The Ultimate Software Group's (ULTI) CEO Scott Scherr on Q1 2016 Results - Earnings Call Transcript

| About: Ultimate Software (ULTI)

The Ultimate Software Group, Inc. (NASDAQ:ULTI)

Q1 2016 Earnings Conference Call

April 26, 2016 5:00 PM ET

Executives

Scott Scherr - Chairman, President and Chief Executive Officer

Mitchell Dauerman - Executive Vice President and Chief Financial Officer

Analysts

Michael Nemeroff - Credit Suisse

Justin Furby - William Blair & Company

Richard Baldry - ROTH Capital Partners

Scott Berg - Needham & Company, LLC.

Brad Reback - Stifel, Nicolaus & Company

Mark Marcon - Robert W. Baird & Co.

Brian Peterson - Raymond James

John Rizzuto - SunTrust Robinson Humphrey

Mark Murphy - JP Morgan

Samad Samana - FBR Capital Markets

Jeff Houston - Northland Securities

Ross MacMillan - RBC Capital Markets

Natasha Asar - JMP Securities

Steve Koenig - Wedbush Securities

John Byun - UBS Securities LLC

Operator

Hello and welcome to Ultimate’s First Quarter Financial Results 2016 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 Dauerman

Okay, thank you, [Priscilla]. Good afternoon, everybody and thanks 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 published on our website.

I am going to begin by reviewing our Q1 financial results and then will provide guidance for the second quarter 2016. For the quarter recurring revenues grew by 28.2% to $152.8 million and total revenues grew by 29.2% to $187.2 million. Revenue retention from our cloud customers was in excess of 97%. Operating income grew by 37.9% to $36 million and the operating margin expanded by a 120 basis points to 19.2%. Net income was $21.9 million and the related net earnings per share was $0.73.

Cash and marketable securities was a $103.8 million and the average daily float balance for our payment services business was approximately $950 million for the first quarter. For the first quarter recurring revenues grew by 28.2% to $152.8 million and we are better than our expectations generally as a result of earlier product starts. Higher recurring revenues also resulted in the related gross margin of 75.4%, which exceeded our forecast.

Services revenues were $34.5 million also exceeded our estimates as a result of both services related to earlier product starts and services from our print services division which includes W-2 and Form 1095-C. The overall services gross margin rate of 9.3% was better than our expectations mostly as a result of higher services revenue. The gross margin rate for total revenues expanded by 80 basis points to 63.3% this quarter from 62.5% in the first quarter of last year due to higher total revenues.

Operating expenses were $82.4 million for the quarter and were slightly less than our expectations mostly in the sales and marketing area. Operating income increased 37.9% to $36 million and the operating margin for the quarter was 19.2% both were better than our expectations mostly due to higher revenues. Net income was $21.9 million and the related net earnings per diluted share was $0.73. Our non-GAAP income tax rate for the year - for the quarter and the year was 39%.

Turning to the balance sheet. Our cash and marketable securities balance was a $103.8 million compared with $129.4 million at December 31, 2015 and reflects a total of $47.6 million used to purchase shares of our common stock in the open market through our stock buyback plan and also shares acquired to settle employees tax withholding liabilities associated with the restricted stock that vested. Yesterday our Board authorized a 1 million share increase in our stock repurchase plan we now have 1,342,000 shares available for repurchase under this planning.

Operating cash flows for the year grew 23% to $32.1 million as compared with $26.1 million in the first quarter 2015. Our capital expenditures for the first quarter were $17.6 million including capitalized R&D cost of approximately $7.1 million. This compares with the first quarter of 2015 when CapEx was $10.9 million and is included $5.7 million of capitalized R&D cost. Also included in the first quarter of this year were higher than usual leasehold improvement costs which are associated with the plant expansion in Weston.

Next, I’d like to discuss our financial guidance. We are modifying our full-year guidance for 2016. Recurring revenues are still expected to grow by approximately 26%. However, total revenues are now expected to grow by 26%. And we expect our operating margins to still be approximately 21%.

Finally, turning to our financial outlook for Q2. We expect recurring revenues to be approximately $158 million and total revenues to be approximately $187 million. As a reminder, services revenues in the second quarter typically step down because Q1 reflects revenues from our print services. We expect the operating margin for Q2 of 2016 to be approximately 20%.

Turning to our upcoming conference schedule during the next quarter I will be at the Jefferies Tech Conference in Miami on May 11; and the Needham Tech Conference in New York on May 19. I will also be at the Stifel Tech Conference in San Francisco on June 6 and the Baird Conference in New York on June 8. Scott will join me on June 15 in Chicago for the William Blair Annual Growth Stock Conference. If you are available at any of those conferences to meet, please let me know.

And now, I’ll turn the call over to Scott.

Scott Scherr

Thank you, Mitch, and thank you everyone for participating on our call this evening. Once again, achieving all of our goals as planned in the first quarter has put us in a strong position to execute on our future objective. Recurring revenues were nearly $153 million, up by more than 28%, and total revenues were $187 million, up by 29%, both compared with Q1 2015.

At the same time, our non-GAAP operating margin came in on the positive side of our targeted 19%, and a year-over-year customer retention rate again exceeded 97%. Sales produced the best first quarter in our history keeping our momentum strong and providing a solid foundation for 2016 and 2017 success.

The enterprise team’s attach rates for new customers in the quarter were on-boarding 78%, time management 61%, recruiting 56%, and performance management 50%. Some of our new enterprise customers were a restaurant franchise of several well-known brands with 20,000 employees that added recruiting, on-boarding, and performance management.

Our construction services firm with 13,000 employees that added on-boarding and time management. A healthcare services company with 12,000 employees that added recruiting, on-boarding, compensation management, performance management, and succession management.

Our mid-market and strategic team’s attach rates were on-boarding 88%, time management 83%, recruiting 72%, and performance management 68%. Some new mid-market customers in the quarter were a systems integrated with 1,500 employees that added all of our optional solutions recruiting, on-boarding, time management, performance management, compensation management, and succession management.

Our non-profit with 1,500 employees had also added recruiting, on-boarding, time management, performance management, comp management, and succession management and an online service resource center with 1,400 employees that added recruiting, on-boarding, and time management.

Our marketing metrics indicate that market demand for our solutions continues to grow. We had a 50% increase in traffic to our website in Q1 2016 versus Q1 2015 by far the most traffic we’ve had for any one quarter in our history. And for our HR workshops that we hold across the country, we had a 69% increase in number of attendees in Q1 2016 over Q1 2015.

In early March, we held our annual customer and partner conference connection and hosted more than 2000 HR business professionals. The enthusiasm and excitement drove the doubling of traffic on our website during the days of the conference compared with traffic during the last year’s conference, and we had more than 5,500 posts in social media also doubled the number we had during last year’s conference.

On Twitter, we tripled our engagement rates. The four-day conference featured more than 60 breakout sessions and workshops and an inspiring employee engagement. We saw a 26% increase in attendance and breakout. We offer hands on marine experience in all four days and trained more than 1,200 people. We also held our first-ever connection code of HCM, where attendees absorbed their software engineers coding new UltiPro features and functionality based on ideas submitted by customers.

Of the customers continued our survey 97% raised their connections and then excellent or good. Here are a few customer comments. This was a phenomenal event. I really learned a lot and came back to the office excited about changes we want to make in our processes. It was my first connection conference. And I was wanted by staff and the relationships with clients. It was executed at a high caliber. My favorite part of the connection is mainly about how ULTI runs its business and have the culture is there.

It really motivated me to want to partner better and make ULTI better because businesses that are relative good intent, need to be supported. The classes and breakout sessions were fantastic. I feel that I gain so much knowledge about Ultimate that I couldn't believe I hadn't been utilizing already. Customer services always often a year events and the staff seems to genuinely care about each other as well as the customer. I am always in light with and energized after connections, I’m glad we are customer.

Also in the first quarter, we were honored to be recognized by FORTUNE Magazine for the fifth consecutive year for our people oriented culture. FORTUNE ranked Ultimate number 15, on 2016 100 best companies to work for list. At the close of the first quarter this year, we were 3,055 strong. We support more than 25 million employee records in the cloud and we continue to leave the cloud industry and numbers of customers using a unified HCM with human resources payroll, talent compensation, and time and labor management.

Our customers continue to support us generously with feedback, collaboration and partnership. A primary business objective remains the same as it been since the inception of Ultimate. The focus on building innovative technology and service solutions that put people first. This approach is part of our identity and has brought us to where we are today. We expect this to fuel our success in reaching our future goals as well. This is Mitch and my 73 conference call together. We want to thank you for taking this journey with us over the years and look forward to your continuing support.

Let’s go to the Q&A.

Question-and-Answer Session

Operator

At this time, we will take questions. [Operator Instructions] We will take our first question from Michael Nemeroff from Credit Suisse. Your line is open.

Michael Nemeroff

Hi guys, thanks for taking my questions and congratulations on another strong quarter. Scott, one question for you and next one follow-up for you if I may. Scott, you’ve seen a lot of success it seems in the strategic market. I'm curious the lower end of the boundary that 300 employee range. What precludes you from going even lower over time?

And then for Mitch, when I look at the guidance for 2016 especially on the recurring revenue, the implied recurring revenue guidance for the back half of 2016 is about 700 basis points lower than the implied guidance for the first half. And I'm just curious what's driving that specifically we see an acceleration of recurring revenue into the back half of the year? Thanks.

Scott Scherr

I’ll answer the first one I think, I mean nothing precludes us from going lower, I think it’s just the focus and putting the best team possible. We are building out the strategic channel now. So nothing precludes us and I would think that sometime in the future we will go lower.

Scott Scherr

Yes, Mike and on the recurring revenue model, I would say that, we do our modeling as same as we always have for recurring. It’s a function of looking at the larger companies and expected lives which are often dictated by what the customer wants to do even if we want to try to hold on forward, which and our teams always trying to do. But I think probably the math is a function of both those customers that went live in 2015 and the timing of those and similarly those that are in process of going live today.

There's no constraints on our implementation team in terms of getting the customer lives so it’s probably just a matter of how it fell out. I’d also say that at this point we're probably close to 99% visible on our full-year guidance of 26%.

Michael Nemeroff

Okay. And then Mitch on the services revenue outperformance this quarter. I'm curious what did you get the utilization rate of the services organization up to and is that sustainable longer-term?

Mitchell Dauerman

Well, first of all when we went to partners for life in 2010 we got away from that whole utilization concept and we brought our customers a fixed fee for implementation. So it's probably more of a function of the activation team, processing, customers in implementation a little bit quicker than we may have modeled. But as I mentioned the outperformance that we saw was partially from activation, but you know the other part it did come from the print services both W-2s and the print aspect of ACA you know the 1095-Cs. So I wouldn’t get overly focused on the activation side.

Operator

Thank you. We will take our next question from Justin Furby with William Blair. Your line is open.

Justin Furby

Thanks guys. And congrats on another fabulous quarter. Scott, I want to ask about the mix of business that you guys are seeing today. Are we at the point where mid-market and strategic are half or more new [ACB] coming in the door and if not is there a point we will get or you think over the next 12 to 24 months and Mitch what are the longer-term margin implications as you see some mix shift to mid market and strategic assuming you see that over the medium and longer-term?

Scott Scherr

We have quoted a 55% enterprise, 45% mid-markets I think when the year falls out there will be somewhere within a couple of points of that, that's how we’re quoted. So that’s what I think it would be I don’t see - I don’t really see that changing in the immediate future. So I’d think 55%, 45% is a good number.

Mitchell Dauerman

I think from the margin perspective, we've been selling in that lower end of the market we just coined it mid-market and strategic for the go-to-market strategy. And when we implemented that came we called it workplace back in 2006, the gross margins on recurring still you know expanded. So I think it's a - I still think we will see some less in the gross margin each year even with the mix in mid-market and strategic being 55%, 45% or even as you might suggest it gets to 50-50.

Justin Furby

Okay. And then in terms of the outperformance of core recurring revenue it sounds like largely - activations I’m curious if you're seeing exchanges in the payroll trends within your existing base, was that all part of what the outperfromance in Q1? Thanks.

Scott Scherr

I don’t see any differences, but it wasn’t that just - and it was just done. I can say they brought couple of few clients live earlier and that’s what accounting for it.

Operator

Thank you. We will go next to Richard Baldry with ROTH Capital. Your line is open.

Richard Baldry

Thanks. We’re typically seeing the services growth - lag product side of the table. In the last couple quarters it’s come closer to match. You think [indiscernible] or long-term those two should really kind of move in lockstep or there’s some unusual events that brought them closer together that may not be sustainable? Thanks.

Scott Scherr

Well I think you are talking about the services revenue growth.

Richard Baldry

Right.

Scott Scherr

In Q1 you pick the print services historically it was just W-2 - picking up some of the ACA front.

Richard Baldry

And its typically been significantly slower on an annual basis than the recurring side and looks like in the last two quarters it’s really come up to be much more imparity. So I am just wondering if long-term you think it is probably more likely to begin the sort of trend in line.

Mitchell Dauerman

Well, I think - yes, I mean I guess it could. Part of the discussion we have is whether, we could develop Sis. We are going to take some of the implementation off the books, so that might have an impact on it. And if you are building a team around UltiPro and Ultimate, that’s good for both of us.

Richard Baldry

And if you look at the buyback, it looks like you really kicked the stock in the quarter, my average that I calculate that was above 156. Can you talk about how you want to pursue that forward; you are still going to be kind of a very opportunistic or maybe more programmatic [indiscernible] program? Thanks.

Mitchell Dauerman

We follow the same program, keep certain amount of money on the balance sheet, targets been a $100 million. And the opportunistic, obviously we have a lot of confidence in where we are going over the years. We also do by routinely as a result of investing of our restricted stock units that happened quarterly. So we are always buying at the market there, so I think that program will continue.

Operator

Thank you. We will take our next question from Scott Berg with Needham & Company. Your line is open.

Scott Berg

Hi Scott, Mitch congrats on a good quarter and I apologize for the background noise here. [Starbucks] is loud. Two questions, first one for Scott, you didn’t give your metric around customers expecting to have intentions to buy in the next 12 months on the call. Any color in terms of what that look like relative to the recent quarters?

Scott Scherr

Yes, I think it was up. Yes, I guess we didn’t give. There is no real reason we didn’t get it. I think it was up - I just don't have it in front of me right now. I mean there's a lot of momentum obviously around the country with all enterprise sales team. We call it are stacked with and met every sales person over a week in four locations. Yes, the price is big as it's ever been, the enthusiasm is big it’s ever been and marketing is –they are growing the tunnel, which I think should be normal as we grow. Then I will make more of it than it is, but no everything is still growing. I think the biggest numbers that were there are over.

Scott Berg

Fair enough. It's been an interesting metric last year, that's why I asked, but…

Scott Scherr

Make sure we do it for next quarter again.

Scott Berg

No problem. My follow-up question would be around your service team, obviously out performed for one-time fees partially in the new quicker implementation this quarter. But, how do you look at the size of your services teams throughout the rest of the year? Demand trends continue to be very healthy. Obviously, your win rates remain healthy and see subscription revenue growth rates. But Mitch talked about your services teams not over capacity, but let’s try to understand I guess new trends through the end of the year potentially…

Scott Scherr

I’d say that two weeks ago we had - I don't know if that’s right. I think it was our second annual or third annual partner conference to help us with implementations. Last year, I think they were up around 80 partners, this year there were 160 people there I presented at it. So I think, we don’t have - we are pretty good at hiring people and getting them on. We're pretty good looking ahead of what we believe we are going to be. And I think with the partner network that - we think we have - we’re in a good position as we could be.

And we are always aggressive in what we believe our sales people will bring in. So I’ve never experienced anything about, someone is saying, we’re pushing back starts so we’re doing this. We can’t get people live. All the people are - and we built on them. We try to get people live as fast as we can in a quality manner, and I don’t think that’s going to change. That answers the question or is that ramble.

Operator

We will take our next question from Brad Reback with Stifel. Your line is open.

Brad Reback

Great. Thanks very much. Any change on hiring plants, Scott.

Scott Scherr

No, our goal was to be - this year at 120 we are right now I mean at this moment we're like a 116. So we are four short off where we want to be. I think that will be done certainly by the end of May. And then I think next year, we want to go in with 126 and we want to get a lot of the new people. Our key is always been to get quality people, bring in as freshmen and getting the top most and then get in the senior people as fast as we can. So I think we could achieve our goals, what we are planning now and I think we can achieve our future goal and like I said 2018 going with 135 in 2018 quality sales people. Grow the average annual productivity and grow PPM.

Brad Reback

Perfect. Thanks very much.

Operator

Thank you. We will go next to Mark Marcon with RW Baird. Your line is open. And Mark your line is open for Q&A.

Mark Marcon

Hi, it’s Mark Marcon, thanks for taking my question. Sorry about the delay. With regards to the competitive environment are you seeing like some of the newer players at all in terms of like a Paycom or velocity they typically have smaller clients, but just wondering if you are seeing it all on the fringes?

Scott Scherr

No, we are seeing single-digits and I would not hold a new, they’ve been announced for years and they went public a couple of years, but we don’t consider them new and I see both of those we see low single-digits.

Mark Marcon

Great. And then with regards to the current selling environment, are you finding that there are - I mean based on the record new sales if doesn’t sound like it, but are you finding any reduction at all in terms of activity, there are some people have speculated maybe there was some acceleration and there was some sales that were brought forward with clients just saying if I’m going to get ready and I will just incorporate the ACA and make a switch before that as opposed to latter. How would you describe that part of the environment this got whole dynamic?

Scott Scherr

Well, I think the demand environment for us is strong as it’s been for while I don’t think I mean personally and I don’t think ACA does really anything to accelerate that on new sales. It did help with our existing client based, because we had client to need an ACA services which we provided, which Mitch said it create some service revenue that we have at the end of the year to segregate that two revenue, but I mean I haven’t seen is for us create any demand on new sales.

Operator

Thank you. We’ll go next to Terry Tillman from Raymond James. Your line is open.

Brian Peterson

Hi, this is Brian Peterson in for Terry and congratulations on the quarter guys. Just a quick question on the services revenue upside $4 million above the model, obviously pretty impressive there. I wanted to - out how much of that specifically was driven by ACA printing. And was the expectation there that the adoption with customer base was higher than you expected and what percentage adoption did you actually see across your customer base?

Scott Scherr

Brian, I don’t think - let me get into small details about the numbers, but the out performance was a little bit less than half from the ACA print, going into ACA print component of it I think it was unclear how many people will use the tool kit we provided that’s for great and do it themselves versus have us do it, so it’s kind of our first time pro estimating, in this case we estimated on the low-end.

The activations are probably about a quarter of it, W-2 for little bit of the excess and then there is - we do forms, we do time so a combination of things, but again few of things, we always say that services is the tail that wags the dog. What we are focused on is growing the recurring revenue and keeping the retention rate as high as we can.

Brian Peterson

I appreciate the color there. And just real quickly any update on the net partnership, how that’s trending there? Thanks.

Scott Scherr

Yes, it’s trending up. I said at the beginning - said about - in the first year we did like the first nine months and I think 5% of our business was from net partnering with NetSuite and my goal this year-end I think that was - we can get 10% as well as I know he has his goals, but we were over - little over 10% of our first quarter sales came through some partnership with NetSuite.

Operator

Thank you. We will take our next question from John Rizzuto with SunTrust. Your line is open.

John Rizzuto

Thank you. Thanks fellas. I wanted to a little bit more on, you show some good statistics around your traffic and your conference attendees and such. And I think at toward the end of last year you were talking a little bit about doing more broad marketing campaign. Obviously you are going to grow organically with the business and with mind share, but are there specific things that you are doing now in the marketing program that you are changing that seem to be working or anything around the strategy to help get the Ultimate name out there and branding more broadly?

Scott Scherr

I think at the end of last year and the beginning of this year we put our first commercial out there. We are doing a lot more media work [mic and mic] other things around. Our seminars that we do around the country I am not sure the exact number but we increased it by about 50% the number of seminars we’re doing around the country. I was recently in Dallas at a sales meeting and you guys there were telling me that they had Dallas was like may be less than a month ago. And last year we had about 200 prospects and customers come to our session there and this year there were over 400.

So I think accelerating that, accelerating our inside sales reps, we continually accelerate that based on the number of sales people we have and as they get more tenured, they get better just like anything in life. The more you do it, if you have someone good, they get better. So I think it’s the increased spend based on our increased sales quota, we expect to get in the business.

John Rizzuto

Okay. So it sounds like it’s fair enough to say so far you think it’s been pretty successful and you will continue to spend as you see the returns?

Scott Scherr

I will continue to spend even if I don’t see the returns. So it’s just one of those things that you have to continue spending.

John Rizzuto

Right.

Scott Scherr

As you grow you have to continue you can’t stop, yes we’re always being doing that in a consistent basis based on your goals you have to do it. But we have been pretty consistent in our sales efforts for a very long-time and I think marketing has something to do with that for sure.

John Rizzuto

Okay. All right. Thank you, good quarter, fellas.

Scott Scherr

Thank you.

Operator

Thank you. We will go next to Mark Murphy with JPMorgan. Your line is open.

Mark Murphy

Yes, thank you very much I will add my congratulations. So Scott I am curious if there was or Mitch I'm curious if there was any discernible difference in the pace of bookings growth this quarter between the enterprise and the mid-market segments because we had heard some suggestion that the mid-market might have been a little busier across the industry but you also mentioned a few decent sized enterprise wins. And so I'm just curious if either those segments had noticeably different trend to it.

Scott Scherr

No, I think you are going to hear that every single quarter because we have almost double the amount of people in the mid-market and strategic than we do in enterprise and they are much more unit driven because when you go lower you know our expectation is more units per sales person than we expect in enterprise. So I think it just normal.

Mark Murphy

Okay. And then so on the other side of ledger, when you look at the implementation of the larger deployment, you have been sporadically once in a while closing some larger deals in 100,000 or 200,000 feet type of range. I am wondering just where your confidence level is in meeting the deployment timeframes or do you feel like you're well-staffed for the one large one that goes live early next year and then also relating to that any high level comments on your overall visibility into 2017 at this point.

Scott Scherr

Well, I think I will go first as Mitch said we’re 99% visible into this year. So when I think about everything that have been slower now, we are really working for 2017. So I think when we guide in Q3 I have lot of confidence in what 2017 is going to look like. We can say kind of like on the same - somewhere is around the same plan that we are now - discussion.

Yes, large - we are staffed and we took one large customer live this year, I call some large customer someone 50,000 pays, I’ve always said we get one year that great, the one-year we’re talking about right now is we have a great team in there. Right now it’s scheduled to the live January 1. If nothing happens on their side, it won’t be our side then I believe we will go live January 1, if something happens or maybe it will be April 1 but it will have a little impact on achieving our goal.

Mitchell Dauerman

Mark, you and I think others have had this kind of common thread of all of a sudden now we have a challenged in having services people to get clients live. But it’s really the same question you would have asked us five years, ten years ago. So it’s just hard of what we do here in the visibility that we have and what our team does to hire people, train them , ultimize them and take care of customers so…

Scott Scherr

We are going to hire 700 people this year, we are on track in our hiring. We have a - it's hard to get into Ultimate but I think we're hiring almost three or four people a day overall. Quality people, we have new hire orientations like we speak to all of them when they come down here. We’ve accelerated some - a month ago, we had one with 170 people, we had one two weeks ago with 170 people in there. So we have not and I don’t believe we will have problem attracting in hiring quality people to join our team.

Mitchell Dauerman

And we did like you and everyone else listening like we always come down for the dinner and I now there are some people on the call who were down recently, so you get a feel for exactly what Scott is taking about.

Operator

Thank you. We will go next to Samad Samana with FBR Capital Markets. Your line is open.

Samad Samana

Hi, guys, a couple of questions. So have you seen any difference in retention rate in the strategic channel versus the rest of the customer base and then I have a follow-up question.

Scott Scherr

There is nothing significant there Samad, like anything you would always expect smaller customers might be slightly worse than the enterprise, but we are talking about marginal difference.

Samad Samana

And as you think about the outside in the W-2 and ACA form services, was there - particular part of the base that attached more of that than expected other than the enterprise or the mid-market and strategic?

Scott Scherr

No, it’s just a matter of our forecasting, first time in China estimate how many customers would have us, print that W-2 as part of the services versus print 1095 as part of the service as opposed to do it themselves.

Operator

Thank you. We’ll move next to Jeff Houston with Northland. Your line is open.

Jeff Houston

Hi guys, thanks for taking my questions. Looking at the attach rate that continued to be very, very healthy, have you considered other areas outside of your current portfolio of non-payroll products that you could offer to new clients and cross sell into your base, it seems almost like mostly to offer a - there would be a pretty healthy attach rate, just curious of those other areas that you are considering.

Scott Scherr

We are working on areas in the human capital management space that are attractive to the head of HR or the head of the payroll. We said we are around $30 opportunity right now and developments by 2018 is to get $40. We have product managers to work on that, we have sales involved in it, our executive relations mangers are involved in it, talking to our client. We have a test right now to $40 in 2018 and management will execute on that, so we are having this call April of 19. I would imagine we will have a $40 opportunity in the HCM space.

Jeff Houston

Got it. Thank you.

Operator

Thank you. We will go now to [indiscernible]. Your line is open.

Unidentified Analyst

Hi, so just looking at our modules, the portfolio of modules that you have. I am just wondering what the pricing kind of trend has been and kind of what your thoughts are going forward as you are eying at that $40 opportunity. Have the modules been pretty flat pricing or you looking at potentials to lift there?

Mitchell Dauerman

There's a firm employee for months on each module. Again to the pricing of every single module, but the cumulative amount of the modules are sum about everything like it set us around $30. When we look at modules, we look at the value to our clients and that’s right in the marketplace. That's how we price. And then sometimes we try and dig into the modules and make them more specific module, which we have done in the past and gotten some of the modules that might have started out as a $1 per employee per month and became $2 per employee per month because of the features and functionality we had it. So same game plan that we've been doing since 2002 and we were the first SaaS vendor out there.

Unidentified Analyst

Okay. And on the earlier product starts that put forward into this quarter. So the point out of the out quarter and did the pipeline kind of back fill that or it will happen there?

Scott Scherr

Yes, it’s just - Steve, we are really talking about very small dollars there. And it’s happened in the past. Yes, there is plenty of backfill for it, but again that goes to the comment about the 99% recurring revenue guidance, and visibility into recurring revenue gains.

Mitchell Dauerman

When you have the best first quarter that we’ve ever had, it obviously fell a lot of the - rest of the year in that and we have to execute in Q2, Q3 and Q4 like we always do.

Operator

Thank you. We will move to our next question here from Ross MacMillan from RBC Capital Markets. Your line is open.

Ross MacMillan

Thank you. And congrats from me as well. Scott, I was just curious ADT saw increased rate of attrition or lower retention whichever way you want to cut it through the back half of last year. And I think they commented there were some company specific reasons for that, but I am just curious is to whether you seen anything tangible in your numbers in terms of maybe the strategic group or other parts of the business in terms of win rate form the ADT base.

And I guess, the pointed question is have you seen anything change with respect to that sort of traditional 50% of your customers coming from the ADT base? Thanks.

Mitchell Dauerman

Yes, I mean it’s been consistent and it’s been pretty consistent that about 65% of our business comes from service growth, nothing is changed.

Ross MacMillan

Thanks very much, congratulations.

Mitchell Dauerman

Thank you.

Operator

Thank you. We will move next to Patrick Walravens with JMP Securities. Your line is open.

Natasha Asar

Hi, this is Natasha on for Pat. Actually the similar question to the one before, but from services like ADTN [indiscernible] and handling ACA filings so that create any additional opportunities or is it just similar question before?

Scott Scherr

Yes, what our competitors do, but obviously for someone to look at anyone in any business then you probably had to dissatisfied with something and if they dissatisfied then they may start looking. So in any business if someone does in and keep their clients happy and then they Michael have to look and also look and get the opportunity to get our process. We have a very high rate to get the business as they are interested in payroll HR and HCM function. Obviously I think we are the best out there, so we need the opportunity and anyone out there is not keeping their clients happy, but put them on place and that’s good for us.

Natasha Asar

Got it. Thank you.

Operator

Thank you. We will move to Steve Koenig with Wedbush. Your line is open.

Steve Koenig

Hi, gentlemen. I’ll just echo other speakers and my congratulations on a great quarter and another for you guys.

Scott Scherr

Thank you.

Steve Koenig

Yes, I wanted to ask on - are you seeing on the package side or more capacity competitors, largest of competitors are you seeing any distractions yet from those basis or are you seeing pricing a promotional tactics from them and you quoted a 97% renewal rates, do you have any sense of how the vendors are doing at getting their customers deployed and getting them renewed, getting them actually implemented and wanted to renew?

Scott Scherr

I think I said that on the ERP side, the percentage of business especially in enterprise that we are getting from the ERP has grown over the years. So I think there are - ERPs in general I think when renewals are up that some of them tend to be looking. So I think it gives us an opportunity, so I think the percentage of business we do get from them has grown from the tasks. And I believe, we’ll continue to grow just I think the sense that it will continue to grow.

Steve Koenig

Yes, and maybe just to get a little bit more granular on that Scott, are you - is it still largely people trading from the on print software or you starting to see folks that might have been sold the soft package that either have them implemented or have and are satisfied with it, to you guys is that’s going to constitute any meaningful part of your business?

Scott Scherr

Well, I think the major part is the on-premise and to a much lesser extent right now, the people has find out other SaaS over the last few years. Once you find out it does take a while to go through the initial implementation start. So I would say to a much lesser extent that.

Operator

Thank you. And we will take one more question. We will go to John Byun from UBS. Your line is open.

John Byun

Hi, thank you. Scott, I have a question and if I look to new revenues and it looks like lot of momentum is going to accelerating in the last four quarters and the question here, what do you think is good thing about the sales cadences year ago I mean realizing ACA only you know everyone had that. And then my follow-up is given the strength why was the market little bit lower than expected this quarter? Thank you.

Scott Scherr

In terms of market, again its marginally lower, but our marketing department deployed different marketing programs depending on what they feel is the best things to do, so it’s currently small, some of it has to do with - companywide, our medical insurance came in - our medical cost came in better than we expected, does that turnaround? We don’t know, but it’s relatively small in the scheme of things.

Mitchell Dauerman

And Scott was asking about the cadence of business.

Scott Scherr

Cadence of business?

John Byun

I mean in terms of what is driving to acceleration and all I say versus year ago?

Scott Scherr

Year ago was driving it, before that was driving it. We basically overall we’ve gone 14 years at 25% recurring revenue growth I think one-year we were at like 23%. So I just think it’s the growth of the company, the growth of the sales organization, the maintaining 97% client base, retention of our client base, we are having a 95% reference of client base keeping 94% retention of our people, keeping our teams strong. So that’s cadence and our cadence is really - and it’s getting better all the time.

Operator

Thank you. And that does conclude Q&A. I’d like to turn the call back to our presenters for any closing remarks today.

Scott Scherr

Appreciate you all on the call taking your time. Mitch, thanks for 73 grade earnings call.

Mitchell Dauerman

See you next time, thanks. All the best.

Operator

This does conclude today’s program. Thank you for your participation. You may disconnect at any time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!