The Ultimate Software Group Management Discusses Q3 2012 Results - Earnings Call Transcript

Oct.30.12 | About: Ultimate Software (ULTI)

The Ultimate Software Group (NASDAQ:ULTI)

Q3 2012 Earnings Call

October 30, 2012 5:00 pm ET

Executives

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

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

Analysts

Michael B. Nemeroff - Crédit Suisse AG, Research Division

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

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

Brad R. Reback - Stifel, Nicolaus & Co., Inc., Research Division

Michael Huang - Needham & Company, LLC, Research Division

Richard H. Davis - Canaccord Genuity, Research Division

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Frederick T. Grieb - Nomura Securities Co. Ltd., Research Division

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

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

Patrick D. Walravens - JMP Securities LLC, Research Division

Operator

Hello, and welcome to Ultimate's Third Quarter 2012 Financial Results Conference Call. [Operator Instructions] Today's conference is being recorded. Your presenters for today will be Mr. Scott Scherr, Chief Executive Officer, President and Founder of Ultimate; and Mr. K. Dauerman, Executive Vice President and Chief Financial Officer. We will begin with comments from Mr. Dauerman. Please go ahead.

Mitchell K. Dauerman

Thank you, Melissa. Good afternoon, and thank you for your interest in Ultimate Software. Before we begin, please be aware that we will be discussing our business outlook, and we'll be making other forward-looking statements regarding our current expectations of future events and the future financial performance of the company. These forward-looking statements are based upon information available to us as of today's date and are subject to risks and uncertainties. We encourage you to review our filings with the SEC 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 review our financial results for the third quarter, and then I'll discuss our guidance. 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 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 23.4% to $67.5 million and represented 82% of total revenues. Total revenues grew by 22% to $82.6 million. Operating income increased by 64.8% to $14.2 million, and the operating margin was 17.2%. Net income grew to $8.1 million compared with $4.9 million last year, and the related net earnings per diluted share was $0.29 compared to $0.18 per diluted share in 2011.

Recurring revenue for the quarter was $67.5 million compared to $54.7 million last year. The gross margin was 72.3% compared with 70.4% for the same period last year. Annualized customer retention exceeded 96% for our customer -- for recurring revenue customer base.

Services revenues were $15.1 million, representing an increase of 18.2% over the same quarter last year. The services gross margin for the quarter reflected the high rate of additional billable consultants driven by our sales growth.

License revenues were 0, which was lower than our expectations. Now this is a positive for our business because it reflects the success of our program to aggressively transition our on-site license customers to our SaaS solution.

The overall gross margin rate for total revenues was 58.3% compared with 57.3% for the same period last year. The expansion was driven by both the growth and margin expansion associated with the recurring revenues. Operating expenses were $34 million for the quarter and were slightly favorable to our expectations.

The capitalization of R&D costs relating to certain software projects commenced this quarter as expected, and the $2.3 million capitalized was in line with our expectation. In our financial statements, this amount is being included with property and equipment as this is considered software developed for internal use in accordance with the applicable accounting rules.

Operating income was $14.2 million, and our operating margin was 17.2% for the quarter versus $8.6 million and 12.7% for the same quarter last year. Net income was $8.1 million or $0.29 per diluted share compared with $4.9 million and $0.18 per diluted share for the same quarter last year.

Our non-GAAP income tax rate for the quarter was 42%. The average daily flow balance for our tax filing business for the year-to-date period was $274 million compared with $168 million for the same period last year. Due to the current yield environment, the revenue impact of these funds is immaterial. We are continuing to invest in this business and expect that the average daily flow for 2013 will be in the $500 million range.

Turning to the balance sheet. Total cash and investments and marketable securities were $82.9 million. On a year-to-date basis, we generated $32.3 million in cash from operations compared with $23.6 million last year.

Our capital expenditures for the first 9 months of this year were $12.2 million, including capitalized R&D costs compared with $10.7 million for the same period last year. We used $5.1 million in the 9-month period to repurchase shares required for settling employees' tax withholding obligations associated with their restricted stock units invested. We have 1,058,000 shares remaining that are available for repurchase under our plan.

Accounts receivable were $57.5 million at September 30. DSOs were 64 days at the end of the third quarter compared with 63 days for the comparable period last year. Current deferred revenues were $83.3 million on September 30 compared with $75.6 million at September 30 last year. Long-term deferred revenues were $1.7 million on September 30 compared with $3.8 million on September 30 of last year. As a reminder, deferred revenues include onetime activation fees, they reflect the transition of on-premise licensed clients to SaaS, whereby annual days maintenance payments are converted to quarterly SaaS payments, and lastly, they reflect 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, which includes recurring revenue growth of approximately 25%, total revenue growth of approximately 23% and an operating margin of approximately 15%. For 2013, our preliminary guidance is to grow recurring revenues by approximately 26%. We expect to see the related gross margin increase slightly from 2012. Total revenues are expected to grow by approximately 24%.

2013 will mark the achievement of Ultimate's 3-year goal to exceed $400 million in revenues. We expect service margins to break even, and we expect license revenues related to on-premise's customers' growth to be approximately $500,000. We expect to expand our operating margins by approximately 200 basis points, while at the same time, making the necessary investments to effectively support the strength of past sales growth as well as the increased revenue growth opportunity before us. We expect the operating margin for 2013 to be approximately 17%.

Our non-GAAP tax rate for 2013 should be approximately 42%, and diluted weighted average shares should be approximately 29.5 million. We expect capitalized R&D costs to be between approximately $12 million and $13 million. R&D costs expensed in the P&L should be close to $70 million.

Other capital expenditures in 2013 will be approximately $17 million, and we expect depreciation and amortization to be approximately $18 million.

We'll provide additional guidance on quarterly trends on our February 2013 call along with our final 2013 guidance. However, we want to remind you that our Q1 operating margin rate is generally lower than Q4.

Turning to our upcoming conference schedule. During the next quarter, I'll be at the Piper Jaffray's Technology Conference in New York on November 6, Stifel Nicolaus' Midwest Conference in Chicago on November 8, Broad Capital's Management Access Conference [ph] in San Francisco on November 14 and the CSFB Tech Conference in Scottsdale on November 27. If you're available at those conferences to meet, please let me know.

And now, we'll turn the call over to Scott.

Scott Scherr

Thank you, Mitch, and thank you, everyone, for participating on the call this evening.

For 2012 third quarter, our results were consistent with our expectations in our 3 most important goal areas: Growth in recurring revenues, customer retention and growth in our operating margin. Our recurring revenues are up by more than 23% for the quarter to $67.5 million. Our annualized customer retention rate was greater than 96%, and our operating margin is just over 17%. New sales for the quarter were also in line with our business plan.

Looking at our enterprise channel, attach rates continued at a healthy pace. Onboarding was 71%, both Recruitment and Performance Management were around 50%; Time Management, 63%; and Tax Management, 83%. Some of our new enterprise customers in the third quarter were: A restaurant chain with 8,000 employees that's like the Salary Planning and Budgeting along with our Core UltiPro solution; another restaurant chain with 3,200 employees had added Onboarding; a nonprofit organization with more than 3,000 employees that has the Recruitment, Onboarding, Performance Management and Salary Planning and Budgeting; a transportation and warehousing company with approximately 3,000 employees that adds Recruitment, Onboarding, Performance Management and Time Management and 2 healthcare organizations that both added Onboarding and time management, one with 2,900 employees and the other with 2,800 employees.

Turning now to our workplace channel. Attach rates for talent, time and text management products continues to be strong. Onboarding was 91%; Recruitment, 81%; Performance Management, 81%; Time Management, 79%; and Tax Management, 98%. Some new Workplace customers in the third quarter were: A medical practice with approximately 1,000 employees that selected Recruitment, Onboarding, Performance Management, Time Management and Salary Planning and Budgeting in addition to the Core solution; a mortgage company also with approximately 1,000 employees added Recruitment, Onboarding, Performance Management, Salary Planning and Budgeting, Succession Management and Time Management; a construction company with more than 800 employees had added Recruitment, Onboarding, Performance Management and Time Management; a hospitality company with more than 800 employees that has the same 4 talent management components; and a software development firm with 750 employees that added Recruitment, Onboarding, Performance Management, Salary Planning and Budgeting, Succession Management and Time Management.

Looking at the fourth quarter for this year, our pipeline is 41% above last year's Q4. The team has prepared to finish the year strong. Earlier this year, we put a plan in place to increase the size of our sales force by 30% by the middle of 2013. We are already 40% of the way there at this time. This plan will put us in solid position to attain our 2014 and 2015 goal.

We have also been aggressively moving over our on-site consumers to our SaaS solution. At the end of Q3, our maintenance revenue from these clients was down to 6% of our annual recurring revenues. Our goal is to have this number to 0 as we enter 2015.

Our marketing metrics reflect the same kind of positive trending that our salespeople are seeing. In Q3 this year, we had the second strongest quarter in our history for prospects looking to purchase within 12 months. This number of potential buyers over the next 12 months was a 70% increase over last year's third quarter and a 10% increase over the prior quarter of this year. By the close of the third quarter this year, we were already ahead of our total looking to buy responses for the 2011 full year in 6 key campaign areas.

One of the most successful campaigns in the quarter was a healthcare reform webcast with 1,868 registrants. Our website traffic for unique visitors in Q3 this year was a 64% increase over light traffic in Q3 of 2011, and was our second highest quarter ever, second only to Q1 of this year when we had that spike in traffic generated from our ranking on Fortune's Great Places to Work and our new brand launch.

Our current customers continue to be powerful allies in helping us to acquire new customers. They readily share their positive experiences, and their satisfaction fuels the market's desire for our solutions. New customers say they buy from us for the same reasons that we have shared with you for years: desire for the exceptional products and services we have as well as a respect for our passion at people and culture.

Jessica Harris, a financial analyst from Kimley-Horn and Associates, a highly respected engineering design firm with more than 60 offices, is a typical example. She recently said, "When we visited Ultimate, we could feel the energy that we have frequently heard this company." When she summarized the reason Kimley-Horn bought from Ultimate, she focused on the strength of our strategic HCM capability, particularly our workforce analytics and our high-quality customer service.

Sammons Financial Group also joined us, have access our product technology and people-focused services; Vicki Murra, an HRIS analyst at Midland National Life Insurance, an SFG member company, also pointed to the strength of our Workforce analytical tools for their decision. In her words, "people-centric reporting and business intelligence." Before UltiPro, their 200-plus managers kept hard copy documents at their desks because their prior vendor controlled their data and made only a limited number of data points available to them. Now, their managers can extract any data they need on their people in minutes online, and can slice and dice it to suit their specific needs.

Another customer that has improved efficiencies with UltiPro is the Texas Rangers baseball team. Prior to using UltiPro for talent acquisitions, they organized multiple job fairs to fill seasonal vacancies every spring to quickly identify and hire 1,200 seasonal people in roles ranging from security to parking to customer service representatives. For each fair, thousands of individuals would wait in line to complete applications, have interviews and complete necessary screening. According to Texas Rangers' finance system analyst, Michelle Noel [ph] , when they used UltiPro this past spring to accept applications online and identify the most qualified, they were able to reduce costs. And as she said, everyone raved how much more smoothly our spring hiring process was using UltiPro.

Callaway Golf, the leading manufacturer of golf clubs, balls, apparel and other golf equipment, is a customer with a similar need to scale up hiring on a seasonal basis, and they've had an equally positive outcome. A customer since 2004, Callaway Golf added Recruitment and Onboarding to its UltiPro suite in 2011. According to Kenneth Kopf, Callaway Golf Senior Principal HRIS representative, "We can now hire the right people more rapidly and get them productive more quickly." And he said, "One of the best things about UltiPro is that it creates a cohesive employee experience for our associates in both the United States and Canada."

Raydon Corporation, a global leader in simulation solutions and the top provider of convoy trainers to the United States Armed Services, called our customer service remarkable, so much better than their previous provider. Michelle Warner, a Cost Manager at Raydon Corporation, points to the superiority of our payroll. "Previously, it could take days to process payroll. But with UltiPro, our payroll now is much faster, smoother and more accurate. At a minimum, we've gained several hours each pay period to focus on other important initiatives that support our overall business."

At the HR Technology Show in Chicago, we showcased UltiPro's latest enhancements that extend our product ecosystem and support the entire spectrum of HR operations by expanding our levels of connectivity. Some of those are integration to CERTPOINT Systems' industry-leading learning management solution through a simple sign-on from our UltiPro Performance Management for managers and employees to administer, register for, complete and track learning activity; the UltiPro carrier network, which is an integration hub for data exchange with benefits providers powered by Informatica, the world's #1 independent leader in data integration software solutions; integration with best-in-class enterprise social network, Yammer, for collaborative Performance Management and integration to HR 360's resource library for federal and state employment law guidelines, HR forms and best practices.

In addition to connectivity enhancements, we extend our global HCM capabilities for our customers to use UltiPro as their single source of truth about employees worldwide and to engage their global employees more fully in HCM processes. The result is that our customers now have increased visibility into global employee data, have standardized reporting on global employees by country or division. All of our SaaS customers are now live on this new release of UltiPro. Bloomin' Brands, Inc., the parent company of Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill, Fleming's Prime Steakhouse and Wine Bar and Roy's, has gone live with UltiPro in all its restaurants, approximately 1,200 locations, as well as its corporate offices for a total of approximately 85,000 employees. "We've had a great partnership since the contract was signed, and our activation processes has been on time and on budget." Our Partners for Life program continues to work well for us. It inspires them to expose larger numbers of their people to our learning services, and it underscores our close partner relationship with customers.

Our 2012 year-to-date number of our people trained is up 11% compared with the same timeframe last year.

Last quarter, we told you about the new type of learning we introduced called flexible learning that is online and as no class restrictions. It allows us to better leverage our trainers and increase the numbers of people we educate. On Monday, September 24, we had the highest number ever of students trained in a single day, due largely to this program, and our customers were very positive about the online flexible learning experience.

In the area of third-party recognition, Ultimate was ranked #93 on this year's InformationWeek 500, an annual ranking of the 500 most innovative United States companies employing information technology in their businesses. The list covers all industries and is unique among corporation rankings, in that it spotlights the power of innovation rather than simply identifying the biggest spenders in information technology. InformationWeek editors said their focus was on companies with a new technologies, new models, new ways of grabbing business opportunities and solving complex business problems.

Also in the quarter, Ultimate was recognized as one the 50 most engaged workplaces in the United States by Achievers. We are honored to be on the shortlist and agreed with Achievers' chairman, Razor Suleman, that companies that focus on employee engagement tends to perform better financially, attract and retain the best talent and enjoy improved customer service and client retention.

We closed the quarter with 1,552 associates. We have one of the most talented and committed workforces in the country, and they will keep our products at the forefront of technology and our services the best in the industry. We are positioned well to extend our leadership in cloud-based people management. We have a 10-year track record of success in SaaS solutions. We believe that we have the largest number of people records in the cloud for unified HCM with 8 million plus records. And we have the largest number of customers using a SaaS solution for unified human resources, payroll, talent and time management.

And our vision remains unwavering. The focus exclusively on HCM people-centric SaaS solutions. This strategy is best for our customers since all of our resources and expertise are dedicated exclusively to ATM development, product enhancement and services. The strategy is best for Ultimate as our exclusive focus gives us the competitive advantage in HCM and the power to expand our share in the huge market we serve.

We thank you as well as our customers for your continuing support. Let's go to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Michael Nemeroff with Crédit Suisse.

Michael B. Nemeroff - Crédit Suisse AG, Research Division

Just looking at the results, solid quarter and really good guide, but the recurring revenues in Q3 were a little bit below what I was expecting. But the above consensus, 2013 recurring revenue guide, makes me think that there was maybe some modest delay in a large implementation? Is that so? And you talked about a couple of large deals, Scott. And I was wondering if you could tell us about the pipeline specifically for large deals right now.

Mitchell K. Dauerman

Mike, let me handle the financial question. First off all, the recurring revenue in the quarter was relatively close to what our expectations were. It wasn't any changes in pushes in lives. We didn't achieve the level of employment growth that we had expected. It's as simple as that. As far as the large clients going live, the revenue recognition for both Outback, that Scott discussed on the call, as well as the other ones, did commence in October.

Scott Scherr

And again, Mike, the pipeline is very strong. I mean, I look at large clients as, quite frankly clients over 5,000 pays [ph] . I think we have a lot of those in the pipeline right now so...

Michael B. Nemeroff - Crédit Suisse AG, Research Division

And if I may, just one follow-up. Workday has come out with a successful public offering. And I know that they talked about their payroll product. I was wondering if you could compare and contrast why it is not as big of a competitive treat as maybe some think?

Mitchell K. Dauerman

Yes, I don't -- we were competing again from the day before the public offering. We competed with them the day after. I mean, I always said -- I always will that our biggest competition is ourself. We have to make -- we have to worry about our products, our services. We have a huge opportunity and not above the other people, quite frankly, in the industry, so. I'm not going to give differentiators between us and Workday.

Operator

And our next question will come from Laura Lederman with William Blair.

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

Following up on Michael's question. If the quarter didn't have the level of employment that you saw, I guess I was trying to get at the comfort with the guidance for full year, because it would imply an acceleration. And help us understand the comfort levels of that and how you get there. And also, I guess the related question is that the organic growth rate this quarter of recurring revenues was 22%, help us understand the acceleration that you'd expect to see that number for '13.

Scott Scherr

Okay. Laura, I'm not sure I understood the second part of your question. I've got a different number. But basically, the impact on the quarter was minimal for employment growth. It's factored into the full year. And based on our -- well the lives that have gone already in October as we talked about, the acceleration in growth rate is driven by the 2 large deals that we've talked about all year. So those have started. And the rest of the difference will be employment growth assumptions. But right now, we believe we've taken it in to consideration. And we should attain the approximately 25% growth rate in recurring revenue.

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

Can you talk about the employment assumptions that you guys are looking at for next year, and is it the same as you're looking at for this year? Just give us a little bit of color around employment.

Scott Scherr

I would say it's still very modest. But again, the biggest driver of our recurring revenue growth, as I've always said, is the sale of new business, it's the time to live. The second biggest driver is sales of additional solutions to existing customers. The remainder, let's call it, 1% of the growth rate, is attributable to changes in employment, attrition, other factors that come in to play. So to talk about one item in isolation, I'm not sure it makes a lot of sense. If you want a short answer, we're expecting some modest increase. But also, we have seasonal customers, just like we have coming up this fourth quarter. And typically, there are seasonal patterns that we try to use our best to guesstimate. But again, the driver of the business is new customers and retention.

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

That's really helpful. One final question. Mitch, you about big deals in the pipeline, I think you said over 5,000 seats, I wasn't quite sure about that correctly. Can you talk a little and give us a little bit more color on larger deals in the pipe?

Mitchell K. Dauerman

I mean I said that for the team. Yes, there's a large number of deals over 5,000 in the pipe, but that's just normal for us now in enterprise. I mean, it's just the way it's always going to be, there's always going to a lot of deals there with over 5,000 employees as we move forward.

Operator

And next our question will come from Richard Baldry from Wunderlich Securities.

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

Maybe build on Laura's question, given the expansion of a large deal pipeline. I think sporadically, you've been willing to raise the price ceiling on Workplace's maximum employees to sell. Would that be something you could see over the next year or 2 over and above the 30% hiring goal, which obviously increases your total capacity as well?

Scott Scherr

Our plan we look out in 12 months to 18 months, we seek Workplace going up, and that will bring Enterprise up as well. So we definitely see that in the future.

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

Okay. And looks like the guidance for next year, the stock-based comp was up pretty solidly. Is there something that changes in that that we should be aware of?

Scott Scherr

Just the change in the stock price and the addition of employees.

Operator

And now we'll take a question from Richard Reback from Stifel, Nicolaus.

Brad R. Reback - Stifel, Nicolaus & Co., Inc., Research Division

Scott, did you say the sales force headcount is going to grow 30% by mid-'13?

Scott Scherr

Yes, we were kind of like came into this year at 62, and we're planning on going into '14 with 82.

Brad R. Reback - Stifel, Nicolaus & Co., Inc., Research Division

Now, I looks like on my notes and I thought it said 20% last quarter. Did I have it down wrong or do you sort of increased the...

Scott Scherr

We just coaxed it a little. Based on where we are, we felt we should increase it a little, so we did.

Operator

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

Michael Huang - Needham & Company, LLC, Research Division

A couple quick ones. So in terms of your partnership with [indiscernible] how important is this relationship to your end customers and processes? And how soon could we see this partnership bear fruit?

Mitchell K. Dauerman

I missed the third point that [indiscernible] had mentioned.

Scott Scherr

I think it was just the need that was clearly there from our prospects and our clients and our product strategy. People sounded really supportive of it. They believed in. So -- and I think it's just something that makes us -- makes our products suite more powerful. And our strategy is to try and do what we do. And if we're not going to do something, let's get the best partner we can. It just fits into the overall strategy.

Michael Huang - Needham & Company, LLC, Research Division

And in terms of kind of the interest you're seeing around the Yammer integration, I know it's still early. But is it still something that your end customers are embracing?

Scott Scherr

I think we're embracing it here. And I don't get to get into our customers and how they're using it, but I would imagine they are. I hear they are. I can tell you at Ultimate Software, we're embracing it here in our Performance Management that we do, so I would think so.

Operator

And now we'll go to Richard Davis from Canaccord.

Richard H. Davis - Canaccord Genuity, Research Division

Maybe I'll go by Brad Davis, since -- at one point, how do you think about adding kind of new modules like I know you partner a lot of times on e-learning? Or even, have you thought about doing benefits on-boarding or link to stuff like that? At what point, do you kind of say, hey, let's build it ourselves versus partner and how are the dynamics on that front?

Scott Scherr

I mean I think it's up to the product strategy. And we look we believe -- there's always in there to give and get least $1 per employee per month, then it's worthwhile for us and we tend to go for it. You look at your staffing, you look at the goals you have, and then you make that decision. Learning, when we get to a certain point, didn't go out to do it. It just didn't make sense for us.

Operator

Our next question will come from Nathan Schneiderman from Roth Capital.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

I just wanted to drill down a tiny bit on the quarter and some of the gives and takes there. So you discussed some of the issues around a little bit of a shortfall in the recurring. But it looked like services was maybe about $1 million-light of what you -- the nonrecurring business was about $1 million-light. And then you had really good overachievement on operating margin, even though you have revenue that missed what you originally thought. So I was hoping you could talk to those 2 dynamics?

Mitchell K. Dauerman

Well, I would say on the nonrecurring, as I mentioned, license revenue came in at 0. So that's probably the biggest driver of that, what you've coined the shortfall and nothing -- the nonrecurring type of revenue. And expenses, just timing expenses we talked about early in the year. We had some expenses that we're pushing out. We thought they were timely in this quarter. They pushed out a little bit further. We may flip them in to investments as we add new people in to the company for growth for next year.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

So does that effectively just shift out to Q4 or are you saying that you think it actually pushes into 2013, those expenses you were thinking might otherwise have hit in Q3?

Scott Scherr

Well, our guidance for 2012 would take into account the fact that if some of those expenses are either not going to be spent in Q4 or they're going to be redistributed into, say, additional headcount and tax filing, that would have been taken into account. And then our guidance for 2013 would stand on its own.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Okay. And then just a question about this whole shift of on-premise customers to your cloud solutions. I was curious, how many customers did you have convert to your cloud solution this quarter? And when you look at that legacy customer base, how many are left?

Scott Scherr

There is -- I'm not sure the exact amount for the quarter. I know it's double digits. When we started trying to convert in '09 a little over 700 on-premise customers. There is about 270 left right now.

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Okay. And then my final question area for you is you, you referenced the global human capital management opportunity becoming the system of record for your customers. And I was curious, just where do you think you are in that process of being adopted as system of record for the human capital management? And to the extent that there are some gating factors that are preventing some of the adoption of your customer base. What would you highlight there?

Scott Scherr

Well, I think every customer that uses us for payroll and HR, that we are the system of record. That is direct system of record, to my opinion, that everything goes off the payroll record. So the people in North America that we're doing and we're tracking their HR people around the country, in which we do, I think the latest, I think we were doing or tracking in about 115 countries from our customer base, I would say that we have the system of record for the information for those clients. I'm not sure there's gating. I'm not sure what gating factors would be in that. We just -- I mean, one of our larger customers just loaded 10,000 employees globally, so have unified reporting in North America and global. And as far as I know, went really well. Well, the feedback I got was well. I was with the customer recently. So I would say that UltiPro is the system of record for their employees in their company.

Operator

And we'll now go to our next question from Greg Dunham from Goldman Sachs.

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Hopefully, can hear me okay. You have guided a healthy 2013, 2013 [ph] above consensus. You increased in your rate of hiring of sales people. Pipeline and people are 40% above where it was last year, and you maintained. And then you basically hit your bookings target for this quarter. Most of the companies we're seeing out there is -- are struggling in this environment. Did you see any push-outs of deals? Have you seen any indication of macro headwinds? And if you we haven't, why haven't you seen them?

Scott Scherr

I mean I have not -- we've been pretty consistent for a very long time, and I think we have a very strong sales force. I think we have a strong pipeline. I think we have a good business plan. If we know what we're doing, we don't get ahead of ourselves and we don't fall behind. So I think it's the plan, keeping everyone focused on the plan; keep making the product better, keep making support better, stick together and win in sales, down to each individual salesperson. We have a very little turnover in sales. So we have a lot of confidence in those areas: product, services and sales. I think the other people might be kind of going a little bit more aggressively on the sales front than us. And we think there's a lot -- -- I would think there's a lot that we think that's somewhat a hard game because the more you hire, then typically, turnover's high, and you don't get the team in place as fast as [indiscernible] Our team has been in place for a long time. Even when we get a new person, that person gets up to speed fairly quickly. We had two Workplace salespeople last quarter who were in their first quarter. And 2 of them sold 7 deals in the quarter, in their first quarter with us. So that was after a training program that we put together, getting people in the industry, then believing we're -- having a lot of confidence they want to join us, but also on what we do. And I mean 2 people, 7 deals in 1 quarter in Workplace, so..

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Do you think there's anything different now than there was? I mean obviously, '08 and '09 was a worse macro environment. But we've seen pockets of weakness before where other companies or all companies in the software space have seen a set of deals happen. Do you think there's anything different about HCM today than say, 12 months ago, or 18 months ago?

Scott Scherr

I think it's more opportunity. I think SaaS keeps on being the key. I think it's beyond mainstream now. It's almost like now, when we go into deals, you have to -- when we go in, it has to be SaaS or someone gets us in and they're looking at the SaaS solution. No one looks at one solution. So if they have to pick HCM and they have to look at 2 solutions, Joe is going to be ultimately someone else. And no, we killed '08 in sales. So we had an unbelievably good '08 in sales as well as '09. I think people are looking to make it -- we're in a place where people change. Some of the biggest service bureaus say they change every 7 years, 15% churn of their client basis. So we're looking for those people who are churning and who want to another solution. It's been that way for 22 years. We're still looking for people who are looking to make a change. And quite frankly, I think more people are looking to make it today because of SaaS.

Operator

And we'll now go to Terrell Tillman from Raymond James.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

I guess the first question just relates to a little bit more in terms of the 30% growth in sales capacity. Could you maybe allocate or describe where the mix of those investments are going to be? And I understand you're still in the process of the investments. But in the U.S., you have UltiPro, you have Workplace. Canada, maybe lead-gen [ph] team. So could you maybe help us prioritize where the investments are being made?

Scott Scherr

We have enterprise sales in Canada. We're looking to expand that down the way, and we're looking to expand Workplace in to Canada. We're looking to expand Workplace in the United States, and we're looking to expand Enterprise in the United States. those are the 4 areas.

Terrell Frederick Tillman - Raymond James & Associates, Inc., Research Division

Okay. So a little bit, so I mean everything, basically. Okay. Mitch, I guess the question in terms of seasonality of margins next year, I mean, is there anything in terms of timing of some your investments that could make that quarterly kind of progression on margins different for next year that we should be thinking about? And then lastly, any commentary at all on operating cash flow?

Mitchell K. Dauerman

Yes, Terry. I think it's probably a little premature to get in to the quarters for next year, other than we wanted to point out to everyone in case they forgot, Q1 normally is slower than Q4 because of beginning-of-year expenses related to employment. We have our national partner conference connections in the beginning of the year. So trying to keep that in mind. I think we'll get more color on it when we get to it, to the final guidance. As far as cash flow, I think again, we once said we start with pretax non-GAAP earnings. You have the excess of capital expenditures over D&A. You do have a little more runoff of the onetime fee. And then from a financial statement presentation perspective, the excess tax benefits, they get re-classed, probably go up, I don't know, $13 million to $18 million. And as a reminder, we don't expect to pay cash taxes until probably 2015, 2016. So from a financial statement perspective, we do reclassify that $18 million out of operating cash flow on the statement of cash flows.

Operator

And we'll take our next question from Fred Grieb from Nomura.

Frederick T. Grieb - Nomura Securities Co. Ltd., Research Division

I just want to make sure I understand the commentary around the FY '12 recurring revenue guidance. So what's implied in Q4 now is about a 10% quarter-over-quarter increase for recurring revenue, and that's about 5% higher than your historical seasonality. So there's 100% of that better than seasonal growth, due to these 2 large deals that are coming online in October?

Scott Scherr

It's a large amount, Fred. Yes, it's probably -- I didn't do the math, but it probably is what drives it.

Frederick T. Grieb - Nomura Securities Co. Ltd., Research Division

Got you, great. And one more question, just -- you talk about the increase in sales force. Can you give us any idea of what type of increase in enterprise quotas is baked into your FY '13 guidance as well?

Mitchell K. Dauerman

I mean, across -- it's probably around 10% all quotas. And as I mentioned before, we have people would start out with us, they get freshman quota, they go to a sophomore quota, their second year, third year, they get in to senior quota. So along with those people, have a minimal turnover getting the freshman to seniors as fast as we can, then with the added headcount, that gets us to the number we need to continue to keep rolling this thing of recurring revenue by 25%, but independent sales deals, approximately 10%.

Operator

And we'll now go to Jeff Houston with Barrington Research.

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

Regarding the license sales, what were you expecting for license revenue in the quarter? And should we expect our models to keep forecasting roughly 0 license revenue going forward?

Scott Scherr

Yes, Jeff. I think I said right now, we think about $0.5 million for next year. And this year, we will probably be expecting probably closer to $2 million. And it's probably going to end up coming in around $1 million, $1.1 million. It's not a driver of the model. It really is a good sign when that license -- we missed the license number because it means we converted more customers.

Jeffrey L. Houston - Barrington Research Associates, Inc., Research Division

Yes, understood. Then switching to customer retention. What steps are you taking to reduce controllable customer attrition? Or is it already about as low as it can get, I think 1.5% or so. And then along those lines, what has been the impact from the Partners for Life program on attrition?

Mitchell K. Dauerman

Well, we're continually -- to invest in our support structures in both Enterprise and Workplace. We have 91 new hires in the quarter and almost 20 were just in support. So we're continuing to invest heavily in the support structure. I'm not going to stop doing that. And yes, and -- we want to control about 2 -- 1.5% to 2% that leave us that we term, "controllable". So I don't know what else to do keep our people, hire good people, get them in there and get our people in front of our customers as much as we can be in front of them. And as far as Partners for Life, the training, it's got some numbers that we trained like 17,500 customers this year. It was an amazing number. So when you think about that many people coming to our training classes, which was a big increase over last year. It has to be Partners for Life because it's free that they're sending more people. And if they send more people, it's just has to be good for us that they're learning our products better than we know it before. And also, I don't think most clients would send their people to training if they were leaving us, thinking about leaving us. So it gives us the opportunity to gain more of their hearts and minds on an ongoing basis. So I couldn't be happier with that program.

Operator

Our next question will come from Mark Marcon from Robert W Baird.

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

I was wondering if you could just give a little bit of color, which with your expectations around pricing and what you've been seeing more recently from some of that competitors. Obviously, we all hear about Workday a lot, but also ADP and Ceridian.

Scott Scherr

Again, from the beginning, out theme was to provide value. I don't think there is anyone like us that has a unified HCM talent, time, tax filing, solution and SaaS. So I mean, I think our pricing is fine. I mean, we add modules. We add numbers to the modules. I think we're close to $26 now. That is sum of everything we have. Our average PEPM goes up almost every quarter in Workplace. I think we just -- we reached $18.

Mitchell K. Dauerman

$18.

Scott Scherr

Yes, we went through $18 on an average per employee per month in the quarter. So that's because people are buying more of the products we have.

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

And you're assuming that, that continues to increase next year as well?

Scott Scherr

Yes, yes. I think it continues to increase as we move forward.

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

And how much of the pipeline are you currently getting from international? You talked about the enhanced global opportunities. Can you give us a sense for what proportion?

Scott Scherr

Well, the whole pipeline of North American companies, some of them could have global employees that we would track. But they're North American companies in United States or Canada that we go after. So the -- if we were doing their -- if we were tracking their global employees, the -- I guess if you ask what percentage of price, that would be a low-single digits of our total pricing.

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

That's very helpful. And then the R&D is going to go up by about $13 million for next year. What's the key driver behind investments for that?

Scott Scherr

Well, I think it's -- we have -- it's new products for the future. We're going deeper with our Talent Management product. It's everything we do, going deeper, adding new products, there's a lot of global in it to go into more localization as a lot of countries around there and the future of UltiPro.

Operator

And we'll now take one more question at this time. It will be Patrick Walravens from GMP Securities.

Patrick D. Walravens - JMP Securities LLC, Research Division

It may be the same answer, but Ceridian acquired Dayforce in April. I'm just wondering what did you think of that product? And can acquisitions like that help Ceridian and ADP become more competitive?

Scott Scherr

I hope not. I don't know, Pat. I mean, like I tell you I believe that -- I believe we have the best solution out there. I think that people like -- believe we have the best solution out there. I think our development team knows that we have that sense of urgency about making it better as our service people. We know they have to have a sense of urgency by taking care of our customers. There has been so many different slices of bread from companies out there over the 22 years. So it’s -- with me, it stayed the same. We got to keep getting better. We're -- our competition is ourselves. Our competition is UltiPro like, how do we make UltiPro better? So I can tell you we do very well against them in the field where we compete.

Operator

And that does conclude our question-and-answer session for today. And at this time, I's like to turn the call over to Scott Scherr for any additional or closing remarks.

Scott Scherr

Thanks for all your support, and for all you people in the Northeast affected by Sandy, all the best. Good night.

Operator

That does conclude our conference for today. Thank you for your participation. You may now disconnect.

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