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The Ultimate Software Group (NASDAQ:ULTI)

Q1 2012 Earnings Call

April 24, 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

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

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

Richard H. Davis - Canaccord Genuity, Research Division

Michael Huang - Needham & Company, LLC, Research Division

Mark R. Murphy - Piper Jaffray Companies, Research Division

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

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Eric Lemus

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Ultimate's First Quarter 2012 Financial Results Conference Call. [Operator Instructions] And today's conference is being recorded. Your presenters today will be Mr. Scott Scherr, Chief Executive Officer, President and Founder of Ultimate; and Mr. Mitchell K. Dauerman, Executive Vice President and Chief Financial Officer. We will begin with comments from Mr. Dauerman. Please go ahead, sir.

Mitchell K. Dauerman

Thank you, Sarah. 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 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. We encourage you to 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.

I'm going to begin by reviewing our financial results for the first quarter of 2012, and then I will provide guidance for the second quarter. Unless otherwise noted, our discussion will be on a non-GAAP basis for all costs, gross margins, operating and net income, as well as EPS when comparing to the same period in the prior year. The primary difference between GAAP and non-GAAP financial information is noncash stock-based compensation. Please refer to the reconciliation of our financial information on a GAAP basis to that on a non-GAAP basis included in the press release published on our website.

For the quarter, recurring revenues grew by 21.9% to $60.9 million. Total revenues grew by 21.4% to $78.3 million. Operating income increased by 32% to $6.4 million and operating margin expanded to 8.2%. Net income grew to $3.7 million compared with $2.8 million last year. The related net earnings per diluted share was $0.13 compared to $0.10 per diluted share last year.

Before I go into some of the details, I'd like to summarize the quarter's results. As many of you know, there's a strong correlation between the growth of our recurring revenues and our services revenues, and both are tied to go-live dates of our clients. It's the nature of our business, at times, that some live dates push to the next quarter and in other times, we pull some new lives into the quarter due to accelerated activations. In the first quarter this year, our recurring revenues of $60.9 million and services revenues of $17 million exceeded our projections, mostly due to more pulls into the quarter than we expected. At the same time, our operating expenses for Q1 were favorable, resulting in an operating margin of 8.2% that was also higher than our expectations.

As I'll discuss at the end of my comments, we're going to maintain guidance for 2012. The primary reasons are: First, there could be some pushes later in the year; and second, some of the operating expense savings we experienced are timing-related, and we expect them to be incurred later in the year.

Now turning to the details, our recurring revenue gross margin of 69.5% was consistent with our expectations as we continue to make investments in our tax filings and our SaaS infrastructure that we've discussed in the past. The services gross margin was 5.9%, which was impacted favorably by the higher services revenues. As a reminder, Q1 also includes annual revenues related to the production of W-2s for our clients. And these do not occur in any other quarter of the year. We are maintaining our 2% to 5% gross margin guidance for 2012 as we will continue to add billable consultants due to continued sales growth.

The gross margin rate for total revenues was 55.7%. The change from 2011 was related to the expected lower recurring revenues gross margins based upon the planned headcount additions to our tax filing and SaaS infrastructure teams in the beginning of this year.

Operating expenses were $37.1 million for the quarter and were favorable to our expectations. We expect a significant portion of these expense savings to be incurred later this year.

Operating income was $6.4 million, and our operating margin was 8.2% for the quarter compared to $4.9 million and 7.6% for the same quarter last year. The excess margin over our guidance was due to the higher recurring and services revenues, coupled with slightly lower costs. Net income was $3.7 million or $0.13 per diluted share compared with $2.8 million and $0.10 per diluted share for the same quarter last year. Our non-GAAP income tax rate for the quarter was 42%.

Turning to the balance sheet, total cash and investments and marketable securities were $67 million. In the first quarter, we generated $14.5 million in cash from operations compared with $8.8 million last year. While part of the increase is due to increased results of operation, a portion is also attributable to the timing of certain payment cycles, particularly with respect to our payroll.

We invested $3.4 million in CapEx this year compared to $4.5 million last year, and we used $3.6 million for the quarter to repurchase shares required for settling employees tax withholding obligations associated with the restricted stock units they're vested. We have 1,058,000 shares remaining that are available for repurchase under our plan.

Accounts receivable were $51.1 million at March 31. DSOs were 59 days at the end of the first quarter compared to 64 days for the comparable period last year. Current deferred revenues were $82.2 million on March 31 compared to $72.3 million at March 31 last year. As a reminder, deferred revenue in the first quarter reflects the seasonality in annual maintenance billings, where it's typical that maintenance revenues recognized in the income statement will exceed the annual maintenance billings recorded as deferred revenue on the balance sheet.

Long term deferred revenues were $2.7 million on March 31 compared with $5.1 million on March 31 last year, reflecting the elimination of onetime infrastructure fees in our SaaS contracts.

Next, I'd like to discuss our guidance. We are reaffirming our full year guidance for 2012. Recurring revenues are expected to grow by approximately 25%, total revenues are expected to grow by approximately 23%, and our operating margin is expected to be approximately 15%.

For the second quarter of 2012, we expect recurring revenues to be approximately $64 million and total revenues to be approximately $79 million. And we expect our operating margin to be approximately 10%.

I'd like to provide a few reminders about our quarterly trends. As I mentioned earlier, in the second quarter, services revenues typically step down from Q1 due to the seasonality of W-2 revenues. Additionally, operating expenses are usually lower compared to Q1 due to various reasons, including the cost related to Connections, our national customer conference, which occurred in Q1.

For the second half of 2012, please remember that we expect certain R&D projects to reach technological feasibility, after which we will be required to capitalize related cost estimated at $4 million to $5 million.

While we do not give guidance on free cash flow, it would be reasonable to expect free cash flow to approximate non-GAAP operating income adjusted for the excess of capital expenditure over depreciation and amortization, which should be approximately $6 million this year, as well as the runoff of onetime fees, which should be approximately $3 million this year. From the financial state and presentation perspective, also keep in mind that we reduced operating cash flow, and therefore free cash flow by what is called excess tax benefits, which are derived from stock-based compensation. This adjustment to the cash flow presentation treats us as if we are current taxpayers, although we do not expect to pay cash taxes until 2015 or 2016. We estimate this adjustment to be $30 million, which is subject to change if tax legislation impacting it is enacted.

Turning to our upcoming conference schedule, during the next quarter, I'll be at the GMP Securities conference at May 16 in San Francisco, Needham's SaaS conference in New York on June 6 and Credit Suisse's software conference in Boston on June 11. Scott and I will be at William Blair's Growth Stock Conference in Chicago on June 13th if you're available at those conferences to meet, please let me know, and now I'll turn the call over to Scott.

Scott Scherr

Thank you, Mitch. And thank you, everyone, for participating on our call this evening. Our key performance metrics exceeded our expectations for the first quarter of 2012 and are a solid foundation for achieving our 2012 and 2013 goal. Recurring revenues were up 22% and total revenues were up 21%, and our operating margin was 8.2%. Our annualized customer retention rate remained at 96%.

Our Enterprise sales team had another successful quarter and their attach rates remained strong and consistent with 2011. Some of our new Enterprise SaaS customers in the first quarter were: a Canadian retail and wholesale distributor with 15,000 employees that added Recruitment, Onboarding and Performance Management to core HR and payroll; a waste management company, with 7,000 employees; another Canadian company that added Recruitment; an entertainment company with 4,300 employees that added Recruitment, Onboarding, Performance Management, Succession, Salary Planning and Budgeting and Global Management; a supermarket chain with 4,200 employees that added Recruitment, Onboarding, Performance and Salary Planning and Budgeting; a publicly traded advertising firm with 3,700 employees that added Performance, Succession and Time Management; and a publicly traded technology company with 2,000 employees that added Performance, Salary Planning and Budgeting, Succession Management, Time Management and Global Management.

Our Workplace team had the best Q1 in their history. Workplace attach rates also remained strong. One standout again was Onboarding. Last quarter, I mentioned Onboardings increased to 70% in Q4 from 36% in Q3 of 2011 when it was first introduced to Workplace. For Q1 this year, Onboarding came in at 95%. Some new Workplace customers in the first quarter were: A health care group with approximately 1,000 employees that selected Recruitment, Onboarding, Performance and Time Management; a pharmaceutical company with 1,000 employees that added Time Management; a security company with 950 employees that added Recruitment and Performance Management; a CPA firm, with approximately 900 employees that added Recruitment, Onboarding and Performance Management; and a technology company with 700 employees that added Onboarding, Performance Management, Salary Planning and Budgeting, Succession Management, Time Management and Global Management.

And marketing results in Q1 confirm a hidden buying interest in our market. Q1 2012 was one of the highest quarters in our history for total number of respondents to our marketing campaign who said they are looking to purchase a new solution in a rapid timeframe, 6 months or less, a 45% increase over the prior quarter. And Q1 2012 also had the highest number ever of information requests. That is prospects contacting us proactively to learn about UltiPro and looking to purchase within 6 months or less.

Business to our website was an all-time high, a 43% increase over Q4 2011, the prior record high for our website traffic.

Turning now to our Connections Conference, we had a 30% increase in attendance over our 2011 conference and 96% of attendees who completed the post conference survey rated the event as good or excellent. Here are a few customer quotes from the survey. "I liked UltiPro before the conference. After attending, I can say that I love UltiPro." "It was amazing to hear the forward thinking of Ultimate." "I love seeing UltiPro's iPhone app, maps and schedules. It has it all." "Best conference I've been to yet. Can't wait till next year." "Loved all the info about Yammer. I'll be sharing this info with our sales and customer service department." "This was the best conference. Coming back next year with colleagues."

Some of our customers who received awards for innovation at the conference were Yamaha Corporation of America for Strategic Talent Management; Groupon for Use of Analytics for Measurable Returns; Callaway Golf for Achievement in Technology; Buffalo Wild Wings for Teamwork; Flow International for Global Impact; Wente Family Estates for Supporting and Meeting Major Corporate Goals; Camden Property Trust for Supporting and Meeting Major Corporate Goals; United Stationers for Achievement in Return on Investment and Cost Savings; and Explorer Pipeline for Partnership.

Our Partners for Life program has continued to bring greater numbers of customers to our training courses and to strengthen our customer relationships. In Q1 this year, we had 31% more students in our classes than in 2011's Q1. Over the 12 months ending March 31, 2012, we trained people from 69% of our total customer base. Of our Enterprise students who attended in Q1 this year, 63% came from customers who have been with us for more than 5 years. This is exactly the impact we wanted to have with Partners for Life: Longtime ultimate customers strengthening their ties with us and learning about our newest solutions. Jeff Marks [ph] from maxIT Healthcare wrote us an e-mail in the middle of his training course and said, "We are currently on a break from training, and I wanted to take this opportunity to give a heartfelt congratulations to you and all of the training staff. You have a phenomenal group of people, and I cannot say enough great things. They are great trainers and great people. I am truly impressed with their ability to take abstract ideas and make them approachable to people at many different levels. You really should be proud."

Jason Flasken [ph] from SSP America, an operator of food facilities at more than 40 airports in the U.S., Canada and the Caribbean, including brands like Arby's, Chick-fil-A and Quiznos said that our physical classroom training, virtual training and our approach to the ultimate experience are the best training he has ever experienced. In his words, "All of this is quality."

Our customers continue to be vocal about the strategic power, UltiPro gives HR executives and their leadership team. Wente Family Estates, the oldest continuously operating family-owned winery in America, has transformed its human capital management in less than 2 years since it deployed UltiPro. Once they have reengineered and streamlined its employee focus processes, like talent acquisition, payroll, performance management and time and labor management. The result is a renewed focus on employees, time and cost savings, more effective recruiting and improved employee retention. According to Jennifer Cook, Senior HR Advisor at Wente Family Estates, "UltiPro's functionality for talent management has given us the ability to transform our people management process from tactical to strategic."

Flow International Corporation, a NASDAQ-listed manufacturer, is also using UltiPro to unify its HR processes and redirect tactical activities into strategic initiatives. Previously, Flow handles its global HCM operations with more than a dozen different systems. The company purchased UltiPro in October 2010, completed a rapid deployment of Recruitment, Onboarding, Benefits Management, Performance Management and Payroll for U.S. and Canada-based employees by March 2011. They have now rolled out UltiPro's HR and Talent Management functionality to their international workforce. According to Theresa Treat, Flow's Vice President of Global Human Resources, "Previously when we had a need for global data, we had to send e-mails to our global managers or facilities to request the information. And then we would have to sort through all the spreadsheets for information. With UltiPro, we have one secure centralized solution with one single sign-on. Employees are happy to have instant visibility into individual details. Managers are in sync, and the execution of our strategies has been strengthened. Our CEO is very happy with how Ultimate's technology is adding rapid value into all components of our business."

Our development team announced our commitment to delivering smartphone and tablet versions of UltiPro at our Connections Conference. The initial version will be compatible with all modern smartphones and tablets: iPhone, iPad, Android, Windows Phone 7, newer BlackBerries and others. Development also announced our partnership agreement with Yammer, the leading provider of enterprise business social network to seamlessly connect Yammer to UltiPro. By integrating our 2 solution sets we combine the rich data about people housed within UltiPro, with Yammer's ability to share continuous feedback on employees' assigned workload, achievements and progress. Yammer also provides a platform for cross-functional collaboration.

We closed the quarter with 1,421 associates and are positioned well to attain our current and future goal. We will achieve them the same way we always have: by keeping our culture strong, making our solutions more strategic and useful to our customers and continuing to care for our customers with a passion unlike any other in the industry. We lead the cloud industry in number of customers using our strategic and unified human resources, payroll, talent and time management solution suite. We intend to extend that leadership by nurturing our customer partnerships and always seeking to ratchet up their satisfaction level with us. These are very good times for us. We are excited about the future and prepared to execute on the many opportunities before us.

We thank you for your interest and support. Let's go to the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Richard Baldry with Wunderlich Securities.

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

You talked a little bit more than in the past about the global products. So perhaps you could talk more specific maybe about how it impacts your per employee per month overall. So the potential within your base, maybe how many customers are up and live on the functionality so we can get a feel for the growth opportunity it offers you.

Scott Scherr

Dave, we've been tracking global employees for a while now. As in our press release, we have employees in over 115 countries that are being tracked by UltiPro. So I think it's just taking it to a different level around the world, doing more what our clients want. Just like what we do with everything. We're trying to go deeper in different areas. I didn't realize I was talking about more about it. We've been doing it.

Operator

We'll take our next question from Laura Lederman with William Blair.

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

Two questions. One, can you talk a little bit about the competitive environment and are you seeing much of ADP advantage and if you're seeing this, can talk a little bit about what you're hearing? And separately, how are you seeing work data are they going too much in the market? And separately, how are the big customers getting up and running that are supposed to be up and running in the second half of the year? One of the reasons I asked is that in your commentary, you are not raising guidance. There might be some push, and I wasn't sure if you were referring to revenue push or potential earnings push, so I wanted clarification on the customer -- comment particularly in relationship to getting the big customers up and running that has help maintain the acceleration of the current revenue growth in the second half. Sorry for the long-winded question, guys.

Scott Scherr

Okay. I'll start with the last one first. The 2 large ones that you're speaking of, both actually went live with components of their companies already. And their solidly on track for the second half of the year. So there are no pushes that we see at all. On a work day -- I think we see them maybe 10% of the time, said that before, mostly in Enterprise. I think it's a small segment that we may be in and they may be in. So we compete against them there. I think many areas, I think they're above us, and they're getting their target. I imagine, and what I hear, it seems like it's Oracle and SAP and ours is a lot of the service growth. As far as the competitive -- were getting -- we were still at 65% of our business in Q1 from Enterprise came from service growth. About 10% from ERPs, yes, from in-house and Workplace, so where 85% came from service growth in Q1. The 3 major service growth and the rest came mostly from smaller service growth. So I don't think there wasn't any difference in where we were getting our business or who we're competing against.

Operator

The next from Canaccord, we'll hear from Richard Davis.

Richard H. Davis - Canaccord Genuity, Research Division

Scott, you guys kind of partner with guys, for example, Yammer and things like that, and one of the areas that we've seen some growth going on is in addition to kind of the e-learning stuff is this what they call employee rewards or employee reward systems as companies like achievers and global force stuff like that. How do you -- I mean, right now, I think your adjacent to that space. Is that something that makes sense for you to partner in or do you have any point of view on that that kind of leg in the HR world?

Scott Scherr

I haven't been involved in any discussions on that. I haven't seen any -- we have product managers who look at what our clients want, and what's out there in the market. And we're always looking for something that would give us additional PEPM. Haven't really heard anything on that. We think that, that's an opportunity at this point in time. That could change but right now, I haven't heard anything about it.

Operator

And next, we'll hear from Michael Huang with Needham.

Michael Huang - Needham & Company, LLC, Research Division

First of all in terms of your partnership with Yammer, so are customers asking for these capabilities or are you ahead on the curve on this? And then, just in terms of your -- deployments that you saw in Q1, is there -- there's some things that you're doing differently in here that's helping the deployment cycles or is that just -- was there some other explanation?

Scott Scherr

It was hard to hear you, it sounds like it's coming from a wind tunnel. But I'll just explain some things. We've been a customer with Yammer for about 2 years, so we've been using it internally. They became a customer of ours in 2011. So it will generate some revenue for us. And we don't expect it to be material. I think the integration has value for our customers and our motivation behind it is to increase customer satisfaction and referenceability of our clients. Again, I couldn't hear a lot of a question, but that's really what we see from Yammer. It's just something that value to our customers at this point in time, and our customers also buy directly from them. So we'll be the conduit, but they'll buy directly from them. We'll do the integration with them.

Operator

And now we'll hear from Mark Murphy with Piper Jaffray.

Mark R. Murphy - Piper Jaffray Companies, Research Division

I wanted to ask you about the shape of the revenue curve for the year. I think the original plan was Q1 recurring revenue growth would be about 20%. And then it would be accelerating during the year to I think the high 20s, maybe even 30% exiting the year. But you referenced that you had some pull-ins here in Q1, and you did reference the possibility of push-outs later in the year. So I just wanted to ask you, has it sort of become a little more of a front-end loaded year in terms of the recurring revenue growth? And then I'll have a quick follow-up question after that.

Mitchell K. Dauerman

Yes, Mark, I think the pattern generally for the year is probably similar to what we said before. Obviously the first quarter came in a little bit higher from the pulls. But we should still gradually increase the year-over-year growth rate in recurring revenues and exit the year close to 30%.

Mark R. Murphy - Piper Jaffray Companies, Research Division

Okay, great. And then, Scott, I wanted to go a little deeper just on the emergence of Workday. In terms of its impact on the HR software market or how it might alter your long-term opportunity or your business strategy, either positive or negative? Do you think it's going to be sustainable to sort of take a viewpoint that they're a large enterprise are more ERP-focused, so you basically don't have to worry about it or is it more of a case where potentially over time you have to take it a little more seriously, just because of its mind share in the HR community, maybe rev up some of your marketing around talent management or anything else? Just kind of thinking a little more like maybe a 3 to 5 year perspective on it.

Scott Scherr

Well, I think we take it seriously. I mean our goal is always to make UltiPro the best that it can be in everything we do. So that if we do compete against an SAP and Oracle or Workday or anyone in the market that we would have the best solution. So I'm not saying, we're not taking them lightly at all. They're just, in my opinion, they're starting out. I don't know what they're going to become. We see them about 10% of the time, but yes, certainly, we're always looking to the future and how we made UltiPro better for whoever we compete against out there. So yes, we have goals, and we're achieving our goals, and we have to win business from all over to achieve our goals. So whoever we're competing against, we're going to try in the best product we can to compete against them, and we're going to try and provide the best service we can.

Operator

Next, we'll hear from Mark Marcon with Robert W. Baird.

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

I was wondering if you could talk a little bit more about your user conference, just in terms of the areas of greatest interest among the customers that were there. What are they asking for that they're not currently getting, but they want to add, et cetera?

Scott Scherr

I think there was a lot of talk about predictive analytics around it. I think a lot of them -- it's performance, its recruitment, it's onboarding. There were different breakouts on everything. There were clients giving sessions on how to use it. Well, I think it's HR how to use UltiPro better. It seemed to me that what I was involved in, it seemed like the predictive analytics, there was a buzz around that with the clients.

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

Can you talk a little bit more about the roadmap around there and what the revenue opportunity is on that?

Scott Scherr

Yes, we have them in multiple clients now. We're doing it through professional services. We gave a lot of the statistics at the user conference on the clients that we've used it with, and those clients were there. So I think our goal is to package it. And it'll give us additional opportunity for PEPM by the end of this year. That will be something that will be in the bag. I'm hoping it'll be in the bag of all the sales people, will be another product that we have.

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

And how are the margins there?

Mitchell K. Dauerman

I guess all the margins incrementally would be 85% incremental margin -- I mean it's the same incremental margin on revenue as we have with anything else.

Operator

And Greg Dunham from Goldman Sachs has our next question.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

I was actually going to hit on the analytics segment as well, but I'll shift to payment services. That's an area of the business that we don't hear too much about, but any sense of contribution of that business in the overall revenue stream and any metrics you could provide on that opportunity would be helpful.

Mitchell K. Dauerman

Greg, as far as tax filings, the business has continued to grow. The attach rate in Workplace continues to be 100%. The attach rate in Enterprise is 75% or 80%, I don't have it exactly in front of me. So that continues. And it's one of those things that were straight up the middle. It is a business that takes a little bit more labor and that's why we've said we've been investing in adding the headcount ahead of the growth. It continues to grow. One of the metrics might be the average daily float balance. Last year, we said the average daily float balance down was $167 million. First quarter, the average daily float balance was $315 million. But it continues to grow, and it's doing well.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

That's helpful. And I guess a follow-up -- I mean, clearly with interest rates the way they are today, you're not making much money off of that, but in the future, how big of kind of float opportunity do you see out there?

Mitchell K. Dauerman

Well, it's like you said. Right now you're not making anything. I think we've said before, we think in 2013, we should be about $500 million to $600 million. But it'll keep growing. So it's a matter of what interest rate do you attach to that dollar balance.

Operator

And Nathan Schneiderman from Roth Capital has your next question.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

I have a few quick ones for you. Just to clarify on Yammer, when one of your customers takes advantage of that product offering, will you collect a per employee per month, and if so, approximately how much?

Scott Scherr

We won't collect a per employee per month to get something from Yammer on it. Again, it's not material.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Okay, and then, Scott, in the past you've given us attach rates for the talent portfolio on the time management portfolio by Enterprise and also by Workplace. I was wondering if you could share that data with us for this quarter?

Scott Scherr

Workplace, Recruitment was 76%; Performance was 62%; Onboarding was 95%; and Time Management was 83%. In Enterprise, Recruitment was 70%; Performance was 65%; Onboarding was 65%; and Time was 57%.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Okay. And then a final question for you, if we look at the year-over-year total revenue growth of about $14 million, how much of that dollar growth would you say came from existing customers, and how much came from new customers? And that's all I have for you.

Scott Scherr

Our goal would be 90% new, 10% existing.

Operator

And now we'll move on to Eric Lemus with Raymond James.

Eric Lemus

I just had a follow-on as far as the attach rate question, but specifically on the tax filing side for the Enterprise business, where exactly do you guys see that trending and do you guys see that trending high going forward. And then just lastly on the client fund obligation, how do you guys see that balance as the year progresses?

Mitchell K. Dauerman

I think at 75% to 80% on Enterprise is a pretty good rate. It could go up a little bit, but I'm not sure that would have a substantial change on anything and Workplace is at 100%. So I don't think it's going to go higher. And as far as the average daily float balance, a typical pattern if it does start to level out after the beginning of the year -- in the first quarter of the year. You typically pick up your most dollars because you're dealing with beginning of the year fica, futa et cetera. So I would guess maybe for the full year, we're somewhere in the $300 million and $350 million range.

Operator

And we'll take one more question. That will come from Raghavan Sarathy with Dougherty & Company.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

I got 2 questions. First one is for Scott. Scott, you talked about a numbers of metrics. You mentioned site traffic increased 43% sequentially, and you're seeing highest number of requests. Can you talk about how this is translating into pipeline, for example, are you seeing bigger deals in the pipeline, are you seeing faster growth rate? Can you talk about how this is translated into business?

Scott Scherr

Well, it just feeds the funnel, and the funnel's larger than it's ever been, but just like I said before, the funnel should be larger than it's ever been. As we grow, we get more opportunities, more people know our name, and it's showing in our marketing results. So I think we're getting more opportunities which is letting us execute on our plan.

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Right. And then so this is just a clarification question, Mitch, you talked about gross margin being down for the recurring revenue because of investments in the tax filing. What is your expectation for the full year? And then on the R&D side, you said you're going to capitalize $4 million to $5 million in the second half of the year. Are you currently expensing that level of R&D expenses? Can you give us some sense for R&D expense during the back of the year?

Mitchell K. Dauerman

To the second question, we are currently expensing close to that amount. We're still hiring a few more people in R&D. And as far as the recurring revenue gross margins, we said I think in guidance, we thought they'd be relatively consistent. Maybe slightly up from last year.

Operator

Mr. Scherr, I'll turn the conference back over to you for any additional or closing comments.

Scott Scherr

Okay, thanks for your time. I appreciate your support. Goodnight.

Operator

Ladies and gentlemen, that does conclude today's conference. Thank you for joining.

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