Ultimate Software Group (ULTI) Q2 2018 Earnings Conference Call Transcript

Ultimate Software Group (ULTI)
Q2 2018 Earnings Conference Call
Jul. 31, 2018 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello and welcome to Ultimate's second-quarter financial results 2018 conference call. At this time, all participants are in a listen-only mode. Today's conference is being recorded. Your presenters today will be Mr. Scott Scherr, chief executive officer, president, and founder of Ultimate, and Felicia Alvaro, executive vice president and chief financial officer.

We'll begin with Felicia. Please go ahead.

Felicia Alvaro -- Chief Financial Officer

Thank you, Kellyanne. 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 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 risk 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 margin, 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 costs 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 of on a non-GAAP basis included in the press release published on our website.

Before I discuss our Q2 financial results and our guidance for the third quarter of 2018, I will discuss our recently completed acquisition, which is expected to further expand our presence in international markets and further enhance our overall value proposition.

Last week, we acquired PeopleDoc, a pioneer in global HR service delivery, which is based in Paris, France, and has more than 1,000 customers with users in 180 countries. The addition of the PeopleDoc global HR service delivery platform will further Ultimate's mission to improve the employee experience by offering new, person-centric features, such as online employee help center, HR case management, and employee file management.

PeopleDoc will continue operating globally as a wholly owned subsidiary of Ultimate, selling and supporting cloud-based HR service delivery solutions that integrate with multiple HCM platforms to organizations based in North America and Europe. In addition, beginning in January 2019, Ultimate customers will have the option to select HR service delivery features as part of the unified UltiPro HCM Suite.

From the financial side, we acquired PeopleDoc for approximately $300 million, of which approximately $75 million we paid in cash upon closing last Friday and $175 million was paid in stock, which was registered with a Form S-3 filed just before this call. In July 2019, we will pay the balance of approximately $50 million in cash. While the acquisition increases our PPM opportunity for the future, PeopleDoc's existing clients do not add meaningful revenue to 2018.

Also, as expected, it comes with some initial cost burden to us. As I will discuss later, we are revising our full-year guidance to reflect the impact of the PeopleDoc acquisition as well as our better than expected year-to-date results. The financial guidance being provided for Q3 includes the impact of two months of expected financial results from PeopleDoc, and for the full year guidance, it includes five months for PeopleDoc. We expect that the PeopleDoc acquisition will be dilutive to our operating results initially and will become accretive to our operating results in 2020.

For the quarter, recurring revenues grew by 22.7% to $239.5 million and total revenues grew 20.7% to $271.2 million. Recurring revenues were slightly better than we expected, mostly due to some deals that went live earlier than predicted and some modeling assumptions around employment. The recurring revenue gross margin was 73.8% which was in line with our expectations. Revenue retention from our cloud customers was approximately 96%.

Total revenues of $271.2 million were slightly above our expectations, mostly due to the increase for recurring revenues.

The total gross margin rate was 64.5%, which was also slightly better than we expected. Our total expenses, which are made up of our cost of revenues and operating expenses, were $215 million for the quarter and were in line with our expectations. Operating income was $56.2 million and the operating margin was 20.7%, which was ahead of our expectations for the quarter, mostly as a result of the increase in total revenues.

Our operating margin computed on the basis of expensing the capitalized R&D cost with the related product amortization added back was 17% and was also ahead of our expectations due to higher total revenues. Our non-GAAP income tax rate for the quarter was 28%. Net income was $40.9 million and the related diluted net earnings per share were $1.32.

Turning to the balance sheet. Our cash and marketable securities balance was $188.1 million and reflects a total of $51.8 million used for shares acquired to settle employees' tax withholding liabilities associated with their restricted stock that vested. Operating cash flows for the year-to-date period grew 32% to $118.1 million, as compared with $89.5 million for the same period of last year.

Free cash flows of $77 million for the year-to-date period grew 68% as compared with $46 million for the same period of 2017. Our free cash flow margin was 14.1% for the six-month period through Q2 2018, as compared with 10.1% for last year, same period. As a reminder, we bill on a quarterly basis as opposed to annually. If we billed on the more typical annual basis, we believe our free cash flow margin would be between 10 percentage points and 15 percentage points higher.

The average daily float balance for our payment services business was approximately $1.4 billion for the six-month period. Our capital expenditures for the six-month period were $41.1 million, including capitalized R&D costs of approximately $25.6 million. This compares with 2017 year-to-date capex of $43.5 million, which included $24.2 million of capitalized R&D cost.

Next, I'd like to discuss our financial guidance. For Q3, including the impact of the PeopleDoc acquisition that we just closed last Friday which represents two months in the third-quarter guidance, we expect recurring revenues to be approximately $250 million to $252 million and total revenues to be approximately $286 million to $288 million. We expect the operating margin to be approximately 20%. We are revising our full-year guidance for 2018 to include the impact of the PeopleDoc acquisition and our better than expected year-to-date results.

We expect recurring revenues to grow by approximately 23% and total revenues to grow by approximately 21% as compared with 2017. We expect our operating margins to be approximately 21% and our as expensed operating margins to be approximately 17% for the year.

Turning to our upcoming conference schedule. During the next quarter, Mitch will be in Dana Point, California, on September 5 for the Piper Jaffray's Technology Select Conference and in Las Vegas on September 9 for the Deutsche Bank Technology Conference. If you are available at those conferences to meet, please let Mitch know.

Now, I'll turn the call over to Scott.

Scott Scherr -- Chief Executive Officer and President

Thank you, Felicia, and welcome to your new role as CFO. Thank you, everyone, for participating in our call this evening. Our second-quarter results were consistent with our plan and we continue to be on pace to achieve all our 2018 goals, including surpassing $1 billion in total annual revenues for the first time this year.

Recurring revenues came in on the positive side of our expectations at $240 million, up by 23%, and total revenues were $271 million, up by 21%, both compared with Q2 2017. Our non-GAAP operating margin was in line with the expectations at 20.7% and our year-over-year customer retention rate was approximately 96%.

Last week, I attended our midyear sales meetings and everyone was extremely excited about their achievements and the momentum they have created. Both our enterprise and mid-market strategic teams had record quarters. Our pipelines are stronger than they've ever have been and we have long-tenured, very knowledgeable salespeople closing our new business.

Starting with our enterprise team, they showed their strength in Q2 2018 as they continued their upmarket focus. The average size of our new enterprise clients in Q2 was the highest we have ever experienced in our history for a quarter.

Turning to attach rates for enterprise customers in the second quarter. Onboarding, Time Management, and Performance all came in at 67%. Recruiting was 56%. Some of our new enterprise customers were a high-profile national restaurant chain with 45,000 employees that added Time Management; a 900-store retailer with 27,000 employees that added Onboarding, Performance, Comp, Succession plus three of our newer solutions, Learning, Perception, and Benefits Prime; a North American staffing firm with 23,000 employees; another staffing firm with 11,000 employees that added all of our key add-on solutions, Recruiting, Onboarding, Time, Scheduling, as well as Performance, Comp, and Succession; a healthcare organization with 10,000 employees that also added all of our key add-ons, Recruiting, Onboarding, Time, Performance, Comp, Succession, and Benefits Prime.

Our mid-market strategic teams attach rates were: Onboarding, 89%; Time Management, 85%; Recruiting, 68%; and Performance Management, 68%. Some new mid-market customers were a recreation company with 2,800 employees that added Recruiting, Onboarding, and Time; a restaurant chain with 2,800 employees; and 60 steakhouses that added Onboarding and Learning; a Canada-based optometrist firm with 2,500 employees that added Recruiting, Onboarding, Time, Scheduling, Performance, and Succession; and a services and consulting firm for the legal industry with 2,100 employees that added Time Management.

Some new strategic customers in the quarter were an automotive service provider with 700 employees that added all of our key add-on solutions, Recruiting, Onboarding, Time, Performance, Comp, Succession, and Learning; and a healthcare organization with 500 employees that added Recruiting, Onboarding, Time, Performance, and Compensation as well as Learning.

Our marketing metrics showed the continuing strength of market demand for our solutions. Q2 this year was the single strongest quarter in our history for looking responders, that is prospects with 300 or more employees who say they are looking to buy an HCM solution in 12 months or less. This represents an 18% increase over Q2 of 2017 and a 24% increase over our first quarter this year. It also represents a significant increase over our previous record-high quarter of Q4 2017, surpassing it by 14%.

On social media, we had a 41% increase over Q2 2017 for leads looking to buy in 12 months or less. For our HR workshops held across the U.S., we had a 22% increase in the number of attendees and a 123% increase in attendees saying they are looking to buy in 12 months or less. Our inside sales team has a 38% increase in closed deals they influenced and for traffic on our company website, it was our second-best quarter ever for unique visitors.

Earlier this month, Ultimate entered into a binding letter of intent with the controlling shareholders of PeopleDoc with respect to acquiring them. We have now officially executed that acquisition. PeopleDoc, a cloud-based pioneer in global HR service delivery is based in Paris, France, and has more than 1,000 customers with users in 180 countries. PeopleDoc has additional offices in Germany, the UK, Finland, the Netherlands, Canada, and the United States.

Adding the global PeopleDoc HR service delivery platform to our offerings will further our mission to improve our customers' employee experience with new person-centric features such as an online employee help center, HR case management, and employee file management. I visited their offices in Paris a couple of weeks ago and they are as excited about joining us at Ultimate as we are to have them. PeopleDoc will operate as a wholly owned subsidiary of Ultimate.

Ultimate received some third-party recognition in the second quarter that we are very proud of. Our customer service department received the gold award for being the No. 1 customer service department of the year for companies with 2,500 employees or more from Customer Sales and Service World Awards. More than 80 judges from a broad spectrum of industries from around the world participated and their average scores determined the 2018 award winners.

In addition, IT Central Station, an online service that evaluates products based on reviews and ratings from real users and validates them by what they call a triple authentication process, ranked Ultimate's UltiPro No. 1 in the Best Cloud HCM Solutions category.

In the area of culture, Fortune magazine ranked Ultimate No. 1 on its 100 Best Workplaces for Millennials list for 2018, making this Ultimate's second consecutive year at the top. The list recognizes companies with high-trust cultures, and the judges from Great Place to Work considered feedback from more than 398,000 employees surveyed in the United States.

Ultimate was ranked No. 2 on the Best Workplaces in Canada list for 2018. The list is based on employees' feedback and in-depth reviews of workplace cultures at hundreds of organizations across Canada.

We were ranked No. 2 on the "25 Highest Rated Public Cloud Computing Companies to Work For" list by Battery Ventures, a global investment firm, and Glassdoor, one of the world's largest job and recruiting websites. Ultimate currently has an employee satisfaction rating of 4 1/2 out of five stars on Glassdoor, with a 90% positive business outlook rating also based on employee feedback.

IDG's Computerworld ranked Ultimate No. 1 Best Place to Work in IT among mid-sized organizations for the second year in a row. Computerworld recognizes companies that provide an intellectually challenging work environment for their IT staff members as well as other factors.

At the close of the second quarter this year, we were 4,451 strong. We will achieve our fifth championship of becoming a $1 billion franchise this year. We now support approximately 40 million people records in our Ultimate cloud. We continue to lead the cloud industry in numbers of customers using the unified HCM with Human Resources, Payroll, Talent, Comp, and Time and labor management.

We have completed the acquisition of PeopleDoc to enhance our global capabilities. We are continuing to grow our infrastructure in preparation for achieving our objective of $2 billion in revenues in 2022. Our customers remain our trusted partners in growth and innovation, and our people-first philosophy continues to be the force behind our success. It will remain the basis of our culture and business model going forward.

This is Felicia's 82nd earnings call in the room with me and our first as our CFO. I am happy to have her by my side. We want to thank all of you for taking this journey with us and look forward to your continuing support.

Let's go to the Q&A.

Questions and Answers:

Operator

Thank you. We'll hear first from Justin Furby with William Blair & Company.

Justin Furby -- William Blair & Company -- Analyst

Thanks, guys. Congrats on a fabulous quarter. Scott, it felt like the checks on our end were quite a bit different than they have been for the last several quarters and it seems like based on your commentary that's maybe the right read. And so I'm just curious if you think there's something that was different when you think about Q2 from the new business side versus Q1 or Q4, Q3 over the last several quarters either from a macro standpoint, a competitive sort of win-rate standpoint or something else maybe bigger that's out there.

And just curious if you have seen that continue here in the first month of Q3 and from a pipeline standpoint. Thanks.

Scott Scherr -- Chief Executive Officer and President

Well, it was true that I mentioned Q2 was the greatest quarter in our history in both enterprise and mid-market strategic but I would say that last year, Q2 was the best quarter of the year and the year before Q2 was like $1 million behind Q4 for the best quarter of the year. So I think we just have a good history of putting up good Q2s. I think maybe that's just how deal flows happen but it certainly was an exceptional quarter. It wasn't unexpected for us.

You always like when it really happens but we were in contract on a lot of deals at the beginning of the quarter and just about every one of them came through, especially in enterprise.

Justin Furby -- William Blair & Company -- Analyst

Got it. And then in terms of just what you're seeing in early Q3 and in the pipeline.

Scott Scherr -- Chief Executive Officer and President

Yeah, the pipeline is strong. I mean, it always builds like that. Like Q2 and Q4 are our best quarters, Q3 is second, and Q1 is always our lightest quarter. So it's a natural build that happens every year.

Justin Furby -- William Blair & Company -- Analyst

Got it. And then I guess just in terms of perception, it seems like you're getting into some big sort of stand-alone deals here. Can you give a sense for what that represents in terms of your bookings? I mean, is it 5% to 10% type of a level? And are you seeing instances where companies buy that initially stand-alone and they're coming back and looking at the HR sort of broader Payroll suite? Thanks.

Scott Scherr -- Chief Executive Officer and President

No. It's minimal now. They're buying it as part of the overall suite. And we do sell it stand-alone but minimal on the revenue side.

Operator

We'll hear next from Richard Baldry with Roth Capital Partners.

Richard Baldry -- Roth Capital -- Analyst

Thanks. Could you talk a little bit about how one-off you view the PeopleDoc acquisition? Obviously, it's the largest you've done in your history. It's international. Does this fit more of a change in strategy with Mitch heading up that effort or is this sort of pretty unusual for you guys? Should we still think of it as more of a tuck-in strategy going forward?

Scott Scherr -- Chief Executive Officer and President

I think it's a tuck-in strategy. I mean, our people in development were dealing with the people, that team, and founders for like two years. They really like them. HR services was on our road map more for $2 billion to $3 billion but it was clearly on our road map.

We clearly thought it was something that we should be doing and I think after two years of becoming somewhat partners with them, they had a decision to make about raising more money and our people were close to them. They were close to us and the conversation went from raising money to would they feel comfortable becoming part of us.

And then I think that much like I enjoy it, our culture won the day. It was like they have a great culture, they built a great company, and they wanted to put their people in a place with a great culture. And they certainly, after being around us for two years, and then through the due diligence of the thing, felt 100% comfortable that we would take care of their people.

So I think we were fortunate to be in that position but we had worked to be in that position and I think, if anything came out that was technology-driven or product-driven and we thought it could be the best of the best out there and it complemented what we have, then we would go after it but we're not acquisitive.

Richard Baldry -- Roth Capital -- Analyst

Could you talk maybe a little bit about the economics of their typical customer deal? I don't know if that fits in an ASP framework or in a per employee per month framework so we sort of understand the impact longer term it could have. Thanks.

Scott Scherr -- Chief Executive Officer and President

It's a per employee per month and we think it fits into kind of like the pricing we have, some of our kind of like Perception and other products we have. Obviously, it gives us an international footprint that we didn't have and beginning next year, we'll give it to our enterprise sales team. We'll give it to our mid-market and strategic sales team and we'll give it to our executive relation managers to offer it to our client base. So it'll help us in North America and obviously, it'll help us internationally.

As well as now we can bundle that with Perception internationally as a stand-alone. Their next product coming out that'll fit with that is Performance, which we'll be able to sell as a stand-alone. So we'll build an HR stand-alone product and start building the PEPM on that, especially for international but also in North America.

Operator

We'll move on to Mark Murphy with J.P.Morgan.

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

Yes. Thank you. I will add my congratulations. So, Felicia, you had commented that free cash flow margins would be 10 percentage points to 15 percentage points higher if you build annually and you did have very strong cash flow growth year to date.

So I'm just curious, it seems like a very meaningful comment but the quarterly or even monthly cadence, I think, is so ingrained in the payroll industry. So I just wanted to clarify, do you see any signs that that could potentially change over time in terms of the quarterly, monthly cadence? Or are you just really just strictly calling that out for comparability purposes?

Felicia Alvaro -- Chief Financial Officer

No. I don't expect that and yes, I was just doing that so you would get a better comparison.

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

OK. And then as a follow-up for you, Scott. It said in the prepared comments that it's the best quarter in your history for new business coming back. And as Justin said, I think it aligns perfectly with the feedback that we had from your partner, Ecosystem, this quarter.

And I think the large deals that you mentioned, it sounded like kind of a blowout there compared to what we're used to. I'm just wondering, though, to try to understand the magnitude of the strength that, as you said, Q2 is often a very strong seasonal quarter. So do you think the pace of new bookings, did it accelerate or feel different on a seasonally adjusted basis? Or are you able to comment in any way whether the sales team came in above plan or if anything about that was abnormal?

Scott Scherr -- Chief Executive Officer and President

No. I think it was a normal, really good Q2, and I think just overachieved on it but both teams were over plan for the first half, and they're in excellent shape to do what, really, they always do; make our numbers to keep us on our track. And that comes from the product, it comes from services, it comes from having a referenceable client base, it comes from having tenure, single-digit turnover in the sales organization, tenured people representing us out there, big pipelines. All that keeps building and continues to build.

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

Great. Thank you very much.

Operator

And from Needham, we'll move to Scott Berg.

Scott Berg -- Needham & Company -- Analyst

Hi, Scott, and welcome, Felicia. Thanks for taking the questions here. Congrats on the good quarter. Scott, I guess two things or first of all, talking about PeopleDoc.

How do you plan on selling that going forward? Is that going to be a completely separate product, separate sales force, or does it fully integrate in with the existing sales force and it's just another product in the bucket? And then I guess with that, do you continue to sell stand-alone or do customers still have to buy a Payroll first?

Scott Scherr -- Chief Executive Officer and President

No, no. Well, we're going to integrate it with the package, with UltiPro, and that will be sold by all our existing sales people now in enterprise, mid-market, and strategic. We'll do like we did with Perception, and it will be sold stand-alone as well in North America and then in internationally, it will be exactly like it is now. It will be sold stand-alone like it is now, only we'll be able to add product to the product suite as we move forward.

No intentions now of doing Payroll internationally.

Scott Berg -- Needham & Company -- Analyst

Got it. Helpful. And then I guess from a follow-up perspective on the commentary on the enterprise side. Do you think the strength from what you've seen, is it driven by more seats just moving up to larger customers or customers buying more of the suite? The attach rates haven't moved meaningfully they kind of bounced around in the same range as the last couple years.

And I've seen you guys for a year or two now seemingly do better off-market just with larger suites. Just wanted to get a viewpoint on that.

Scott Scherr -- Chief Executive Officer and President

Yeah. And Q2 was definitely the average size of the employees. Because like you said, the attach rates remain pretty much the same so it was just the larger size of the accounts.

Scott Berg -- Needham & Company -- Analyst

That's all I have. Thanks for taking the questions.

Scott Scherr -- Chief Executive Officer and President

OK.

Operator

We'll hear next from Brad Reback with Stifel.

Brad Reback -- Stifel Financial Corp. -- Analyst

Great. Thanks very much. Scott, on these really large deals which you did in the enterprise this quarter, was the competitive landscape meaningfully different?

Scott Scherr -- Chief Executive Officer and President

No, it's the same. No, it's the same division, the same league, same people. Not different at all.

Brad Reback -- Stifel Financial Corp. -- Analyst

Got it. And then on the bookings mix, was it different than the traditional 60/40 because of the larger deals?

Scott Scherr -- Chief Executive Officer and President

Well, I'll give you that. No, it might have been 55/45, that's close.

Brad Reback -- Stifel Financial Corp. -- Analyst

Got it. Thanks very much.

Scott Scherr -- Chief Executive Officer and President

You're welcome.

Operator

And Brian Peterson with Raymond James has our next question.

Brian Peterson -- Raymond James -- Analyst

Hi. Congrats on the quarter and thanks for taking the questions. So just one for me on PeopleDoc. Just curious, how should we think about your pace of investment both in the solutions and then potentially geographically in other regions building from there? Thanks, guys.

Scott Scherr -- Chief Executive Officer and President

Well, we have obviously the sales force. We have our infrastructure here in North America so it is just adding another product to that infrastructure. Most of the development team is in Paris. They're going to keep making that product better just like we do over here.

I think going to go through 2019 and then it's going to give us the opportunity to open up other offices internationally to sell it at a fairly quick pace. We just want to get our hands around it and they want to get their hands around us and all that. So I believe that when we get into 2020, we're going to be able to open up other locations internationally that we don't have offices now, we're not selling, we don't have salespeople on the street. I think we'll be able to do that, certainly.

Well, we don't do it now but it will be something we're going to do but I think it starts in 2020.

Brian Peterson -- Raymond James -- Analyst

Got it. Thanks, Scott.

Scott Scherr -- Chief Executive Officer and President

Welcome.

Operator

From Piper Jaffray, we'll move to Alex Zukin.

Taylor Reiners -- Piper Jaffray -- Analyst

Hi. This is Taylor Reiners on for Alex and I wanted to echo my congratulations to Felicia. I wanted to drill in on a comment on the recurring revenue being mostly driven by deals that went live earlier than expected. I was just wondering if you could give us an update now that it has been about a year since we saw the elongation in implementation timelines.

What are you seeing in terms of your progress there and how do you see that shaking out during the rest of the year?

Felicia Alvaro -- Chief Financial Officer

Thanks. Actually, with regards to the time to live, it's pretty much in line with our expectations which we, as we mentioned a year ago, we reset based on the expected mix, lending itself more toward the larger deals, to an extent.

Taylor Reiners -- Piper Jaffray -- Analyst

Got it. That makes sense. And then just a follow-up on your partner channels. You start to go upmarket.

Was wondering how is your current partner community handling these larger implementations? And then you're starting to see anything with respect to opportunities to engage with larger systems integrators as the enterprise mix continues to grow?

Scott Scherr -- Chief Executive Officer and President

Yes. I think we're about 15% of our deals now are with integrators. I think within the next year it will jump to 20%. I think I mentioned last time we had our annual integrators summit and there were 160 people here, something like that.

And so yeah, as we grow, they grow. I mean, I'm very satisfied with the channel that our services team built and you know that by the referenceability of the accounts and the surveys that go out about the implementation, how the success of it and then how it gets turned over to customer success. So yeah, I mean, that's a big part of our success in being able to grow like we've grown and handled the deals that we're handling.

Taylor Reiners -- Piper Jaffray -- Analyst

Got it. Thanks again.

Operator

Our next question will come from Siti Panigrahi with Wells Fargo.

Siti Panigrahi -- Wells Fargo Securities -- Analyst

Thanks for taking my question. Congrats on a great quarter. Scott, going back to this PeopleDoc acquisition, that definitely complements your product portfolio and international expansion but what do you think about the customer base? It seems to be pretty large. Out of that 1,000 customers, how much do you have overlap at this point? And what other payroll HCM products do they use their customer base? I'm trying to understand you surrounding now your competitors and how much will that help in share gain.

Scott Scherr -- Chief Executive Officer and President

Yeah, I think the opportunity is in our client base to put their product in. I'm not sure the exact percentage but mostly internationally, they do have a good decent base in the United States but normally, it's definitely something that we can get into over time and get an opportunity but I see the real asset as selling this product internationally, adding some of our products to that suite internationally, getting it to our sales teams to sell as part of our suite and getting it back to our client base. I'd say it's 90/10 that than going after their client base.

Siti Panigrahi -- Wells Fargo Securities -- Analyst

I see. And then when you talk about your long-term growth opportunity like $2 billion by 2022, or $3 billion now in 2025, how much of that when you think about that goal, how much of it is international expansion versus more cross-selling your current product into the customer base? Just wanted to understand what are the key growth drivers for that kind of growth.

Scott Scherr -- Chief Executive Officer and President

Well, I think at $1 billion we have less than 8% of the North American market so we have a clear shot just with what we're doing at $2 billion. I think at $3 billion, international pops in and if they could do 10% of $3 billion then I think that would be good if they could do that, but I think they'll help our growth to $3 billion. And then from there, we'll see where it goes.

Siti Panigrahi -- Wells Fargo Securities -- Analyst

Great. Thanks for the color.

Scott Scherr -- Chief Executive Officer and President

Sure.

Operator

Terry Tillman with SunTrust has our next question.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Yeah. Thanks and congrats on the new opportunity and role here, Felicia. My first question for you in terms of I think you mentioned in your prepared remarks positive employment trends versus what you were looking for. Could you quantify that and did anything change in the modeling in the second half of the year for employment trends among your customers?

Felicia Alvaro -- Chief Financial Officer

First of all, we did have some employment trends but it was fairly marginal from the perspective of the beat we had against our own expectations. So do we have it? Yeah. We had some of it but it's not significant so I wouldn't count on it for the rest of the year.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

OK. And just thanks. And then, Scott, in terms of PeopleDoc, in terms of things like Case Management, HR Service Delivery, is it replacing something that was in place that was legacy or does this tend to be a greenfield investment and are these deal sizes, like Perception, bigger or smaller? Thank you.

Scott Scherr -- Chief Executive Officer and President

It's greenfield, same as Perception but one thing is due diligence. I gave it to Viv who's has been with me from the beginning. She's our Chief People Officer and once she went through the demo with their people, the first thing she said to me, when can I get this thing? And she's in implementation right now on it. So it's completely something that compliments UltiPro.

It's a new HR category by all the big analysts out there. Did I answer it?

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

You did. Thank you.

Scott Scherr -- Chief Executive Officer and President

OK.

Operator

And from Credit Suisse, we'll hear next from Brad Zelnick.

Brad Zelnick -- Credit Suisse -- Analyst

Thanks very much for taking the question and congrats on a good quarter. So the metrics you shared around looking responders sound very compelling. From your experience, what do you think is driving the strength and the interest right now and how is the productivity of your digital marketing spend having an impact?

Scott Scherr -- Chief Executive Officer and President

I mean, we made the decision at the beginning of well, last year, that this year we would up our branding budget by 50%. Now we did. So I think that had a big impact on it. I think we're getting bigger, our brand is getting bigger, we have more clients, more people.

I think it's a natural growth that happens when a company is doing good and spending money. In places in the past, we didn't spend money. We didn't spend money on commercials like a year ago. We weren't sponsoring the Masters winner a year ago.

We're doing much more seminars around the country because we added to the budget. I think it's a natural progression with a good marketing team, with them having the money to spend in the right places and the company getting bigger.

Brad Zelnick -- Credit Suisse -- Analyst

And it clearly seems to be working. Just to follow-up on...

Scott Scherr -- Chief Executive Officer and President

They're a big part of it. We just had our national midyear sales meetings and they couldn't thank marketing enough for the opportunities that they're putting into the pipeline for them.

Brad Zelnick -- Credit Suisse -- Analyst

Got it. If I could follow-up on a separate topic. Post-PeopleDoc now and the push more into international, if we were to look back, say, three years from now and you were successful internationally, what might be the percentage of your mix outside America? And how will you have gotten there?

Scott Scherr -- Chief Executive Officer and President

My gut at $3 billion would be 10% around there. And that's just a gut I have. I see in there that's what I think. If you ask my gut, that's my gut.

Brad Zelnick -- Credit Suisse -- Analyst

Cool, thanks. Thanks.

Scott Scherr -- Chief Executive Officer and President

OK.

Operator

We'll hear next from Jesse Hulsing with Goldman Sachs.

Jesse Hulsing -- Goldman Sachs -- Analyst

Yeah, thank you. Scott, curious about the pricing environment, particularly in the enterprise as you have more success upmarket. Any changes to what you're seeing from competitors and how they're pricing deals?

Scott Scherr -- Chief Executive Officer and President

No. I think we've been facing the same come competitors for a long time. I think that how they price hasn't really changed and how we price really hasn't changed. So no, I don't see any.

Jesse Hulsing -- Goldman Sachs -- Analyst

And Felicia, the PeopleDoc contribution, I believe in the release you gave us the third-quarter revenue expected but I didn't see a full-year revenue number there. Can you remind me what that might be so that we can kind of bridge to organic growth?

Felicia Alvaro -- Chief Financial Officer

That was factored into our revised guidance, both on recurring and total. And for purposes of our total for the five-month period, I'd say around $14 million, $15 million.

Jesse Hulsing -- Goldman Sachs -- Analyst

Perfect. Thank you both.

Scott Scherr -- Chief Executive Officer and President

Thank you.

Operator

And from Evercore ISI, we'll hear from Kirk Materne.

Peter Levine -- Evercore ISI -- Analyst

Thanks. This is Peter Levine in for Kirk. Just two quick ones for me. Any updates or progress with the Microsoft partnership? Trying to understand, I guess, your expectations longer term.

Do you think this opportunity with Microsoft can drive 5% of bookings growth similar to, I guess, some of the peaker levels you saw with the other NetSuite deal?

Scott Scherr -- Chief Executive Officer and President

Yeah, I haven't seen that happening. I think it's really in the early stages. Our people, they're getting with their distributors but I don't have a real good feel on that, Peter, of what the potential is right now.

Peter Levine -- Evercore ISI -- Analyst

And then the last question is with your move into Europe, I believe, on your last call, you were still kind of mapping out your go-to-market strategy if it was going to be direct, indirect. Any updates you can provide for us on that front?

Scott Scherr -- Chief Executive Officer and President

Say that again?

Peter Levine -- Evercore ISI -- Analyst

On your last call, you were talking about your go-to-market strategy in Europe. You were deciding whether it was going to be direct or indirect with partners. Any updates that you can provide?

Scott Scherr -- Chief Executive Officer and President

Yeah. Well, the update is PeopleDoc. So, as of last Friday, we have offices in France, England, and Germany that have salespeople and so, yeah. We have a sales force there that is on quota with a team around them and infrastructure around them.

So we're going to build off of that. That's our strategy, direct salespeople. Same as in North America now. Hello?

Operator

We'll go next to Steve Koenig with Wedbush Securities.

Steve Koenig -- Wedbush Securities -- Analyst

Hi. Thanks for taking my questions. Scott, I'm wondering, is it too early yet to hear any update to your plans to begin another wave of adding salespeople? Am I too early for that? I know you felt you had filled out for the year pretty well, so just an update there would be great.

Scott Scherr -- Chief Executive Officer and President

You're not too early to ask the question, and the answer is we're set right now for what, I have a team in place right now that will get what I believe we need in '19.

Steve Koenig -- Wedbush Securities -- Analyst

Right.

Scott Scherr -- Chief Executive Officer and President

Which was our goal. [Inaudible] two, two-year we hired, got the people in, got a great crew of people in, they're doing everything that we want them to do and more. So other than the single-digit turnover we seem to have, the team is in place to get us what we need in 2019. No new hires.

Steve Koenig -- Wedbush Securities -- Analyst

Terrific. And if I could add a quick one. I'm wondering are you seeing any change in terms of attrition from service bureaus, in particular, as one or more of them push their cloud product into their base? And your new business kind of mix from service bureaus versus ERP packages, is that kind of the same or any change there as well?

Scott Scherr -- Chief Executive Officer and President

No. I mean, our history isn't built on taking that business. So, I don't want to like ... but no. It's going good and we like the division we're playing in.

Steve Koenig -- Wedbush Securities -- Analyst

Sounds good. Great. Congrats on the quarter.

Scott Scherr -- Chief Executive Officer and President

Thank you.

Felicia Alvaro -- Chief Financial Officer

Thanks.

Operator

We'll take one more question. That will be from Mark Marcon of R. W. Baird.

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

Hi. A couple of quick questions. One, the enterprise wins were really impressive this quarter. Is there anything aside from just the typical legacy providers in terms of the source of those enterprise wins? Are you seeing any expansion there? And then secondly, recurring gross margin was a little bit lower than expected.

Is there anything specific there to highlight or is that a function of maybe of ASC 606 or something else?

Felicia Alvaro -- Chief Financial Officer

I'll take the recurring margin. Actually, the recurring margin was in line with our expectation. It did include the amortization of kept software for a product that was released in the quarter.

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

I see.

Scott Scherr -- Chief Executive Officer and President

Yeah, especially the larger deals in enterprise, some of these deals have been working two years, three years. I think it was just they all came together in one quarter and closed in one quarter. So I don't think it's not like we weren't working it a year ago or two years ago. So, I think it's just...

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

Same source of...

Scott Scherr -- Chief Executive Officer and President

Same source. We run against the same competitors all the time as I'm sure they run against the same competitors all the time.

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

Great. Congrats.

Scott Scherr -- Chief Executive Officer and President

Thank you.

Felicia Alvaro -- Chief Financial Officer

Thank you.

Operator

And I would like to turn the conference back to you all for any closing remarks.

Scott Scherr -- Chief Executive Officer and President

Yeah. Again, just thanks for your support and congratulations to Felicia on her first call. And just so all of you won't panic, Mitch is sitting in the room with us.

Felicia Alvaro -- Chief Financial Officer

We couldn't do without him.

Scott Scherr -- Chief Executive Officer and President

Couldn't do without him. So all the best to everybody.

Felicia Alvaro -- Chief Financial Officer

Thanks to all of you.

Scott Scherr -- Chief Executive Officer and President

See you next quarter. Bye.

Felicia Alvaro -- Chief Financial Officer

Bye-bye.

Operator

[Operator signoff]

Duration: 49 minutes

Call Participants:

Felicia Alvaro -- Chief Financial Officer

Scott Scherr -- Chief Executive Officer and President

Justin Furby -- William Blair & Company -- Analyst

Richard Baldry -- Roth Capital -- Analyst

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

Scott Berg -- Needham & Company -- Analyst

Brad Reback -- Stifel Financial Corp. -- Analyst

Brian Peterson -- Raymond James -- Analyst

Taylor Reiners -- Piper Jaffray -- Analyst

Siti Panigrahi -- Wells Fargo Securities -- Analyst

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Brad Zelnick -- Credit Suisse -- Analyst

Jesse Hulsing -- Goldman Sachs -- Analyst

Peter Levine -- Evercore ISI -- Analyst

Steve Koenig -- Wedbush Securities -- Analyst

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

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