The Ultimate Software Group, Inc. Q2 2008 Earnings Call Transcript

| About: Ultimate Software (ULTI)

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

Q2 2008 Earnings Call Transcript

July 29, 2008 5:00 pm ET

Executives

Scott Scherr – Chairman, President and CEO

Mitchell Dauerman – EVP, CFO and Treasurer

Analysts

Richard Baldry – Canaccord Adams

Richard Davis – Needham & Company

David Cohen – JP Morgan

Steve Koenig – KeyBanc Capital Markets

Terry Tillman – Raymond James

Brad Reback – Oppenheimer & Company

Nathan Schneiderman – Roth Capital Partners

Mark Marcon – Robert W. Baird

Dan Cummins – Soleil

Brad Whitt – Broadpoint Capital

Operator

Welcome to Ultimate Software’s second quarter 2008 financial results conference call. Your presenters today will be Mr. Scott Scherr, Chief Executive Officer, President, and Founder of Ultimate Software; and, Mitchell K. Dauerman, Executive Vice President and Chief Financial Officer. Today’s conference is being recorded. All participants have been placed in a listen-only mode. Following the presentation, there will be a question-and-answer period and instructions will be provided at that time. We will begin with comments from Mitchell Dauerman.

Mitchell Dauerman

Thank you, Alan. 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 at www.sec.gov for additional information on risk factors that could cause actual results to differ materially from our current expectations. We assume no duty or obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

I’m going to discuss the financial results for our second quarter. Unless otherwise noted, our discussion will be on a non-GAAP basis for all for all costs, gross margins, net income, and EPS when comparing to the same period in the prior year. The primary difference between GAAP and non-GAAP financial information is non-cash, stock-based compensation. Please refer to the reconciliation of the financial information on a GAAP basis to that on a non-GAAP basis attached to the press release published on our Web site.

Now, turning to the second quarter results. New ARR for the quarter grew by 44% to $10.1 million. Total revenues grew by 19% to $41.5 million, and recurring revenues grew by 20% to $25.4 million. On a non-GAAP basis, pretax net income was $2.2 million, and pretax EPS was $0.08 per share. On an after tax basis, non-GAAP net income was $1.3 million or $0.05 per share.

I am going to focus my comments on the following five topics. First, the better than expected new ARR; second, the rollout of new initiatives for workplace clients, UtiPro Tax Filing and UltiPro Time Management; third, a discussion of our recorded recurring revenues for the quarter; fourth, the identification of a new time to live trend along with the impact that this trend is going to have on our 2008 guidance; and, fifth, the introduction of preliminary 2009 guidance.

As I mentioned, new ARR for the quarter was $10.1 million representing a 44% quarter-over-quarter growth rate and a 42% year-to-date growth rate over the last year, both growth rates far exceeding our guidance of 25%. We are raising our guidance for new ARR for 2008 to be in excess of 30%, and we are introducing preliminary guidance for new ARR growth for 2009 of 30% as well.

Our Workplace initiative continue to be a significant driver for the ARR growth as it represented 15% of total new ARR for both the second quarter and the year-to-date. Since the workplace sales team is focusing on the 200 to 700 employee target market, our seasoned enterprise sales team has moved that market with respect to the size of their new clients. Since Q2 of last year, our average inter-sourcing client employee size has increased from 1100 to 1800 employees this quarter. The average per-employee-per-month fee for both workplace and enterprise clients has remained consistent, reflecting solid penetration of add-on modules such as Time and Attendance, Recruitment and Performance Management. We expect that the average PEPM will rise in the near future as we rolled out two new solutions for Workplace customers this quarter, UltiPro Tax Filing and UltiPro Time Management.

Our Workplace tax filing product is based partly on software license from a third party and partly based on extensions at integrations developed by our own internal development team. The result is a proprietary offering that will be seamlessly be integrated into our Workplace product offering, allowing us to automate many features and streamline and leverage our internal operations. As of today, we already have 21 clients for whom we are processing tax payments to the U.S. government, to state, and local jurisdictions.

The second new Workplace offered product is UltiPro Time Management. This offering will be partly based on a source scope we purchased from NOVAtime Technology, Inc. for its fast time and attendance offering and similar to the tax filing offering partly based on extensions and integrations developed by our own internal development team. We purchased the source code for $2 million, $500,000 was paid in the second quarter and the balance will follow by the end of the year.

Both of these offerings have and will produce new ARR. However, due to the newness of these products, the financial statements reflect nominal recurring revenue from them. Our second quarter recurring revenue costs have increased for the tax filing services team. And our second quarter R&D expenses have increased as well for additional developers who are working on both of these projects. We expect these costs incremental to our original internal plan to continue for the rest of the year and into 2009.

The success of Workplace has also had an impact on our Q2 sales and marketing expenses as we have accelerated the hiring of the Workplace sales team, and we have also increased our Workplace related marketing expenses. In addition, our marketing expenses grew due to four times the expected attendance at our thought leadership workshops that we have discussed in the past.

Now turn to recurring revenues, we found that our reported recurring revenues have fallen short of our expectations for the quarter and will fall short for the year. There have been two primary items at play here. The primary factor impacting our Q2 results was the new trend in the dollar weighted average time to live, which manifested itself this quarter, and is directly related to our sales mix becoming skewed towards larger clients. This change was not apparent to us when we established our growth goals for this year. And the change to the model became clearly evident as this quarter was closing.

To be a little more specific, ARR gets reflected in the financial statements as recurring revenue where the client goes live on the product. The amount of recurring revenue (inaudible) gets reflected is a direct function of the size of the customer and the amount of ARR associated with that customer. Up to now, we’ve experienced and modeled a dollar weighted average time to live per core UltiPro of six months and up to three months longer for complimentary products.

Since establishing our goals for the year, a number of changes to the client’s expected live dates occurred particularly with larger clients, which carried significantly more ARR with them. We conducted a detailed (inaudible) examination of all our agreements and the following new trends have emerged. First, the average size of our Enterprise inter-sourcing customer has increased directly as a result of Workplace taking away the lower end of the Enterprise target market. The average size in Q2 of ’07, as I said before, was 1100 employees, and this quarter was 1800 employees. But our new sales mix for Enterprise customers has skewed up towards customers who have a size of more than 3000 employees. Second, we now have significantly more ARR tied to large customers. Third and more importantly, these larger customers are asking to tailor more product features to their unique business requirements. And they’re asking for more extensive interfaces to their various internal and external systems to put them in a position to use as many of the features in UltiPro as possible. This system interfaces include not only the customary TL, 401(k), and health and welfare interfaces, but now include interfaces to security systems, information technology systems, and procurement systems, to name a few.

While our Time to Life for Workplace is four months, the trend to larger customers, which individually and collectively carry more ARR and also have more complex requirements, has extended our time to live on a dollar weighted average basis by approximately two to three months in our new model, as compared to our existing internal model. It is important to note that the push out of the time to live does not change the overall value of recurring revenues from each of these customers.

Another adverse impact on a return revenue result as compared to our existing model occurred as our client retention rate dropped from our expected 99% to 97%. The drop wasn’t caused by unsatisfied customers as those loss in the year were very few. However, we have seen more than expected fallout as a result of bankruptcy and tight economic times particularly in the financial services and the airline sectors.

Now to relate this specifically to Q2, the estimated impact of the extension in time to live was around 800,000 or 3% of what we have forecasted, with attrition accounting for the balance. Because of the layering effect inherent in the recurring revenue model, there is a cumulative impact from both of these items on the financial statements for the balance of this year. And this leads into the fourth topic I wanted to cover, our revised guidance for 2008.

During my discussion, I noted our better than expected new sales or ARR, the expansion of costs relating to new initiatives in Workplace, and the extension of Time too, Time from contract signing to billing. Therefore, we are raising our 2008 ARR growth guidance from 25% to more than 30%. We believe our year-over-year growth rate for recurring revenues will be 23%, and total revenue will be about 20%.

On the expense side, we expect to invest an additional $1 million in R&D, and an additional $1 million in sales marketing over our original expectations for the year in order to take advantage of the opportunity in front of us from both a product perspective and a sales perspective. Depending on the revenue mix between licensed and inter-sourcing, we expect operating margins will be approximately 10%.

Finally, I’d like to discuss our preliminary 2009 guidance. We intend to continue to grow our Workplace sales team and with a higher PEPM potential value as well as the continued performance of our Enterprise sales team, we expect that new business for ARR will grow 30%.

On the recurring revenue line, taking into account the new time to live model and using our best estimates for live dates for our larger customers, we expect recurring revenues will grow between 30% and 35% over 2008, total revenues to grow between 25% and 30%. Since we are accelerating some of our R&D headcounts and certain costs into 2008, we are expecting very limited headcount additions in 2009. Consequently, our operating expense growth should be around 12% to 15% and will provide a source of operating leverage. The bottom line is we expect to expand the operating margins for 2009 to between 15% and 18%.

Turning to our upcoming conference schedule, during the next quarter we will be at conference hosted by Canaccord Adams in Boston during August. If you’re available at those conferences to meet, please let us know. I will turn the call over to Scott.

Scott Scherr

Thanks, Mitch. I want to thank you all for participating in our call this evening. As Mitch said, new ARR of $10.1 million were up by 44% in the second quarter this year over last year’s second quarter, with 94% of that amount coming from our software as a service model inter-sourcing. Workplace contributed 15% of the new ARR number for the quarter. Here’s some color on sales for Q2 and the first half.

Our Enterprise team finished Q2 at a 106% of plan, and the first half at 108%. The team is fully staffed, seasoned, confident, and has the largest pipeline in the history of Ultimate. The attached rates for our add-on products stayed consistent. The tenure and leadership of this team is second to none in the industry. 60% of the enterprise team achieved mid-year club. And I expect more than 80% to be at our year-end club.

Our Workplace team finished Q2 at 117% of plan, and the first half at 133% of plan. The team is fully staffed, well prepared, and very confident in their ability to achieve their goals the second half.

We rolled out two very exciting products tailored for the Workplace team, UltiPro Tax Filing at the beginning of the quarter and UltiPro Time Management at our mid-year meeting in July. We had a 100% attach rate in Q2 for the tax filing solution. And we expect attach rates of 80% or higher on a routine basis in the future.

Our Workplace team has already sold five Time Management units. And we expect attach rates to be consistently over 50% in the future for this solution. Sixty five percent of our Workplace quota carriers achieve mid-year club. And I expect more than 80% of the team to be at our year-end club.

For competitive reasons, we have stopped providing numbers of new units per quarter and names of new customers. But I do want to give you some metrics that’ll reflect the success we’re having. In Q2 of this year, our sales organization sold 72% more new units than in Q2 of 2007. For the first half of 2008, they sold 44% more units than in the same period of the previous year. Clearly, this is a positive impact from the Workplace effect.

Our plan to extend our market penetration is working. We are leveraging the strength of our core UltiPro product and capitalizing on the opportunities to grow our business organically.

If both our Enterprise and Workplace teams are 100% of plan in the second half, our new ARR growth for 2008 will be 34%. After attending both teams’ mid-year sales meetings a couple of weeks ago, I expect both teams to exceed 100% in the second half.

During the second quarter, we won two awards that reflect the essence of what we are doing and speak to what we’re all about. The first was our development team being named the best product development team in America by the American Business Awards in its Stevie Awards competition. There were an average of 65 entries per category. And our team won first place over well known finalist like Mozilla Corporation, Prudential Retirement, and Sharp Electronics. As a creative force behind UltiPro and inter-sourcing, our development team is world-class and deserves this recognition for the great products and technology that they’ve given us.

The second recognition was Ultimate’s ranking as the number one best medium sized company to work for in America by the Great Place to Work Institute. I had the pleasure to accept the award before an audience of more than 15,000 as the Society for Human Resource Management’s 60th annual conference in Chicago. It was an honor.

We believe that creating an environment where our people can reach their full potential and work as a team results in the best products and services, and ultimately drives to growth of our business. Our people and culture has always been the key to our success. And we will continue taking care of both as passionately as ever.

In closing, I know that our business is stronger than it has ever been. We are managing the business to take full advantage of the opportunities that are before us. And we will continue to do so. As always I thank you for your support. It’s greatly appreciated. Let’s move to the Q&A.

Question-and-Answer Session

Operator

(Operator instructions) And we’ll go to Richard Baldry with Canaccord Adams.

Richard Baldry – Canaccord Adams

Thanks. Can you talk about when you saw this trend really start to emerge with these slower deployments? It seems like it came off kind of quick. And then maybe why you believe this is actually a long term shift versus maybe a short term phenomenon as the team moves into larger scale deals. And then maybe why with the Workplace being a faster implementation and that group starting to ramp, why the blended sort of deployment number when held relatively stable? Thanks.

Mitchell Dauerman

Okay. Rich, it’s Mitch. I can answer the question. The emergence of the trend happened at the end of the quarter. And I think we go back to the beginning of the year and we looked – we didn’t see anything different in the trend at the beginning of the year when we were doing our model that would say that the model we’ve been using for five years to estimate the time to live should change.

It was during this quarter that we started to see contract projected live dates change. And it was until – quite frankly, after the end of June when we’re looking at the numbers that we are able to go and compare to our planning and translate what happened. And what we ended up doing was going back through all our contracts. Identifying the ARR associated with each of the contract. We have stratified it into many different sizes. And I think what became clear is if you start with the back end of 2007, we began selling a significantly more – well clients that carried within themselves significantly more ARR.

This is kind of the effect of Workplace because Workplace was taking out the 200 to 700 employee market. The Enterprise guys were force to go up market. And quite frankly they were very successful. And so, when we now looked at the deals at the end of the second quarter, and we saw where the date to change to and we investigated from talking about why they change, what happened, it became clear that our Enterprise customer base shifted up towards companies over 3,000 employees. Those customers tend to have many more complex needs. They have many more options. And they also want to figure out how can they use the system to its fullest extent, to automate as many features and as many things as they can.

There also was a tendency, you might be familiar in the larger organizations, to make decisions by – maybe go by committee. So whereas in less complex organizations, decisions about what directions to take things in may take a couple of days. There were examples of these clients who were in this over 3,000 employee size taking three weeks to make a decision that normally would take a couple of days. But it’s because of the nature of that customer. It’s I think when we started looking at what pushed up from Workplace and that volume to that ARR tied to the larger deals. And then looked inside and think, “What do these customers want?” The result was what we said. The trend in these larger customers is to start later.

It’s not our nature or our desire to ever tell a customer that they have to go live on something earlier. We look at this in the long term, as you know. And to us keeping a retention rate that’s 97% is very valuable. So our approach has always been from day one, do everything to make the implementation very solid, have the turnover customer support solid, and keep the client for a long time.

So I think in terms of is it a short term phenomenon? I think that because of the Workplace effect, I think that the chances are that the revenue – that the client mix probably stays comparable to what we’ve just experienced. And that’s why we felt it was important to indicate that by making a model change and changing our assumptions. There’s obviously a lot of focus within the company on time to live.

And to answer your last part of your question about what does Workplace mean to all of these. Workplace was 15% of new sales, new ARR this year. So it’s relatively small. But as we get into next year, Workplace should be 25% to 30% of the new ARR. And since Workplace seems to be averaging about four months’ time to live, as Workplace grows and becomes a larger component of total ARR, the overall time to live will shrink naturally as a result of that. But again, I just want to point out one thing, they push because clients decide to go live later. It doesn’t change the overall value of that client over its term. I’ll turn that back to you, Rich.

Scott Scherr

Thanks. And also I’ll do that is that in the past, and I guess for the last five, years that when a client – we’ve had clients push. We’ve had clients go sooner. I think that was the add-on products. And the success we’ve had selling Time and Attendance, Performance and Recruitment. It just seems on the larger clients that a lot of them want to live with everything at once. And I think when that happens, when someone pushes at the beginning of a quarter, it’s not – you don’t – if you’re scheduled to go live April 1 or July 1. If everything’s not set like they wanted, then typically you move to the next quarter. Or if it’s October 1 you move to January 1. You typically you don’t start in the middle of the quarter. So I think when we looked through every single deal, which we did, we just thought it was prudent to – we do think it’s a trend.

Obviously we’re getting much – we’re getting larger deals, which is a good thing for us. Workplace is getting traction, which is a good thing for us. But I think as of now it just seems like that’s where we are at it at this point in time. And we felt we should say what we’ve said.

Richard Baldry – Canaccord Adams

On the tax filing product, can you maybe talk a little bit about the P&L implications of that? And also the balance sheet side of the table. And then any – maybe any contractual restrictions in moving that on to the Enterprise side versus holding it in the Workplace side of the table. Thanks.

Mitchell Dauerman

Rich, I’ll let Scott talk about the contractual side and where we’ll move to, but as far as the financial statements, we did break out right below the current assets. We’re in the current assets a line, which is funds held on behalf of clients, which I thinks was $1.8 million at the end of the quarter and a corresponding obligation. Those funds are invested in US treasuries overnight. And overtime, when that interest becomes more significant, it will show up as a line item as part of total revenues. Today, that piece if fairly insignificant.

As far as the revenue that’s generated from being able to offer that product, that is included in the PEPM. So it is included in the ARR. And I think, as Scott mentioned, we have 100% attach rate in Workplace in that base. So that’s pretty exciting.

Scott Scherr

And I mean contractually, because now we have a good relationship with (inaudible) on the Enterprise side. Right now we’re looking at it as the Workplace footprint, not for the Enterprise side.

Richard Baldry – Canaccord Adams

Thanks.

Operator

And we’ll go next to Richard Davis with Needham & Company.

Richard Davis – Needham & Company

Thanks. One question is with regard to the deployment, is it just the customers or is there any capacity constraint that you guys have with regard to the number of services people to get out there and do that?

Scott Scherr

No. I think it’s – I mean we’re at staff, we’ve been at staff. I mean obviously, we continue to hire as we keep exceeding our sales goals. But it is not a staffing issue.

I visit a lot of accounts in the cycle. And I just – I mean to – I don’t want to over simplify it, but its larger accounts that’ll send you – you get larger accounts with more AAR moving out three months. It creates just these two-month thing that – you’re hearing it now for the first time. I’ve heard it a few weeks ago for the first time. And then I’ll probably have the same impact that you’re having right now. But then after going after it and really understanding it, it’s just a business trend that is there. I mean it’s a – in a way it’s a good trend because we’re selling much larger clients on the Enterprise side. The Workplace is working. But this is – I mean this is what it causes, so. I mean it’s a short term impact to us against what we’ve said. And I think it’s a long term gain for us in the future.

Richard Davis – Needham & Company

And then with regard to not talking about customer lend, not many companies – most companies reveal that. Ha there been a change in the competitive environment or was it – what was the logic behind doing that. I mean, I don’t really care if you do it, but I was just – there’s a change in your normal communications. I’m just curious what’s up?

Scott Scherr

Yes. I think it’s just that when we disclose names, and all of the sudden the competition, when we take someone away from somebody, we have all the people from the competition going to that account. At that time, it just seems unwise to do that. So we stopped. We’ve had –

Richard Davis – Needham & Company

Got it.

Scott Scherr

That’s really it.

Richard Davis – Needham & Company

Okay. Those are my questions. I want other people to ask stuff.

Operator

And our next question comes from David Cohen with JP Morgan.

David Cohen – JP Morgan

Hi guys. Mitch, just a question on the attrition, in terms of the bankruptcies, can you help quantify whether it’s the net change in clients or the net change in client’s paid? And then five of the bankruptcies and the impact, and what the outlook for that is, over say, the next six months?

Mitchell Dauerman

Well, the retention rate we’re quoting is based on annual recurring revenue from the inter-sourcing clients or recurring revenues. So it’s not a client counted as a dollar impact. And there are a number of them that had some fairly significant changes impacting our year, which is more than we have seen in the past. I think that the more significant thing is instead of in the past, we would end up with the chapter 11. So the company maybe a little scaled down, but it would continue on. Here we did see some chapter seven liquidations. And when they hit you in the beginning of the year, they hit you for the full year. So if you take your bankruptcies and terminations, stuff, over and above what, say, we expected, you’re probably for the full year, the effect is probably $1.5 million to $1 million, just to give you some perspective relative to what we would have planned. I hope that answers your question.

David Cohen – JP Morgan

Thanks. And in terms of any – you’ve talked about, in the past, about contract minimums. But if you see employment levels declining at your clients, my guess is that you’re not necessarily going to look to push back and say, “Well no. you cut back. And so we’re going to force the minimums on you.” Have you seen clients cutting back in terms of the number of employees that’s had an impact?

Mitchell Dauerman

Well, we said that the – okay. So we do have minimums in the floors, and when we went to the air we were across the board slightly above the minimums. And we always said, even if they all shrunk back to revenues, it’s $4 million or $5 million, or something like that, just from over all shrinkage. So in that context, it wasn’t significant. And again, you would have to have shrinkage across the entire base.

But what we’ve seen is – I think we’ve seen the absence of growth as opposed to shrinkage. So there’s probably some stuff going on in there. But within that, we did have one large financial services company that according to their contract, if they are divested of a division, they were allowed to reduce their minimums on the payroll side. And that happened. And that was fairly significant and unexpected. We’ve had a home builder who did drop significantly below their minimums. And they ask for some relief. And what the sales team did at that time, which I think was a smart move, was they got them to purchase Time and Attendance for the remainder – for their current employee base. So we’ll bring them up in live. That revenue will come on down the road. But in the interim, yes, we gave them a break on their minimums so they could get through these tough periods. And we expect they’ll be with us a long time. And the cycles will change. And those employee minimums will come back up.

So I wouldn’t say we’re seeing dramatically more than in the past in terms of customers coming back and saying, “We want to go below the minimums.” I think if anything, it’s more the companies that either have gone out of business or can’t survive on their own and are being acquired by somebody else.

David Cohen – JP Morgan

Okay. And then you’ve mentioned with the float income related to the tax filing, you’re going to be capturing that in the ARR. Because I would imagine you’re charging – you’re charging me for my entire per-employee-per-month for the tax filing. And then there’s the float income. Or am I not understanding that?

Mitchell Dauerman

Let me clarify. I may have confused you on that. The per-employee-per-month fee for tax filing services is included in new ARR and will be included in recurring revenues. The interest from the float balances, so far, have been insignificant. They will not be included in ARR. But on the face of the financial statements when they become significant, they will show up as a separate line item. So we’ll have a license line, a services line, a recurring revenues line, and an interest from tax filing line.

David Cohen – JP Morgan

And so where is that interest falling today?

Mitchell Dauerman

Today, it’s negligible. We began starting these clients in Q2. We have 21 right now. And the average daily float balance as of June 30th was $600,000, so, and with US Treasuries where they are.

David Cohen – JP Morgan

Right.

Mitchell Dauerman

Yes. It’s exciting for the future, but right now it’s a – I think we’re providing a service that our customers want. It’s straight up the middle.

David Cohen – JP Morgan

Right. And now with the change in the business trend, should we expect to see services revenues pick up with these larger more complex clients?

Mitchell Dauerman

Well, yes. I would think that would be the nature of it. From what we’re seeing, I don’t know how much yet, but yes. That would be the case because there’s more – because the implementation would be longer. There are more complex things. There’re more things to do. They’ll be more technical services as well as the field consultant.

David Cohen – JP Morgan

And should we see deferred revenues moving higher as well?

Mitchell Dauerman

Well, our contract generally, the only thing that goes into deferred revenue is three months payment of the PEPM when they are going to start, plus the one-time fee. So I’m not sure that will be any different. There are certain cases where a customer may build into their overall payments services so we would record deferred services revenue. But absence that, I don’t think deferred would behave dramatically different because of the shift to larger customers.

David Cohen – JP Morgan

Okay. Then just to make sure I’ve understood this change. Basically, it’s a timing issue, right? So you have the ARR comes in, and it’s just hitting the P&L later than it would have historically. Is that –?

Mitchell Dauerman

Yes. It’s rolling into ’09. And once you’ve reset that time to live, it’s essentially – it’s unfortunately, it’s a one-time effect for the most part, but you’re correct. As Richard was asking, does the trend stay consistent? If it does, yes. Then it’s a one-time effect.

David Cohen – JP Morgan

Okay. And Scott, I think you said that this Workplace effect has pushed Enterprise to look at deals 3,000 employees and up or employees goes up to seven. So is there a need for a team to focus sort of in between on the 700 or 3,000?

Scott Scherr

No, no. I think that was just the average because we’ve gotten – quite frankly, we’ve gotten multiple deals over 10,000 pays. But I think the way we have it now with Workplace is 700. It works fine. And I think it’s just – it did what we thought it would do. And it pushed the Enterprise guys up. But I don’t (inaudible) – I think everything’s worked – the worst part about this whole call is that everything’s working so great. And I understand how you guys are all feeling right about now because we’ve been feeling that way.

But the business is working great. I mean, the Workplace thing is better than what I could have expected. Enterprise is basically killing it. Our retention rate went down a 97 point something percentage. But I mean that just the nature of the beef. I don’t think it’s because of the quality of our product or anything like that. We have a very good implementation team that’s staffed. And, hey like I’ve said, we have larger clients who have more needs, which is in a way a positive thing for us. Because once they do go live, we’re integrating into their whole business. So we become a fabric – UltiPro becomes more of a fabric of their business. So the exit barrier, once we do all these things that these larger clients is good for us in the long run.

David Cohen – JP Morgan

Okay. Last question, what’s the logic behind having two code basis for Time and Attendance and then to a purchase to tax filing?

Scott Scherr

Yes. Well, I think the Time and Attendance to is – absolutely 100% clear. The footprint of the Enterprise solution was just too big for Workplace. They didn’t fit. And tax filing, it was more business. The business did not work with the deal we had for the Enterprise prospects when you get into the 200 to 700. So on one, it was a footprint, which could not ever handle – the footprint was too big on the Time and Attendance product. And on tax filing, I think it was more financially. It just couldn’t – it couldn’t fit into the financial model that we had set on the Enterprise side.

David Cohen – JP Morgan

Okay. Thank you very much, Scott.

Scott Scherr

Thank you.

Operator

And we’ll move now to Steve Koenig with KeyBanc Capital Markets.

Steve Koenig – KeyBanc Capital Markets

Hi, Scott. Hi, Mitchell.

Mitchell Dauerman

Hi Steve.

Scott Scherr

Hi.

Steve Koenig – KeyBanc Capital Markets

I’ll try to keep my questions down to two here. First one, I was curious about, Mitch, when you were talking about where time to live might go in ’09 and you’ve talked about Workplace becoming bigger in the mix. I’m curious, is it possible though that Enterprise deals could continue to get more complex? And are you doing anything to control kind of scope of complexity for new projects and new project sizes?

Mitchell Dauerman

Yes. I mean I think – maybe the answer to that is no. I don’t think they’re going to become more complex because I think we’ve run the gamut of – our largest deal is 40,000 employees that goes to 60,000 in season. So I don’t think it’s that. I think it’s the quantity that we’ve had. And I think it’s also the growth of the product and the add-on products we have. So now you have multiple products going into a large client, new client of ours. And you just get more people involved to want to do more things with the product.

And I think it’s – again, I think it’s a two-month reset of time to live from our six – we went five years with – on the inter-sourcing side, six months. And now, apparently it looks like it’s eight months. And we’re getting more large deals. But I don’t think it’s going to – and we’ve been – obviously, a lot of meetings on it over the last three weeks. And I don’t think it’s going to get worse. So we’re going to do everything we can to make it better. I mean forget the customized – we’ll do everything we can to make it better.

Steve Koenig – KeyBanc Capital Markets

Then I guess that leads me to my follow-up, which was – last question here, what specifically are you doing to control the time to live as you’re going forward?

Mitchell Dauerman

We’ve always – our goal is always, from the beginning, to get time to live as short as it could be. So from the beginning, we had tools that we did. So now, with these – I mean the new things that our larger customers are asking us for, I mean, we have to develop tools to do it. So they’re not custom on each one. So the more tools we develop as we see it. But that still will not take someone who is – in just our model, someone who is 10,000 pays, and all of the sudden you’re sitting in a room with 30 people because they bought everything we have. And now you’re dealing with 30 people instead of four people, and saying that the average waited time wouldn’t go from six months to eight months. I just think it’s the nature of the beef when you get into larger deals. And it could be that that’s just the right number right now.

Steve Koenig – KeyBanc Capital Markets

Okay.

Mitchell Dauerman

I mean that’s what we think right now. And again, I think it’s a short term thing that really doesn’t – I think nine, we pick it up, and then as we go forward to where we want to be in 12. It actually accelerates because we’re getting more ARR coming in.

Steve Koenig – KeyBanc Capital Markets

Okay. Thank you very much.

Mitchell Dauerman

Thank you.

Scott Scherr

Thanks, Steve.

Operator

And we’ll take our next question from Terry Tillman with Raymond James.

Terry Tillman – Raymond James

Hey guys. I’ll follow Steve’s lead and just have a few questions. First, Scott, you said you’re tailing it at the Enterprise market. I mean the ARR is strong, but do you see any impact at all, though, in the Enterprise market in terms of just the link of the sale cycle or just the close rates? Anything at the margin, though, a little bit softer?

Scott Scherr

No, nothing. And I just came from – I said, we have our mid-year meeting and – I just had two weeks ago with the whole Enterprise team. We had the mid-year meeting, and then we had the Workplace. No. I’d be very surprised if they weren’t over 100% in the second half. The pipelines are very strong, stronger than I’ve ever seen them. No. I think it’s a combination of where we are as a company, our products. And I see no – no. I don’t see that at all. I see momentum. I see strength.

Terry Tillman – Raymond James

Yes. Well then, Scott, in terms of the Workplace stats you gave out in the past, along with Enterprise in terms of per-employee-per-month, I forgot what it was for Workplace. But can you maybe remind us what it was per-employee-per-month? And now with these two additional modules, assuming there’s attached, what that would then take the average to?

Scott Scherr

We’re averaging around $12.50. Again, I think that’s going to go up. Again, the price is averaging $9. We said it was consistent with the first quarter.

Terry Tillman – Raymond James

Okay. And then just, Mitch, my last question, related to the hiring. I just want to make sure I understood this. You talked about accelerating some of the hiring. I mean you’d already – I think that you guys had mentioned before, you’re accelerating the Workplace hiring. But I thought you had said, in ’09, maybe the hiring slows down, or does it cease, or how do we think about headcount increases ’09? And if there are going to be more minimal, where will they still be focused on? Thank you.

Mitchell Dauerman

Okay. Terry, what I was speaking specifically about was the operating expense side, and very specifically, the R&D, where because of their hiring, they will have very limited headcount. Because they’re hiring into 2008 early, they’ll have very limited hiring into 2009. In the sales and marketing area, we’re still going to add – we’ll firm it up when we get to the next quarters. But eight to ten Workplace people. So that will happen. There maybe a couple of support people for them. That will generally be fairly limited. And then G&A, I can assure you, will be relatively limited.

So I think that’s why we have fairly good confidence about our headcount growth and the impact on operating expenses. Obviously, I’m making a distinction between headcount that will go into services because that’s the question that was asked before. Services revenues will grow and we’ll add people to support that growth. And then, in hosting a customer support, as you generate more customers, more employees, and more revenue, we’ll add headcount commensurate with that.

Operator

And we’ll go now to Brad Reback with Oppenheimer & Company.

Brad Reback – Oppenheimer & Company

Good morning, guys. How are you?

Mitchell Dauerman

Hey, Brad.

Scott Scherr

Hi, Brad.

Brad Reback – Oppenheimer & Company

Hey, could you give us a sense how many employees you expected at the beginning of the quarter to go live? And how many ultimately did?

Mitchell Dauerman

Brad, we don’t do the model that way, based on employees. What we do is we take the ARR and we take our expected time to live. We try to break ARR down into its components, being inter-sourcing, the complementary products, and Workplace. And that’s what we did at the beginning of the year. Then we used the historic trends. We looked at what we have seen in the past, and if we saw anything different. And it hadn’t changed. So we would just take the ARR generated in a particular month, and schedule it out.

But you bring up a good point that – well you gave me a chance to make a good point. So let’s take Q1. And this did not affect Q2. But Q1, the ARR we projected included two deals. Those two deals that ended up being sold, generically, they would go live in six months. But the way they were sold, they represented $1.5 million of ARR. Had that ARR gone live according to the regular model, we would have begun revenue recognition this year. Both of those clients were large clients. When the implementation team got involved in the scoping, going through how the client wanted to use the product, what they wanted to do, the people involved, they selected a live date in January of ’09. The impact on 2008 of those two deals, compared to our model, was $1.5 million.

Brad Reback – Oppenheimer & Company

Okay. And Scott.

Scott Scherr

Yes.

Brad Reback – Oppenheimer & Company

When you said you had found out a couple of weeks ago about this issue, was this a case where the service guys maybe weren’t as forthcoming with some of the delays in some of the bigger contracts and it snuck up on you? Or what exactly happened there?

Scott Scherr

No. I don’t – I think it was – a few weeks ago, I think it started in June, when Mitch started seeing an impact on it, and it got to me, but –

Mitchell Dauerman

But Brad, let me try to clarify. There are what we have from the implementation team what we call change reports. We start to see some live dates. But as we went through closing out each month, the April and May months, the various work. They weren’t that dramatic. They weren’t that significant to say it appears as so there’s a, I’m going to use the term, wholesale change. When you got to closing out June, which would happen – our first pass at preliminary numbers on revenues happened about, I don’t know, five days, seven days after the close of the month.

It’s that – we obviously saw that the revenues were out of line with what we expected. And that’s where we began digging into the details to look at every single deal, what we expected, what happened. And we could see that for this quarter, the vast majority of the miss was in June. So that wouldn’t happen even though you could start to see moved dates. We have so many different products within a client for you to say, “Here’s a moved date. It automatically turns into this dollar amount.” It’s actually when you get to the end and you add up all the dollars and you compare it back to – it’s gaining a high sights 20/20 now. But it took until after the quarter, and –

Scott Scherr

I also think that anything – at some point in anything, it manifests itself at some point in time. The planes hadn’t manifested itself – was now. I mean it just appeared. And then after all the researching going through it, and beating ourselves up the whole month of July, I mean you end up with feeling like maybe you feel right now. But then you end up feeling like, “Wow. This is okay. We’re selling bigger deals. We’re selling more business. The bigger deals want more.” And when you take it all and you figure it out, it’s a two-month lag in your model. And the lag hits – obviously, it hits 2008 in a way that we don’t like it to hit 2008. But then, we’re right back on track in 2009 with it. So then the question, obviously, is the credibility to believe that we could be on track in 2009. And we do. And we’ll just have to prove that as time goes on.

Brad Reback – Oppenheimer & Company

Fair enough. Thanks a lot, guys.

Scott Scherr

Thank you.

Mitchell Dauerman

Thanks, Brad.

Operator

And we’ll go now to Nathan Schneiderman with Roth Capital Partners.

Nathan Schneiderman – Roth Capital Partners

Hi. Thanks very much. Hi, Scott. Hi, Mitch.

Scott Scherr

How are you?

Mitchell Dauerman

Hi, Nate.

Nathan Schneiderman – Roth Capital Partners

A handful of quick questions for you. I was hoping you could – part of the issue for the operating profit outlook this year is the affirmative decision to spend more on R&D. And I was wondering if you could talk us through that decision. What changed to make you want to spend more? And then, what specifically are you spending more on in the R&D area?

Mitchell Dauerman

I mean it was really the – it was tax filing and Time and Attendance for Workplace, those two things. It became apparent to us as we were going in. We were giving away business on the line. And we made a decision to go after it. And then, once we made the decision to go after it, we accomplished it. We had 40 vendors. We looked at due diligence on the Time and Attendance products. And we narrowed it down to one that we felt was the best for us. And then we went for it. Once you do that, you have to put a team together.

The tax filing side, we’re in front of it. We knew a little earlier that that was something in the Workplace market was hampering us from doing even better than we were doing. So we just went after that as well. Well those were the two things. They were business decisions based on a clear opportunity in the marketplace to create more ARR faster.

Nathan Schneiderman – Roth Capital Partners

Got it.

Mitchell Dauerman

And the total dollar amount was $1 million over the year. So it was –

Nathan Schneiderman – Roth Capital Partners

To what extent do you have a – do you feel like you have a technology problem on the automation tools to help customers go live? And I was – I thought you may have said, to my earlier question, that some of the R&D efforts were going to work to get customers live faster. Could you just talk us through that? And how much of this is the technology gap? And how much of it is just inherent on a large customer taking on lots of products?

Mitchell Dauerman

I mean I think even when you say a large customer, the alternative that that large customer has, we’re probably implementing in half the time as anyone else that they could implement who we’re competitive with on those large clients. But I don’t think it’s a development thing. We have a whole customer – a service team, implementation team that’s always looking at liaison tools to make it faster. I guess normal business for us is to keep trying to make it faster.

If you took some of the deals we’ve got. And again, I’m not going to go over the names. But if you take 15,000 employee deal that takes UltiPro, Employee Self-service, Manager Self-service, Time and Attendance, Recruitment and Performance, and to say that that deal could take nine months or 10 months to go live. I mean that’s a homerun in our industry to go live in that amount of time. The fact is we’re getting a lot more of those deals. Literally, almost, well, 50%. When we look – we take it year-over-year, 50% of our ARR comes from deals over 3,000 employees.

So it’s been a dramatic increase in the number of larger deals we’re getting. I’ve always said in the past that the more deals we get in, the more deals we’ll close. And we’re getting in more larger deals, and we’re closing them. The impact has created a two-month lag in the average time to live.

Nathan Schneiderman – Roth Capital Partners

Got it. Given that these large customers are demanding more services, more customization, more integration, why did your service revenue decline sequentially? It was down about $1 million from the prior two quarters. I would have thought maybe it would actually go up in that kind of scenario.

Scott Scherr

Well now, Nate, you’re catching the Q1. Remember, you have W2 sort of prepared. And we bill extra for that. So I think, traditionally, you would see that each year, except from Q2.

Mitchell Dauerman

Q1 to Q2, they would go down for that. And quite frankly, we have a little bit – a little more PTO that gets taken now. And the consultants’ heads finish school, and they do that. And we managed that process.

Nathan Schneiderman – Roth Capital Partners

Okay.

Mitchell Dauerman

There was nothing in the services revenues that services margins. That would have concerned us.

Nathan Schneiderman – Roth Capital Partners

Okay. And then final question for you, it sounds like you think you are going to get this recovery in 2009 to levels that were pretty close to what we were modeling for the total revenue. But I’m just curious on the up margin side, we’re at the mid point here at 16.5%. That would be a fair bit less than our prior model on pretty similar revenues. So what’s happening on the expense side in ’09 that’s restricting the operating margin? And thanks very much for answering the questions.

Scott Scherr

Sure, Nate.

Mitchell Dauerman

Well, I’ll talk about our model. And our model is that there will be a little bit of a shift in those revenues towards services. When you take the ranges of the guidance we gave you that’s what’s going to happen. You can take license and put it flat. We told you the range of the recurring. So the difference is services. And services will carry a lower gross margin. So that’s going to keep that down. I think on the operating expense side, the reason you’re going to get leverage into next year is because operating expenses will grow between 12% and 15%, which will be lower than this year. And again, that is partially due to development, hiring in advance. So therefore, we’re seeing very limited headcount or cost increase in R&D.

So I think you – I think going with the mid point of the guidance, hey, we’re a little bit south of where we originally thought. We didn’t anticipate the – this one time – push off in the time to live. But it is the new model. And I think this is the result of taking what we learned, and applying them going forward consistently to the bottom line. And I think it’s a good business model.

Did that answer your question?

Nathan Schneiderman – Roth Capital Partners

Yes. Thank you very much.

Operator

And we’ll go to Mark Marcon with Robert W. Baird.

Mark Marcon – Robert W. Baird

Good afternoon. I was wondering, with regard to the Enterprise clients, with the additional work that’s required. Are the economic characteristics as attractive? Is there anything that would cause the recurring gross margin to decline or change at all relative what we’ve previously expected?

Mitchell Dauerman

No. I don’t mean to sound that short, but if you go through the implementation, it may take longer. I mean if they’re more complex and they want to integrate the system to route more internal-external systems, if they want to have more people involved, if they want to have project management, they pay for that. We do bill by the hour, so. That’s going to change. And I think, a couple of previous questions it kind of asked, will that mean services will go up. It sounds like they probably will. How much, I don’t know right now.

But in terms of going forward, the recurring revenue, we’re going to have 10,000 employees or 8,000 employees, or 16,000 employees rolling off a certain PEPM. The cost that’s supporting that employee is really a function of the equipment, which doesn’t change, the number of employees on equipment, which is variable. So I don’t think it – I think if anything else, it could be – it’s probably more profitable, if I thought about it.

Mark Marcon – Robert W. Baird

Good. And then the gross margin on recurring revenue exclusive to Ceridian that trended down a little bit to sequentially. It’s still up year-over-year, but not as much as what we saw in the first quarter. You mentioned something earlier in the call in terms of what drove that. Could you repeat that please?

Mitchell Dauerman

Yes. A large portion, as you point out, and I think it’s a good point to make, Ceridian did fall off in the second quarter. So there was $1.5 million in Q1 returning revenues that are not in Q2. So that’s going to impact your margins, but also tax filing. So why we’re rolling it, we built a team, getting ahead of the revenue and ahead of taking those 21 client slots. So there is a team of people who have to use the software to take the information, make sure it’s done correctly, transfer it to the various government agencies, and so on. And so that cost, essentially, does proceed taking that business to steady state.

Mark Marcon – Robert W. Baird

So there’s no reason why the incremental gross margin trend should change from a longer term perspective.

Mitchell Dauerman

I don’t think so.

Mark Marcon – Robert W. Baird

If anything, maybe it goes up a little bit.

Mitchell Dauerman

Yes. I mean we run in the, what, 75%, 80% incremental gross margins. And I don’t see anything that tells me that that could change in the long term in a negative way.

Mark Marcon – Robert W. Baird

Great. And then, on the Enterprise clients taking longer to implement, I understand that they’re more complicated. Is it possible that part of the reason why they’re decision-making is taking longer, particularly starting in June, is this the economic headwinds that everybody’s facing and that maybe causes them to slow things down a little bit?

Mitchell Dauerman

Well, we haven’t heard that, but I think if you said it in another way, if companies are constrained and adding employment, they may have project people who are working on those assignments that are handling multiple other tasks within the organization. So if they can’t get through reconciling a parallel payroll because they have other things that they’re doing, as Scott mentioned, that could be a reason why they say, “I can’t get it done. Let’s push it three months.” So I think that’s a – that’s a possibility for sure.

Mark Marcon – Robert W. Baird

Is it possible that maybe it slows up a little bit more just until things kind of normalize?

Mitchell Dauerman

You could never say no, but I don’t think so. I think from the – the amount of work that we have done, after seeing these variants for the quarter, has been very extensive. I mean it’s been 21 days straight. So I think that it’s – there’s a lot of focus on it. I think that this drag we’re getting is it should stay in that frame, that the revenue – the revenue size –

Scott Scherr

I think also, if you took, again, like Mitch said, this has been going on for a while now with us. But if you took Q2 of 2008, 49% of our ARR came from companies greater than 3,000 employees with complementary products. If you just went back to Q1 2007, it was 21%. So just almost normal if you have – if all of a sudden you go from 21% of your ARR is better clients over 3,000, and then you jump to 49%. It would just, in a way, be logical if you have complementary products because it would take some time longer to get all that implemented the way they want. Obviously, with our product, you can do a lot of things with our product. So it almost is – it’s a self-fulfilling prophecy in a lot of ways, I mean, with what’s happening. The fact is they just didn’t see it, and it materialized in the quarter.

But then when you look at it, and then you look at everything around it, Q2 2008, 49% of our ARR was from companies over 3,000 with complementary products, Q1 2007, 21%.

Mark Marcon – Robert W. Baird

And that clearly takes longer.

Scott Scherr

I mean just normal that when you larger clients, more people are involved, you have more complementary products. And again, just in our business, when someone – if they don’t go the beginning of a quarter, it could just naturally push, nobody’s fault, to the next quarter. It’s typically large deals or most deals don’t like to go mid quarter when it’s involved with payroll. It’s just the nature of these.

Mark Marcon – Robert W. Baird

And do you think you’ve seen all the impact that you will see in terms of bankruptcies or reductions in employment? Or do you think that that’s potentially – in terms of your assumptions, are you assuming that that’s going to stay at these levels or that perhaps it gets a little bit worse?

Mitchell Dauerman

We’ve taken it up a little bit. We’ve obviously tempered down any other assumptions at this point. It’s hard to call. It’s hard to call. I think that we’ve seen the trends on the customers we’ve had. I wouldn’t say we’ve had – we’ve seen any indications of impending bankruptcies or – you see that when somebody is stringing out payments for a while. But then again, it’s hard to string them out because they won’t be able to do payroll if they don’t pay us.

Mark Marcon – Robert W. Baird

Right.

Mitchell Dauerman

So yes. In terms of looking at ’09, quite frankly, the reason for the wider range on the ’09 recurring revenue is to take some of that into account, from one end being very conservative.

Mark Marcon – Robert W. Baird

Great. And then finally, did you give us the sales force numbers, just in terms of Enterprise versus Workplace? And where they’re at? And what we would anticipate the year-ending?

Mitchell Dauerman

I haven’t, but I will.

Mark Marcon – Robert W. Baird

All right.

Mitchell Dauerman

Enterprise seems fully staffed for our staffing needs for 2009. We’re 26, we have five client-based sales people fully staffed. That’s our goal for 2009 going in. And Workplace, our goal going into 2009 was about 20 full time quota carrying Workplace sales people going into 2009. And those 20 are onboard right now. We’re basically fully staffed for 2009. As everyone knows, we’ve accelerated the Workplace. We’re way ahead of where we thought we would be on staffing.

Mark Marcon – Robert W. Baird

Terrific. Thank you.

Mitchell Dauerman

Thank you.

Operator

And our next question comes from Dan Cummins with Soleil.

Dan CumminsSoleil

Thanks. I just have one final question, maybe. With respect to the customer role, you mentioned – I think you mentioned airlines and financial. But it seems like there’s another category of weakness, those being just small companies having problems financing working capital, and so forth. So I just follow on from the previous question, have you really bedded the customer role such that this guidance really represents a very conservative case based on where you now stand with respect to the visibility of the business model?

Mitchell Dauerman

Sure. Dan, keep in mind that customer on that inter-sourcing is paying on a monthly basis. So that’s a difference between – if we were talking about 2000 when we can only sell license. It was just license. That’s a fair question. Might you see different capital expenditures, but in the case of inter-sourcing, it’s a question of ultimate – UltiPro is a substitute product that produces a higher ROI. So I don’t think – well, we haven’t seen it, especially if you look at the sales production.

Sales production is ahead of where we expected, has strong momentum. So I don’t think we – I don’t think that is affecting our ability to sell. On the license side, yes, it could.

Scott Scherr

Also, our average client, even in Workplace, is over 300 pays. And like we’ve said, it’s running like a little more to 3,000 on the Enterprise side, average, so. And our client base is mostly – this probably averages 1,500 to 3,000, something like that. So I don’t see that.

Dan CumminsSoleil

Okay. I do have one more for Mitch. With respect the overall visibility of the financial model, is there a change that you’re going to implement that perhaps requires a new system or a new layer of analytics, maybe a marked book close month-to-month? This is really a jolt to – for us here just in terms of the visibility of the financial model.

Mitchell Dauerman

Yes. And we understand that. And firstly, I empathize. But the reality is, yes, we’ve learned a lot from what we did. We have always – we have always been working with our implementation team to monitor changes to live dates. The sensitivity to having the best live dates in that database in heightened. So we believe we’re going to get better information. We’ve instituted a process now with any contract that is, what we would call, a large ARR contract. That there would be personal conversations with the people involved to get the best estimated dates, which was what was reflected in this current model.

Within the implementation team, there is heightened visibility to – if live dates are going to change that we get notice – they get noticed beforehand so that they could be proactive. In some cases, a live date changes or is going to change because the customer may not have enough manpower to do a certain function. Now, we will get brought to the top or bubble up sooner. And we’re looking at and say, “Maybe we should throw somebody out there to help them and keep it on track.” So I think all those things are happening. And I think that with the guidance we gave, it took into account, just to be very specific, every account for which, if you will, the scope process has been completed. We took the estimated live dates for those.

For those where scope had not been completed, so there is some – there is some conversation that may go on that during that process might change the forecasted live date, we used our longer time to live period. And for new ARR, we assume that the revenue mix within Enterprise would remain comparable to what we are now seeing, with the higher amount being in larger, more complex. And we’ve scheduled that out accordingly.

I don’t what else that we could do to make our model and guidance that much more visible. I think that – quite frankly, I think the fact that we’ve taken down this year’s guidance by as much as we did should indicate that we’ve taken what you’ve said very much to heart in building our model and trying to create as much visibility, and in trying to take out the volatility.

Dan CumminsSoleil

Okay. Very good. Thank you.

Mitchell Dauerman

Thanks.

Operator

And we have time for one more question. And we’ll go to Brad Whitt with Broadpoint Capital.

Brad Whitt – Broadpoint Capital

Hey, guys. Thanks for taking my questions. Mitch, can you give us any kind of updated guidance around the free cash flow, CapEx, that kind of thing?

Mitchell Dauerman

Sure. Well, we think CapEx will end this year somewhere at – probably around $14.5 million that includes the purchases of source code. Depreciation and amortizations could end somewhere around $9.5 million. Our (inaudible) and our working capital still remains flat. I know you didn’t want all those details, but when you bring it down, I think your free cash flow ends up around $0.55 range, plus or minus, as we talked before. And I think that’s just going to be when you do the math on the new guidance, you’re going to get there.

When you get the 2009, right now, we’re seeing CapEx around $12 million. We’re seeing depreciation, amortization a little bit less than that, say $11 million. Again, we’ll guess working capital will break even. And so, I think we’ll see free cash flow somewhere around non-GAAP net income before taxes, let’s say maybe $0.10 lower. And again, on that basis, we’re assuming that we’re going to keep share count around the $27 million range as we are going to continue our stock buyback program.

Did I answer your question?

Brad Whitt – Broadpoint Capital

Yes. That’s very helpful, very helpful. Let’s see if I have any – one other follow on. I think that’s all I have. Thanks, guys.

Mitchell Dauerman

Okay, Brad. Thank you.

Scott Scherr

Thank you.

Operator

And that concludes the question-and-answer session. Mr. Dauerman, I’d like to turn the conference back to you for any additional or closing remarks.

Mitchell Dauerman

I’d like to turn it to Mr. Scott Scherr.

Scott Scherr

I appreciate you all coming on the call and going through this. I know this hasn’t been easy for you. And it hasn’t been easy for us. I just want to say that there’s a change to our model. I think it’s a short term change. And I think in many ways, it’s very positive about how our business is going. I know no one likes change in the environment we’re in. I think we’re on track to achieve everything we want to achieve. And I think most of you know what we think is great in us. And I think we’re on track to achieve it, so. Thanks for your support. And Mitch and I are here to answer any questions whenever you have them. So goodnight, and again, thanks for being on the call. Bye.

Operator

Ladies and gentlemen, that does conclude today’s conference. Thank you for your participation. You many now disconnect.

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