, what would need to happen to 100 basis points improvement in 2016 on the operating margin line? And that’s it from me, thanks.
Mitchell K. Dauerman
Mike, look, when you go from 50 to 100, I think we all know we’re talking of relatively small drivers. It's a question of how are you moving towards improving margins each year and getting to break through the $1 billion in 2018. And I think you could think about puts and takes. Sales and marketing to invest more in marketing whether it's an hard dollars or whether it's in adding more quota carriers and the timing of them. If you invest more into development as you see opportunities, you have to bring on more products in get from our current $30 per employee per month opportunity closer to our goal of $40, we set for 2018.
I think those are kinds of the things. Obviously you can have small set, but we really discount the noise in the system. It’s about where we are going.
Thank you. We will take our next question from Justin Furby with William Blair & Company.
Scott, can you just discus big picture the more aggressive hiring past year on the sales side? You go back to 2010, 2011, 2012 days and you were still keeping the sales team flat or flattish and now clearly you’re making much more aggressive investments. And you seem to be liking what you’re seeing here and its’ paying off. I am just wondering what's driving the change in your mind on the hiring side; is it market dynamic where things feel like starting to open up, is maybe a competitive change where things are moving more favorable for you? And we’ve heard some rumors in terms of adding of another sales layer this year. I wonder if you could maybe address that and update where you seeing it with 2018 hiring target, are you still thinking 135? [Ph] That’s a question I’ve been working at for while, so go ahead. Sorry.
When we started, it was probably 18 months ago that we came up with a strategic channel which was a place where our sales people were already selling but we thought if focus on it with another sales organization within the mid-market organization that would be good for everybody and certainly good for Ultimate. So, I think the idea was at that point we have 16 hires, two people on each team, see how that goes and then try and build managers from that team from those teams, and if it goes well have the six managers of the six teams come from within and then build up six people on each team to 36. So, it just took off better than I could have thought it could take off in a short period of time. And in that short period of time, we were able to get to six managers from within the infrastructure. So, we got them. So, now we are at a point where by the end of the quarter those six managers are own place. Some of the teams are fully built out. And we thought we should accelerate this to the 36 in the United States as fast as we can, which is what is happening.
As far as enterprise, which is over 1,500, I think we just looked at what we did in the mid-market and strategic and said hey, maybe if we go 1,500 to 25,00 in enterprise, do kind of like the same thing and put another team in there, have our veterans [ph] that are with us focus on 2,500 and up that it could be good, similar to what we did in the mid-market in strategic. So, we started another team within the infrastructure of enterprise 1,500 to 2,500; we took one of our star managers put them in charge of it, hired six new people into that already. The plan is probably to hire -- it goes well like we think it will we’ll hire probably by the end of the year. So we go into 2017 with 12.
Finally, my number hasn’t changed from 135 in 2018, the only thing I think we will have more veteran players on the team in 2018 because we are accelerating when the people come in. When someone comes in with us, they get a freshmen quota, then they get sophomore quota, then senior quota. So, to put more senior quota people in line in 2018 which I believe will give us -- with this opportunity we have to achieve our goals when we become $1 billion dollar company because our goal is not to stop there, it’s to continue to grow north of 20% after $1 billion.
And then do you -- when you think about our performance in Q4, how much of that is -- is there one thing that is absolutely knocking out of the park, or across the board strength that you’re seeing and just curious what you see from a pricing standpoint, in terms of Q4?
I mean pricing what we normally get -- enterprise exceeded their goal in Q4, the mid-market held it and strategic held it. [Ph]
Thank you. We will take our next question from Scott Berg with Needham and Company.
I’ve got two questions here for you guys. First of all Scott, you increased your revenue guidance for the year coming off the strong fourth quarter and improved the visibility from 93% to 97%. So, I think that first, how you’ve done that coming off of the Q4 in a couple of years? Can you may be talk about other competitive dynamic from the quarter, maybe win rates that might have changed or improved or anything else that you’re seeing that might have contributed to even better expected quarter?
I think it’s just -- like I said, I think it was a perfect storm. We always get to hire the best people, we have that opportunity because I think we did build the field and people want to play in our team. But I think it just all came together. The strategic team did much better than I thought it could ever do in such a short period of time. The mid-market team exceeded their goals, and enterprise exceeded their goals. So, it was probably the push from strategic doing so well in that market so fast. But it works like Mitch gives me a number that hey, he takes all the numbers, he crunches them, and it comes to a number and that number came to what we told everybody today. And that number was a result of an exceptional Q4 that will layer in over 2016. So, I mean it just works like that every year. We just never had that much of a boost in Q4 before we gave our guidance.
And I guess as you look at the deal flow in the second half which we all know was strong, as you look at implementation capacity, is there anything internally that will change in ‘16 in terms of maybe the percentage of deals that you actually implement yourselves versus maybe working with consultants? Just trying to understand if you have the great capacity levels already set to address the increased demand?
I think we're involved in every deal. We used our ecosystem to support us in deals. And I think in 15 -- I believe it was between 10% and 15% of the deals that the ecosystem was part of I think to probably be between 15% and 20% this year. But also we were -- we have a lot of TechSTARS programs, interim programs that -- we have people in the wings here. So, we can handle the implementation. It's not something that -- there's no stress in the organization right now or with the results that happened in Q4 about implementation or getting people live in a quality manner.
We'll take our next question from Rich Baldry with Roth Capital Partners.
The new retention higher than 97% level, I'm curious as the strategic group steps up in contribution, won’t that number sort of naturally come down when you think of the smaller businesses, their lifecycles and they’re being acquired, going out of business, how you're going to think about it, tend to offer higher churn rates. So, is that something as we look out a few years, we shouldn't be kind of focused on that 97% number sort of naturally as your customer base evolves, it should probably come down a little on its own?
I don't know. We're focusing on the 97% and we think the number is still above 300 employees, so I don't see that. I think between our -- just all our support -- services organization, our executive relation management organization, I don't see any sense of that. I sense that it was going up. Before I even got the numbers, I met with the leaders of the team and I said I just sensed it's going up. I’ve been at meetings with our customers, there's no noise in all the channels. And then once the numbers came in, it did go up. I think once they go with us that they should hopefully stay with us forever. I know that's not possible but I think that's our mindset that they should stay with us forever and we should do everything we can to make them stay with us forever. So, now I think 97% is the new number and that's now our goal. So everyone at Ultimate is focused on making that happen.
And follow-up, could you talked a little bit about continued progress on the NetSuite partnership, maybe for where you're dealing more with them at the enterprise level, at mid-market level; how are you feeling about that now?
Yes, I mean it's better than I could have expected. They accounted for about 5% of our business in 2015 and we signed the -- really signed the agreement in March last year. So, the pipelines are strong, the relationships are getting better. My goal and I know Zack’s goal is to double it this year, double the amount of business that we did in the second year of the relationship. I couldn't be more pleased with it. They've been a great partner. I believe if you asked them, we've been a great partner to them. And I think it's a compelling solution together. So, I think it is good now and I think it's going to get better.
Thank you. We'll go next to Brad Reback with Stifel.
Scott, how much do you think ACA helps the strategic business?
I don't think at all. I think just part of the whole thing. I mean I don't think at all. We have prospects out there, we have prospects who are looking and I think we're in a place where the strategic sales people are able to sell them. And I said it before; I think there's no one we compete against who doesn’t have ACA. I think it’s just part of being in this business you have to take care of that, so I would say zero.
Just as a follow-up to that, do you think it encouraged people to begin looking a little more aggressively for solutions in the back half of the year for the need to debt compliance?
I don’t, because again I think that whoever they were with, unless they’re with some in house solution that they had to deal with. But 50% of our -- well, 65% of our business comes from service bureaus and there isn’t a service bureau that doesn’t handle ACA. So, no; I do not think that.
Thanks. We will take our next question from Terry Tillman with Raymond James.
This is Brian Peterson in for Terry. I wanted to peel back the onion a bit on what’s driving your success in a strategic market. Obviously, you’ve added a lot of new clients here. But if you look at it versus your expectations maybe 18 months ago, is it a bigger total opportunity than you expected as you had better luck in actually converting on those opportunities or are you seeing customers sign up for much more modules than you actually expected?
No, I don’t think it was a bigger opportunity, I think it was the length of time it took us to get successful with the people we have onboard which part of them we never experienced in the past with new hires coming onboard and contributing what they did, I think obviously that there is a great market out there. The sales cycle is shorter and our unified HCM I think was compelling to the prospects that they were looking for. I don’t know if I answered this but I don’t think there is really any magic to it.
Just for clarification on the NetSuite comment you just made, the 5% of business that’s related to bookings not revenue, correct?
And we’ll go next to Nandan Amladi with Deutsche Bank.
So, just a bit of a conceptual question probably for Mitch, on the retention rates. Historically you’ve said over 96%, today it’s 97%. How much has the underlying data actually moved for you to raise 500 points?
The calculation we’ve been doing is the same we’ve been doing for 15 years, and that is we take the annual recurring revenue of the clients that are lost during the preceding 12 months and we divide it by the recurring revenue for the month prior to the quarter we’re measuring on an annualized basis. So, obviously as our revenues go up, it takes more losses to move the needle. But I don’t know -- I couldn’t give you a number to tell you how much it is to move it.
And we’ll go next to Mark Murphy with J.P. Morgan.
Thanks a lot and congratulations on the quarter. This is Benjamin filling in for Mark. I want to ask you about the managed services offering. I mean it has been a couple of years now with expenditures. [Ph] Can you talk about how it has fared so with respect to your expectations and if it has been influencing larger deal planning, et cetera?
It has, it has exceeded our expectations. It was about 5% of our total revenues in managed services. But then if you take that 5%, probably it's another 5% of deals we’ve got because of it that weren’t part of managed services. So, I’d say that probably if you looked at it what it impacted on the total, it's about 10% of our business, which was -- they exceeded our expectations for 2015.
Also, if I can, on the product roadmap, is there -- if you could remind us, if there is any eminent dates [ph] for any of your modules that are coming up? And what would be the top one or two areas that you might be focusing on in 2016 from a product development standpoint?
I didn’t really get the middle of -- their job is to get us from $30 to $40 over the next few years. And right now I know there is on the training side, we’re working on the training side. And I think that will be the next thing that we probably introduce to some training solution sometime this year, that will be the next thing. There are other things we’re working on but I really don’t want to get into them. But if we were to introduce something, I wouldn’t be surprised of it was some training application.
Just to clarify; is that a learning management system?
Yes, nail on that.
And we’ll take our next question from Ross MacMillan with RBC Capital Markets.
Mitch, I don’t know if I missed this, but did you give backlog number or do we wait for the filings to see that?
Mitchell K. Dauerman
You wait for the filings, but just be careful to read how we describe, how the backlog is calculated.
Is that because some of the larger multiyear -- or sorry, some of the larger deals that you’ve signed maybe in the last 12 months that are still fee implemented, might show up in that or any color?
Mitchell K. Dauerman
It's both ways for us. It's the calculations based on contracts that had not begun for their entire term. So, some deals that have longer term, some could be shorter, whether they’re bigger or longer. But this was the definition of backlog at the SEC and Ultimate agreed to back in 2003. [Ph]
And Scott just curious, at the high end of the enterprise segment, are you seeing any change in the times you're seeing Workday and/or are you seeing any more signs of Oracle, I guess cloud HCM, what was Fusion?
Yes, very little Oracle and Workday stays consistent at about 10%.
We’re going next to Jeff Houston with Northland Securities.
So, if we look at the tax filing float balance, Mitch I think you said it was about 633 million -- with tax or interest rates increasing just a bit, trying to back into what the EPS impact might be for ‘16. Is it right to say maybe that could add a couple of pennies especially that float balance increases through the year?
Mitchell K. Dauerman
It will add something. Keep in mind that when they announce a rate increase, it doesn’t get through the type of securities we're investing in, being treasuries and government. So, it's a very small amount, if anything this year. But if they continue to raise rates, and as you point out, the balance will continue to go up and will probably be 750 million or so in 2016. So, it's simple math as you take what rate we're thinking, take all taxes and divide it by 30 million.
Thank you. We have time for one more question. We'll go to Steve Koenig with Wedbush Securities.
Just wondering if you can maybe help us think about your penetration; how should we think about your penetration of your core market and maybe the strategic market as well? Should we think about the $25 million with respect to the Ultimate target or how do you all think about it?
Our latest numbers were that, we were penetrated in the enterprise market which is about 1,500 at 9% and in mid-market which is 501 to 1,500 at 7%. And then in strategic market right now we’re defining as 300 to 500 about 3%. And overall way we think about is that we cross over the $1 billion in ‘18, we'll have less than 10% of our addressable market in North America.
In 2018, okay. And those percentages; are you arriving at those by looking at employee counts or revenue opportunity, how are you getting there?
Employee count times the average PPM we're getting now, not the opportunity on PPM. If we take the opportunity, it will be -- so the opportunity will be greater. So, what we're selling at now, we take the employees evolving accounts in those ranges and we qualify it.
Thank you. At this time, I’d like to turn the program back over to Mr. Scott Scherr for any additional or closing comments.
Our 25th year couldn't have been better, and Mitch and I couldn't be happier, I mean sticking with him for 72 earnings calls or something that I should be rewarded for as so should he. But anyway, thanks for all your support. It's exciting times at Ultimate. We look forward to the future. All the best.
That does conclude today’s call. Thank you.
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