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Ultimate Software Group (NASDAQ:ULTI)
Q1 2018 Earnings Conference Call
May. 1, 2018 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome to Ultimate's first-quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. Today's conference is being recorded. You are limited to one question and one follow-up question.

Your presenters today will be Mr. Scott Scherr, chief executive officer, president and founder of Ultimate and Mitchell K. Dauerman, executive vice president and chief financial officer. We will begin with comments from Mitchell Dauerman.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Thank you, Justin. Before I begin the normal warning, let me just say that I'm very excited to announce and congratulate Felicia Alvaro for her promotion to chief financial officer and treasurer. She's been at my side for 20 years. From the beginning, she has led our finance team and that included SEC compliance, reporting, forecasting.

And over the years, she's been involved in every aspect of what we do here at Ultimate in the accounting and finance team. She shows incredible clarity in her focus and her ethics. What I think makes her the ideal choice for us is her intimate understanding of Ultimate's strategies and market approach, her strong communication skills, her empathetic leadership style.So I'm proud to turn our financial leadership over to her and to call her my very dear friend. After 22 years as Ultimate's CFO, I am looking forward to continuing my tenure at Ultimate in the investor relations role and working alongside Scott and our other leaders more closely on strategic initiatives.To be crystal clear, I'm not going anywhere.

For those of you who have asked about my health, I am perfectly fine, other than my wife thinks I'm overweight. So before I go into the call, Felicia, congratulations. I couldn't be more happy for you. I know you're genuinely pleased as well and I know that Wall Street will love you even more than me.So now on to the call.

Let's see. Safe harbor. Please be aware that we will be discussing our business outlook and will be making other forward-looking statements regarding our current expectations of future events and the future financial performance of the company. These forward-looking statements are based upon information available to us as of today's date and are subject to risks and uncertainties.

Please review our filings with the SEC for additional information on risk factors that could cause actual results to differ materially from our current expectations. We assume no duty or obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.Unless otherwise noted, our discussion will be on a non-GAAP basis for all cost, gross margins, operating and net income, as well as EPS. The primary differences between GAAP and non-GAAP financial information are non-cash, stock-based compensation, transaction cost related to business combinations and the amortization of acquired intangible assets. Please refer to the reconciliation of our financial information on a GAAP basis to that on a non-GAAP basis, including in the press release published on our website.So I'm going to begin by reviewing our Q1 financial result and then I'll provide guidance for Q2.For the quarter, recurring revenues grew 24.5% to $236.6 million and total revenues grew 21.1% to $276.8 million.

Recurring revenues exceeded our expectations for several reasons, including better than expected seasonal employment from our customer base compared to our modeling assumptions, and earlier than expected go-lives, as well as better than expected annual one-time recurring fees from our strategic partners. The recurring revenue gross margin rate was 74.9%, ahead of our expectations due to the additional revenue. Revenue retention from our cloud customers was approximately 96%. Service revenues were $40.2 million and the services gross margin rate was 1.6%, and it was in line with our expectations.

The total gross margin rate was 64.2%.Our total expenses, which are made up of our cost of revenues and operating expenses were $220.7 million for the quarter and were slightly favorable to our expectations due to the timing of certain expenses. Operating income was $56.1 million and the operating margin was 20.3%, which is ahead of our expectations for the quarter, mostly as a result of the increase in recurring revenues.Our operating margin computed on the basis of expensing the capitalized R&D costs and adding back the related product amortization was 16% and it was ahead of our expectations due to higher recurring revenues. Our non-GAAP income tax rate for the quarter was 28%. Net income was $40.5 million and the related diluted net earnings per share were $1.30.Our cash and marketable securities balance was $147.9 million and reflects a total of $50.3 million used for shares acquired to settle employee tax withholding liabilities associated with their restricted stock that vested.

Operating cash flows for the quarter grew 22.1% to $56.6 million, as compared with $46.3 million in Q1 of 2017. The average daily float balance for our payment services business was approximately $1.5 billion for the quarter.Our capital expenditures for the year to date period were $22.9 million, including capitalized R&D costs of approximately $13.6 million. This compares with 2017's capex of $22.8 million, roughly the same, which included $11.6 million of capitalized R&D costs.Next, I'd like to discuss our financial guidance. We are reaffirming our full-year guidance for 2018.

We expect recurring revenues to grow in excess of 20% and total revenues to grow in excess of 18% as compared with 2017. We expect our operating margins to be in excess of 21% and our as-expensed operating margins to be in excess of 17% for the year.For Q2, we expect recurring revenues to be between $237 million and $239 million and total revenues to be between $267 million and $269 million. As a reminder, services revenues in the second quarter typically step down because Q1 includes revenues from our print services. We expect the operating margin for Q2 to be in excess of 20%.Turning to our upcoming conference schedule, during the next quarter, I will be in San Francisco on May 8 for the SunTrust conference, in New York on June 6 for the R.W.

Baird conference, and in Boston on June 11 for the Stifel conference. On May 15, Scott, Felicia and I will be at the JPMorgan conference in Boston, and in Chicago on June 13 for the William Blair conference. If you're available at those conferences to meet, please let me know.And now, for the 81st and final time, let me turn it over to my partner, Scott Scherr.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Thank you, Mitch, and thank you, everyone, for participating in our call this evening. We had a great start to 2018 with the first quarter. We are on pace to achieve all of our 2018 goals, including reaching $1 billion in revenues, and we laid a solid foundation for our future growth.Recurring revenues came in ahead of our expectations at approximately $237 million, up by 25%, and total revenues were $277 million, up by 21%, both compared with Q1 2017. Our non-GAAP operating margin of greater than 20% also exceeded expectations and the year-over-year customer retention rate was again approximately 96%.Our enterprise team's attach rates for new customers in the quarter were: Onboarding 82%, Time Management and Recruiting, both 64%, and Performance Management 55%.

Some of our new enterprise customers were a distributor of home and commercial building supplies with 11,000 employees that added Onboarding, Time and Comp Management; a management services provider in the healthcare sector with 8,000 employees that added Recruiting, Onboarding, and Time Management; and a healthcare company with 5,500 employees that added Recruiting, Onboarding, Performance Management, Comp Management, Succession Management, and a couple of other new products, Perception and Benefits Prime.Our mid-market strategic team's attach rates were; Onboarding 97%, Time Management 85%, Recruiting 76%, and Performance Management 73%. Some new mid-market customers in the quarter were: a real estate investment and management firm with 2,500 employees that added Recruiting and Time management; a global accounting group with 2,000 employees that added Recruiting, Onboarding, Time Management, Performance Management, Comp Management, Succession, and two of our new products, Learning and Perception; and a public sector accounting firm with 1,500 employees that added Recruiting, Onboarding, Performance, Comp, Succession, and three of our new products, Learning, Perception, and Benefits Prime.Some new strategic customers in the quarter were: a credit union with 500 employees that added all of our key add-on solutions, Recruiting, Onboarding, Time Management, Performance, Comp, Succession, plus two of our new products, Learning and Perception; and a privately held company operating in several industries with 600 employees, who added all of our key add-on solutions, Recruiting, Onboarding, Time, Performance, Comp, and Succession.In nearly all areas of marketing, our metrics were the highest in our history as a company, underscoring the continuing strength of market demand for our solutions. We had 102% increase in social media respondents saying they're looking to buy in 12 months or less. Our website traffic was the highest we have ever had.Our webcast program had a 42% increase in responders looking to buy in 12 months or less.

Online event responders indicating they are looking to buy within 12 months increased 25%. We also had a 17% increase in unsolicited information requests that said they are looking to buy in less than 12 months. We see these proactive requests as one of the strongest indicators of serious interest in our solution.In mid-March, a record of nearly 4,000 HR and business professionals, partners, and industry analysts joined us in Las Vegas for Connections, our annual customer conference. We had the opportunity to thank and honor our customers and we celebrated our people-focused technologies and practices that are transforming the HR community.

The three-day conference offered more than 75 break-out sessions and workshops to help customers enhance their employees' experience with UltiPro.In the conference's opening session, Chief Technology Officer Adam Rogers and Vice President of Products Martin Hartshorne showcased three of Ultimate's new solutions: Xander, UltiPro Workforce Management, and Benefits Prime. Xander is our artificial intelligence platform, which leverages natural language processing and machine learning technology and works within UltiPro Perception, the industry's leading sentiment analysis solution, Xander enables company leaders to identify underlying sentiments in employees' open-ended survey responses, determine themes, and view analytics that informs decision-making.UltiPro Workforce Management, which is made up of two products, UltiPro Time and UltiPro Scheduling, that integrate with UltiPro Time Clocks to create a more convenient, flexible employee experience. Employees have easy access to common functions like mobile app clocking in and out, shift swapping, and requesting PTO while managers have a dashboard for faster scheduling approvals, and smarter planning with key labor metrics and analytics, templates, and libraries. UltiPro Benefits Prime offers a much more modern, easy to use decision support experience for an organization's entire workforce, making it easier than ever to view benefits options, compare plans, and understand the array of available choices.At the conference, we also presented our Annual Innovation Awards, recognizing customers that have demonstrated extraordinary business results or HCM Innovation with UltiPro in the past year.

Among our nine winners were: Dacotah Banks that won in the category of Innovation Evangelist for using insight from UltiPro Perception to unlock organizational performance; Silverado Senior Living that was our Business Impact winner for saving $3 million over 12 months by using real-time, detailed people analytics to drive business decisions.Ultimate announced an agreement with Mercer that allows UltiPro customers to use Mercer Sirota's benchmark data to understand how their own workforce metrics, such as employee satisfaction and employee engagement compared to those of similar businesses. Using UltiPro Perception, our customers can now select from more than 130 questions to capture their own employee's ratings and then view those ratings alongside Mercer | Sirota's benchmark data. Mercer is a global consulting leader and a wholly owned subsidiary of Marsh & McLennan Companies.In April, we held our fifth advisory summit in Fort Lauderdale, an annual meeting we hold in Fort Lauderdale with leading HCM advisors, consultants, and influencers to update them on our product road map and strategic directions. It was our largest group ever, with more than 250 registrants, 33% growth over last year, and representation from more than 100 firms.

Among the attending firms were Deloitte, Tata Consulting, Ernst & Young, KPMG, Mercer, PwC, AON, and Capgemini. We always have many positive comments from attendees. One example is Jennifer Wise of Wise Consulting, who said, "The transparency and information provided by the Ultimate team is always very helpful. It is great to see the road map, hear about customer successes, meet others in the greater Ulti ecosystem, and further understand those capabilities that can be most critical to our clients." This forum continues to facilitate expansion of our partnership ecosystem and increases our opportunities for effective UltiPro consulting, pipeline sharing, and revenue growth.Ultimate received some third-party recognition in the first quarter.

In February, Fortune magazine ranked Ultimate No. 3 on its prestigious list of the 100 Best Companies to Work For in 2018. Also, in February, Ultimate won a Silver Stevie Award for 2018's Best Customer Service Department of the Year, and we were also named to both Canada's 25 Best Workplaces for Inclusion and Canada's 25 Best Workplaces for Women.This month, we were equally proud to be ranked No. 4 on Workforce Magazine's Workforce 100, our highest ranking ever on this list and the highest in our industry.

The Workforce 100 evaluates companies from all over the world in seven HR management areas, and this year's list includes such leading companies as Amazon, Nike, Apple, and Netflix. Also this month, Ultimate was ranked No. 2 on the Best Workplaces in Canada list for 2018 by Great Place to Work. The list is based on employee feedback and in-depth reviews of workplace cultures at hundreds of organizations across Canada.At the close of the first quarter this year, we were 4,324 strong.

We will achieve our fifth championship of becoming $1 billion franchise this year. We continue to grow our infrastructure that we have been working on for more than 24 months to accommodate our objective to achieve $2 billion in revenues in 2022. We now support more than 38 million people records in our Ultimate cloud, and we continue to lead the cloud industry in numbers of customers using a unified HCM with human resources, payroll, talent, comp, and time and labor management. Our customers remain our allies in growth and they are the source of inspiration for our innovations and future directions.This is Mitch's and my 81st and last conference call together.

He made his first investor call as Ultimate's CFO in 1998 when our franchise was valued at $180 million and we had 299 employees. He is stepping down now as CFO from a franchise with a market value of nearly $8 billion, more than 4,300 employees. He is a Hall of Fame CFO, partner, leader, and friend. I thank him for his 22 years in this role and look forward to all the value he will create for us in his new role of focusing on investor relations and strategic initiatives.Felicia Alvaro, our vice president of finance, will succeed him.

In her 20 years at Ultimate, Felicia has been involved in all aspects of Ultimate's finances, including accounting, financial planning and analysis, financial reporting and financial compliance, as well as operations. She began her career with KPMG as a certified public accountant and had 10 years of experience with both public and private companies prior to joining us at Ultimate. Mitch has been grooming her for years. She has been on all 81 investor conference calls we've had as a publicly traded company.

She is ready, she is excited, and we welcome her to her new role as CFO, which officially begins tomorrow.I want to take this time to just thank Mitch, Felicia. I think that this is the way it's supposed to be. Someone's supposed to have a good career. Mitch is not leaving and he will still be here with us, as he said.

Felicia, thank you. I mean, I think it's the way it's supposed to be. Mitch is supposed to groom somebody in the organization. She earned -- you earned this position, Felicia.

So without getting too choked up, let's go to the Q&A.

Questions and Answers:

Operator

Thank you. The first question comes from Michael Nemeroff with Credit Suisse.

Michael Nemeroff -- Credit Suisse -- Analyst

Hi, guys. Thanks for taking my questions. Mitch, I'm glad you're sticking around. Felicia, hearty congratulations and I look forward to working with you, and I'm sure everybody else does as well.

A couple of questions. Time to Lives, has that gotten any better? Did that contribute to the upside in recurring revenue in the quarter? Also, Mitch, I think you have mentioned something about one-time revenues. How much did that contribute to the recurring line this quarter? And then, also, I know you guys typically don't update the guidance as per your normal practice but these results were really strong both on the top-line recurring revenue. Margin came in a couple hundred basis points higher.

And I think Q1 for the last couple of years has been the low point on margin. I just want to manage expectations just so that, Mitch, you're not leaving Felicia with a consensus that may be unachievable. Thanks very much.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Well, Felicia set the guidance, so I'm not leaving her with anything. So let's get started backward. Our guidance for the year was talking about being in excess of, what was it, 20%. So I think we've been trying to set a tone of, let's say, a more conservative-type model, not a beat and raise.

So, I guess, I would say to you and to investors, don't get ahead of it. Q1 was good. I think when we go through a process and we model recurring revenue, there are assumptions we make, whether it's with revenues from strategic partners. In this case, one of the larger ones was from Intuit and our relationship with TurboTax.Secondly, we do an estimate, you call it "time to live" but when somebody can go live, and I would say, yes, they did go live a little bit sooner but it's a marginal improvement.

Directionally, it's where we expect it to go and where the activation team's focused on. And the other component's always around employment. Some of you may remember a few years ago when seasonal employment dropped down much more than we expected and we had a miss.So we're always trying to gauge where do we think that drop-off from Q4 to Q1 is going to be. It happened to come in better but all you can do is try to make different assumptions.

And I would say in this case, collectively, they all came in better than we expected. That resulted in the outperformance. Some of it, as you could tell, probably if you look at your numbers for Q2 for recurring, led to guidance a little bit higher than you were. And again, we would just caution you, we've got a plan for the year.

It's in excess of ... let's play it out the rest of the year.

Michael Nemeroff -- Credit Suisse -- Analyst

That's helpful. Thanks very much.

Operator

And next question comes from Justin Furby with William Blair and Company.

Justin Furby -- William Blair & Company -- Analyst

Thanks, guys, and I'll echo my congrats to you Mitchell on a terrific run and Felicia congrats to you. I look forward to peppering you with multipart questions. Two questions. First, actually both of them for Scott.

The new Workforce Management product, just curious, I know it's early but what types of customers are you selling it into? And I guess any feedback from the sales organization would be helpful here in the first 90 days or so in the field. And I'd love to hear sort of your thoughts on the impact competitively with that product and market.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Well, all strategic deals are that, all mid-market deals are that, and probably 50% of the enterprise deals are that. So every deal I said on the attach rates, which Time Management in the quarter was 85% for the mid-market and strategic, it's all that. So I think it's an upgrade to the product we had and it's been well-received. So I think the attach rates did go up and I think they'll stay up.

Justin Furby -- William Blair & Company -- Analyst

Got it. That's helpful. And then, I guess the second one for you, Scott, just the sales hiring process. Maybe you gave it but I missed it, but can you give an update on where you are with sales heads and where you expect to grow the most in terms of the different components: enterprise, mid-market, strategic, over the next few years? Thanks.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Around 130 going to 135, most of the growth in heads were in mid-market and strategic. We put a strategic team in Canada, which we didn't have last year. Also, Justin, can I ask you a question?

Justin Furby -- William Blair & Company -- Analyst

Yes, please.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Yes. Someone just sent me a text, did I force Mitch out? So I want to make it clear that it was 100% his call. He could have stayed here forever. This was his call 100%.

And like I said, he's been grooming Felicia for a long time. So Mitch had a life plan but like you said, we're still staying together and I'll see you in Chicago with Mitch.

Justin Furby -- William Blair & Company -- Analyst

Sounds good. I'll look forward to it. Thanks, guys.

Operator

And next will be Richard Baldry with Roth Capital.

Richard Baldry -- Roth Capital -- Analyst

Thanks. I'm a little surprised someone has your text number that would ask a question like that.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

That's bad. Right, Rich?

Richard Baldry -- Roth Capital -- Analyst

I only lasted 60 quarters but it was a 50x stock return. So I'll say thanks to Mitch as well for [Inaudible]. And just a quick easy one maybe. Given the market cap you put together now and the strategic initiative as part of Mitch's new title, sort of curious if you think that there are more opportunities you want to be looking at, putting someone with his background in the company into a role like that might argue that there's something more you're starting to see at the scale that could be interesting.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Yes, very smart of you, I would say, but, yes, I believe we have $2 billion on our sights but I think we're looking now at $3 billion and what it all takes. So I think we've got to take opportunities of the opportunities that are out there to make us stronger on the product side and the technology side. And yes, we're stepping it up there. So you're right.

Richard Baldry -- Roth Capital -- Analyst

All right. I'll leave it there. Thanks a lot.

Operator

And next will be Brad Reback with Stifel.

Brad Reback -- Stifel Financial Corp. -- Analyst

Great. Thanks very much. So on that comment that you're stepping it up on the product side, is that predominantly organic or would you accelerate inorganic?

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Both. No, it's always been both. We've done five acquisitions in our history. They were all either product-related or technology-related while we were building our own products as well.

So I don't think anything will change. I think it's just that we're going to keep doing it, and I think because of our size, we could become a little more aggressive in it.

Brad Reback -- Stifel Financial Corp. -- Analyst

Got it. And just a quick follow-up on related, given the success Patrick Reed had and your sponsorship with him, do you see a good uptake in inbounds in April?

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Well, I thought you were going to say how great a golf picker I am in choosing Patrick Reed but, yes, there was huge inbounds. It was all over the place. It was going crazy when that was going on. So, yes, obviously, they give you all the statistics of how much you see and what's it actually worth, I don't want to tell.

I hope Patrick's not listening on this call but it's worth well over 100 times what we're paying him.

Brad Reback -- Stifel Financial Corp. -- Analyst

Well, I hope the price doesn't go up too much on renewal.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

I hope not either. We have a two-year deal, so this is the first year.

Brad Reback -- Stifel Financial Corp. -- Analyst

Thanks very much.

Operator

And our next question comes from Siti Panigrahi with Wells Fargo.

Siti Panigrahi -- Wells Fargo Securities -- Analyst

Mitch and Felicia, I also extend my congratulation on both of your transitions. Mitch, great working with you. So I have a question. Usually, December, the last two weeks of December is always a busy week.

So I'm wondering if you could give some color about the activity in December that you saw versus prior years. And also, what are you seeing in the demand environment, both in mid-market and enterprise? And I have a follow-up.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

December was Q4 so that we covered that in our February conference call. As far as the activity, the pipelines are as strong as they've ever been. We've had very little churn over in sales. We're almost staffed to where we want to be in the year.

Well, this year so far we've had all our sales meeting and we had what we call the stake tours, which we had in April that I've been in front of every single salesperson this month. We've also had all our sales clubs. So I think there's huge energy, confidence. I think we're in a really good place and we need to execute and take advantage of it.

Siti Panigrahi -- Wells Fargo Securities -- Analyst

And I was trying to find more on the booking side in December that [Inaudible] back in the second half. Can you hear me?

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Yes.

Siti Panigrahi -- Wells Fargo Securities -- Analyst

I was trying to find more on that but on the margin side, it was a nice [Inaudible].[Crosstalk]

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Sorry, Siti. We had a good fourth quarter as was evidenced by our call in February.

Siti Panigrahi -- Wells Fargo Securities -- Analyst

OK. On the margin side, it was a nice beat, 200 bps than what you guided but you kept your margin for FY 2018 same. So I'm wondering how you're seeing your expenses, any investment. How should we think about that for the remaining quarters?

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Yes, Siti, I think it did come in better. Some of it had to do with some timing differences in terms of when we're going to spend some items. Obviously, we had better-than-expected recurring. Our operating margin is in excess of, so it kind of depends where it all falls out at the end of the year, how much in excess of that 21% will be.

I think like we always do, we're looking at building the company for the long-term. So we would make the right decisions that would help us: one, meet our promises to Wall Street; and two, invest in our future. Like Scott said before, it's not just getting to $2 billion. It's going past $2 billion to $3 billion.

So I think that's the way we've been as long as we've been here. So we'll continue to do that.

Siti Panigrahi -- Wells Fargo Securities -- Analyst

Great. Thank you.

Operator

And next will be Mark Murphy with J.P.Morgan.

Mark Murphy -- J.P.Morgan -- Analyst

Thank you, Mitch. Is there any chance you could continue to dial in for the earnings call just so that we can keep saying it's your 83rd or 84th earnings call together with Scott, maybe get to 100?

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

No. We've built a throne in my office and he's just going to sit in it on every call.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

But Felicia also gets to tag on. This is her 81st too. So, the next one is her 82nd. She hasn't even started one, Mark.

Mark Murphy -- J.P.Morgan -- Analyst

All right. Well, we'll have that image in our mind of you sitting there on the throne. I like that. So, Scott, I actually wanted to ask you, what is your view on real-time or continuous payroll capabilities? Because we had heard some commentary about a near-term capability to do real-time payroll calculations based on timecard changes.

And I guess I'm just curious is that accurate. And is that something that's important to many of your customers?

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Mark, it's Mitch. That is something the development team has been tracking and working on. So it is something that is in the works for us.

Mark Murphy -- J.P.Morgan -- Analyst

Is that coming out within the next quarter or two?

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

I don't know the timing, to be honest with you.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

I don't, either.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

We can check with Adam and Martin and let you know.

Mark Murphy -- J.P.Morgan -- Analyst

OK. So the other question I wanted to ask was when we look at the sequential growth in recurring revenue, it was over 10% sequentially. And that is the best growth since Q1 of 2007. We have to go back a little over a decade.

And I guess I'm curious, to what extent do you think that's being driven by, I guess, any discrete large go-live that might have happened? And just more generally, kind of going back to Mike Nemeroff's question, how much faster is the rate of go-lives versus last summer? Is it a difference of a couple days, a couple weeks?

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

We don't measure things in terms of days. I appreciate the question, though, with that perspective. I would say, yes, it has to be slightly better than originally expected but it's marginal. I think what happened in Q1 was just a combination of all things going in the right direction, so in a sense, we did pull a little bit of stuff forward.

We did set some better performance from our relationships with our strategic partners. I know some of the people on the call cover into it and we have a great relationship with them and TurboTax. And that's been beneficial. So I think from a modeling perspective, if all the things that we assume, some of which normally don't come in right on, everything did but if the issue you're getting to is people's concern about Time to Live, I would say categorically it is not extending.

It is, if anything, shrinking but remember, even if it shrunk a month, it's a one-time thing. And, as we talked about on several calls, it's a function of the customer and their needs and their timing and their setup and how many products they bought. And we sell a lot more products and we're selling a lot larger customers. So you have to put those dynamics into play, and we can only control a portion of the activation.

It is a cooperative process. I think any vendor like ours would say, it's cooperative with the customer but our activation team is focused on it. They continue to enhance tools. They're continuing to take on as much as they can and control that but I think it's all good.

Mark Murphy -- J.P.Morgan -- Analyst

Thank you for clarifying and congrats on a really historic run as CFO.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

I'm still going to be around having dinner with you, Mark. You're not getting rid of me that fast.

Mark Murphy -- J.P.Morgan -- Analyst

Yes. We'll have dinner in a couple of weeks and you can sit on the throne.

Operator

And next will be Scott Berg with Needham.

Scott Berg -- Needham & Company -- Analyst

Hey, Scott and Mitch, congrats on a really strong quarter there. My original question was on Patrick Reed but I can't ask that I guess. We'll save that for another day. I guess, Scott, the one question I wanted to ask if we picked up in our checks in the quarter and sometimes it's splitting hairs but that your win rates in, I forget what the name of the segment is these days, they keep changing.

I think it's your mid-market. Customers with maybe 500 to 1,500 employees seem to have improved a little bit over the last couple, three quarters. Now it might be a small amount. Maybe it's something more than that but just wanted to hear your thoughts on that because you've always been strong in there but it was, we heard it, several places.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

No, I think I look at strategic and mid-market as in one organization. Strategic people sell underneath 500 employees and some mid-market people sell 500 to 1,500 and some sell 500 to 2,500, I don't know. They've been strong for so long, that whole organization, so the tenure keeps building. We've been growing it.

This year in the mid-market, counting both, 500 to 1,500 and 500 to 2,500, we added 12 people, quality people, obviously. We wouldn't add in people who weren't quality but 12 people.

And then, we added 12? No, excuse me. We added six and then we added six and five, 11 strategic people, putting five in Canada. We didn't have a strategic team in Canada, so we added in Canada. So all together, it was 12.

So 17 people in the mid-market and the strategic team. So maybe more people out there. We tend to train them really good, really fast, so maybe that had something to do with what you heard, more people on the street. I mean, like I said, we were at sales meet.

So I was with them three times since the beginning of the year, at a sales meeting, the club, and then what we call the state tours. And we're off to a really good start.

Scott Berg -- Needham & Company -- Analyst

Fantastic. And Mitch, it's been fun. I look forward to more conversations but I thought your next gig was going to be as a CTO, not an IR head. T standing for ticket support.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

That is my principal job.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

We did not take that away from him that responsibility.

Scott Berg -- Needham & Company -- Analyst

Fantastic. Thanks for taking my questions, guys.

Operator

And next will be Brian Peterson with Raymond James.

Brian Peterson -- Raymond James -- Analyst

Thanks, guys, for taking the question. Congrats on the quarter. I was actually going to ask you about Patrick Reed, too but now all I can think about is Game of Thrones but anyway [Inaudible]. So, on the implementations, I know when we talked about this issue last in 2017, there were a couple of customer segments that saw some of the extended implementation cycles.

I'm just curious, has there been any commonality in the improvement? And just specifically on some of the large wins that you referenced in the fourth-quarter call, any changes to those implementation assumptions? Thanks, guys.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

No, I would say that the larger deals which drove the extension of that time-to-live came in, went live as we expected. The time-to-live on something like that has stayed relatively the same. I think when you get probably to the mid-market, the smaller deals because remember, we talked about those larger ones had extended from six to seven months, and we thought that would pull back in. So we're seeing a little bit of improvement there but, again, I just don't want people to overreact to that.

It is an improvement. Directional, it's good. It's factored into our guidance.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

But the enterprise got better. They're the bigger deals, so they got better. Mid-market stayed the same to a little better but enterprise made some real progress there.

Brian Peterson -- Raymond James -- Analyst

Good color. Thanks, guys.

Operator

And next will be Alex Zukin with Piper Jaffray.

Alex Zukin -- Piper Jaffray -- Analyst

Hey, guys. I echo all the previous congratulations. Maybe just a couple of for me. So, Scott, just given the strength that you're talking about in the quarter, could you maybe comment on just the bookings trends that you saw versus your plan? And specifically, maybe where they were better or worse versus enterprise versus strategic? And then maybe for Mitch on the sales and marketing expense in the quarter as a percentage of revenue, it's a little bit lower than we've seen it historically.

It could be because of 606 but just wanted to get some clarity on that, and how we should think about free cash flow margins for the balance of this year?

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Yes, I mean, I would just say, Q1 across the board met my expectations. It always starts the year and it's always our lowest quarter in bookings. We don't give the numbers but it's always our lowest quarter because obviously at the year-end, we have our sales meetings, we have our clubs and we have Connections, and our state tour. So but it was in line with what I thought, sets us up good for the year and we have a lot of momentum going into Q2, and hopefully, we execute and build Q2, Q3 right up to Q4.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

And, Alex, the percentage is lower as you point out because of 606, and the timing of when we have some advertising and marketing spend.

Alex Zukin -- Piper Jaffray -- Analyst

Got it. And just on free cash flow.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Yes, sorry. Yes, so if I had to I guess, I'd say free cash flow probably is somewhere in the 12% to 13% on margin. It's lower than last year. If you remember, last year came in very strong at the end of the year.

And then, when we talked about this year's capex, we are expecting to have to do some leasehold improvement spending that we didn't do the year prior year commensurate with our growth and planning for the future. So that's how we're kind of thinking, probably goes down a little bit for that reason but then, as we don't spend it the year after that, it should kind of return back up in that trajectory.

Alex Zukin -- Piper Jaffray -- Analyst

Got it. And guys, if I could just squeeze one more in, another just following up on the earlier question about the one-time recurring benefit from maybe the Intuit partnership specifically. Just any sense in just helping us quantify that a little bit more granularly, given the sequential guide for recurring revenue is obviously just different than we've seen before?

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Yes, Alex, I mean we're not going to give you all the granular details of the components of recurring. I don't think other companies do that but I would say, there was some of that but the amount that we continue on based on the assumptions we think are reasonable are factored into the Q2 return revenue guidance. I don't know your specific numbers but I'm guessing it's a couple of million dollars ahead of probably where the Street was. So maybe that's a way to look at it.

Again, trying to retain a certain degree of conservatism in the modeling.

Alex Zukin -- Piper Jaffray -- Analyst

Got it. Thank you, guys.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

OK.

Operator

And our next question comes from Kirk Materne with Evercore ISI.

Kirk Materne -- Evercore ISI -- Analyst

Thanks very much and I'll echo everyone else's congrats to Felicia and Mitch on a really nice run. Maybe just two quick ones. Scott, could you just give us a little bit of an update on the Microsoft partnership? And how that's going from your vantage point? And then, Mitch, I know there's a lot of moving parts on operating margins right now with 606 but if you were to look at the business on a little bit more of an apples-to-apples basis versus last year, are we still seeing some operational leverage in the numbers right now? Thanks.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

On Microsoft, our people are establishing relationships with their resellers. It's a little different than the NetSuite deal because we're not dealing with a direct sales force. We're dealing with resellers. So they've been establishing those relationships.

I believe on the development side, they're working with them on integrations between our payroll and their general ledger.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Yes, and as far as the operating margin, obviously our goal is to continue to get some natural operating margin leverage out of the business. I think we talked about whether it's 50 basis points, 40 basis points, 30 basis points but directionally that way. 606 does help us probably close to a couple-hundred basis points now that we've finalized the numbers and our estimates of that. And I just would remind you, if you're just looking at the numbers, some of the upside that was in Q4 of last year we did not repeat into Q4 of this year.

So that should be taken into account if you're trying to triangulate what I just said from 2017 to 2018.

Kirk Materne -- Evercore ISI -- Analyst

Great. Thank you very much.

Operator

And next will be Jesse Hulsing with Goldman Sachs.

Jesse Hulsing -- Goldman Sachs -- Analyst

Yes. Thanks, guys. And Mitch, you're going to miss our quarterly sparring sessions. Scott, it sounds like, just reading between the lines a little bit with Mitch's new role and just to focus on broadening product and portfolio that you're getting, you've good opportunity to get more aggressive.

I'm wondering if you've given more thought to expanding internationally and if that's something that you're looking at as well.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Yes. We have. Yes.

Jesse Hulsing -- Goldman Sachs -- Analyst

In Europe or Australia, or what's the thought process there?

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Europe. We're looking into Europe right now.

Jesse Hulsing -- Goldman Sachs -- Analyst

Any thoughts on the timeline for something like that over the next couple of years, over the next five years? What are you thinking there?

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

No, no. I think within the next year, hopefully. We'll see how it goes but hopefully within the next year.

Jesse Hulsing -- Goldman Sachs -- Analyst

Interesting. That's good to know. And then, with regards to, I guess, bookings mix...

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Just remember, Perception, which we can sell stand-alone, gives us the opportunity to go to places like that and sell stand-alone. There is new Performance product, which we're working on, will give us the opportunity to go over there. So we'll have an opportunity with the product to go over there. And then, obviously, once you have the product, then you could look at other things.

Jesse Hulsing -- Goldman Sachs -- Analyst

Would you expand internationally with payroll eventually as well or --

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

No.

Jesse Hulsing -- Goldman Sachs -- Analyst

No, OK. So just HCM and tools and that sort of thing?

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Yes.

Jesse Hulsing -- Goldman Sachs -- Analyst

Interesting. OK. And then, in the quarter, and I guess when you look at the year, any change on how you think, I guess, the bookings mix will look between your different segments: strategic, mid-market, and enterprise?

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Where are we? I'll tell you, one second. I'd say about 60% mid-market and strategic and 40% enterprise.

Jesse Hulsing -- Goldman Sachs -- Analyst

Got you. That's very helpful. Thanks, guys.

Operator

And next will be Ross MacMillan with RBC Capital Markets.

Ross MacMillan -- RBC Capital Markets -- Analyst

Thanks so much. And, Mitch, you will be missed from wearing the CFO hat but congratulations to you and to Felicia. I don't want to belabor the Q1, Q2 sort of seasonality but maybe on those one-time impacts. So I'm just curious as to why those were bigger this year.

I think the Intuit relationship goes back five or six years. Was there any particular reason why you think those were stronger? And then, on the employment side, when you have that trend rate that's better, let's say, in Q1 as it was this year, do you sort of extrapolate off that? Or how does it actually sort of flow into the model when you think about the employment levels of your customers? Thanks.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Yes. I mean, I think when you look at employment, I mean, look, in the scheme of things, it's a very small amount in terms of percentage growth or percentage dollars. When you're modeling, you're trying to look at past performance. You're not trying to outguess yourself.

So I would tell you that, Q1 did better on the employment, we probably tempered it a little bit in Q2, not trying to get too far ahead of ourselves as well but in the scheme of things, while it's great that we're ahead by 6 1/2 or so million dollars in recurring, we're talking about $1 billion company. So there are many factors that come into play.

Ross MacMillan -- RBC Capital Markets -- Analyst

Yes. And on the one-time, was there anything, in particular, you'd call out as to why that was stronger? Is it also employment-related or --

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

No, Ross, I think it was just there was a combination of assumptions that go into recurring that. Again, it does not just go live of new customers. It's additional products. It's employment growth.

It's timing of closing of acquisitions. It's float. It's price increase. There are so many factors but what Felicia and her team have done for many years is try to come up with different ways to look at those components to try to come up with something that we would think is reasonable.

And I would just say this time, all those items came in better but I don't know that we're in a position to say why each one came in better. Obviously, the Intuit TurboTax did and that's a one-time, that's a fact but that will recur next year but the other items, again, on employment seasonality, your guess probably as good as mine as to what's going to happen in Q2. So we make the best estimates we can.

Ross MacMillan -- RBC Capital Markets -- Analyst

Understood. That's helpful. Maybe, Mitch, just one more. The question was asked on free cash flow margin earlier and you obviously have some higher capex.

I wondered if you could just comment on cash flow from operations margin this year, maybe to sort of put a fine point on that.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Cash flow from operations, I think we were looking in the low 20% range as well impacted by the leasehold improvements. No, that wouldn't be leasehold improvements. Low 20%.

Ross MacMillan -- RBC Capital Markets -- Analyst

Low-20s? OK. Perfect. Thanks again and congrats on the change. Appreciated working with you and look forward to working with you going forward.

Thanks.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Yes, don't forget, I'm still around.

Ross MacMillan -- RBC Capital Markets -- Analyst

Agreed.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

He's not going anywhere.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Yes, you guys are killing me off. I'm still here.

Ross MacMillan -- RBC Capital Markets -- Analyst

Not at all.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Seriously, you're killing me now.

Operator

And our next question comes from Abhey Lamba with Mizuho Securities.

Abhey Lamba -- Mizuho Securities -- Analyst

Yes. Thank you, and congrats, Mitch and Felicia. I know, Mitch, you're going to be around, so we're going to get time to chat more but, Scott, could you comment on the pricing environment that you're seeing out there for the upper mid-market to lower enterprise deals? Any change in the competitive environment that's impacting pricing in that space? And, Mitch, can you give us some idea what does your new role involve, especially with regards to strategic initiatives? What type of initiatives would you be leading?

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

On the pricing, our pricing, we get a per-employee-per-month that we get in the quarter. And I really don't see anything different from prior quarters on the deals we sold. On Mitch, there's a couple we're looking at right now, one of them Mitch is already involved in and he'll be involved in many more going forward. So we don't want to talk about who that is but he's involved in one now and he'll be involved in many more moving forward.

Abhey Lamba -- Mizuho Securities -- Analyst

Thank you.

Operator

And next will be Steve Koenig with Wedbush Securities.

Steve Koenig -- Wedbush Securities -- Analyst

Hi. Thanks for taking my question. So I'll echo the congratulations to Felicia. And good to hear, Mitch, that you aren't trying to lose us.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Thanks, Steve.

Steve Koenig -- Wedbush Securities -- Analyst

So I just want to ask you guys about the platform, maybe can you give us an update on how that's coming? And then, financial impact, should we expect capitalized software to remain, I think, it's around the $45 million level this year? Is that about what we should expect until the project concludes?

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Well, I think as far as the capex stuff, I think we're around that $45 million, probably somewhere around. It's too early to say for sure but maybe around that same range next year and then dipping down. And I think we've said before, we know there's always going to be the amount of software that has to be capitalized for SaaS-developed products. And we're trying to kind of figure out when you look long term, is there a metric, a percentage that we could start modeling off of but it's something that Felicia has been working very closely with.

Adam on and his team and we've been doing that. So it's something we're focused on. And as far as the products, they're coming along on schedule.

Steve Koenig -- Wedbush Securities -- Analyst

Fantastic, great. Well, thanks again everyone and congrats to all of you and nice working with you, Mitch. We'll talk to you soon, I'm sure.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Thanks, Steve.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Thank you.

Operator

And our next question comes from Mark Marcon with R.W. Baird.

Mark Marcon -- Robert W. Baird & Company -- Analyst

I'd like to add my congratulations. Mitch, it's been just an absolute pleasure working with you over the years and looks forward to continuing to work with you, and Felicia congratulations. Scott, I was wondering if you could talk a little bit about if you're seeing any sort of difference in terms of the source of new client wins if that seems to be broadening out, both on the enterprise as well as on the strategic side.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

I don't really see anything different. We're a horizontal product line. I think the only places we don't really go are -- we really don't go into government, but anyone else is really a prospect. And I think the only thing I'd say with Perception, now we can go into deals that we might not have had an opportunity to get because we might not be looking at payroll but on that product, it just seems like we can get into some really, really large companies with that, get a foot in the door, and who knows what happens in the future.

So I guess to answer your question, now I'm thinking about it, I think perception allows us to get into some very high-end deals that we couldn't have got into in the past. That's a good thing for us.

Mark Marcon -- Robert W. Baird & Company -- Analyst

That is. How much is that adding? Or when you take a look at, like, this last quarter, when you price that by itself, how do you price it? How should we think about it? What's it adding incrementally? And then just to go back to --

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

We're not going to give our pricing but I'll say we've already sold them in a very short time. I think we're over 300 customers that we sold on it.

Mark Marcon -- Robert W. Baird & Company -- Analyst

Including some big ones?

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Yes. And a lot of big ones in the pipeline. So, I think it won't be that material on the revenue side as we grow but it will be more material on getting us into doors that we haven't been in. And maybe getting deals that maybe we didn't have an opportunity to get in the past.

Operator

And that does conclude the question-and-answer session. I'll now turn the conference back over to Scott Scherr for any additional or closing remarks.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

I think I should say something but I'm not sure what I should say. So, Mitch, do you want to say something now?

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Yes, I've never ended a call, so I'll kind of ramble for one second. First off, I do want to thank Scott for the trust he had in me 22 years ago when I had no idea what a CFO was. And he gave me the opportunity, and here I am. Respect and honor.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Right back at you.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

I'm absolutely privileged and humbled to have served as a CFO for all of our UltiPeeps, their families, for our customers, for our prospects, and for all of you on Wall Street. I do want to say there is no way I could have done what I did without my team. Many of you know that I'm able to travel as much and do the IR work because I have such a strong team behind me. And they are exceptional, and they will be exceptional for Felicia.

I'm excited about Felicia. She's going to be amazing. She is amazing, and you guys will get to know her. And before kind of signing off, for me, I want to acknowledge the other person in the room who's been here for 81 quarters, which is Linda Miller.

Some of you who've been around that long like Baldry knows her. She was our head of marketing. She's been with us forever. She makes Scott and I sound really good.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Really good.

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Corrects our New Jersey and New York grammar, so we don't sound like bums but, Linda, without you, doing this wouldn't have been the same. And so I want to thank you. And so for the rest of you, I wasn't forced out. It was my choice.

I'll be on the road. I'll be in San Francisco on Tuesday. Kind of the same old, same old. And thank you, everyone.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

And I think we should probably say, "Go Yankees," right?

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Go Yankees.

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

See you around, guys. Bye.

Operator

[Operator signoff]

Duration: 61 minutes

Call Participants:

Mitchell K. Dauerman -- Chief Financial Officer and Treasurer

Scott S. Scherr -- Chairman, President, and Chief Executive Officer

Michael Nemeroff -- Credit Suisse -- Analyst

Justin Furby -- William Blair & Company -- Analyst

Richard Baldry -- Roth Capital -- Analyst

Brad Reback -- Stifel Financial Corp. -- Analyst

Siti Panigrahi -- Wells Fargo Securities -- Analyst

Mark Murphy -- J.P.Morgan -- Analyst

Scott Berg -- Needham & Company -- Analyst

Brian Peterson -- Raymond James -- Analyst

Alex Zukin -- Piper Jaffray -- Analyst

Kirk Materne -- Evercore ISI -- Analyst

Jesse Hulsing -- Goldman Sachs -- Analyst

Ross MacMillan -- RBC Capital Markets -- Analyst

Abhey Lamba -- Mizuho Securities -- Analyst

Steve Koenig -- Wedbush Securities -- Analyst

Mark Marcon -- Robert W. Baird & Company -- Analyst

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