UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________

FORM 10-K

☑		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2017
	For the fiscal year ended December 31, 2018
or
☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to
Commission file number: 0-24347

_______________

The Ultimate Software Group, Inc.

(Exact name of Registrant as specified in its charter)



Delaware	65-0694077
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

2000 Ultimate Way,	33326
Weston, FL	(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code:

(954) 331-7000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:	Name of Each Exchange on which Registered:
Common Stock, par value $.01 per share	The Nasdaq Stock Market LLC
	(NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the Registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit ~~and post~~ such files). Yes ☑ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑x Accelerated filer ☐ Non-accelerated filer ☐ ~~(Do not check if a smaller reporting company)~~ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

The aggregate market value of Common Stock, par value $.01 per share, held by non-affiliates of the Registrant, based upon the closing sale price of such shares on the NASDAQ Global Select Market on June 30, ~~2017~~2018 was approximately $57.96 billion.

As of February 2228, ~~2018~~2019, there were 3031,~~573~~680,~~486~~177 shares of the Registrant’s Common Stock, par value $.01, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

THE ULTIMATE SOFTWARE GROUP, INC.

INDEX

		Page(s)
	Forward-Looking Statements	2
	PART I
Item 1.	Business	2
Item 1A.	Risk Factors	1416
Item 1B.	Unresolved Staff Comments	2325
Item 2.	Properties	2325
Item 3.	Legal Proceedings	2325
Item 4.	Mine Safety Disclosures	2325
	PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	2325
Item 6.	Selected Financial Data	2628
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2830
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	4142
Item 8.	Financial Statements and Supplementary Data	4344
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	7882
Item 9A.	Controls and Procedures	7882
	Independent Registered Public Accounting Firm’s Report on Internal Control over Financial Reporting	8084
Item 9B.	Other Information	8186
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	8186
Item 11.	Executive Compensation	8490
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	84104
Item 13.	Certain Relationships and Related Transactions, and Director Independence	84107
Item 14.	Principal Accountant Fees and Services	84108
	PART IV
Item 15.	Exhibits	85109
Signatures		88112

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017~~2018 (this “Form 10-K”) of The Ultimate Software Group, Inc. and subsidiaries (“Ultimate,” "Ultimate Software," “we,” “us” or “our”) may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent our expectations or beliefs, including, but not limited to, our expectations concerning our operations and financial performance and condition, and our expectations regarding our ability to complete the Merger (as defined below) and the timing of such Merger, as well as our ability to realize the anticipated benefits from the Merger. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. Ultimate’s actual results could differ materially from those contained in the forward-looking statements due to risks and uncertainties associated with fluctuations in our quarterly operating results, concentration of our product offerings, development risks involved with new products and technologies, competition, our contractual relationships with third parties, contract renewals with business partners, compliance by our customers with the terms of their contracts with us, and other factors disclosed in Ultimate’s filings with the Securities and Exchange Commission. Risks and uncertainties related to the Merger include, but are not limited to, the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement (as defined below); the failure of the parties to satisfy conditions to completion of the Merger, including the failure of our stockholders to approve the Merger or the failure of the parties to obtain required regulatory approvals; the risk that regulatory or other approvals are delayed or are subject to terms and conditions that are not anticipated; changes in our business or in our or our businesses’ operating prospects; the impact of the announcement of, or failure to complete, the Merger on our relationships with employees, customers, vendors and other business partners; and potential litigation related to the Merger. Other factors that may cause such differences include, but are not limited to, those discussed in this Form 10-K, including the risk factors set forth in Item 1A. Ultimate undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

UltiPro® and its related design are registered trademarks of Ultimate in the United States. This Form 10-K also includes names, trademarks, service marks and registered trademarks and service marks of companies other than Ultimate.

PART I

Item 1. Business

Overview

With offices in the United States, Canada, France, Germany, England, and Singapore, Ultimate Software is a leading provider of cloud-based human capital management solutions, -often referred to as human capital management ("HCM")-and employee experience solutions. Ultimate's UltiPro product suite ~~("UltiPro")~~ is a comprehensive, engaging solution that has human resources ("HR"), ~~payroll,~~ and ~~benefits~~payroll ~~management~~ at its core and includes benefits management, talent acquisition, talent management, time management, and global people management, functionality available in 14 languages with ~~more~~61 ~~than 37~~ country-specific localizations. ~~The~~Ultimate ~~solution~~also isoffers ~~delivered via software-as-~~a-~~service~~la-carte ~~("SaaS"),~~employee ~~now~~experience ~~more~~solutions, ~~commonly~~such ~~known~~ as ~~the~~HR ~~cloud~~Service ~~computing~~Delivery ~~model, to organizations based in the United States~~ and ~~Canada~~"Perception," ~~including~~an those with global workforces. At the close of 2017, we had more than 4,100 organizations as customers and more than 37 million people records in our HCM cloud. We attained our leadership position, we believe, through our focus on unified HCM, peopleemployee-~~centric~~sentiment ~~product~~analysis ~~design, cloud technology, and strong customer relationships~~solution.

~~UltiPro~~Ultimate's issolutions ~~designed~~are todelivered ~~deliver~~via ~~the~~software-as-a-service ~~functionality~~("SaaS"), ~~businesses~~now ~~need~~more tocommonly ~~manage~~known ~~the~~as ~~complete~~cloud ~~employee~~computing, ~~life cycle from recruitment~~ to ~~retirement~~organizations ~~and to facilitate high levels of employee engagement~~ with ~~their~~employees ~~employers~~in ~~and~~the ~~one~~United ~~another.~~States, ~~The~~Canada, ~~solution includes unified feature sets for talent acquisition and onboarding~~Europe, HRAsia ~~management and compliance~~Pacific, ~~benefits management~~ and ~~online~~other ~~enrollment,~~global ~~payroll,~~locations. ~~performance~~At ~~management,~~the ~~employee~~close ~~engagement~~of ~~surveying~~2018, ~~compensation~~we ~~management~~had ~~with~~more ~~salary~~than ~~planning~~5,600 ~~budgeting,~~organizations ~~incentive~~as ~~award~~customers ~~planning,~~and ~~succession~~more ~~management,~~than ~~learning~~48 ~~management,~~million ~~reporting~~people ~~and~~records ~~analytical~~in ~~decision-making~~our ~~and~~cloud ~~predictive~~environment. ~~tools,~~We ~~and~~attained ~~time~~our ~~capture,~~leadership ~~scheduling~~position, ~~attendance~~we ~~tracking~~believe, ~~and~~through ~~absence~~our ~~accruals.~~exclusive ~~UltiPro~~focus ~~has~~on ~~role-based~~solutions ~~features~~that ~~for~~help HRcompanies ~~professionals,~~manage ~~executives,~~their ~~managers,~~employees ~~administrators,~~in ~~and~~an ~~employees~~engaging ~~whether~~way. ~~they~~Key ~~are~~factors in orour ~~out~~success ofhave ~~the~~been ~~office,~~our ~~including~~people-centric ~~access~~product todesign, ~~business-critical~~cloud ~~information~~technology, onand ~~mobile~~strong ~~devices~~customer ~~such~~relationships asnurtured ~~the~~by ~~iPhone,~~our ~~iPad,~~services team and ~~other~~throughout ~~smartphones~~the ~~and~~Ultimate ~~tablets~~organization.

~~Our~~UltiPro ~~customers~~is ~~tell~~designed usto ~~that~~deliver ~~UltiPro~~the ~~helps~~functionality ~~them~~businesses need to ~~streamline~~manage ~~talent~~the ~~management,~~complete HRemployee ~~and~~life ~~payroll~~cycle ~~processes~~from recruitment to ~~significantly~~retirement, ~~reduce~~and ~~administrative~~to facilitate high levels of employee engagement with their employers and ~~operational~~one ~~costs~~another. ~~while~~The ~~also~~solution ~~empowering~~includes ~~them~~unified tofeature ~~manage~~sets ~~the~~for talent inacquisition ~~their~~and ~~workforces~~onboarding, ~~more~~HR ~~strategically.~~service ~~UltiPro~~delivery ~~provides~~and ~~our~~management, ~~customers~~compliance, ~~tools~~benefits tomanagement ~~analyze~~and ~~workforce~~online ~~trends~~enrollment, ~~for~~payroll, ~~better~~performance ~~decision~~management, ~~making~~employee engagement surveying, ~~identify~~compensation ~~high-performing~~management ~~talent~~with ~~within~~salary ~~their~~planning, ~~organizations~~budgeting, ~~predict~~incentive ~~who~~award ~~future~~planning, ~~high~~succession management, learning management, reporting and analytical decision-~~performers~~making and ~~retention~~predictive ~~risks~~tools, ~~will~~and betime ~~with~~capture, ascheduling, ~~high~~attendance ~~degree~~tracking, and absence accruals. UltiPro has role-based features for HR professionals, executives, managers, administrators, and employees whether they are in or out of ~~accuracy~~the office, ~~find~~including access to business-critical information ~~quickly~~ and ~~perform~~functions ~~routine~~on ~~business~~mobile ~~activities~~devices ~~efficiently~~such as the iPhone, iPad, and Android smartphones and tablets.

~~bundled~~workforces ~~services~~more ~~package~~strategically. ~~Since~~UltiPro ~~many~~provides ~~companies~~our incustomers ~~the~~intelligent ~~mid-~~tools and ~~strategic~~insights ~~markets~~for doengaging ~~not~~workforces ~~have~~and ~~information~~understanding ~~technology~~organizational ~~(“IT”)~~dynamics, ~~staff~~analyzing ontrends ~~their~~for ~~premises~~better todecision ~~help~~making, ~~with~~identifying ~~system~~high-performing ~~deployment or ongoing management issues~~talent, wepredicting ~~have~~who ~~created~~future ahigh-performers ~~bundled~~and ~~services~~what ~~package~~retention torisks ~~give~~will ~~these~~be ~~customers~~with a high degree of ~~convenience~~accuracy, byfinding ~~handling~~critical ~~system~~information ~~configuration,~~quickly ~~business rules,~~ and ~~other~~performing ~~situations~~routine ~~for~~business ~~them~~activities ~~“behind the scenes~~efficiently.~~” UltiPro is marketed primarily through our enterprise, mid-market, and strategic direct sales teams.~~

Our cloud offering of UltiPro provides web-based and mobile access to comprehensive HCM functionality for organizations that want to simplify delivery and support of their business applications. We have found that UltiPro is attractive to companies that want to focus on their core competencies to increase sales and profits while we supply and manage the hardware, infrastructure, ongoing maintenance and backup services for our customers.

We market our UltiPro solutions primarily to enterprise companies, which we define as organizations with 2,501 or more employees, including those with 10,000 employees and larger; mid-market companies, which we define as those having 501-2,500 employees; and strategic market companies, which we define as those having 100-500 employees. Our mid-market and strategic customers have access to nearly all the features that our larger enterprise companies have through UltiPro, plus a bundled services package. Since many companies in the mid- and strategic markets do not have information technology (“IT”) staff on their premises to help with system deployment or ongoing management issues, we have created a bundled services package to give these customers a high degree of convenience by handling system configuration, business rules, and other situations for them “behind the scenes.” UltiPro is marketed primarily through our enterprise, mid-market, and strategic direct sales teams.

Merger Agreement

On February 3, 2019, Ultimate entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Unite Parent Corp., a Delaware corporation (“Parent”), and Unite Merger Sub, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Parent (“Merger Sub”). Pursuant to the Merger Agreement, Ultimate would be acquired by an investor group led by Hellman & Friedman (“H&F”), a leading private equity investment firm, in an all-cash transaction for $331.50 per share in cash (representing an aggregate value of approximately $11 billion), after which Ultimate would operate as a privately held company. Parent is a newly-formed entity that will be owned by the investor group.

The Merger Agreement provides, among other things and subject to the terms and conditions set forth therein, that Merger Sub will be merged with and into Ultimate (the “Merger”), with Ultimate continuing as the surviving corporation and as an indirect wholly owned subsidiary of Parent. The Merger Agreement provides that each share of common stock, par value $0.01 per share, of Ultimate (“Common Stock”) outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than shares of Common Stock owned by Ultimate in treasury, Parent, Merger Sub or any wholly owned subsidiary of Ultimate or Parent and shares of Common Stock owned by stockholders of Ultimate who properly demand and do not withdraw a demand for, or lose their right to, appraisal rights pursuant to Section 262 of the General Corporation Law of the State of Delaware) will at the Effective Time automatically be cancelled and converted into the right to receive $331.50 in cash (the “Merger Consideration”), without interest and subject to applicable withholding taxes.

Pursuant to the Merger Agreement, as of the Effective Time, (i) each Ultimate stock option will become fully vested and be converted into the right to receive an amount in cash equal to the product of (A) the excess, if any, of the Merger Consideration over the applicable exercise price of such option, multiplied by (B) the number of shares subject to such option, subject to applicable withholding taxes, and (ii) each restricted stock award and restricted stock unit award that is outstanding immediately prior to the Effective Time will, whether granted prior to the date of the Merger Agreement or granted on or after the date of the Merger Agreement, become fully vested and be converted into the right to receive the Merger Consideration in respect of each underlying share of Common Stock, subject to applicable withholding taxes.

Ultimate’s board of directors (the “Board of Directors ” or the “Board”) has unanimously approved and declared advisable the Merger Agreement and the transactions contemplated thereby, including the Merger. The obligation of the parties to complete the Merger is subject to customary closing conditions, including, among others, (i) the adoption of the Merger Agreement by a majority of outstanding shares of Common Stock entitled to vote thereon (the “Company Stockholder Approval”), (ii) the expiration or earlier termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the decisions, orders, consents or expiration of any waiting periods required to consummate the Merger under the anti-competition laws of certain foreign jurisdictions have occurred or been granted, (iii) the absence of any law, order or injunction of a court or governmental entity of competent jurisdiction prohibiting the consummation of the Merger, (iv) the accuracy of the representations and warranties contained in the Merger Agreement (subject to certain qualifications), (v) the performance in all material respects by the parties of their respective obligations under the Merger Agreement that are required to be performed at or prior to the Effective Time and (vi) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement) occurring after the date of the Merger Agreement.

Ultimate has made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants (i) to conduct its business in all material respects in the ordinary course during the period between the execution of the Merger Agreement and the closing of the Merger, and not to engage in specified types of transactions during this period, subject to certain exceptions and (ii) to convene a meeting of its stockholders for the purpose of obtaining the Company Stockholder Approval. The Merger Agreement provides for a 50 day “go-shop” period beginning on February 3, 2019, and continuing until 11:59 p.m., New York City time, on March 25, 2019, during which period the Board of Directors and Ultimate’s financial advisor are permitted to actively initiate, solicit and encourage alternative acquisition proposals from third parties and to provide information to, and participate in discussions and engage in negotiations with, third parties regarding any alternative acquisition proposals. After such 50-day go-shop period and subject to certain exceptions, Ultimate will be subject to customary “no-shop” restrictions prohibiting it from soliciting alternative acquisition proposals, engaging in discussions or negotiations with respect to such proposals or providing non-public information in connection with such proposals. Subject to certain exceptions, the Board of Directors is required to recommend that Ultimate’s stockholders adopt the Merger Agreement and may not withhold, withdraw, qualify or modify in a manner adverse to Parent such recommendation or take certain similar actions which are referred to in the Merger Agreement as a “Change of Recommendation”. However, Ultimate may, prior to the time the Company Stockholder Approval is obtained, make a Change of Recommendation in connection with a Superior Proposal or Intervening Event (each as defined in the Merger Agreement), and in the case of a Superior Proposal, terminate the Merger Agreement, if Ultimate complies with certain notice and other requirements.

The Merger Agreement contains certain termination rights, including, among others, (i) the right of either party to terminate the Merger Agreement if the Merger is not consummated on or before August 3, 2019, or if the Company Stockholder Approval is not obtained at a meeting of the Company’s stockholders at which a vote on the adoption of the Merger Agreement is taken; (ii) the right of Ultimate to terminate the Merger Agreement (a) if Parent and Merger Sub fail to consummate the Merger following satisfaction or waiver of the conditions to Parent’s obligation to consummate the Merger and completion of a specified marketing period for Parent’s debt financing or (b) prior to the time the Company Stockholder Approval is obtained, in order to substantially concurrently enter into an agreement providing for a Superior Proposal, subject to complying with the terms of the Merger Agreement; and (iii) the right of Parent to terminate the Merger Agreement prior to the time the Company Stockholder Approval is obtained if the Board of Directors effects a Change of Recommendation. The Merger Agreement provides that, upon termination of the Merger Agreement under specified circumstances, Ultimate will be required to pay Parent a termination fee of $331 million; provided that if Ultimate terminates the Merger Agreement during the 50-day go-shop period and simultaneous with such termination enters into a definitive agreement for an alternative acquisition, then the termination fee payable by Ultimate to Parent will be $110 million. The Merger Agreement further provides that Parent will be required to pay Ultimate a termination fee of $550 million if the Merger Agreement is terminated under specified circumstances.

Cloud Computing Model

Market acceptance of cloud computing for mission critical enterprise applications has become increasingly common in recent years since software can be delivered cost-effectively, reliably, and securely to businesses over the Internet, eliminating the need for customers to purchase supporting software and hardware for an on-premise system and the need to hire IT staff to monitor, maintain, and upgrade such a system.

We introduced our first subscription-based service solution over the Internet in December of 2000, and we began marketing our first multi-tenant SaaS HCM to enterprise companies in 2002. Since that time, we have significantly expanded our HCM offerings and the cloud infrastructure that supports them. Today, we develop our solutions using cloud-native technologies and architectural patterns to provide our customers with solutions that are effective, engaging, flexible, and resilient. Our cloud model is based on a multi-tenant architecture that is both open and secure with support for user experiences on both desktop and mobile devices. Our customers that have moved away from traditional on-premise software to our cloud-based service applications benefit by substantially reducing the cost and complexity typical of on-premise software implementations, customizations, and upgrades. Through our cloud-based ~~SaaS~~delivery model, we supply and manage the hardware, infrastructure, ongoing maintenance, and backup services for our customers. We install the latest version of our software for our customers, reducing their need to buy and maintain their own technology infrastructure resources., Asand as a part of our cloud model, we also provide ~~activation~~launch and training services to our customers as well as ongoing support services.

Our cloud-based solutions are hosted in ~~four~~eight data centers: one located near Atlanta, Georgia, one near Phoenix, Arizona, one near Toronto, Canada, one near Vancouver, Canada, one near Ashburn, Virginia, one near Dallas, Texas, one near Frankfurt, Germany and the ~~fourth~~eighth near ~~Vancouver~~Paris, ~~Canada~~France. Our data center facilities are owned and operated by independent third parties, who provide redundant power, bandwidth, and physical security. Ultimate employees deploy, monitor, and manage our hardware and software systems in accordance with our security and data privacy policies, which are subject to examination by an independent third-party.

Market Share

Based on our customer counts and market data from Hoover's/Dun & Bradstreet as of January 5, ~~2018~~2019, we estimate our approximate share of the total available market (TAM) at the close of ~~2017~~2018 to be 8approximately 7 percent for enterprise companies, 812 percent for mid-market companies, and 23 percent for companies in the strategic market.

Company Information

Ultimate is a Delaware corporation formed in April 1996 to assume the business and operations of The Ultimate Software Group, Ltd. (the “Partnership”), a limited partnership founded in 1990. During August 2006, Ultimate formed a wholly-owned subsidiary, The Ultimate Software Group of Canada, Inc. (“Ultimate Canada”), to accommodate our operations in Canada. During February 2015, Ultimate formed a wholly-owned subsidiary, The Ultimate Software Group of Asia, PTE. LTD. In July 2018, Ultimate acquired PeopleDoc SAS, a simplified joint-stock company (société par actions simplifiée) organized under the laws of France (“PeopleDoc”) and formed a wholly-owned subsidiary, PeopleDoc SAS, based in Paris, France. There were no material assets or revenues in Canada, Singapore or ~~Singapore~~Europe as of or for the year ended December 31, ~~2017~~2018. Ultimate's headquarters is located at 2000 Ultimate Way, Weston, Florida 33326, and our telephone number is (954) 331-7000.

Capabilities of UltiPro

UltiPro is a comprehensive cloud-based solution designed to deliver the functionality businesses need to manage the complete employee life cycle from recruitment to retirement, and to facilitate high levels of employee engagement with their employers and one another. The solution includes feature sets for talent acquisition and onboarding, HR ~~management~~service delivery and management, compliance, benefits management and online enrollment, payroll, performance management, employee engagement surveying, compensation management, succession management, learning management, reporting and analytical decision-making tools, time and attendance, and role-based self-service capabilities for executives, managers, administrators, and employees whether they are in or out of the office. UltiPro offers the following capabilities to our customers:

Role-Based Internet Access to Functionality. UltiPro provides web and mobile access to workforce-related business functions, company communications, and reporting for everyone in our customer's organization, not just the HR department. The access and specific functionality can be tailored to our customer's process requirements and the individual user's role. We believe that UltiPro's employee-facing web applications can increase management and administrative efficiencies by providing immediate access to reporting, staff management processes and business intelligence for business leaders, and can reduce operating costs by eliminating the need for organizations to print and distribute paper communications, handbooks, forms, and paychecks. Using tablets or smartphones, employees can manage their goals, provide feedback to managers, search and apply for career opportunities, access their own personal information, such as pay statements, and view their company's employee directory to look up contact information or employee photos. In addition, managers can approve or deny daily workflow transactions, such as salary changes and paid time off, access reports and analytics, and readily review goals, competencies, and accomplishments of their team members.

3Rich and Highly Configurable Functionality. UltiPro has rich functionality built into the solution and provides extensive capabilities for configuration and integration. As a result, we have found that our customers can avoid extensive customizations and yet are able to achieve a highly tailored solution to meet their specific business needs. Since UltiPro's feature-sets are unified, our customers can streamline their management of the total employment cycle and can generate strategic HR and talent management insights from UltiPro as their primary, central system of record for their employee data.

byFlexible, ~~eliminating~~Rapid ~~the~~System ~~need~~Setup ~~for organizations to print~~ and ~~distribute~~Configuration. ~~paper~~UltiPro ~~communications, handbooks, forms,~~ and ~~paychecks.~~our ~~Ultimate~~streamlined ~~also provides~~ UltiPro ~~functionality~~Launch ~~for~~Experience ~~use~~have onbeen ~~mobile~~designed ~~devices.~~to ~~Using~~minimize ~~tablets~~the ortime ~~smartphones,~~and ~~employees~~effort ~~can~~required ~~manage their goals, provide feedback~~ to ~~managers,~~set ~~search~~up and ~~apply~~configure ~~for~~the ~~career~~system ~~opportunities,~~to ~~access~~address ~~their~~individual ~~own~~company ~~personal~~needs. ~~information,~~Largely ~~such~~because asour ~~pay~~UltiPro ~~statements,~~solutions ~~and~~deliver ~~view~~extensive ~~their~~functionality ~~company's~~that ~~employee~~can ~~directory~~be configured to ~~look~~align upwith ~~contact~~our ~~information~~customers' orvarious ~~employee~~business ~~photos.~~models Inwith ~~addition,~~few ~~managers can approve or deny daily workflow transactions~~customizations, ~~such~~our assetup ~~salary~~of ~~changes~~new ~~and~~customers ~~paid~~is ~~time~~faster ~~off, access reports~~ and ~~analytics,~~simpler ~~and~~than ~~readily~~implementations ~~review~~typical ~~goals,~~of ~~competencies~~legacy, ~~and~~on-premise ~~accomplishments of their team members~~software.

~~Rich~~Reduced ~~and~~Total ~~Highly~~Cost ~~Configurable~~of ~~Functionality~~Ownership. We believe that the UltiPro ~~has~~solution ~~rich~~provides ~~functionality~~cost ~~built~~saving ~~into~~opportunities ~~the~~for ~~solution~~our customers and ~~provides~~that ~~extensive~~UltiPro ~~capabilities~~is ~~for~~competitively ~~configurability~~priced. AsIn ~~a result~~addition, we ~~have~~believe ~~found~~ that our ~~customers~~current ~~can~~practices ~~avoid~~in ~~extensive~~launching ~~customizations~~the ~~and~~UltiPro ~~yet~~solution ~~are~~result ~~able~~in tocost ~~achieve~~savings afor ~~highly~~customers ~~tailored~~when ~~solution~~compared towith ~~meet~~implementations ~~their~~of ~~specific~~other ~~business~~similar ~~needs~~solutions in the industry. ~~Since~~The UltiPro's ~~feature-sets~~customer ~~are~~may ~~unified,~~also ~~our~~reduce ~~customers~~the ~~are~~administrative ~~able~~and toIT ~~streamline~~support ~~their~~costs ~~management~~associated ofwith the ~~total~~organization's ~~employment~~HR, ~~cycle~~benefits and ~~can~~payroll ~~generate~~functions ~~strategic~~over HRtime. ~~and~~Administrative ~~talent~~costs ~~management~~are ~~reports~~often ~~from~~further ~~UltiPro~~reduced asby ~~their~~providing ~~primary~~an organization with greater access to information, ~~central~~streamlined ~~system~~HR ofprocesses ~~record~~and ~~for~~transactions, ~~their~~and ~~employee~~control ~~data~~over reporting.

Flexible, Rapid System Setup and Configuration. UltiPro has been designed to minimize the time and effort required to set up and configure the system to address individual company needs. Largely because our UltiPro solutions deliver extensive functionality that can be configured to align with our customers' various business models with few customizations, our setup of new customers is faster and simpler than implementations typical of legacy, on-premise software. 5

Reduced Total Cost of Ownership. We believe that the UltiPro solution provides cost saving opportunities for our customers and that UltiPro is competitively priced. In addition, we believe that our current practices in activating the UltiPro solution result in cost savings for customers when compared with implementations of other similar solutions in the industry. The UltiPro customer may also reduce the administrative and IT support costs associated with the organization's HR, benefits and payroll functions over time. Administrative costs can be further reduced by providing an organization with greater access to information, streamlined HR processes and transactions, and control over reporting.

Modern Cloud-Native Technologies. We are consistently focused on evolving our cloud architecture, leveraging the most appropriate technologies, platforms, and patterns to solve business challenges and deliver value to our customers. The primary characteristics of our technology and cloud architecture are:

• Multi-Tenant SaaS offering. We take on the responsibility of delivery, maintenance, and upgrades. This allows us to serve all of our customers from a single code base for each of our offerings, reducing complexity and improving reliability.

• Cloud-Native Applications and Platforms. Micro-Service oriented applications deployed on robust Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) backed cloud platforms allow our offerings to scale and better ~~isolate~~react ~~themselves~~to ~~from~~changing ~~failure~~demands, leading to more resilient and reliable solutions for our customers.


•	A highly configurable platform that enables customers to achieve a tailored UltiPro experience for their businesses without incurring the high expense of custom software.


•	Extensible offerings that leverage web services and event-based integrations to expose functionality to the outside world, including an extensive network of partners.


•	Industry-leading tools, technologies and design patterns including, but not limited to, Microsoft .NET, Java/Spring, Python, AngularJS, Openstack and Docker Containers to streamline the complexities of our HCM domain and focus on how our users want to use UltiPro rather than expect them to change their behavior to accommodate our product.

Rich End-User Experience, Ease of Use and Navigation. We design our products to be user-friendly and to simplify the complexities of managing employees and complying with government regulations in the HR, payroll, and talent management areas. UltiPro uses familiar, consumer-style navigation, which we believe makes our solution convenient and easy to use. While traveling or out of the office, our customer's HR professionals, executives, managers, administrators, and employees can manage payroll and employee functions and run reports by accessing UltiPro over the Internet or find answers to key routine questions by using anthe UltiPro application on their mobile devices.

Comprehensive Customer Services and Industry-Specific Expertise. We provide several types of customer service: cloud services, professional setup and ~~activation~~launch services, customer support services, knowledge (or training) services, and a group of optional service offerings we call Select Services that includes payment services (such as tax filing, garnishment management and check printing), ongoing managed services, and other specific-need services such as filing the Patient Protection and Affordable Care Act ("ACA") compliance documents for customers. The voice of our customers is incorporated into all of our processes, and all of our services are designed to create a positive, proactive and productive UltiPro experience for our customers. We have multiple avenues for our customers to give us feedback and recommendations on product enhancements, and we provide our customers a portal where they can choose to learn about UltiPro and Ultimate in the style that best suits them — online webinars, videos, instructional documents, online chats, customer communities, and other vehicles. We recognize the importance of issuing timely updates that reflect changes in tax and other regulatory laws and employ a dedicated research team to track jurisdictional tax changes for more than 10,000 active tax codes included in UltiPro as well as changes in other employee-related regulations.

enhancements, and we provide our customers a portal where they can choose to learn about UltiPro and Ultimate in the style that best suits them - online webinars, videos, instructional documents, online chats, customer communities, and other vehicles. We recognize the importance of issuing timely updates that reflect changes in tax and other regulatory laws and employ a dedicated research team to track jurisdictional tax changes for more than 10,000 active tax codes included in UltiPro as well as changes in other employee-related regulations.

Managed Services. As part of our mission to simplify the work lives of our customers’ human resources and payroll people, we introduced UltiPro Managed Services in 2013. These managed services are now part of our Select Services offerings and are designed for those customers who want to outsource some components of their HR, payroll, benefits, and HCM technology management functions without sacrificing the control of, or access to, their employee data that they enjoy with our cloud solution. Unlike other outsourced payroll or Human Resources Information System ("HRIS") services that typically take a one-size-fits-all approach, our customers can select from a variety of payroll management, HRIS, and/or benefits management services and combine them into a tailored bundle that best suits their unique needs.

UltiPro Standard Functionality and Optional Capabilities

UltiPro's standard functionality includes, but is not limited to, a set of role-based features that engage employees while allowing HR generalists as well as benefits, compensation, and payroll managers and other business managers to develop, coach, evaluate and reward their people and meet organizational objectives. Business intelligence along with system configuration tools and integration capabilities support our customers' connections with third-party applications and providers. UltiPro also includes employee relations' tools for managing disciplinary actions and grievances, and health and safety incidents.

In addition to UltiPro's HCM functionality, our customers have the option to purchase a number of additional capabilities on a per-employee-per-month (“PEPM”) basis, which are available to enhance and complement the core functionality of UltiPro and which are based on the particular business needs of our customers. These optional UltiPro capabilities currently include (i) the talent acquisition suite (recruitment and onboarding); (ii) the talent management suite (performance management, talent predictors, and succession management); (iii) learning management; (iv) employee engagement surveys; (v) compensation management; (vi) benefits enrollment; (vii) time and scheduling management; (viii) payment services; (ix) wage attachments; and (x) other optional features (collectively, “Optional Capabilities”), which are described below.

functionality of UltiPro and which are based on the particular business needs of our customers. These optional UltiPro capabilities currently include (i) the talent acquisition suite (recruitment and onboarding); (ii) the talent management suite (performance management, talent predictors, and succession management); (iii) learning management; (iv) employee engagement surveys; (v) compensation management; (vi) benefits enrollment; (vii) time and scheduling management; (viii) payment services; (ix) wage attachments; (x) HR service delivery; and (xi) other optional features (collectively, “Optional Capabilities”), which are described below.

Differences between capabilities available to our enterprise, mid-market and strategic customers are specified below. Unless otherwise specified, capabilities are included in both our enterprise and mid-market offerings.

UltiPro's Standard HR/Payroll Functionality

UltiPro can act as the gateway to business activities for a company's executives, management team, HR/payroll staff, administrators, and employees. Employees of customers can access UltiPro from standard web browsers such as Microsoft Internet Explorer, Mozilla Firefox and Google Chrome, view information and perform tasks in a language of their individual choice (most commonly English, Spanish, or French), set their personal preferences for the order and placement of home-page content, and set up access to any available page in one click. Ultimate believes that UltiPro allows our customers to improve service to their employees through better communications and to save time because managers and administrators can complete hundreds of common employee-related tasks, including administering benefits, managing staff and accessing reporting and business intelligence in real time, from one central solution. UltiPro also enables companies to provide secure, on-demand access to company and personal information for their employees over the Internet.

UltiPro's Standard HR/payroll functionality includes, but is not limited to, the following:

Human Resources Management. UltiPro manages all aspects of a person and their employment relationship regardless of where the employee resides. This includes personal details, skills and competencies, international identification documents, employment history, employment contracts (for those employees in countries that require them), performance, job and salary information, career development and preferences, and health and wellness programs. This allows single country or multinational organizations to easily manage and report on worldwide headcounts, and other critical business metrics. In addition, UltiPro facilitates the recording and tracking of key information for government compliance and reporting in the US, Canada and many other countries. This includes the Consolidated Omnibus Budget Reconciliation Act (COBRA), the Health Insurance Portability & Accountability Act (HIPAA), regulations implemented by the Occupational Safety & Health Administration (OSHA), workers' compensation regulations, the Family Medical Leave Act (FMLA), the ACA (Affordable Care Act), and Equal Employment Opportunity (EEO) laws for the United States. UltiPro also enables compliance with HIPPAA confidentiality requirements for protecting sensitive data such as employee social security numbers.

Benefits Management. UltiPro allows companies to automate the administration of health, welfare, dental, vision, and other benefits they offer their employees, including configuration and the matching of employee and employer contributions. UltiPro also enables employees to check benefit options and coverage online. UltiPro eliminates the need for duplicate rules, duplicate data entry, and reconciliation reporting because it stores details for deductions and benefit plans in one common table. These features include rules for coverage, premium and employer match computations, and eligibility and participation determinations. UltiPro also allows companies to maintain and administer paid time off allowances (including vacation, sick, and holiday accrual computations), track leave-time taken, and facilitate the response to employee leave requests.

Payroll. UltiPro's payroll features a powerful engine that handles hundreds of payroll-related computations intended to minimize the customer's need for side calculations or additional programming. UltiPro delivers complex wage calculations such as average pay rates for overtime calculations, shift premiums, garnishments and levy calculations. With UltiPro, a company's central payroll department, remote offices or multiple divisions can process payroll and can define and report on who completes each specific processing step based on the exact needs of the organization, thus supporting appropriate segregation of duties. All of this is managed through an easy-to-use dashboard of payroll tasks and statuses. To help our customers reduce the complexities and errors associated with administrators manually assigning appropriate payroll taxes to employees in the United States, Ultimate offers an embedded feature called Smart Tax Search™. Smart Tax Search™ leverages the latest GIS (geographic information systems) technology to enable UltiPro to automatically assign the correct federal, state, and local payroll taxation rules based upon the home and work addresses listed in UltiPro’s employee records.

Tablet-Based Time clock. UltiPro TouchBase, which was introduced in connection with our acquisition of Employtouch (the "Employtouch Acquisition"), provides our customers an interactive mobile time clock device that collects time punches, as well as highlights the information most critical to employees and managers via an engaging activity stream. With UltiPro TouchBase, our customers can capture employee time on a touchscreen tablet device, collecting employee-validated data for cost accounting and payroll; can leverage photos for accurate capture of employee time-entry, avoiding ~~'buddy punches'; and can validate transactions using PIN (Personal Identification Number) entry, HID (Human Interface Device), RFID (Radio Frequency Identification), magnetic swipe or barcode.~~

'buddy punches'; and can validate transactions using PIN (Personal Identification Number) entry, HID (Human Interface Device), RFID (Radio Frequency Identification), magnetic swipe or barcode.

Role-Based Self-Service. Authorized managers have self-service access to staff information such as salary, compensation history, key dates and emergency contacts, with reporting and workforce analysis tools to facilitate decision-making. A customer's managers can view and update staff information, manage department activities, post job openings, leverage recruiting and hiring tools, and perform queries on workforce data. UltiPro's document management features can be used to house and categorize employee-related documents such as drivers' licenses, consent forms, and completed I-9 forms with required identification. Administrators, managers and employees have the ability to attach files in standard formats such as Microsoft Word, PDF, JPEG, and spreadsheets to employee files. The documents can be grouped and sorted to individual requirements, as necessary.

Employees also may be given immediate, security-protected access to view their own pay details on a mobile device or the web, and benefits summaries, frequently used forms, and company information on the web. They can also update personal information such as address, phone number, emergency contacts, and skills; change their preferences such as direct deposit accounts and benefits selections; make routine requests such as asking for vacation time; and enroll in training.

UltiPro Business Intelligence. UltiPro Business Intelligence leverages a business intelligence platform from IBM Cognos Corporation, a third-party provider, for built-in, ad hoc HR, payroll, and talent management reporting and analysis. Accessed via the web and mobile, UltiPro Business Intelligence gives users the ability to access data across the UltiPro solution - —from HR and payroll to benefits administration and enrollment, compensation, talent acquisition and onboarding, talent management, compliance, year-end data, and ~~more_and~~more—and enables them to create, modify, and distribute workforce-related reports and automated notifications. UltiPro also includes a pre-configured data mapping library and pre-authored reports and analytics. Controlled by role-based security, everyone in a customer's organization—from line managers to executives —can have immediate access to key workforce metrics, and they can personalize their own user experience to show the reports they want to see and how they want to see them. We believe that UltiPro Business Intelligence gives our customers significant strategic value for managing their workforce-related functions and saves them labor time and money by eliminating or reducing the need for internal technology resources to generate hundreds of individual reports for disparate executive and management needs. UltiPro Business Intelligence is available to manager roles on a mobile device or tablet to provide quick access to mobile optimized reports and analytics. We also embed key data insights and visualizations in context of the application. These data visualizations are developed as part of the core application and provide in-context support to decision-makers.

Other Key Capabilities. UltiPro's tracking of hours worked in payroll ties to UltiPro's benefits management, enabling automatic calculation of employees' hours of service eligibility and providing HR leaders analytical insight into compliance risk related to the ACA delivered via a Healthcare Eligibility Dashboard and our UltiPro ACA Toolkit. UltiPro includes capabilities for consent, data erasure, data portability, access and rectification, which allow organizations that store or process personal information of EU residents to comply with the General Data Protection Regulation (GDPR). UltiPro includes system configuration tools such as graphical workflow configuration and platform configuration to allow customers to extend UltiPro with secure, personalized and reportable fields. Conditional workflow enables organizations to authorize HR/payroll staff, managers, or supervisors to manage key HR processes with multiple approvals via UltiPro, expediting business activities such as hiring an employee or making a salary increase. UltiPro workflow is configurable based on customer need and includes numerous pre-configured processes based on industry best-practices. In addition, UltiPro offers role-based security, flexible business rules, and an easy-to-use content management tool. System administration is designed to enable non-technical users to administer UltiPro's role-based security, built-in conditional workflow, and system business rules, as well as to enable system administrators to post company communications, link to external web sites and tailor functionality to reflect the customer's own company user experience requirements. Broadcast communications tools are available and can leverage employee qualifiers in UltiPro for distribution of mass communication emails to ensure accurate recipients and the trackable follow-up and/or acknowledgment often required with regulated notifications. Enterprise Integration Tools also are included to provide the ability to interface with third-party cloud and on-premise applications and providers such as general ledger, payment services, time clocks, banks, 401(k) and benefits providers, check printing services and unemployment management services. Delivered integrations are also available to customers through UltiPro Connect and the UltiPro Developer Network of preferred partners to facilitate extending their UltiPro and third-party data across multiple systems.

6UltiPro Predictors. The UltiPro predictive analytics solution is a key part of the core UltiPro suite where predictive metrics and indicators are available to support manager decisions. The predictors are based on statistical algorithms we developed, refined, and validated with numerous customers. UltiPro’s predictive analytics help managers to determine the best actions to take for further developing or changing the career trajectory of employees reporting to them, thereby helping organizations to reduce turnover and improve employee engagement. For example, organizations can set tolerances for certain predictive metrics in our UltiPro Retention Predictor™, giving a manager or HR generalist the ability to see immediately if an employee exceeds the tolerance level they have defined as "at risk of leaving" and, thereby, providing

with secure, personalized and reportable fields. Conditional workflow enables organizations to authorize HR/payroll staff, managers, or supervisors to manage key HR processes with multiple approvals via UltiPro, expediting business activities such as hiring an employee or making a salary increase. UltiPro workflow is configurable based on customer need and includes numerous pre-configured processes based on industry best-practices. In addition, UltiPro offers role-based security, flexible business rules, and an easy-to-use content management tool. System administration is designed to enable non-technical users to administer UltiPro's role-based security, built-in conditional workflow, and system business rules, as well as to enable system administrators to post company communications, link to external web sites and tailor functionality to reflect the customer's own company user experience requirements. Broadcast communications tools are available and can leverage employee qualifiers in UltiPro for distribution of mass communication emails to ensure accurate recipients and the trackable follow-up and/or acknowledgment often required with regulated notifications. Enterprise Integration Tools also are included to provide the ability to interface with third-party cloud and on-premise applications and providers such as general ledger, payment services, time clocks, banks, 401(k) and benefits providers, check printing services and unemployment management services. Delivered integrations are also available to customers through UltiPro Connect and the UltiPro Developer Network of preferred partners to facilitate extending their UltiPro and third-party data across multiple systems.8

UltiPro Predictors. The UltiPro predictive analytics solution is a key part of the core UltiPro suite where predictive metrics and indicators are available to support manager decisions. The predictors are based on statistical algorithms we developed over the course of more than two years and validated with numerous customers. UltiPro’s predictive metrics help managers to determine the best actions to take for further developing or changing the career trajectory of employees reporting to them, thereby helping organizations to reduce turnover and improve employee engagement. For example, organizations can set tolerances for certain predictive metrics in our UltiPro Retention Predictor™, giving a manager or HR generalist the ability to see immediately if an ~~employee exceeds the tolerance level they have defined as "at risk of leaving" and, thereby, providing them an~~ early warning to take an appropriate action to increase the chances of that employee staying. In addition to our UltiPro Retention Predictor, the solution includes an UltiPro High Performer Indicator™, which identifies employees who consistently receive high pay raises, and an UltiPro High Performer Predictor™, which ranks employees predicted to be high performers based upon a number of variables tracked in UltiPro, and the UltiPro Engagement Indicator which provides insight into an employee’s level of engagement at their organization. To assist managers in identifying and tracking key actions designed to increase the engagement and retention of team members, UltiPro Leadership Actions prompt a leader to intervene in a positive and proven-to-be effective fashion, based on best practices in talent management. UltiPro Recruiting’s Candidate Match feature analyzes multiple aspects of incoming candidates and the positions they have applied for to provide insights around a candidate’s potential fit for a position, thereby helping recruiters and hiring managers to focus talent searches and identify appropriate opportunities for qualified applicants.

UltiPro's Optional Capabilities

UltiPro Talent Acquisition is a suite of add-on products comprised of Recruitment and Onboarding.

i) Recruiting. The Ultimate team designed our recruiting solution to transform the recruiting process by increasing candidate engagement and simplifying the work of recruiters. Built to be candidate-centric, UltiPro Recruiting has a consumer-like interface to attract and keep top talent engaged, with the goal to reduce the typical 40 percent to 80 percent online application drop-off rate typically occurring with traditional applicant tracking solutions. Rather than being restricted to limited profile information and résumés typical of traditional solutions, candidates can build an in-depth online presence that gives recruiters and hiring managers a more complete understanding of who they are and their abilities. UltiPro Recruiting includes an appealing user interface, gamification, and collaboration tools. It is fully mobile and integrates with popular social networks such as LinkedIn and Twitter. At the same time, UltiPro Recruiting automates the recruiting process for hiring managers, recruiters, and HR staff by enabling them to track and manage standard recruitment tasks such as posting open jobs, reviewing résumés, screening candidates, and scheduling interviews.

ii) Onboarding. UltiPro Onboarding is a comprehensive solution that provides employers the ability to engage and welcome new employees into an organization before the first day of work and to speed their time to productivity. UltiPro Onboarding enables dynamic content such as video messages from executives, managers, and co-workers and gives new hires the ability to connect with fellow team members, request a mentor, engage in self-directed learning through a feature called ‘Unlock Your Potential,’ and complete required and compliance-related documents. The solution is easily configurable to meet the specific needs of an organization and includes such activities as obtaining required government and procedural paperwork, including electronic signatures and document storage; provisioning necessary equipment and job-specific tools such as office location, computer equipment, and uniforms; ensuring enrollment in necessary training programs; and familiarizing new hires with the employer's core values and business objectives.

UltiPro Talent Management is a suite of add-on products comprised of Performance Management, Talent Predictors, and Succession Management.

i) Performance Management. UltiPro Performance Management helps companies maximize the development of their people and improve employee satisfaction by automating and enhancing the performance process, using competency-based employee development. UltiPro Performance Management streamlines the processes of evaluating performance and completing performance reviews, validating competencies, identifying top performers for succession planning, and tracking and executing coaching, training and development plans. The solution also supports a continuous process of capturing real-time employee feedback from a social network and, through our mobile solution, makes goal management and access to talent profile information, employee observations, and journaling convenient for employees and managers alike.

ii) ~~Succession Management. With~~ UltiPro’s ~~Succession~~Talent ~~Management,~~Predictors ~~organizations~~are ~~can~~predictive ~~involve~~analytics ~~company~~tools ~~leadership,~~that ~~managers,~~help ~~and~~organizations ~~individuals~~to inevaluate antheir ~~ongoing,~~talented ~~collaborative~~people ~~process~~more ofproactively ~~succession~~and ~~planning.~~objectively ~~Employees~~by ~~can~~providing ~~manage~~them ~~their~~meaningful, ~~own~~unbiased ~~talent~~metrics. ~~profiles-updating~~Our ~~factors~~predictive ~~that~~analytics ~~influence~~include: UltiPro ~~succession~~Retention ~~readiness~~Predictor, ~~such~~which asforecasts ~~mobility~~an ~~preferences,~~employee’s ~~languages,~~likelihood ~~education,~~of ~~accomplishments,~~staying ~~and~~with ~~competencies-to~~the ~~ensure~~organization ~~that~~for ~~leadership~~the ~~has~~next a12 ~~deeper~~months; ~~understanding~~UltiPro ofHigh ~~the~~Performer ~~talent~~Indicator, ~~landscape~~which athelps ~~their~~leaders ~~organization. Visible~~ to ~~employees~~identify ~~and~~who ~~managers,~~top ~~UltiPro's~~performers ~~employee~~are ~~“talent~~in ~~card”~~their ~~provides~~organization; ~~a consolidated~~ and ~~comparative~~UltiPro ~~view~~High ofPerformer ~~multiple~~Predictor, ~~succession-readiness~~which ~~factors,~~identifies which ~~then~~employees ~~can~~have bethe ~~used~~likelihood inof ~~both~~becoming ~~decision-making~~high ~~and~~performers ~~career~~in ~~development~~the ~~processes~~future.

iii) Succession Management. With UltiPro Succession Management, organizations can involve company leadership, managers, and individuals in an ongoing, collaborative process of succession planning. Employees can manage their own talent profiles-updating factors that influence succession readiness such as mobility preferences,

languages, education, accomplishments, and competencies-to ensure that leadership has a deeper understanding of the talent landscape at their organization. Visible to employees and managers, UltiPro's employee “talent card” provides a consolidated and comparative view of multiple succession-readiness factors, which then can be used in both decision-making and career development processes.

Other Optional Capabilities include, but are not limited to, the following products, which are supplemental to UltiPro's standard HR/payroll capabilities:

UltiPro Learning. Through a strategic partnership, Ultimate has the right to market and distribute an independent third party's learning management product as part of the UltiPro solution. We have branded this product UltiPro Learning. Ultimate is the single-source contact for customer implementations and ongoing solution support for UltiPro Learning. It is both web-based and mobile and is integrated with UltiPro's HR and talent management functionality. UltiPro Learning is a new approach to learning that supports the collaborative and on-demand nature of learning demanded by employees today. UltiPro Learning allows organizations to create, curate, and deliver learning content to employees and other members of the extended enterprise to meet their professional and personal learning needs. Customers can also create learning academies to meet specific organizational needs.

UltiPro Perception. UltiPro Perception was introduced as part of the acquisition, made in the third quarter of 2016, of Kanjoya, Inc. ("Kanjoya"), a California corporation (the “Kanjoya Acquisition”), located in San Francisco, California. UltiPro Perception offers a modern way to collect and understand feedback through employee surveys and in-depth analytics of that data for HR and managers. The solution enables organizations to solicit feedback from employees in both structured and unstructured forms. Using the power of the ingrained Natural Language Processing (NLP) engine, UltiPro Perception analyzes feedback in a variety of ways, providing leaders a deeper understanding of employee sentiment while safeguarding employee privacy and anonymity. The built-in analytics allow everyone from HR and company executives to individual managers to view and gain a deeper insight into employee sentiments, identify employee feedback trends, and compare team results. These insights provide the basis for organizations to take appropriate action tailored to the needs of both teams and leaders, with the objective to improve engagement, satisfaction, and retention.

UltiPro Compensation Management. UltiPro Compensation Management includes Salary Planning, Salary Budgeting and Incentive Compensation Plans capabilities. This expanded solution is designed to support executives, managers and compensation analysts working with salary increase allocations and to incentivize employees by giving them visibility into their individual compensation plans. Highly configurable, including multi-currency and pro-ration capabilities, UltiPro Compensation Management makes it easy for companies to manage their unique compensation plans and salary award processes with flat amounts, percentages and unit-based compensation such as restricted stock unit awards. Managers can review their salary budgets and merit pool guidelines and determine the best way to allocate pay increases to their employees within their approved budget parameters. Once managers decide on the allocations, the related pay increases and awards are automatically submitted, approved and updated to UltiPro Payroll.

UltiPro Benefits Enrollment. With UltiPro Benefits Enrollment, employees can enroll in the appropriate benefit plans for their individual needs online, either at work or from home, during defined open enrollment periods. Employees can also choose to quickly renew their benefits in a single click and are guided to make the right selections based on prerequisites that link benefit plans together. UltiPro mobile capabilities enable employees to update their retirement contributions on the go. Benefits administrators can configure the enrollment process and messaging to make the process easy for employees and can monitor the enrollment progress. UltiPro Benefits Enrollment also guides employees through the benefit and personal information changes necessary as a result of life events such as getting married, having a baby or moving. UltiPro also delivers more than 70 predefined Benefit Carrier templates to facilitate the electronic feeds required for insurance carriers and plan administrators, reducing the need for manual reporting of employee census information, participant coverage, and billing reconciliation.

UltiPro Benefits Prime. Ultimate has the right to market and distribute an independent third party's benefit administration, decision support, and enrollment product as part of our UltiPro solution. We have branded this product UltiPro Benefits Prime. Benefits Prime serves as an optional advanced benefit solution that focuses on simplifying the administration of complex plan rules and improving the employee enrollment experience. Through in-depth education and personalized recommendations, UltiPro Benefits Prime helps employees better understand the benefits options available to them. With an easy-to-navigate solution, robust tools for administrators, and connections with hundreds of carriers, UltiPro Benefits Prime delivers consumer-grade benefits shopping and decision-support capabilities for an organization’s employees, along with advanced benefits billing, compliance, reporting and ongoing support for the benefits administrator. Organizations can configure the solution to support diverse programs, automate processes, ensure compliance, and engage employees. Ultimate is the single-source contact for customer implementations and ongoing solution support for UltiPro Benefits Prime, and it is integrated with core UltiPro HR and Payroll capabilities.

UltiPro Time, Attendance, and Scheduling (designed for enterprise companies). Through a strategic partnership, we have the right to market and distribute an independent third party's time and labor management product as part of the UltiPro solution. We have branded this product as UltiPro Time and Attendance, marketing the components as UltiPro Time and Attendance, UltiPro Leave Management, and UltiPro Workforce Scheduling (collectively, “UTA”). Ultimate is the single-source contact for customer implementations and ongoing solution support for UTA. UTA is web-based and integrated with UltiPro's payroll, HR, and benefits functionality. UltiPro Time and Attendance tracks time and attendance labor metrics and supports a variety of time-capture mechanisms. UltiPro Leave Management includes all of the functionality required to effectively track and manage employee leave. UltiPro Workforce Scheduling features industry-specific employee scheduling options to ensure that organizations in different environments deploy employees in an efficient and legislatively compliant manner.

UltiPro Time Management (designed for mid-market and strategic companies). UltiPro Time Management delivers the functionality and flexibility needed to manage employee time and attendance efficiently and provides web access to real-time employee time and labor information. UltiPro Time Management provides companies with the tools to proactively prevent issues that negatively impact business performance, such as employee coverage gaps, labor law violations, and excess labor spending. Fully integrated scheduling, time and attendance, and leave management capabilities reduce payroll expenditures and streamline payroll and workforce management processes.

UltiPro Workforce Management. The UltiPro Workforce Management suite is a limited release of UltiPro Time and UltiPro Scheduling applications, which was new in 2017. It is fully integrated with UltiPro Payroll and is designed to deliver a relatively effortless experience for time tracking and scheduling for employees at every level. The solution reduces the need for supportive resources; increases visibility into time off, allowances, and work schedules; and elevates the convenience of time tracking through features such as mobile access and in-app messaging between managers and employees. UltiPro Workforce Management removes the demands and roadblocks of traditional labor management systems by requiring minimal human interactions and proactively presenting relevant information to enable employees to quickly manage their own time and schedules.

UltiPro Payment Services. WeWith ~~have the right to market and distribute an independent third party's tax filing solution that we have branded~~ UltiPro Payment Services ~~(“UltiPro Payment Services”). With this~~ solution, companies are able to meet all Federal, state, and local payroll tax filing obligations quickly and easily. The UltiPro solution saves payroll staff time by eliminating the administrative burdens associated with tax filing. UltiPro Payment Services enables businesses to deposit federal, state, and local tax payments for more than 10,000 active tax codes via electronic funds transfer or check and automates filing for monthly, quarterly, and annual tax returns.

UltiPro Wage Attachments. For organizations required to process third-party payments on behalf of their employees for items such as child support, tax levies, and creditor garnishments, UltiPro Wage Attachments provides the means to effectively streamline and manage the payment process. UltiPro Wage Attachments eliminates the burden associated with payments to third parties by using information entered and calculated in UltiPro, so there is no need to manage payment processing or analyze varying disbursement schedules for multiple jurisdictions. We ensure that each third-party payment is made according to the designated payment method and reaches its required destination within the assigned timeframe.

Patient Protection and Affordable Care Act (ACA) Compliance. In the fall of 2015, Ultimate began deploying an ACA Toolkit that enables our customers to comply with ACA regulations by the 2016 deadline. The toolkit is embedded in UltiPro and automatically populates the Forms 1094-C and 1095-C with the appropriate employee, benefits, and organization information. In addition, Ultimate offers our customers additional optional ACA-related services branded UltiPro ACA Employer Services. These include such services as printing and electronic filing of 1094-C and 1095-C forms with the IRS on our customer’s behalf and ongoing proactive monitoring and managing of employee eligibility alerts, notices, and penalty responses.

9UltiPro HR Service Delivery is suite of products for organizations to manage their HR service operations and communications while delivering content in context to employees and managers. UltiPro File Management and UltiPro Case Management are being introduced to Ultimate’s customers as a result of Ultimate’s acquisition of PeopleDoc made in the third quarter of 2018. Headquartered in Paris, France, PeopleDoc is a respected pioneer in HR Service Delivery.

UltiPro File Management. UltiPro Employee File Management makes it simple and convenient for HR team members to actively manage employee files, giving them the ability to create, access, share, or delete files at any time, from anywhere. New documents generated as part of an HR process or employee request are automatically sent to the correct employee file and can be accessed on demand. HR departments can easily reduce compliance risks with this solution’s ability to define retention schedules by document type and geography, provide reports on missing or expiring documents, and protect sensitive information with role-based access.

UltiPro Case Management. UltiPro Employee Case Management helps employees acquire the information and assistance they need from HR via a personalized knowledgebase or by submitting requests that are automatically routed to the appropriate HR team member for answering. Employees can search for and find answers to their HR-related questions at any time and from anywhere. HR can track and report on key metrics and monitor key performance indicators for insight into this HR service experience. Since requests submitted to HR by employees are automatically tracked and routed based on configurable, predefined workflows, organizations save time, increase efficiency, and deliver a better, more consistent employee experience.

Other Optional Capabilities. We offer a number of additional HR and payroll-related services to extend the value of UltiPro, including test environment services, W-2 print services, pre-employment screening, paycheck modeling, pay cards, unemployment tax management, employment verification services, employee assistance, health and wellness, and work/life balance programs. In addition, we offer UltiPro Federated Single Sign-On for standards-based identity management by leveraging Microsoft's Active Directory Federated Services infrastructure as well as single-sign-on capabilities through our partner Ping Identity. These solutions help improve and simplify data security by enabling individuals to use a single login credential (such as a network login) to seamlessly access UltiPro over the Internet.

Technology

We strive to use the most modern and capable technologies available for delivering solutions that are flexible, easy to use, fast, and secure. Major characteristics of our cloud application platform include, but are not limited to, the following:

Multi-tenancy. As a SaaS provider, we use a multi-tenant cloud model that allows us to support multiple customers on a single set of systems while maintaining performance, security, and reliability. We manage and maintain our solutions for our customers, including all hardware and software upgrades. Our customers benefit by reducing their need to keep their own IT resources on staff for UltiPro solutions. Our cloud customers also benefit from having the most current version of UltiPro installed as soon as it is available.

Configurability. We have invested in our own technology and approaches for enabling application and system configurability, giving our customers the ability to achieve a highly tailored solution while minimizing or eliminating the need to create custom code.

Openness and Connectivity. We leverage widely adopted technology and industry standards for exposing data and functionality via application programming interfaces (APIs). Customers can access their HCM data based on these standard, open, and secured connections in order to link to their in-house systems, third-party cloud applications, and other systems that require data feeds such as benefits providers. Our UltiPro Carrier Network (UCN) leverages industry-leading solutions ~~from Informatica~~, allowing Ultimate to create standard, reusable connectors that support the unique data transfer requirements of individual benefits providers, simplifying both the development and maintenance of these connections. Ultimate also supports a number of ~~pre-~~partner integrations developed through our UltiPro Developer Network (UDN) and packaged connectors for solutions that expand or extend the functionality included in UltiPro. These packaged integrations include, but are not limited to: Yammer, a provider of enterprise social networking solutions; CERTPOINT, a provider of learning management solutions; and Ping Identity, which offers single-sign-on capabilities for business applications.

Domain-Driven, User-Centered Design. Our solution design approach includes domain-driven design, which provides a streamlined process for developing software with the complexities of an HCM domain in alignment with the principles of a service-oriented ~~architecture~~microservices ~~(SOA)~~architecture. A key focus of our user-centered design is to optimize the overall user experience of our customers and to maximize user engagement. We have invested significant resources in usability design and testing to create a consumer-grade experience that is flexible, responsive, and personalized. In the design of the user-experience, our emphasis is on how users want to use the product rather than the expectation that users will change their behavior to accommodate the product.

~~Mobile~~Omni-~~Centric~~Channel User Experience. In addition to the user experience capabilities available through ~~Microsoft.NET,~~UltiPro’s ~~Ultimate uses Hypertext Markup Language version 5 (HTML5) and responsive~~ web ~~design~~experience, ~~approaches~~the toUltiPro ~~deliver~~mobile ~~flexible~~application ~~user~~available ~~experiences~~ for ~~smartphones~~iOS and ~~tablets.~~Android ~~This~~devices ~~mobile~~provides ~~framework~~employee ~~supports~~and ~~applications~~manager ~~delivered~~functions through ~~multiple~~native ~~browsers~~mobile ~~and~~interactions. ~~automatically~~Additionally, ~~adapts~~interactive ~~to screen size and orientation and takes advantage of gesture~~capability-based ~~capabilities.~~functions ~~Other~~are ~~features~~now ofavailable ~~our~~through ~~mobile-centric~~a ~~user~~more ~~experience~~conversational ~~include~~interface ~~search~~using ~~for~~UltiPro’s ~~both~~Slack people data and functionality, configurability for individual users that allows them to drag and drop individual content 'gadgets' and menu controls, and favorite-specific functionality for quick accessintegration.

Workflow. Ultimate supports numerous transactions and operational processes for our customers. These processes are frequently unique to an individual customer and typically require multiple steps, approvals, data input, and confirmations. To support our customers' unique requirements, UltiPro includes configurable business process automation, or workflow, which enables customers to automate processes based on their own needs and change these processes over time without custom software code.

Business Intelligence. Ultimate provides sophisticated data query and report authoring via IBM Cognos, a leading suite of business intelligence tools. Our customers can access reports and conduct data queries from a web browser and are able to apply on-line analytical processing to multidimensional data cubes for exploring data on employees graphically and statistically from diverse angles. We maintain a link between Cognos' report catalog and UltiPro's data dictionary, eliminating the necessity for customers to create and maintain ad hoc reporting catalogs on their own. We also maintain a BI Exchange, an online community where Ultimate professionals and customers can post, download, and share standard reports. We have unified 12

10Business Intelligence. Ultimate provides sophisticated data query and report authoring via IBM Cognos, a leading suite of business intelligence tools. Our customers can access reports and conduct data queries from a web browser and are able to apply on-line analytical processing to multidimensional data cubes for exploring data on employees graphically and statistically from diverse angles. We maintain a link between Cognos' report catalog and UltiPro's data dictionary, eliminating the necessity for customers to create and maintain ad hoc reporting catalogs on their own. We also maintain a BI Exchange, an online community where Ultimate professionals and customers can post, download, and share standard reports. We have unified security for the data elements across UltiPro and Cognos instances so that role-based security controls data access across both solutions. We also provide single sign-on to simplify and secure user access.

security for the data elements across UltiPro and Cognos instances so that role-based security controls data access across both solutions. We also provide single sign-on to simplify and secure user access.

Data Centers for Cloud Offering

Our cloud offering provides web-based access to comprehensive HCM functionality for organizations that want to simplify delivery and support of their business applications. As a part of our cloud offering services, Ultimate provides the hardware, infrastructure, ongoing maintenance and backup services for our customers at ~~four~~eight data centers. The data center located near Atlanta, Georgia, is owned and operated by Quality Technology Services (“QTS”). The data centers located near Toronto and Vancouver, Canada, are owned and operated by Cyxtera Technologies ("Cyxtera") (formerly CenturyLink Technology Services ("CenturyLink") ),. ~~and~~The ~~the~~ data center located in Phoenix, Arizona, is owned and operated by Iron Mountain Data Centers, LLC (formerly IO Phoenix One, LLC). After the PeopleDoc acquisition, Ultimate also provides services to our customers at data centers (located near Ashburn, Virginia, Dallas, Texas, and Frankfurt, Germany), which are owned and operated by Rackspace US, Inc. (“Rackspace”) and a data center located near Paris, France which is owned and operated by Ecritel France (“Ecritel”).

Ultimate's use of the data center located near Atlanta, Georgia, is governed by a Master Space Agreement dated February 2, 2012 with Quality Technology Services Metro, LLC (“QTS Metro”). Pursuant to the terms of the QTS Agreement, Ultimate may from time to time submit orders for the use of certain physical space within the data centers for hosting Ultimate's hardware equipment, as well as Internet connectivity services, security, power and generator back-up, environmental controls and access controls. The QTS Agreement provides that any service order will automatically renew for successive renewal terms, unless either party notifies the other party in writing at least sixty days prior to the end of the then current term that there will be no such renewal. Furthermore, the QTS Agreement may be terminated at any time by either party thereto, if: (i) the non-terminating party breaches any material term of such QTS Agreement and fails to cure such breach within 10 days after receipt of written notice; (ii) the non-terminating party becomes the subject of a voluntary or involuntary proceeding relating to insolvency, bankruptcy, receivership, liquidation, or reorganization; or (iii) a court or other government authority having jurisdiction over the services prohibits the furnishing of services governed by such QTS Agreement.

Ultimate's use of the data centers located near Toronto and Vancouver, Canada, are governed by a Master Services Agreement dated April 30, 2013 (the “CenturyLink Agreement,” now known as Cyxtera) between Ultimate's wholly owned subsidiary Ultimate Canada and CenturyLink. Pursuant to the terms of the CenturyLink Agreement, Ultimate Canada has use of certain physical space within the data center for hosting Ultimate Canada's hardware equipment, as well as Internet connectivity services. The CenturyLink Agreement contains provisions relating to data security and access to the data center. Upon placing a service order, Ultimate Canada is guaranteed certain pricing terms and is committed to minimum usage levels for a period of at least 36 months from the effective date of April 1, 2016, per an addendum entered into by both parties to extend the term of the original agreement. The CenturyLink Agreement will renew on a month-to-month basis unless either party gives at least sixty days written notice prior to the completion of the applicable term that there will be no such renewal. The CenturyLink Agreement provides that its term will end upon the expiration of the term of the last-executed service order. Ultimate has guaranteed the payment of all amounts due from Ultimate Canada to CenturyLink under the CenturyLink Agreement.

Ultimate's use of the data center located near Phoenix, Arizona is governed by a License and Master Services Agreement dated February 27, 2012 (the "IO Phoenix Agreement,") with Iron Mountain Data Centers, LLC (formerly IO Phoenix One, LLC). Pursuant to the terms of the IO Phoenix Agreement, Ultimate has use of certain physical space within the data center for hosting Ultimate's hardware equipment, as well as Internet connectivity services. The IO Phoenix Agreement contains provisions relating to data security and access to the data center. Ultimate is guaranteed certain pricing terms through the initial term of the agreement, and is committed to minimum usage levels for a period of at least 42 months from November 1, 2014, the effective date of an addendum entered into by both parties to extend the term of the original agreement. The IO Phoenix Agreement will automatically renew thereafter for additional terms of one year unless either party gives written notice prior to the completion of the applicable term that there will be no such renewal. Ultimate must give written notice within 60 days while IO Phoenix must give written notice within 120 days.

Pricing

Our cloud offering is designed to provide an appealing pricing structure to organizations that prefer to minimize the initial cash outlay associated with typical capital expenditures for traditional on-premise products. Our cloud customers purchase the right to use UltiPro on an ongoing basis for a specific term in a shared or dedicated hosted environment, and the arrangement can typically be renewed after its initial term has expired. In the shared environment, Ultimate provides an infrastructure with servers shared among many customers who use a web browser to access the application software through the related data center. In the dedicated environment, the customer does not share servers with other customers but rather has its own set of servers. The pricing for our cloud offering, including both the hosting element as well as the right to use UltiPro, is on a per employee per month ("PEPM") basis.

Research and Development Activities

Ultimate incurs research and development expenses, consisting primarily of software development personnel costs, in the normal course of our business. Such research and development expenses are for enhancements to our existing products and for the development of new products. During 2017, 2016 and 2015, we spent $203.2 million, $158.5 million and $120.0 million, respectively, on research and development activities, gross of capitalized software. During 2017, 2016 and 2015, $52.6 million, $37.9 million and $26.3 million, respectively, of research and development expenses were capitalized for computer software development costs related to an internal-use development project (the "Development Project") that is expected to be offered in the future. Components of the overall capitalized Development Project, become ready for their intended use throughout the life cycle of the Development Project. The first component became ready for its intended use during May 2014 and other components have become ready for their intended use since 2014. Amortization for the components of the Development Project that are completed will begin when they are ready for their intended use and will be included with cost of recurring revenues in our consolidated statements of income once amortization commences.

Customer Services

~~The National Customer Service Association named~~ Ultimate’s customer services ~~team~~department ~~Service~~has ~~Organization~~a history of ~~the~~being ~~Year~~recognized inby ~~the~~third-parties ~~large~~for ~~business~~excellence. ~~category~~In ~~in 2017~~2018, Customer Sales and ~~the~~Services ~~Stevie~~World Awards ~~recognized~~named ~~our~~Ultimate ~~services~~Customer ~~team~~Service ~~with~~Department aof ~~2017~~the ~~People’s~~Year, ~~Choice~~a ~~Award~~Gold ~~for~~winner. ~~Favorite~~At ~~Customer Service in~~ the ~~Computer~~same ~~Services~~time, ~~category. Stevie~~Ultimate ~~Awards~~ also ~~recognized~~earned ~~Ultimate~~a ~~with~~ Silver ~~Awards~~Stevie Award for Customer Service Department of the Year. In 2017, ~~Innovation~~the inNational Customer Service, ~~and~~Association named Ultimate’s services team the ~~2017~~Service Organization of the Year in the large business category, the Innovation Award. Network Products Guide named Ultimate’s ~~services~~ team the “Best Customer Service Department of the Year”, and Stevie Awards honored our team with a People’s Choice Award for Favorite Customer Service in ~~its~~the ~~2016~~Computer ITServices ~~World~~category. ~~Awards~~In 2016, ~~and~~ the Technology Services Industry Association recognized our services team for “Innovation in Transformation of Support Services” in its ~~2016~~ TSIA Star Awards.

We believe that our focus on delivering our customers a positive and productive UltiPro experience has differentiated Ultimate in the marketplace and is critical to the quality of Ultimate's comprehensive service solution. We provide our customer services in two broad categories: (i) professional services and (ii) customer support services and product maintenance. Additionally, we provide services associated with the delivery of our cloud-based solutions. These services include, but are not limited to, purchasing and supporting hardware and system software; installing new versions of UltiPro; and backing up customer data.

Professional Services. Ultimate's professional services include system setup and ~~activation~~launch (i.e., implementation), executive relationship management (“ERM”), and knowledge management (or training) services. We believe that our setup and ~~activation~~launch consulting services are differentiated from those of other vendors by speed, predictability and completeness. Our successful record with rapid ~~system~~solution ~~activation~~launches ~~and~~for ~~implementations~~our customers is due, we believe, to our standardized methodology, consultants, highly configurable product functionality, and comprehensive conversion and integration tools.

Ultimate has a primarily long-tenured team of functional and technical consultants who are dedicated to assisting customers with rapid deployments. In addition, we provide our customers with the opportunity to participate in formal training programs conducted by our learning team (on-site and virtual), including online self-paced courses, "Quick Tours," and on-demand training. Training programs are designed to increase our customers' ability to use the full functionality of our products, thereby maximizing the value of our customers' investments. Courses are designed to align with the stages of product launch and to give attendees hands-on experience with UltiPro. Trainees learn such basics as how to enter new employee information, set up benefit plans and generate standard reports, as well as more complex processes such as defining company rules, configuring the system and creating custom reports. Ultimate maintains training facilities in Atlanta, Georgia; Schaumburg, Illinois; Santa Ana, California; and at our headquarters in Weston, Florida. Ultimate rents training facilities in other locations, such as Dallas, Texas; Toronto, Canada; Montreal, Canada; Vancouver, Canada; and other cities on an as-needed basis. After our customers have processed their first live payroll using UltiPro (referred to as going “Live”) and have been turned over to our customer support and maintenance program, we assign a customer relationship manager to the account to assist customers obtaining maximum value of the UltiPro solution, connect with other Ultimate users and advanced business analytics. The ERM team also focuses a large portion of its time on customer retention, which is an important aspect of Ultimate's long-term business model.

Customer Support. We offer comprehensive and on-going support services to all of our UltiPro customers. Ultimate had a recurring -revenue, ~~cloud~~ customer -retention rate ~~which~~of ~~was~~ approximately 96% in ~~2017~~2018. Ultimate's customer support services include: software updates that reflect tax and other legislative changes; a named customer service representative; telephone support 24 hours a day, 7 days a week; unlimited access to Ultimate's employee tax center on the web; seminars on year-end closing procedures; a customer blog; and periodic newswire emails. In addition, our customer support services team maintains a Customer Success Portal for our customers where customers can submit inquiries and service requests as well as search a knowledge base of information for instant answers to questions, holds an annual national user conference and arranges for Ultimate professionals to attend smaller, user-organized user group meetings on a routine basis throughout the United States.

for Ultimate professionals to attend smaller, user-organized user group meetings on a routine basis throughout the United States.

Customers

As of December 31, 2017, Ultimate provides our UltiPro solutions to more than 4,100 customers with more than 37 million people records in our cloud. Ultimate's customers represent a wide variety of industries, including manufacturing, food services, sports, technology, finance, insurance, retail, real estate, transportation, communications, healthcare and other services. For each of the three years ended December 31, 2017, no customer accounted for more than 10% of total revenues. 14

As of December 31, 2018, Ultimate provides our solutions to more than 5,600 customers, and we have more than 48 million people records in our cloud, including the customers and people records we added with the PeopleDoc acquisition. Ultimate's customers represent a wide variety of industries, including manufacturing, food services, sports, technology, finance, insurance, retail, real estate, transportation, communications, healthcare and other services. For each of the three years ended December 31, 2018, no customer accounted for more than 10% of our total revenues.

Sales and Marketing

We market and sell our products and services primarily through our direct sales force.

Our direct sales force includes business development vice presidents, directors and managers who have defined territories, typically geographic. The sales cycle begins with a sales lead generated through a national, corporate marketing campaign or a territory-based activity. In one or more on-site visits, phone-based sales calls, or web demonstrations, sales managers work with application and technical sales consultants to analyze prospective client needs, demonstrate Ultimate's UltiPro solutions and, when required, respond to requests for proposals. The sale is finalized after customers complete their internal sign-off procedures and the terms of the contract are negotiated and signed.

With a sale of the cloud offering, the agreement generally requires PEPM fees based on company size, and bundled fees for implementation and training. Typical payment terms include a deposit at the time the contract is signed and ongoing PEPM payments on specific payment dates designated in the contract, usually tied to the Live date.

We support our sales force with a comprehensive marketing program that includes public relations, advertising, direct mail, trade shows, seminars and workshops, email marketing, social media marketing, and web marketing. Working closely with the direct sales force, customers and strategic partners, our marketing team defines positioning strategies and develops a well-defined plan for implementing these strategies. Our marketing services include market surveys and research, overall campaign management, creative development, demand generation, results analysis, and communications with field offices, customers, and marketing partners.

Intellectual Property Rights

Ultimate's success is dependent, in part, on our ability to protect our proprietary technology. We rely on a combination of copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. We do not have any patents or patent applications pending.

Competition

The market for our products is highly competitive. Our products compete primarily on the basis of technology, delivered functionality, price/performance and service.

Ultimate's competitors in our enterprise market include (i) large service bureaus, primarily Automatic Data Processing Inc. (“ADP”) and, to a lesser extent, Ceridian; and (ii) companies, such as Oracle, Lawson, and Workday that offer human resource management and payroll software products for use on mainframes, client/server environments and/or in the cloud. In our mid-market and strategic market, Ultimate's competitors include primarily payroll service providers, such as ADP, Paychex, Ceridian, Paycom and Paylocity.

Backlog

Backlog consists of our UltiPro cloud-based solutions under signed contracts for which the services have not yet been delivered. Our backlog amounts include the full contract value of sales to our customers that have not yet processed their first payroll using UltiPro and are not indicative of the annual recurring revenue value of such sales. Backlog can vary from one year to the next when the average contract period fluctuates significantly. At December 31, ~~2017~~2018, Ultimate had backlog of $~~456~~522.21 million compared with $~~399~~456.92 million as of December 31, ~~2016~~2017. Ultimate expects to fill approximately $~~392~~441.27 million of the backlog during ~~2018~~2019. Ultimate does not believe that backlog is a meaningful indicator of sales that can be expected for any future period. There can be no assurance that backlog at any point in time will translate into revenue in any subsequent period.

Employees

As of December 31, ~~2017~~2018, Ultimate employed 45,~~208~~113 people, including the employees we added with the PeopleDoc acquisition. Ultimate believes that our leadership's relationships with employees are good. This belief is validated by Ultimate’s #1 ranking in the large company category of Fortune magazine’s 2018 ~~list~~and of2019 40lists of Best Workplaces in Technology, our ~~third~~fourth consecutive year to be recognized as #1, and Ultimate's # 3 ranking on Fortune's 2018 list of 100 Best Companies to Work For, our seventh year to be ranked in the top 15. Ultimate was also ranked #2 on Indeed’s 2017 list of Best Companies to Work for in the U.S. and #10 on Glassdoor’s large-company list of Best Places to Work in 2018. In 2017, Ultimate was ranked #1 on Fortune's 100 Best Workplaces for Millenials list. Other high rankings on 2017 Fortune lists, based primarily on employee survey feedback, were: #2 on 100 Best Workplaces for Women, #3 on Best Workplaces for Diversity, #2 on 50 Best Workplaces for Parents, and #7 on 50 Best Workplaces for Giving Back. Ultimate has a history of good employee relationships as confirmed by consistently high ratings of our workplace culture by third parties over the years. As far back as 2008 and 2009, when Ultimate was a smaller company, the Great Place to Work Institute ranked Ultimate the #1 Best Place to Work in America among medium-sized companies for both years. When Ultimate exceeded 1,000 employees in size and became eligible for Fortune’s large company lists, Fortune ranked Ultimate #25 on its 2012 100 Best Companies to Work For list, #9 on its 2013 list, #20 on its 2014 list, #21 on its 2015 list, and #15 on its 2016 list. However, we know competition for qualified employees in the technology sector and Ultimate's HCM industry, in particular, is intense. Ultimate’s management team recognizes that our future success will depend, in part, on our continued ability to attract, hire and retain qualified people.

For, our seventh year to be ranked in the top 15, as well as our #3 ranking on People magazine's 2018 list of Companies That Care. Also in 2018 Fortune ranked Ultimate #1 on its list of 100 Best Workplaces for Women and #1 on its list of 100 Best Workplaces for Millennials, Ultimate's second year to earn the top spot. Ultimate has a history of good employee relationships as confirmed by consistently high ratings of our workplace culture by third parties over the years. In 2017, in addition to the multiple-year rankings noted above, Ultimate was ranked by Fortune magazine and Great Place to Work as: #2 on 100 Best Workplaces for Women, #3 on Best Workplaces for Diversity, #2 on 50 Best Workplaces for Parents, and #7 on 50 Best Workplaces for Giving Back. As far back as 2008 and 2009, when Ultimate was a smaller company, the Great Place to Work Institute ranked Ultimate the #1 Best Place to Work in America among medium-sized companies for both years. When Ultimate exceeded 1,000 employees in size and became eligible for Fortune’s large company lists, Fortune ranked Ultimate #25 on its 2012 100 Best Companies to Work For list, #9 on its 2013 list, #20 on its 2014 list, #21 on its 2015 list, and #15 on its 2016 list. However, we know competition for qualified employees in the technology sector and Ultimate's HCM industry, in particular, is intense. Ultimate’s management team recognizes that our future success will depend, in part, on our continued ability to attract, hire and retain qualified people.

Available Information

Ultimate's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports and any registration statements, including but not limited to registration statements on Form S-3, are available free of charge on Ultimate's website at www.ultimatesoftware.com as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission (“SEC”). Information contained on or accessible through Ultimate's website is not part of this Form 10-K. You may record and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC ~~also~~ maintains an Internet site that contains the reports, proxy and information statements and other information regarding us that we file with the SEC. You can access the SEC's website at www.sec.gov.

Item 1A. Risk Factors

Ultimate operates in a rapidly changing and dynamic business environment that involves risk and uncertainty. The following discussion is a description of risks and uncertainties associated with our business that could cause, or contribute to causing, actual results to differ materially from expectations. These are not all of the risks we face. We may be adversely affected by risks not currently known or that we currently consider immaterial.

The Merger is subject to various closing conditions and other risks which may cause the Merger to be delayed or not completed at all or have other adverse consequences.

The Merger is subject to various closing conditions that must be satisfied or waived to complete the Merger. There can be no assurance that these conditions will be satisfied or waived or that the Merger will be completed in a timely manner or at all. Failure to satisfy or obtain waivers of any closing condition may jeopardize or delay the completion of the Merger and result in additional expenditures of money and resources including, but not limited to, the adverse impact of a termination fee of up to $331 million payable by Ultimate under certain circumstances specified in the Merger Agreement. The Merger also is subject to approval by Ultimate’s stockholders. There is no assurance that Ultimate’s stockholders will approve the Merger. In addition, the Merger is contingent upon the receipt of certain regulatory clearances or approvals. There can be no assurance that the conditions to closing will be satisfied or waived or that other events will not intervene to delay or prevent the closing of the Merger. If the Merger is not completed for any reason, the price of our Common Stock may decline to the extent that the current market price reflects an assumption that the Merger will be consummated and our stockholders will not receive any payment for their shares in connection with the Merger. Instead, Ultimate would, in such case, remain an independent public company, and its shares will continue to be traded on the NASDAQ.

Legal proceedings instituted against Ultimate and others relating to the Merger Agreement also could delay or prevent the Merger from becoming effective within the agreed upon timeframe. In addition, we may elect to terminate the Merger Agreement in certain circumstances, and the parties can mutually decide to terminate the Merger Agreement at any time prior to the consummation of the Merger before or after stockholder approval. Further, uncertainty among our employees about their future roles after the completion of the Merger may impair our ability to attract, retain and motivate key personnel, and the pending finalization of the Merger may disrupt our business relationships with our existing and potential customers, suppliers, vendors, landlords, and other business partners, who may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than us. The adverse consequence of the pending finalization of the Merger could be exacerbated by any delays in completion of the Merger or termination of the Merger Agreement.

We have incurred, and will continue to incur, significant transaction and related costs in connection with the Merger.

We have incurred and expect to continue to incur a number of costs associated with completing the Merger. Such costs include the payment of certain fees and expenses incurred in connection with the Merger, including legal and other professional

advisory fees. The substantial majority of these costs will be non-recurring expenses and will primarily consist of transaction costs related to the Merger. Additional unanticipated costs also may be incurred.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities, including, among other things, restrictions on our ability to acquire other businesses and assets, dispose of our assets, make investments, enter into certain contracts, repurchase or issue securities, pay dividends, make capital expenditures, amend our organizational documents, incur indebtedness and settle litigation. These restrictions could prevent us from pursuing strategic business opportunities, taking actions with respect to our business that we may consider advantageous and responding effectively and/or timely to competitive pressures and industry developments, which may as a result materially adversely affect our business, results of operations and financial condition.

If the Merger Agreement is terminated, we may, under certain circumstances, be obligated to pay a termination fee to Parent and/or reimburse Parent for its expenses. These costs could require us to use cash that would have otherwise been available for other uses and/or incur debt to pay such fees.

If the Merger is not completed, in certain circumstances, we could be required to pay a termination fee of up to $331 million to Parent. If the Merger Agreement is terminated, and we are required to pay a termination fee, we may incur debt to pay such fees. For these and other reasons, termination of the Merger Agreement could materially adversely affect our business operations and financial results, which in turn would materially and adversely affect the price of our common stock.

Our failure to maintain and increase acceptance of UltiPro, which accounts for substantially all of our revenues, could cause a significant decline in our revenues.

Currently, the UltiPro solutions, including the UltiPro standard/HR payroll product and Optional Capabilities and related services, account for substantially all of our revenues. Our future success depends on maintaining and increasing acceptance of UltiPro. Any decrease in the demand for UltiPro would have a material adverse effect on our business, operating results and financial condition.

If we are unable to enhance our products and develop new services, our revenue growth may be harmed.

Our ability to attract new customers and increase revenue from existing customers will depend in large part on our ability to enhance and improve our existing UltiPro product suite and Optional Capabilities and to introduce new features and Optional Capabilities to our product offering. The success of any enhancement or new feature depends on several factors, including the timely completion, introduction and market acceptance of the enhancement or service. If we are unable to develop enhancements and introduce new features and Optional Capabilities to our existing products in a cost-effective manner that keeps pace with rapid technological developments, our business could be adversely affected. If we are unable to successfully develop, acquire new services or enhance our existing products to meet customer requirements, our revenues may not grow as expected.

Due to the method of accounting for sales from our cloud offering, a change in the period of the time from contract date to the Live date (“Time-to-Live”) could negatively impact the amount of recurring revenues recognized in a reporting period.

Sales production, as it pertains to sales of cloud units, is not reflected in recurring revenues and related variable costs in our consolidated statements of income typically until the related customer goes Live. In our internal business model, we make certain assumptions, among other things, with respect to future sales production, revenue growth, variable costs, personnel costs and other operating expenses.

Our expectations for recurring revenue growth are typically established based on combinations of actual sales production (for those units that have been previously sold but have not yet gone Live) and expected future sales production, together with expectations as to the Time-to-Live periods. Estimates for Time-to-Live periods are usually based on (i) specific estimates (for certain backlog sales) provided by our field personnel, which estimates include factors and assumptions that are not within the control of our field personnel; and (ii) estimates for Time-to-Live periods for other cloud sales (including backlog sales without specific estimates at that point in time), as well as expected sales, which are typically based on assumptions derived from our historical Time-to-Live periods. These estimates are adjusted periodically, and prospectively, based on management’s assessment of Time=-to-Live for backlog sales at that point in time. Factors that could impact the estimates for Time-to-Live periods include, but are not limited to, customer size (as larger customers may have longer implementations, tend to go Live on more UltiPro features and have more interface and integration requirements), and the number of complementary products sold in addition to UltiPro to a single customer, which in some cases involve customers’ desire to go Live on all products at once, as compared with UltiPro first followed by complementary products.

To the extent there are changes in the underlying assumptions which drive Ultimate’s expected revenue growth from cloud sales, which include, but are not limited to, actual sales production achieved and changes in Time-to-Live periods, our recurring revenues and services revenues, as reported in our consolidated statements of income, could differ materially from levels we expected to achieve.

A systems failure or other service interruption at the data center owned and managed by QTS, the data centers owned and managed by Cyxtera (formerly known as CenturyLink), and the data center owned and managed by Iron Mountain Data Centers, LLC (formerly IO Phoenix One, LLC) and used for our hosting services could result in substantial expense to us, loss of customers and claims by our customers for damages caused by any losses they incur.

We offer hosting services, which include hardware, infrastructure, ongoing maintenance and back-up services, to our customers in the United States at a data center owned and operated by QTS, at a location near Atlanta, Georgia and at a data center owned and operated by Iron Mountain Data Centers, LLC (formerly IO Phoenix One, LLC) near Phoenix, Arizona. We also offer hosting services, which include hardware, infrastructure, ongoing maintenance and back-up services, to our customers with employees exclusively in Canada at two data centers owned and operated by Cyxtera (formerly known as CenturyLink), one near Toronto, Canada and one near Vancouver, Canada.

These hosting services, which are provided as part of our cloud offering, must be able to be reliably operated on a 24 hours per day, seven days per week basis without interruption or data loss. The success of the cloud offering depends on our ability to protect the infrastructure, equipment and customer data files against damage from:


•	Human error;


•	Natural disasters;


•	Power loss or telecommunication failures;


•	Sabotage or other intentional acts of vandalism; and


•	Unforeseen interruption or damages experienced in moving hardware to a new location.

We perform a daily backup of our customer data which is stored offsite of the data centers. In addition, QTS has implemented various activities comprising QualityTech’s Business Continuity Planning & Disaster Recovery Program which includes risk assessment and business impact analysis, redundancy and crisis and emergency response procedures. Cyxtera also has a Business Continuity Program which handles business continuity planning, incident management and site emergency action planning. However, the occurrence of one of the above listed events or other unanticipated problems at any of the data centers could:


•	Result in interruptions in the services we provide to our customers, during which time our customers may be unable to retrieve their data;


•	Require us to spend substantial amounts of money replacing existing equipment and/or purchasing services from an alternative data center;


•	Cause existing customers to cancel their contracts;


•	Cause our customers to seek damages for losses incurred; or


•	Make it more difficult for us to attract new customers.

We face risks associated with security breaches or cyber-attacks.

We face risks associated with security breaches or cyber-attacks of our computer systems and those of our third-party representatives, vendors and service providers. Although we have implemented security procedures and controls to address these threats, our systems and our software products may still be vulnerable to breaches, data theft, computer viruses, programming errors, attacks by third parties, or similar disruptive problems.

If our systems, or the hosting systems at our third party owned data centers, were breached or attacked, the proprietary and confidential information of our company and our customers could be disclosed, and we may be required to incur substantial costs and liabilities, including the following:


•	Expenses to rectify the consequences of the security breach or cyber-attack;


•	Liability for stolen assets or information;


•	Costs of repairing damage to our systems;


•	Lost revenue and income resulting from any system downtime caused by such breach or attack;


•	Loss of competitive advantage if our proprietary information is obtained by competitors as a result of such breach or attack;


•	Increased costs of cyber security protection;


•	Costs of incentives we may be required to offer to our customers or business partners to retain their business; and


•	Damage to our reputation.

As a result, any compromise of security of our systems or cyber-attack could have a material adverse effect on our business, reputation, financial condition, and operating results.

Rapid technological changes and the introduction of new products and enhancements by new or existing competitors could undermine our current market position.

The market for our products is characterized by rapid technological advancements, changes in customer requirements, frequent new product introductions and enhancements and changing industry standards. The life cycles of our products are difficult to estimate. Rapid technological changes and the introduction of new products and enhancements by new or existing competitors could undermine our current market position. Our growth and future success will depend, in part, upon our ability to:


•	Enhance our current products and introduce new products in order to keep pace with products offered by our competitors;


•	Adapt to technological advancements and changing industry standards; and


•	Expand the functionality of our products to address the increasingly sophisticated requirements of our customers.

We may not have sufficient resources to make the necessary investments and we may experience difficulties that could delay or prevent the successful development, introduction or marketing of new products or enhancements. In addition, our products or enhancements may not meet the increasingly sophisticated customer requirements of the marketplace or achieve market acceptance at the rate we expect, or at all. Any failure by us to anticipate or respond adequately to technological advancements, customer requirements and changing industry standards, or any significant delays in the development, introduction or availability of new products or enhancements, could undermine our current market position.

Our business may be adversely impacted if the ACA is repealed in its entirety or certain aspects of the ACA are repealed or changed as a result of recent political changes.

The ACA remains subject to legislative efforts to repeal, modify or delay the implementation of the law. The recent Presidential and Congressional elections may result in additional or successful efforts to repeal, modify or delay implementation of all or certain aspects of the ACA. Generally, if the ACA is repealed or modified in whole or in part, or if implementation of certain aspects of the ACA is delayed, such repeal, modification or delay could adversely impact our existing and future business and operating results. For example, any such repeal, modification or delay could negatively impact the revenue we currently generate from our UltiPro ACA Toolkit or our UltiPro ACA Employer Services. While we expect continued challenges to the ACA, at this time we are unable to more precisely predict the full impact of any repeal, modification or delay in the implementation of the ACA.

Our acquisitions of other companies, products, or technologies may result in operating difficulties, dilution, and other harmful consequences that may adversely impact our business and results of operations.

As part of our overall business strategy, from time to time, we acquire complementary businesses, products and technologies. These transactions could be material to our financial condition and results of operations. We expect to continue to evaluate, and potentially enter into, acquisitions and a wide array of strategic transactions in the future.

We may not realize the anticipated benefits of our acquisitions to the extent that we anticipate, or at all, because acquisitions involve many risks, including:


•	difficulties integrating the acquired operations, personnel, technologies, products or infrastructure;


•	diversion of management's attention or other resources from other critical business operations and strategic priorities;


•	unexpected difficulties encountered when we enter new markets in which we have little or no experience, or where competitors may have stronger market positions;


•	inability to maintain relationships with customers and partners of the acquired business;


•	the difficulty of incorporating acquired technology and rights into our products and services;


•	potential unknown liabilities associated with an acquired business;


•	unanticipated expenses related to integrating acquired technology with our existing technology;


•	the impact on our results of operations due to depreciation and amortization related to acquired intangible assets, fixed assets and deferred compensation;


•	the tax effects of any such acquisitions;


•	potential litigation, such as claims by third parties related to intellectual property of the businesses we acquire;


•	potential write-offs of our investments in acquired businesses;


•	the need to implement controls, procedures and policies appropriate for a public company at companies that prior to the acquisition lacked such controls, procedures and policies; and


•	challenges caused by distance, language and cultural differences.

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and strategic transactions could cause us to fail to realize the anticipated benefits of such acquisitions or transactions, incur unanticipated liabilities, and harm our business generally.

We may issue additional equity securities to pay for future acquisitions or other strategic transactions, the issuance of which could be dilutive to our existing stockholders and affect the trading price of our securities. If any acquisition or other strategic transactions is not perceived as ultimately improving our financial condition and operating results, our stock price may decline. Further, if we fail to properly evaluate and execute acquisitions or other strategic transactions, our business and financial condition may be seriously harmed.

Adverse changes in general economic or political conditions could adversely affect our operating results.

As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic and political conditions. If the state of the economy and the rate of employment deteriorate in the future, many customers may delay or reduce technology purchases. This could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies, increased price competition, customers purchasing fewer services or Optional Capabilities than they have in the past, customers requesting longer payment terms, customers failing to pay amounts due and slower collections of accounts receivable. In addition, increased unemployment could result in significant decreases in our recurring revenues from our existing customer base as we price our ongoing recurring revenues on a PEPM basis, subject, in many cases, to minimum employee sizes per customer. Any of these events would likely harm our business, results of operations, financial condition and cash flows from operations.

Defects and errors in our software could affect market acceptance of our products.

Software products such as those offered by us may contain undetected errors or failures when first introduced or as new versions are released. Testing of our products is particularly challenging because it is difficult to simulate the wide variety of computing environments in which our customers may use these products. Despite extensive testing, from time to time we have discovered defects or errors in our products. Defects and errors may:


•	Cause delays in product introductions and shipments;


•	Result in increased costs and diversion of development resources;


•	Require design modifications; or


•	Decrease market acceptance of, or customer satisfaction with, our products.

Despite testing by us and by current and potential customers, errors may be found after commencement of commercial shipments, which may result in loss of or delay in market acceptance which could have a material adverse impact upon our business, operating results and financial condition.

If our direct sales force is not successful, we may be unable to achieve significant revenue growth in the future.

We sell our products and services primarily through our direct sales force. Our ability to achieve significant revenue growth in the future will depend upon the success of our direct sales force and our ability to adapt our sales efforts to address the evolving markets for our products. If our direct sales force does not perform as expected, our revenues could suffer.

Our current and future competitors include companies with greater financial, technical and marketing resources than we have and if we are unable to compete successfully with other businesses in our industry or with in-house systems developed by potential customers, our profitability will be adversely affected.

Our future success will depend significantly upon our ability to increase our share of our target market, to maintain and increase our recurring revenues from new and existing customers and to sell additional products, product enhancements, maintenance and support services and training and consulting services to existing and new customers. The HCM market is intensely competitive. Our competitors include:


•	Large service bureaus, primarily ADP and, to a lesser extent, Ceridian;

• A number of companies, such as Oracle, Lawson, and Workday that offer HCM software products for use on mainframes, client/server environments and/or Web servers; and, in the UltiPro mid-market and strategic markets, ~~payroll service providers such as ADP, Paychex, Ceridian, Paycom and Paylocity that service companies on the smaller end of the mid-market; and~~

payroll service providers such as ADP, Paychex, Ceridian, Paycom and Paylocity that service companies on the smaller end of the mid-market; and


•	The internal HR/payroll departments of potential customers which use custom-written software.

Our competitors may develop products that are superior to our products or achieve greater market acceptance. Many of our competitors or potential competitors have significantly greater financial, technical and marketing resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and to changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than we can. We believe that existing competitors and new market entrants will attempt to develop in-house systems that will compete with our products. We may be unable to compete successfully against current or future competitors. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share.

The loss of the services of one or more of our key employees could negatively affect our ability to implement our business strategy.

Our success depends to a significant extent upon a limited number of members of senior executive management and other key employees, including Scott Scherr, our Chairman of the Board of Directors, President and Chief Executive Officer. We do not have employment contracts with any of our key personnel. The loss of the services of one or more of our key employees could have a material adverse effect upon us. In addition, uncertainty created by turnover of our key employees could cause further turnover of our employees.

If we are not able to successfully recruit personnel, our revenues could be negatively affected.

Our ability to achieve significant revenue growth in the future will also depend on our success in recruiting, training and retaining sufficient sales, marketing, professional services, product development and other personnel.

The potential growth of our business and expansion of our customer base may place a significant strain on our management and operations, and we may be unable to manage that growth and expansion successfully.

We expect to increase research and development, professional services, sales and marketing and administrative operations as and when appropriate to accommodate our growth plans. Accordingly, our future operating results will depend on the ability of our management and other key employees to continue to implement and improve our systems for operations, financial control and information management and to recruit, train, manage and retain our employee base. We cannot be certain that we will be able to manage any future growth successfully.

Our business relies heavily on the products of Microsoft, which may not always be compatible with our products, and we may be required to spend significant capital if businesses adopt alternative technologies that are incompatible with our products.

Our software products are designed primarily to operate with Microsoft technologies and our strategy requires that our products and technology be compatible with new developments in Microsoft technology. Although we believe that Microsoft technologies are currently widely utilized by businesses of all sizes, we cannot be certain that businesses will continue to adopt such technologies as anticipated, will migrate from older Microsoft technologies to newer Microsoft technologies or will not adopt alternative technologies that are incompatible with our products. As a result, we may be required to develop new products or improve our existing products to be compatible with different technologies that may be used by our customers. We cannot be certain we will be able to adapt our product to any technologies other than Microsoft’s.

If our third-party software is not adequately maintained or updated or independent third party's products that we market and distribute as part of the UltiPro solution are no longer available to us, our sales could be materially adversely affected.

Certain products utilize software of third-party software developers or products from third parties from whom we have either purchased a license or the underlying source code of such software, entered into a service agreement with the vendor or have entered into a strategic alliance that gives us the right to market and distribute such product. Although we believe that there are alternatives for these products, any significant interruption in the availability of such third-party software or products could have a material adverse impact on our sales unless and until we can replace the functionality provided by these products. Additionally, we are, to a certain extent, dependent upon such third parties’ abilities to enhance their current products, to develop new products on a timely and cost-effective basis and to respond to emerging industry standards and other technological changes. We may be unable to replace the functionality provided by the third-party software or products currently offered in conjunction with our products in the event that such software or products become obsolete or incompatible with future versions of our products or are otherwise not adequately maintained, updated or available.

offered in conjunction with our products in the event that such software or products become obsolete or incompatible with future versions of our products or are otherwise not adequately maintained, updated or available.

If we are unable to release annual or periodic updates on a timely basis to reflect changes in tax laws and regulations or other regulatory provisions applicable to our products, the market acceptance of our products may be adversely affected and our revenues could decline.

Our products are affected by changes in tax laws and regulations and generally must be updated annually or periodically to maintain their accuracy and competitiveness. We cannot be certain that we will be able to release these annual or periodic updates on a timely basis in the future. Failure to do so could have a material adverse effect on market acceptance of our products. In addition, significant changes in tax laws and regulations or other regulatory provisions applicable to our products could require us to make a significant investment in product modifications, which could result in significant unexpected costs to us.

If we are unable to protect our proprietary rights against unauthorized third-party copying or use, our revenues or our methods of doing business could be negatively impacted.

Our success is dependent, in part, on our ability to protect our proprietary rights. We rely on a combination of copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. We do not have any patents or patent applications pending, and existing copyright, trademark and trade secret laws afford only limited protection. As a result, we cannot be certain that we will be able to protect our proprietary rights against unauthorized third-party copying or use. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary. In addition, others may develop products that perform comparably to our proprietary products. Policing the unauthorized use of our products is difficult.

Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trademarks, copyrights or trade secrets or to determine the validity and scope of the proprietary rights of others; such litigation may be expensive and divert the attention of management.

Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trademarks, copyrights or trade secrets or to determine the validity and scope of the proprietary rights of others. Any litigation could result in substantial costs and diversion of resources and management attention.

As is common in the software industry, from time to time we may become aware of third-party claims of infringement by our operations or products of third-party proprietary rights. While we are not currently aware of any such material claim, our software products may increasingly be subject to such claims as the number of products and competitors in our industry grows, as the functionality of products overlaps and as the issuance of software patents becomes increasingly common. Any such claims, with or without merit, can be time consuming and expensive to defend, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, or at all.

Privacy concerns could result in regulatory changes that may harm our business.

Personal privacy is a significant issue in the United States and in many other countries where our customers operate. The United States and many other countries have imposed restrictions and requirements on the use of personal information by those collecting such information. Changes to law or regulations affecting privacy, if applicable to our business or product, could impose additional costs and potential liability on us and could limit our use and disclosure of such information. If we were required to change our business activities or revise or eliminate services, our business could be harmed.

The sale and support of software products and the performance of related services by us entail the risk of product or service liability claims, which could significantly affect our financial results.

Customers use our products in connection with the preparation and filing of tax returns and other regulatory reports. If any of our products contain errors that produce inaccurate results upon which users rely, or cause users to misfile or fail to file required information, we could be subject to liability claims from users. Our cloud and maintenance renewal agreements with our customers typically contain provisions intended to limit our exposure to such claims, but such provisions may not be effective in limiting our exposure. Contractual limitations we use may not be enforceable and may not provide us with adequate protection against product liability claims in certain jurisdictions. A successful claim for product or service liability brought against us could result in substantial cost to us and divert management’s attention from our operations.

We may be adversely affected by substantial quarterly fluctuations in our revenues and operating results.

Our quarterly revenues and operating results have varied significantly in the past and are likely to vary substantially from quarter to quarter in the future. Our quarterly operating results may fluctuate as a result of a number of factors, including:


•	Increased expenses from one quarter to another (especially as they relate to product development and sales and marketing);


•	Spending patterns of our customers;


•	Timing of our product releases;


•	Increased competition;


•	A drop in the near-term demand for our products, particularly in relation to professional services; and


•	Announcements of new products by Ultimate or by our competitors.

We establish our expenditure levels based upon our expectations as to future revenues, which are comprised primarily of recurring revenues and services revenues. If revenue levels are below expectations, particularly services revenues which are more subject to variations between periods than recurring revenues, expenses can be disproportionately high in a particular period. For example, while sales production could be at our level of expectations, depending on the spending patterns of our customers including the timing in which they begin the implementation of UltiPro and the extent to which they use Ultimate’s resources, the immediate reported total revenues could be lower than expected.

Our operating results for previous fiscal quarters are not necessarily indicative of our operating results for the full fiscal years or for any future periods. We believe that, due to the underlying factors for quarterly fluctuations, quarter-to-quarter comparisons of our operations are not necessarily meaningful and that such comparisons should not be relied upon as indications of future performance.

Our stock price has experienced high volatility, may continue to be volatile and may decline.

The trading price of our Common Stock has fluctuated widely in the past and may do so in the future, as a result of a number of factors, many of which are outside our control, such as:


•	The volatility inherent in stock prices within the sector in which we conduct business;


•	The volume of trading in our Common Stock, including sales upon exercise of outstanding stock options and upon the vesting of restricted stock and restricted stock units;


•	Failure to achieve earnings expectations;


•	Changes in our earnings estimates by analysts;


•	Variations in our actual and anticipated operating results, including, but not limited to, prospective financial guidance provided by Ultimate to our investors and research analysts; and

• ~~The~~Our ~~announcement~~ability ofto acomplete ~~merger~~the orMerger, ~~acquisition.~~and realize the anticipated benefits from the Merger; and

~~Stock~~• ~~markets~~The ~~have~~diversion ~~experienced~~of ~~extreme~~management ~~price~~ and ~~volume~~employee ~~fluctuations~~time, ~~that have affected~~ the ~~market~~use ~~prices~~ of ~~many~~resources, ~~technology~~ and ~~computer~~the ~~software~~incurrence ~~companies,~~of ~~particularly~~significant ~~Internet-related~~costs ~~companies.~~in ~~Such~~seeking ~~fluctuations~~to ~~have~~complete ~~often~~the ~~been~~ Merger;

20Stock markets have experienced extreme price and volume fluctuations that have affected the market prices of many technology and computer software companies, particularly Internet-related companies. Such fluctuations have often been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could adversely affect the market price of our Common Stock.

unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could adversely affect the market price of our Common Stock.

Further, securities class action litigation has often been brought against companies that experience periods of volatility in the market prices of their securities. Securities class action litigation could result in substantial costs and a diversion of our management’s attention and resources.

Anti-takeover provisions in our certificate of incorporation and by-laws and under our Amended and Restated Rights Agreement and Delaware law could substantially increase the cost to acquire us or prevent or delay a change in control and, as a result, negatively impact our stockholders and the price of our Common Stock.

We have taken a number of actions that could have the effect of discouraging a takeover attempt. For example, we have adopted an Amended and Restated Rights Agreement that would cause substantial dilution to a stockholder, and substantially increase the cost paid by a stockholder, who attempts to acquire us on terms not approved by our Board of Directors. This rights plan could prevent us from being acquired.

Our Board of Directors is divided into three classes, each of whose members serve for a staggered three-year term. This board structure may prevent stockholders from changing the composition of our Board of Directors quickly.

In addition, our certificate of incorporation grants our Board of Directors the authority to fix the rights, preferences and privileges of and issue up to 2,500,000 shares of preferred stock without stockholder approval. Although we have no present intention to issue shares of preferred stock, such an issuance could have the effect of making it more difficult and less attractive for a third-party to acquire a majority of our outstanding voting stock. Preferred stock may also have other rights, including economic rights senior to our Common Stock, which could have a material adverse effect on our stock price.

We are also subject to the anti-takeover provisions of Section 203 of Delaware General Corporation Law. This section provides that a corporation may not engage in any business combination with any interested stockholder (as defined in that section) during the three-year period following the time that a stockholder became an interested stockholder. This provision could have the effect of delaying or preventing a change in control of our company.

The growth of the international operations of our business subjects us to additional risks associated with foreign operations.

International operations are subject to risks associated with operating outside of the United States. During the fourth fiscal quarter of 2006, we began operating in Canada (through the formation of a wholly-owned Canadian subsidiary). During ~~2017~~2018, we continued to grow our operations in Canada and Singapore, and began operating in Europe through the acquisition of PeopleDoc SAS. The financial impact of our international operations to our overall business has been insignificant to date. However, over time, our international operations may grow and increase their significance to our business. Sales to international customers subject us to a number of risks, including foreign currency fluctuations, unexpected changes in regulatory requirements for software, international economic and political instability, compliance with multiple, conflicting, and changing governmental laws and regulations, difficulty in staffing and managing foreign operations, international tax laws, potentially weaker protection for our intellectual property than in the United States, and difficulties in enforcing such rights abroad. If sales to any of our customers outside of the United States are delayed or canceled because of any of the above factors, our revenue may be negatively impacted.

Our international operations also increase our exposure to international laws and regulations. If we are unable to comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs and potential litigation.

If our goodwill or acquired intangible assets become impaired, we may be required to record a significant charge to earnings.

Under U.S. generally accepted accounting principles, we review our acquired intangible assets for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered in circumstances indicating that the carrying value of our goodwill or acquired intangible assets may not be recoverable include a reduction in our market capitalization (as a result of a decline in our stock price) to a level below our consolidated stockholders’ equity as of the applicable balance sheet date, declining future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or acquired intangible assets is determined, resulting in a negative impact on our results of operations.

Changes in, or interpretations of, accounting principles could result in unfavorable accounting changes.

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles and accompanying accounting pronouncements, implementation guidelines, and interpretations. Changes in these rules or their interpretation could significantly change our reported results and may even retroactively affect previously reported transactions. Our accounting principles that recently have been or may be affected by changes in accounting principles include, but are not limited to: recurring revenue recognition and accounting for income taxes.

Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.

Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, or by changes in the valuation of our deferred tax assets and liabilities. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other domestic and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that these potential examinations will not have an adverse effect on our operating results and financial position.

2224

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate headquarters ~~in Weston~~, ~~Florida~~which ~~are~~includes atexecutive ~~different~~offices, ~~locations~~operations inand ~~the~~product ~~city,~~development ~~which~~facilities, is located in ~~the~~Weston, ~~aggregate~~Florida, ~~consist~~and consists of approximately ~~337~~345,000 square feet of leased space. Wein ~~also~~multiple ~~have~~buildings, ~~leased~~and ~~facilities~~one inowned ~~Atlanta,~~facility ~~Georgia;~~consisting ~~Alpharetta,~~of ~~Georgia;~~approximately ~~Memphis~~5,000 ~~Tennessee;~~square ~~Scottsdale~~feet. In addition, ~~Arizona;~~we ~~Santa~~and/or ~~Ana,~~our ~~California;~~wholly ~~Toronto~~owned foreign subsidiaries lease office space in various locations throughout North America, ~~Canada;~~Europe ~~San~~and ~~Francisco~~Asia totaling approximately 360,000 ~~California;~~square feet. We operate data centers in North America and ~~Singapore~~Europe pursuant to various co-location license arrangements.

Currently, we also lease or license satellite offices for certain field personnel in various locations throughout ~~the~~North ~~United~~America ~~States~~ and, to a much lesser extent, internationally. We believe that our existing facilities are suitable and adequate for our current operations for the next 12 months. We further believe that suitable space will be available as needed to accommodate any expansion of our operations on commercially reasonable terms.

We believe that our existing facilities are suitable and adequate for our current operations for the next 12 months although we expect to expand our facilities capacity at our corporate headquarters and in certain field locations during fiscal 2019 to support our continued growth. We further believe that suitable space will be available as needed to accommodate any expansion of our operations on commercially reasonable terms.

Item 3. Legal Proceedings

From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently a party to any legal proceedings the adverse outcome of which, individually or in the aggregate, could reasonably be expected to have a material adverse effect on our operating results or financial condition.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information. ~~The following table sets forth, for the periods indicated, the high and low sales prices of~~ Ultimate’'s ~~common stock, $0.01 par value (the "~~Common Stock~~"),~~ asis ~~quoted~~traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “ULTI." As of February 19, 2019, we had approximately 66 holders of record, representing approximately 4,689 stockholder accounts.

	2017		2016
	High	Low	High	Low
First Quarter	$201.65	$182.35	$194.70	$148.26
Second Quarter	225.63	192.83	213.35	183.30
Third Quarter	233.42	181.59	224.07	200.19
Fourth Quarter	224.57	188.96	218.25	180.29

AsPerformance ofGraph. The ~~February~~following 20graph compares the cumulative total stockholder returns on Ultimate’s Common Stock for the five year period covering December 31, 2013-December 31, 2018, weon ~~had~~an ~~approximately 44~~annual ~~holders~~basis, with the cumulative total return of ~~record,~~the ~~representing~~NASDAQ ~~approximately 5,020~~Composite ~~stockholder~~Index ~~accounts~~and the RDG Software Composite Index for the same period.

We have never declared or paid any cash dividends on our capital stock and do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain future earnings to fund the development and growth of our business. The payment of dividends in the future, if any, will be at the discretion of our Board of Directors.

Performance Graph. The following graph compares the cumulative total stockholder returns on Ultimate’s Common Stock for the five year period covering December 31, 2012-December 31, 2017, on an annual basis, with the cumulative total return of the NASDAQ Composite Index and the RDG Software Composite Index for the same period.

Purchases of Equity Securities by the Issuer. On October 30, 2000, Ultimate announced that our Board of Directors authorized the repurchase of up to 1,000,000 shares of our outstanding Common Stock (the “Stock Repurchase Plan”).

On February 6, 2007, Ultimate’s Board of Directors extended the Stock Repurchase Plan by authorizing the repurchase of up to 1,000,000 additional shares of our issued and outstanding Common Stock.

On February 5, 2008, Ultimate’s Board of Directors extended the Stock Repurchase Plan further by authorizing the repurchase of up to 1,000,000 additional shares of our Common Stock.

On October 26, 2009, Ultimate’s Board of Directors extended the Stock Repurchase Plan further by authorizing the repurchase of up to 1,000,000 additional shares of our Common Stock.

On October 24, 2011, Ultimate’s Board of Directors extended the Stock Repurchase Plan further by authorizing the repurchase of up to 1,000,000 additional shares of our Common Stock.

On April 25, 2016, Ultimate's Board of Directors extended our Stock Repurchase Plan further by authorizing the repurchase of up to 1,000,000 additional shares of our Common Stock.

As of December 31, ~~2017~~2018, Ultimate had purchased 4,657,995 shares of our Common Stock under the Stock Repurchase Plan, with 1,342,005 shares available for repurchase in the future.

The number of shares of Common Stock repurchased by us during the three months ended December 31, 2017 is as indicated below:

Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Cumulative Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
October 1 – 31, 2017	12 (1)	$	194.22	4,657,995	1,342,005
November 1 – 30, 2017	151,571 (1)	$	203.04	4,657,995	1,342,005
December 1 – 31, 2017	92 (1)	$	218.23	4,657,995	1,342,005

Item 6. Selected Financial Data

The following selected consolidated financial data is qualified by reference to and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Ultimate’s Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K. The consolidated statements of income data presented below for each of the years in the three-year period ended December 31, 2017 and the consolidated balance sheet data as of December 31, 2017 and 2016 have been derived from our Consolidated Financial Statements included elsewhere in this Form 10-K. The years ended December 31, 2016, 2015, 2014 and 2013 were revised in connection with an immaterial correction of prior period financial statements. See Note 17 in our Notes to Consolidated Financial Statements for further discussion.

	Years Ended December 31,
	2017			2016			2015			2014			2013
Consolidated Statements of Income: (in thousands, except per share data)
Revenues:
Recurring	$	802,300		$	654,199		$	516,400		$	419,771		$	335,287
Services	138,429			127,092			101,681			86,165			75,110
Total revenues	940,729			781,291			618,081			505,936			410,397
Cost of revenues:
Recurring	210,560			172,676			138,587			117,700			92,101
Services	143,140			127,433			99,948			85,939			76,577
Total cost of revenues	353,700			300,109			238,535			203,639			168,678
Gross profit	587,029			481,182			379,546			302,297			241,719
Operating expenses:
Sales and marketing	269,781			224,416			169,664			117,033			93,879
Research and development	150,583			120,650			93,671			83,542			67,757
General and administrative	122,119			94,432			72,893			47,379			36,869
Total operating expenses	542,483			439,498			336,228			247,954			198,505
Operating income	44,546			41,684			43,318			54,343			43,214
Other (expense) income:
Interest expense and other, net	(813		)	(717		)	(491		)	(353		)	(229		)
Other income, net	397			451			256			339			104
Total other expense, net	(416		)	(266		)	(235		)	(14		)	(125		)
Income before income taxes	44,130			41,418			43,083			54,329			43,089
Provision for income taxes	(30,075		)	(12,178		)	(28,825		)	(13,640		)	(20,082		)
Net income	14,055			29,240			14,258			40,689			23,007
Net income per share: (1)
Basic	$	0.47		$	1.01		$	0.50		$	1.44		$	0.83
Diluted	$	0.46		$	0.96		$	0.48		$	1.39		$	0.79
Weighted average shares outstanding: (1)
Basic	29,791			28,976			28,634			28,293			27,773
Diluted	30,799			30,414			29,721			29,343			29,013
Balance Sheet Data: (in thousands)	As of December 31,
	2017			2016			2015			2014			2013
Cash and cash equivalents	$	155,685		$	73,773		$	109,325		$	108,298		$	79,794
Corporate investments in marketable securities	9,434			24,088			20,058			10,156			10,453
Total assets	1,377,211			1,134,688			1,448,689			1,181,859			593,804
Deferred revenue	198,861			173,976			145,727			109,705			103,184
Long-term borrowings, including capital lease obligations	8,727			3,985			3,665			3,759			2,833
Stockholders’ equity	$	518,025		$	414,215		$	317,186		$	263,310		$	183,827

The number of shares of Common Stock repurchased by us during the three months ended December 31, 2018 is as indicated below:



Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Cumulative Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
October 1 – 31, 2018	14 (1)	$	295.69	4,657,995	1,342,005
November 1 – 30, 2018	34,864 (1)	$	258.39	4,657,995	1,342,005
December 1 – 31, 2018	360 (1)	$	238.59	4,657,995	1,342,005

(1) Represents shares of Common Stock that were acquired by us at the fair market value of the Common Stock as of the period stated, in connection with the satisfaction of our employees' tax withholding liability resulting from the vesting of restricted stock holdings.

Item 6. Selected Financial Data

The following selected consolidated financial data is qualified by reference to and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Ultimate’s Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K. The consolidated statements of income data presented below for each of the years in the three-year period ended December 31, 2018 and the consolidated balance sheet data as of December 31, 2018 and 2017 have been derived from our Consolidated Financial Statements included elsewhere in this Form 10-K. The years ended December 31, 2016, 2015, and 2014 were revised in connection with an immaterial correction of prior period financial statements. See Note 18 in our Notes to Consolidated Financial Statements for further discussion.



	Years Ended December 31,
	2018			2017			2016			2015			2014
Consolidated Statements of Income: (in thousands, except per share data)
Revenues:
Recurring	$	997,066		$	802,300		$	654,199		$	516,400		$	419,771
Services	143,478			138,429			127,092			101,681			86,165
Total revenues	1,140,544			940,729			781,291			618,081			505,936
Cost of revenues:
Recurring	273,165			210,560			172,676			138,587			117,700
Services	158,569			143,140			127,433			99,948			85,939
Total cost of revenues	431,734			353,700			300,109			238,535			203,639
Gross profit	708,810			587,029			481,182			379,546			302,297
Operating expenses:
Sales and marketing	285,293			269,781			224,416			169,664			117,033
Research and development	203,729			150,583			120,650			93,671			83,542
General and administrative	139,192			122,119			94,432			72,893			47,379
Total operating expenses	628,214			542,483			439,498			336,228			247,954
Operating income	80,596			44,546			41,684			43,318			54,343
Other (expense) income:
Interest expense and other, net	(693		)	(813		)	(717		)	(491		)	(353		)
Other income, net	3,458			397			451			256			339
Total other income (expense), net	2,765			(416		)	(266		)	(235		)	(14		)
Income before income taxes	83,361			44,130			41,418			43,083			54,329
Provision for income taxes	(18,221		)	(30,075		)	(12,178		)	(28,825		)	(13,640		)
Net income	65,140			14,055			29,240			14,258			40,689

Net income per share: (1)
Basic	$	2.11		$	0.47		$	1.01		$	0.50		$	1.44
Diluted	$	2.06		$	0.46		$	0.96		$	0.48		$	1.39

Weighted average shares outstanding: (1)
Basic	30,854			29,791			28,976			28,634			28,293
Diluted	31,578			30,799			30,414			29,721			29,343

Balance Sheet Data: (in thousands)	As of December 31,
	2018			2017			2016			2015			2014
Cash and cash equivalents	$	151,247		$	155,685		$	73,773		$	109,325		$	108,298
Corporate investments in marketable securities	10,741			9,434			24,088			20,058			10,156
Total assets	1,920,717			1,377,211			1,134,688			1,448,689			1,181,859
Deferred revenue	239,949			198,861			173,976			145,727			109,705
Long-term borrowings, including capital lease obligations	6,239			8,727			3,985			3,665			3,759
Stockholders’ equity	$	844,978		$	518,025		$	414,215		$	317,186		$	263,310

________________________________


(1)	See Note 11 of the Notes to the Consolidated Financial Statements for information regarding the computation of net earnings per share.

2729

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information we believe is relevant to an assessment and understanding of our results of operations and financial condition. This discussion should be read in conjunction with our Consolidated Financial Statements and Notes that are included in this Form 10-K. Also, the discussion of Critical Accounting Policies ~~and Estimates~~ in this section is an integral part of the analysis of our results of operations and financial condition.

Business Overview

With offices in the United States, Canada, France, Germany, England, and Singapore, Ultimate Software is a leading provider of cloud-based human capital management solutions, —often referred to as human capital management (“"HCM”")—and employee experience solutions. Ultimate's UltiPro product suite ~~(“UltiPro”)~~ is a comprehensive, engaging solution that has human resources ("HR"), ~~payroll,~~ and ~~benefits~~payroll ~~management~~ at its core and includes benefits management, talent acquisition, talent management, time management, and global people management, functionality available in 14 languages with ~~more~~61 ~~than 37~~ country-specific localizations. ~~The~~Ultimate ~~solution~~also isoffers ~~delivered via software-as-~~a-~~service~~la-carte ~~("SaaS"),~~employee ~~now~~experience ~~more~~solutions, ~~commonly~~such ~~known~~ as ~~the~~HR ~~cloud~~Service ~~computing~~Delivery ~~model, to organizations based in the United States~~ and ~~Canada~~"Perception," ~~including~~an those with global workforces. At the close of 2017, we had more than 4,100 organizations as customers and more than 37 million people records in our HCM cloud. We attained our leadership position, we believe, through our focus on unified HCM, peopleemployee-~~centric~~sentiment ~~product~~analysis ~~design, cloud technology, and strong customer relationships~~solution.

~~UltiPro~~Ultimate's issolutions ~~designed~~are todelivered ~~deliver~~via ~~the~~software-as-a-service ~~functionality~~("SaaS"), ~~businesses~~now ~~need~~more tocommonly ~~manage~~known ~~the~~as ~~complete~~cloud ~~employee~~computing, ~~life cycle from recruitment~~ to ~~retirement~~organizations ~~and to facilitate high levels of employee engagement~~ with ~~their~~employees ~~employers~~in ~~and~~the ~~one~~United ~~another.~~States, ~~The~~Canada, ~~solution includes unified feature sets for recruiting and onboarding~~Europe, HRAsia ~~management and compliance~~Pacific, ~~benefits management~~ and ~~online~~other ~~enrollment,~~global ~~payroll,~~locations. ~~performance~~At ~~management,~~the ~~employee~~close ~~engagement~~of ~~surveying~~2018, ~~compensation~~we ~~management~~had ~~with~~more ~~salary~~than ~~planning~~5,600 ~~budgeting,~~organizations ~~incentive~~as ~~award~~customers ~~planning,~~and ~~succession~~more ~~management,~~than ~~learning~~48 ~~management,~~million ~~reporting~~people ~~and~~records ~~analytical~~in ~~decision-making~~our ~~and~~cloud ~~predictive~~environment. ~~tools,~~We ~~and~~attained ~~time~~our ~~capture,~~leadership ~~scheduling~~position, ~~attendance~~we ~~tracking~~believe, ~~and~~through ~~absence~~our ~~accruals.~~exclusive ~~UltiPro~~focus ~~has~~on ~~role-based~~solutions ~~features~~that ~~for~~help HRcompanies ~~professionals,~~manage ~~executives,~~their ~~managers,~~employees ~~administrators,~~in ~~and~~an ~~employees~~engaging ~~whether~~way. ~~they~~Key ~~are~~factors in orour ~~out~~success ofhave ~~the~~been ~~office,~~our ~~including~~people-centric ~~access~~product todesign, ~~business-critical~~cloud ~~information~~technology, onand ~~mobile~~strong ~~devices~~customer ~~such~~relationships asnurtured ~~the~~by ~~iPhone,~~our ~~iPad,~~services team and ~~other~~throughout ~~smartphones~~the ~~and~~Ultimate ~~tablets~~organization.

~~Our~~UltiPro ~~customers~~is ~~tell~~designed usto ~~that~~deliver ~~UltiPro~~the ~~helps~~functionality ~~them~~businesses need to ~~streamline~~manage ~~talent~~the ~~management,~~complete HRemployee ~~and~~life ~~payroll~~cycle ~~processes~~from recruitment to ~~significantly~~retirement ~~reduce~~and ~~administrative~~to facilitate high levels of employee engagement with their employers and ~~operational~~one ~~costs~~another. ~~while~~The ~~also~~solution ~~empowering~~includes ~~them~~unified tofeature ~~manage~~sets ~~the~~for talent inacquisition ~~their~~and ~~workforces~~onboarding, ~~more~~HR ~~strategically.~~service ~~UltiPro~~delivery ~~provides~~and ~~our~~management, ~~customers~~compliance, ~~tools~~benefits tomanagement ~~analyze~~and ~~workforce~~online ~~trends~~enrollment, ~~for~~payroll, ~~better~~performance ~~decision~~management, ~~making~~employee engagement surveying, ~~identify~~compensation ~~high-performing~~management ~~talent~~with ~~within~~salary ~~their~~planning, ~~organizations~~budgeting, ~~predict~~incentive ~~who~~award ~~future~~planning, ~~high~~succession management, learning management, reporting and analytical decision-~~performers~~making and ~~retention~~predictive ~~risks~~tools, ~~will~~and betime ~~with~~capture, ascheduling, ~~high~~attendance ~~degree~~tracking, and absence accruals. UltiPro has role-based features for HR professionals, executives, managers, administrators, and employees whether they are in or out of ~~accuracy~~the office, ~~find~~including access to business-critical information ~~quickly~~and functions on mobile devices such as the iPhone, iPad, and ~~perform~~Android ~~routine~~smartphones ~~business~~and ~~activities efficiently~~tablets.

Our ~~cloud~~customers ~~offering~~tell ofus that UltiPro ~~provides~~helps ~~web-based~~them ~~access~~ to ~~comprehensive~~streamline ~~HCM~~talent ~~functionality~~management, ~~for~~HR ~~organizations~~and ~~that~~payroll ~~want~~processes to ~~simplify~~significantly ~~delivery~~reduce administrative and ~~support~~operational ofcosts ~~their~~while ~~business~~also ~~applications.~~empowering Wethem ~~have~~to ~~found~~manage ~~that~~and ~~UltiPro~~develop isthe ~~attractive~~talent toin ~~companies~~their ~~that~~workforces ~~want~~more tostrategically. ~~focus~~UltiPro onprovides ~~their~~our ~~core~~customers ~~competencies~~intelligent totools ~~increase~~and ~~sales~~insights for engaging workforces and ~~profits~~understanding ~~while~~organizational wedynamics, ~~supply~~analyzing ~~and~~trends ~~manage~~for ~~the~~better ~~hardware~~decision making, ~~infrastructure~~identifying high-performing talent, ~~ongoing~~predicting ~~maintenance~~who future high-performers and what retention risks will be with a high degree of accuracy, finding critical information quickly and ~~backup~~performing ~~services~~routine ~~for~~business ~~our~~activities ~~customers~~efficiently.

In addition to UltiPro's HCM functionality, our customers have the option to purchase a number of additional capabilities on a per-employee-per-month (“PEPM”) basis, which are available to enhance and complement the core functionality of UltiPro and which are based on the particular business needs of our customers. These optional UltiPro capabilities currently include (i) the talent acquisition suite (recruitment and onboarding); (ii) the talent management suite (performance management, talent predictors, and succession management); (iii) learning management; (iv) employee engagement surveys; (v) compensation management; (vi) benefits enrollment; (vii) time management; (viii) payment services; (ix) wage attachments; (x) UltiPro ACA toolkit and (xi) other optional features (collectively, “Optional Capabilities”), which are described above.

28(performance management, talent predictors, and succession management); (iii) learning management; (iv) employee engagement surveys; (v) compensation management; (vi) benefits enrollment; (vii) time and scheduling management; (viii) payment services; (ix) wage attachments; (x) HR service delivery; and (xi) other optional features (collectively, “Optional Capabilities”).

All Optional Capabilities are priced solely on a subscription basis. Some of the Optional Capabilities are available to enterprise, mid-market and strategic market customers while others are available exclusively to either enterprise, mid-market or strategic market customers, and availability is based on the needs of the respective customers, the number of their employees and the complexity of their HCM environment.

The key drivers of our business are (i) growth in recurring revenues; (ii) operating income, excluding non-cash stock-based compensation, ~~and~~ amortization of acquired intangibles, and transaction costs for business combinations ("Non-GAAP Operating Income"); and (iii) ~~revenue~~ retention of our customers once our solutions are sold (“Customer Retention”). For the year ended December 31, ~~2017~~2018, our (i) recurring revenues grew by 2224.63%, compared with the same period in ~~2016~~2017, and (ii) Non-GAAP Operating Income was $~~194~~234.1 million, or 20.65% of total revenues, as compared with $~~157~~194.61 million, or 20.26% of total revenues, for the same period in ~~2016~~2017. For the year ended December 31, ~~2016~~2017, our (i) recurring revenues grew by 2622.76%, compared with the same period in ~~2015~~2016, and (ii) Non-GAAP Operating Income was $~~157~~194.61 million, or 20.26% of total revenues, as compared with $~~126~~157.86 million, or 20.52% of total revenues, for the same period in ~~2015~~2016. As of December 31, ~~2017~~2018, our Customer Retention, on a trailing twelve-month basis, was approximately 96% for our recurring revenue cloud customer base~~, compared with approximately 97% for the prior year~~. See “Non-GAAP Financial Measures” below.

Our ability to achieve significant revenue growth in the future will depend upon the success of our direct sales force and our ability to adapt our sales efforts to address the evolving markets for our products and services. We provide our sales personnel with comprehensive and continuing training with respect to technology and market place developments. Aside from sales commissions, we also provide various incentives to encourage our sales representatives, including stock-based compensation awards based upon performance.

The HCM market is intensely competitive. We address competitive pressures through improvements and enhancements to our products and services, the development of additional features of UltiPro and a comprehensive marketing team and process that distinguishes Ultimate and its products from the competition. Our focus on customer service, which enables us to maintain a high Customer Retention rate, also helps us address competitive pressures.

As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions. If general economic conditions were to deteriorate, we may experience delays in our sales cycles, increased pressure from prospective customers to offer discounts and increased pressure from existing customers to renew expiring recurring revenue agreements for lower amounts. We address continuing economic pressures by, among other things, efforts to control growth of our operating expenses through the monitoring of controllable costs and vendor negotiations.

Ultimate has two primary revenue sources: recurring revenues and services revenues. The primary component of recurring revenues is subscription revenues from our cloud offering of UltiPro. The majority of services revenues are derived from implementation consulting services.

As cloud units are sold, the recurring revenue backlog associated with UltiPro grows, enhancing the predictability of future revenue streams. Cloud revenues include ongoing monthly subscription fees, priced on a PEPM basis. Revenue recognition for our recurring revenue stream is typically triggered when the customer processes its first payroll using UltiPro (or goes “Live”).

~~Critical~~Merger ~~Accounting Policies~~ Agreement

~~The~~On ~~preparation~~February of3, ~~financial~~2019, ~~statements~~Ultimate inentered ~~conformity~~into ~~with~~the ~~U.S.~~Merger ~~generally~~Agreement ~~accepted~~with ~~accounting~~Parent ~~principles~~and ~~(“GAAP”)~~Merger ~~requires~~Sub. ~~management~~Pursuant to ~~make~~the ~~estimates~~Merger ~~and~~Agreement, ~~assumptions~~Ultimate ~~that~~would ~~affect~~be ~~the~~acquired ~~reported~~by ~~amounts~~an ofinvestor ~~assets~~group ~~and~~led ~~liabilities~~by ~~and~~HF, ~~disclosure~~a ofleading ~~contingent~~private ~~assets~~equity ~~and~~investment ~~liabilities~~firm, atin ~~the~~an ~~date~~all-cash oftransaction ~~the~~for ~~financial~~$331.50 ~~statements~~per ~~and~~share ~~the~~in ~~reported~~cash ~~amounts~~(representing an aggregate value of ~~revenues~~approximately $11 billion), ~~costs~~after ~~and~~which ~~expenses,~~Ultimate ~~and~~would ~~related~~operate ~~disclosures~~as ~~during~~a ~~the~~privately ~~reporting~~held ~~period~~company. ~~Actual~~See ~~results~~Part ~~could~~I, ~~differ~~Item ~~from~~1A ~~those~~and ~~estimates~~“Risk Factors” for additional information.

Acquisition

Purchase Agreement and Ultimate acquired PeopleDoc. PeopleDoc, a pioneer in HR Service Delivery, is based in Paris, France, and has more than 1,000 customers with users in 180 countries. The addition of the PeopleDoc HR Service Delivery platform will further Ultimate's mission to improve the employee experience by offering new, person-centric features, such as an online employee help center, HR case management, and employee file management. See Note 4 of the Notes to Consolidated Financial Statements.

Critical Accounting Policies & Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. Such estimates include, but are not limited to, revenue recognition, income taxes, and the valuation of deferred tax assets, long-lived assets and acquired intangible assets through business combinations. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from those estimates under different assumptions or conditions.

We believe that of our significant accounting policies, which are described in Note 3, "Summary of Significant Accounting Policies and Recent Accounting Pronouncements," to our consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition

WeEffective January 1, 2018, we recognize revenues in accordance with Accounting Standards Update ("ASU") ~~No. 2009~~2014-1309, “~~Multiple-Deliverable~~ Revenue ~~Arrangements”~~from Contracts with Customers” (“~~ASU~~Topic ~~2009-13~~606”). We ~~use~~The ~~the~~core ~~relative~~principle ~~selling~~of ~~price~~Topic ~~method~~606 tois ~~allocate~~that ~~the~~revenue ~~total~~is ~~consideration~~recognized toupon ~~units~~transfer of ~~accounting~~control inof apromised ~~multiple~~products ~~element~~or ~~arrangement.~~services Weto ~~allocate~~customers ~~revenue~~ in an ~~arrangement~~amount ~~using~~that reflects the ~~estimated~~consideration ~~selling~~we ~~price~~expect ~~(“ESP”)~~to ofreceive ~~deliverables~~in ifexchange itfor ~~does~~those ~~not~~products ~~have~~or ~~vendor-specific~~services. ~~objective~~To ~~evidence~~achieve ~~(“VSOE”)~~the orcore ~~third-party~~principle ~~evidence~~of ~~(“TPE”)~~Topic of606, ~~selling~~we ~~price.~~ perform the following steps:

291) Identify the contract(s) with a customer;

~~VSOE~~2) Identify is the ~~price~~performance ~~charged~~obligations ~~when~~in the ~~same or similar product or service is sold separately. We define VSOE as a median price of recent stand-alone transactions that are priced within a narrow range.~~contract;

~~TPE~~3) Determine ~~is determined based on~~ the ~~prices~~transaction charged by our competitors for a similar deliverable when sold separately. However, due to the difficulty in obtaining sufficient information on competitor pricing and differences in our product offerings when compared with those of our peers, we generally are unable to reliably determine TPE.price;

~~ESP~~4) Allocate ~~is our best estimate of~~ the ~~selling price of an element in a~~ transaction. ~~If we are unable to establish selling~~ price ~~using either VSOE or TPE, we will use ESP in our allocation of arrangement consideration. The objective of ESP is~~ to ~~determine~~ the ~~price~~performance atobligations ~~which~~in ~~we would transact business if~~ the ~~product~~contract; or service were sold by us on a stand-alone basis. Our determination of ESP involves the use of a customary discount from the list (or book) price for each element, with the discounted price applied within a narrow range. The customary discount is derived from historical data that has been analyzed to determine trends and ~~patterns. We analyze the customary discount used for determining ESP on no less than an annual basis.~~

We5) Recognize ~~evaluate~~revenue ~~each deliverable in our arrangements to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting~~ when it(or ~~has stand-alone value to our customers. Our products and services continue to qualify~~ as) ~~separate~~we ~~units~~satisfy ofa ~~accounting~~performance ~~under ASU 2009-13~~obligation.

~~There~~The ~~are~~significant majority of our two major ~~elements~~revenue insources, recurring and services, is derived from contracts with customers. Recurring revenues are primarily related to our ~~multiple~~subscription-based ~~element~~SaaS ~~arrangements~~performance obligations. Services revenues are primarily related to implementation services for our SaaS customers (including services typically billed on a time and materials basis) and, to a much lesser extent, fees for other services, including the ~~delivery~~provision of ~~our~~payroll-related ~~UltiPro~~forms, ~~offering~~sales of time clocks and the printing of W-2 and Affordable Care Act ("ACA") forms for certain customers, ~~which~~as ~~are~~well ~~recurring~~as ~~revenues~~certain client reimbursable out-of-pocket expenses (i"Other Services").~~e.,~~ ~~cloud~~Fees charged to subscription-based ~~revenues~~SaaS performance obligations are each priced on a per-employee-per-month (“PEPM”) basis for a given calendar month based on usage, and fees charged for implementation services are typically priced on a fixed fee basis for activating the product offering. Our SaaS subscription revenues ~~(mostly~~are ~~implementation~~satisfied ~~consulting~~over time, because they are simultaneously received and consumed by the customer. Our activation services) revenues are satisfied over time because they are simultaneously received and consumed by the customer.

~~For~~Our ~~multiple~~SaaS ~~element~~performance ~~arrangements,~~obligations ~~the~~are ~~consideration~~each ~~allocated~~priced tobased ~~cloud~~on ~~subscription~~the ~~revenues~~number isof ~~recognized~~active customer employees, as ~~recurring~~of ~~revenues~~the signing of the contract, at the contract PEPM rate over the initial contract ~~period,~~term. asOur ~~those~~activation ~~subscription-based~~ services are ~~delivered,~~based ~~typically~~on ~~commencing~~a ~~with~~fixed ~~the~~fee ~~Live~~charged ~~date~~to ofour ~~the~~customers. ~~related~~There ~~product.~~is ~~The~~typically no variable consideration ~~allocated~~related to ~~fixed~~our ~~fee~~SaaS ~~implementation~~performance ~~consulting~~obligations or our activation services, innor ~~multiple~~do ~~element~~they ~~arrangements~~include isa ~~recognized~~significant asfinancing ~~services~~component, ~~revenues~~non-cash onconsideration, or consideration payable to a ~~percentage~~customer. ofOur ~~completion~~SaaS ~~basis~~performance (obligations are typically billed quarterly in ~~relation~~advance towhile ~~progression~~our ~~through~~activation ~~implementation~~services ~~phases),~~are bybilled ~~product~~over the implementation period.

~~Single~~Our ~~element~~SaaS arrangements ~~typically~~include ~~consist~~multiple ofperformance ~~renewals~~obligations ~~for~~and ~~cloud~~transaction ~~subscriptions~~price ~~and~~allocations ~~implementation~~are ~~consulting~~based ~~services~~on ~~sold~~the onstand-alone aselling ~~time~~price ~~and~~("SSP") ~~materials~~for ~~basis.~~each ~~Under~~performance ~~these~~obligation. ~~single~~There ~~element~~is ~~arrangements,~~an ~~cloud~~observable ~~subscription~~input ~~revenues~~for ~~are~~SSP ~~recognized~~for ~~over~~each of the ~~related~~SaaS ~~renewal~~performance ~~period,~~obligations. asSince ~~the~~activation services ~~are~~do ~~delivered~~not have directly observable pricing, the SSP is estimated using market conditions and ~~implementation~~observable ~~consulting~~inputs, ~~services~~which ~~are~~is ~~recognized~~calculated asbased ~~the~~on ~~related~~historical ~~time~~average ~~and~~discounts ~~materials~~off ~~services~~our ~~are~~standard ~~performed~~price list.

WeFor ~~recognize~~our performance obligations, the consideration allocated to cloud subscription revenues ~~when~~is ~~all~~recognized ofas recurring revenues, typically using the ~~following~~output ~~criteria~~method, over the initial contract period, as those subscription-based services are ~~met:~~consumed,

~~• persuasive evidence of an arrangement exists;~~32

•typically ~~delivery~~commencing ~~has~~with ~~occurred;~~the date the customer processes their first live payroll using UltiPro (referred to as going "Live"). The consideration allocated to activation services is recognized as services revenues based on the proportion performed, using reasonably dependable estimates (in relation to progression through activation phases), by product. Activation services are performed by our implementation consultants and, to a lesser extent, third party implementation partners. For activation services performed by third party implementation partners, we act as the principal and report revenues on a gross basis, meaning the amounts billed to customers are recorded as services revenues, and related expenses incurred are recorded as cost of services revenues. We control the activation services performed by third party implementation partners and act as principal because we are ultimately responsible to our customers and have full discretion in establishing prices.

•Customers also enter into contracts for services billed on a time and materials basis and Other Services. Time and materials services are satisfied over time because the ~~fees~~customer simultaneously receives and consumes the benefit as we perform. Services revenues for time and materials work are ~~fixed~~recognized in the period performed. Fees from Other Services substantially include the provision of payroll-related forms, sales of time clocks and ~~determinable;~~printing services for certain customers. For these Other Services, revenue is recognized at a point in time, upon shipment which is when control of the goods and services transfers to the customer.

• collection is considered probable.

If collection is not considered probable, we recognize revenues when the fees are collected. If the fees are not fixed and determinable, we recognize revenues when the fees become due from the customer. If non-standard acceptance periods or non-standard performance criteria are required, we recognize revenue when the acceptance period expires or upon the satisfaction of the acceptance/performance criteria, as applicable.

The majority of services revenues are recognized over the implementation period, which is from the contract execution date until the Live date. Cloud revenues are recognized over the initial contract term, typically beginning in the month the customer goes Live.

Recurring Revenues

Recurring revenues primarily consist of subscription revenues recognized from our customers' use of UltiPro after they have gone Live.

i) Cloud subscription revenues are principally derived from PEPM fees earned from UltiPro units that are Live. Ongoing PEPM fees are recognized as subscription revenues as the services are delivered, typically commencing when the customer goes Live.

ii) Effective January 1, 2015, we no longer have maintenance revenues associated with our Legacy customers and we stopped supporting our Legacy customers after December 31, 2014. Since the time we announced that we would stop supporting our Legacy product in 2012, we successfully converted the majority of our Legacy customers to the cloud. Those customers that did not convert terminated.

With UltiPro, our customers do not have the right to take possession of our software and these arrangements are considered service contracts. The selling price of multiple deliverables in cloud arrangements is derived for each element based on the guidance provided by ASU 2009-13. The multiple elements that typically exist in cloud arrangements include (1) recurring revenues from the combination of hosting services, the right to use UltiPro, and maintenance of UltiPro (i.e., product enhancements, updates and customer support) and (2) professional services (i.e., primarily implementation consulting services).

The pricing for the three elements that pertain to recurring revenues (i.e., hosting services, the right to use UltiPro and maintenance of UltiPro (as described above)) is bundled. Since these three bundled elements are components of recurring revenues in the consolidated statements of income, allocation of selling price to each of the three elements is not necessary and they are not reported separately. Selling price, which is established through VSOE, for the bundled elements, as a whole, is determined on the basis of renewal pricing, without taking into consideration potential price increases or potential changes in the number of employees of the customer in the future due to the uncertainties surrounding these potential occurrences. These bundled elements are provided on an ongoing basis, represent undelivered elements and are recognized on a monthly basis as the related services are performed, typically commencing once the customer goes Live.

Services Revenues

Services revenues primarily include revenues from fees charged for implementation consulting services in connection with the implementation of our product solutions and, to a much lesser extent, fees for other services, including the provision of payroll-related forms, sales of time clocks and printing services for certain customers, as well as certain client reimbursable out-of-pocket expenses.

Our multiple element contracts contain recurring cloud revenues and implementation consulting services priced on a fixed fee basis. Time and materials implementation consulting services are sold as stand-alone sales not directly related to the basic implementation of the cloud product. The total arrangement consideration is allocated to services elements in the arrangement based on relative selling prices, using the prices established when the services are sold on a stand-alone basis. Selling price is established through ESP for fixed fee implementation consulting services that are included in our multiple element contracts.

Revenues from implementation consulting services sold on a fixed-fee basis are recognized using the percentage of completion accounting method, which involves the use of estimates. Percentage of completion is measured at each reporting date based on progress made to date.

Revenues from implementation consulting services, billed on a time and materials basis (at an hourly rate), are recognized as these services are performed. Other services are recognized as the product is shipped or as the services are rendered, depending on the specific terms of the related arrangement.

Capitalized Internal-Use Software Costs

We follow the guidance of Accounting Standards Codification ("ASC") Topic 350-40, "Intangibles Goodwill and Other-Internal Use Software" (“ASC 350”), in accounting for costs related to software developed for internal use. ASC 350 requires companies to capitalize qualifying computer software costs, which are incurred during the application development stage. Costs capitalized during the application development stage include external direct costs of materials and services consumed in developing or obtaining internal-use software and payroll and payroll-related costs for employees who are directly associated with, and who devote time to, the internal-use computer software. In addition to capitalizing costs for software (which are used by us in our general operations, for internal purposes), we also capitalize costs under ASC Topic 350-40 for certain software development projects related to our suite of products sold to our customers exclusively on a subscription basis under our software-as-a-service ("SaaS") offering of UltiPro.

Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight-line basis over its estimated useful life. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. To the extent there is amortization of capitalized costs associated with development projects for UltiPro sold to our customers on a SaaS basis, the related amortization is included with cost of recurring revenues upon the commencement of that amortization period.

31Goodwill and Intangible Assets

The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments and estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.

At December 31, 2018, our goodwill totaled $219.9 million and our identifiable net intangible assets totaled $144.4 million. We assess the impairment of goodwill of our reporting unit annually, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit's carrying value is compared to its fair value. We consider both market and discounted cash flow approaches to determine the fair value of the reporting unit. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit. We conducted our annual impairment test of goodwill as of December 31, 2018, and 2017. As a result of this test, we determined that no adjustment to the carrying value of goodwill for our reporting unit was required.

We evaluate our amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset or group of assets. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset. We also evaluate the estimated remaining useful lives of intangible assets and whether events or changes in circumstances warrant a revision to the remaining periods of amortization. Assumptions and estimates about future values and remaining useful lives of our intangible assets are complex and subjective. They can be affected by a variety of factors,

including external factors such as industry and economic trends and internal factors such as changes in our business strategy and our internal forecasts.

Results of Operations

The following table sets forth the consolidated statements of income data of Ultimate, as a percentage of total revenues, for the periods indicated. The ~~years~~year ended December 31, 2016 ~~and~~was ~~2015 were~~ revised in connection with an immaterial correction of prior period financial statements. See Note 1718 inof ~~our~~the Notes to Consolidated Financial Statements for further discussion.

	For the Years Ended December 31,
	2017		2016		2015
	2018		2017		2016
Revenues:
Recurring	8587.34	%	8385.73	%	83.57	%
Services	1412.76		1614.37		16.53
Total revenues	100.0		100.0		100.0
Cost of revenues:
Recurring	2224.40		22.14		22.41
Services	1513.29		1615.32		16.23
Total cost of revenues	37.69		3837.46		38.64
Gross profit	62.41		6162.64		61.46
Operating expenses:
Sales and marketing	2825.70		28.7		2728.47
Research and development	1617.08		1516.50		15.25
General and administrative	1312.02		1213.10		1112.81
Total operating expenses	5755.70		5657.37		5456.43
Operating income	4.7.1		54.37		75.03
Other income (expense):
Interest expense and other, net	—		~~(0.1~~—	)	(0.1	)
Total other expense, net	—0.2		~~0.1~~—		—0.1
Total other income (expense), net	—0.2		—		~~(0.1~~—	)
Income before income taxes	4.7.3		54.37		65.93
Provision for income taxes	(31.26	)	(13.62	)	(41.76	)
Net income	1.5.7	%	31.75	%	23.27	%

The following table sets forth the non-cash stock-based compensation expense resulting from stock-based arrangements that is recorded in our consolidated statements of income for the periods indicated (in thousands):

	For the Years Ended December 31,
	2017		2016
	2018		2017
Cost of recurring revenues	$	1116,~~931~~087	$	811,~~613~~931
Cost of services revenues	79,~~909~~472		67,~~198~~909
Sales and marketing	7571,~~428~~641		5975,~~187~~428
Research and development	1216,~~026~~275		812,~~238~~026
General and administrative	3926,~~133~~878		3139,~~641~~133
Total stock-based compensation expense	$	~~146~~140,~~427~~353	$	~~113~~146,~~877~~427

~~Overview~~Comparison of ~~Financial~~Fiscal ~~Results~~Years Ended December 31, 2018 and 2017

In comparison with 2016, our total revenues for 2017 increased by $159.4 million and our total cost of revenues and operating expenses, combined, increased by $156.6 million, resulting in an increase in our operating income of $2.9 million.34

During the years ended December 31, 2017 and 2016, our non-cash stock-based compensation expense increased $32.6 million and $31.5 million, respectively, from the prior year primarily as the result of certain restricted stock awards granted in connection with changes we made with respect to, and the final termination of, our change in control plans ("CIC Revenues

32Our revenues are derived from recurring revenues and services revenues. See “Revenue Recognition” above for further discussion of Ultimate’s revenue sources and its method of accounting for each of them.

~~Plans")~~Total ~~for~~revenues ~~certain~~increased ~~senior officers~~21. ~~These restricted stock awards granted in March 2015, February 2016, and February 2017, accounted for $22.~~2% ~~million~~to ~~of the~~ $321,140.65 million ~~increase in our non-cash stock-based compensation expense~~ for ~~the~~2018 ~~year~~from ~~ended December 31, 2017 and~~ $19940.7 million ~~of the $31.5 million increase in our non-cash stock-based compensation expense~~ for ~~the year ended December 31, 2016~~2017. The remaining increases were due to the effects of new grants in each year and the impact of changes in our stock price ("General Operations"). See Note 15 in our Notes to Consolidated Financial Statements for further discussion.

~~The~~Recurring ~~following~~revenues, ~~table~~primarily ~~sets~~consisting ~~forth~~of ~~the~~subscription ~~stock~~revenues from cloud-based ~~compensation~~UltiPro, ~~expense~~increased ~~associated~~24.3% ~~with~~to ~~modifications~~$997.1 ~~made~~million tofor ~~the~~2018 ~~Company's~~from ~~change~~$802.3 million for 2017. The increase in ~~control~~recurring ~~plans~~revenues asfor ~~discussed~~2018 ~~above~~was primarily based on the revenue impact of incremental units sold to customers that have processed their first payroll using UltiPro (inor ~~thousands~~gone "Live"): since December 31, 2017, including the UltiPro core product and, to a lesser extent, Optional Capabilities of UltiPro. Cloud subscription revenues are recognized as recurring revenues over the initial contract period, as those services are delivered, typically commencing with the Live date.

	For the Years Ended December 31,
	2017		2016
Stock-based compensation expense:
Stock-based compensation expense related to General Operations	$	81,468	$	71,119
Stock-based compensation expense related to CIC modifications	64,959		42,758
Total non-cash stock-based compensation expense	$	146,427	$	113,877

Our annual revenue customer retention rate for our recurring revenue cloud customers was approximately 96% at the end of 2018 (calculated on a 12-month rolling basis) which compares to approximately 96% at the end of 2017. The impact on recurring revenues of UltiPro units sold has been a gradual increase from one reporting period to the next, based on the incremental effect of revenue recognition of the subscription fees over the terms of the related contracts as sales in backlog go Live.

~~Net~~Services ~~income~~revenues ~~decreased~~increased ~~$15~~3.26% ~~million for 2017, compared with 2016. This decrease was due~~ to a $17143.95 million ~~increase in our provision~~ for ~~income~~2018 ~~taxes, partially offset by our pre-tax income~~ from ~~operations~~$138.4 Onmillion ~~December~~for ~~22,~~ 2017~~, the federal government passed the federal Tax Cuts and Jobs Act (the "Tax Act")~~. The ~~Tax~~increase ~~Act~~in ~~reduced~~services ~~our~~revenues ~~federal~~for ~~statutory~~the ~~tax~~year ~~rate~~was ~~from~~primarily ~~35%~~due to ~~21%,~~additional ~~effective~~implementation ~~January~~revenues 1,to ~~2018.~~support ~~Accounting~~increased ~~Standards Codification ("ASC") 740~~sales, ~~"Income~~from ~~Taxes"~~both ~~("ASC~~Ultimate's ~~740"),~~implementation ~~requires~~consultants ~~companies~~as towell ~~recognize~~as ~~the~~third ~~effect~~party ofimplementation ~~tax~~partners ~~law changes in the period of enactment. During the quarter ended December 31~~and, ~~2017, we adjusted the statutory federal and state income tax rates~~ to ~~our deferred tax assets and liabilities. As~~ a ~~result~~lesser ~~of the statutory rate decrease~~extent, wean ~~had~~increase ~~a reduction~~ in ~~our~~Other ~~net~~Services ~~deferred~~revenues ~~tax~~mainly ~~asset~~attributable ~~balance of $8.8 million. We recorded $8.7 million of the $8.8 million reduction in our net deferred tax asset balance~~ to our ~~provision~~print services for ~~income~~certain ~~taxes in our consolidated statement of income and $0~~customers.~~1 million to our consolidated statements of comprehensive income.~~

Cost of Revenues

Cost of revenues consists of the costs of recurring and services revenues. Cost of recurring revenues primarily consists of costs to provide customer support services ("Customer Support") to cloud customers, the cost of providing periodic updates and the cost of recurring subscription revenues, including hosting data center costs and, to a lesser extent, amortization of capitalized software. Cost of services revenues primarily consists of costs to provide implementation services and training to Ultimate’s customers and, to a lesser extent, costs related to sales of payroll-related forms, time clocks and print services, as well as costs associated with certain client reimbursable out-of-pocket expenses.

Total cost of revenues increased 22.1% to $431.7 million for 2018, from $353.7 million for 2017.

Cost of recurring revenues increased 29.7% to $273.2 million for 2018 from $210.6 million for 2017. The $62.6 million increase in the cost of recurring revenues for the year was primarily due to increases in both cloud costs and Customer Support costs, as described below, and, to a lesser extent, increased amortization of capitalized software costs from the development project to be sold in the future as a cloud product only (the "Development Project") which resulted from other product modules becoming available for their intended use.


•	For the year ended December 31, 2018, the increases in cloud costs were principally as a result of the growth in cloud operations from increased sales, including increased labor costs and, to a lesser extent, increased variable costs associated with our cloud operations.


•	The increase in Customer Support costs for the year ended December 31, 2018 was primarily due to higher labor costs commensurate with the growth in the number of cloud customers serviced.

Cost of services revenues increased 10.8% to $158.6 million for 2018 from $143.1 million for 2017. The $15.4 million increase in cost of services revenues was primarily due to an increase in the cost of implementation, including higher labor and related costs and, to a lesser extent, the increased use of third-party implementation partners.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and benefits, sales commissions, travel and promotional expenses, and facility and communication costs for direct sales offices, as well as advertising and marketing costs. Sales and marketing expenses increased 5.7% to $285.3 million for 2018 from $269.8 million for 2017. The $15.5 million increase in sales and marketing during 2018 was primarily due to increased labor and related costs (including the impact of an increase in sales personnel) and, to a lesser extent, higher advertising and marketing expenses, partially offset by lower sales commissions resulting from the adoption of Topic 606 due to the longer amortization period under this new standard. Effective January 1, 2018, we adopted the requirements Topic 606 resulting in a change in the amortization period of deferred incremental

commission costs from 2 - 3 years under Topic 605, to 7 years under Topic 606. The 7 year amortization period is based on analyzing our customer contract term periods and our customer life, taking into consideration technological changes for our UltiPro product offering. Deferred incremental commission costs are amortized on a systemic basis, consistent with the pattern of transfer of the goods or services to which the asset relates.

Research and Development

Research and development expenses consist primarily of software development personnel costs. Research and development expenses increased 35.3% to $203.7 million in 2018 from $150.6 million in 2017. The $53.1 million increase in research and development expenses during 2018 was principally due to higher labor and related costs associated with the ongoing development of UltiPro and Optional Capabilities, including the impact of increased personnel costs (predominantly from additional headcount), net of capitalized labor costs. For the years ended December 31, 2018 and 2017, we capitalized $54.0 million (including $3.5 million in non-cash stock-based compensation) and $52.6 million (including $4.0 million in non-cash stock-based compensation), respectively, of computer software development costs related to the Development Project. The capitalized costs for the Development Project were primarily from direct labor costs and, to a lesser extent, third party consulting fees for the years ended December 31, 2018 and 2017. For the years ended December 31, 2018 and 2017, there was $9.9 million and $4.4 million, respectively, of amortization associated with certain product modules of the Development Project which were ready for their intended use. The amortization of capitalized software is included in cost of recurring revenues.

General and Administrative

General and administrative expenses consist primarily of salaries and benefits of executive, administrative and financial personnel, as well as facility costs, external professional fees and the provision for doubtful accounts. General and administrative expenses increased by 14.0% to $139.2 million for 2018 from $122.1 million for 2017. The $17.1 million increase in general and administrative expenses during 2018 was primarily due to higher labor and related costs, including increased personnel to support Ultimate's growth in operations, increased professional fees and an increase in the provision for doubtful accounts.

Provision for Income Taxes

In 2018, based on pre-tax income, we had income tax expense of $18.2 million as compared with $30.1 million in 2017. The decrease in income tax expense of $11.9 million was attributable to the revaluation in the federal statutory tax rate from 35% to 21% effective January 1, 2018 due to the passing of the federal Tax Cuts and Jobs Act by the federal government on December 22, 2017 and a reduction in the Summary of Interpretation No. 48 ("FIN 48") reserve attributable to an IRS examination settled in 2018.

Comparison of Fiscal Years Ended December 31, 2017 and 2016

Revenues

Our revenues are derived from recurring revenues and services revenues. See “Revenue Recognition” above for further discussion of Ultimate’s revenue sources and its method of accounting for each of them.

Total revenues increased 20.4% to $940.7 million for 2017 from $781.3 million for 2016.

Recurring revenues, primarily consisting of subscription revenues from cloud-based UltiPro, increased 22.6% to $802.3 million for 2017 from $654.2 million for 2016. The increase in recurring revenues for 2017 was primarily based on the revenue impact of incremental units sold to customers that have processed their first payroll using UltiPro (or gone "Live") since December 31, 2016, including the UltiPro core product and, to a lesser extent, Optional Capabilities of UltiPro. Cloud subscription revenues are recognized as recurring revenues over the initial contract period, as those services are delivered, typically commencing with the Live date.

Our annual revenue customer retention rate for our recurring revenue cloud customers was approximately 96% at the end of 2017 (calculated on a 12-month rolling basis) which compares to approximately 97% at the end of 2016. The impact on recurring revenues of UltiPro units sold has been a gradual increase from one reporting period to the next, based on the incremental effect of revenue recognition of the subscription fees over the terms of the related contracts as sales in backlog go Live.

Services revenues increased 8.9% to $138.4 million for 2017 from $127.1 million for 2016. The increase in services revenues for the year was primarily due to additional implementation revenues to support increased sales and, to a lesser extent, as a result of increased fixed fee implementations primarily in association with interfaces with UltiPro.

As previously discussed in our second quarter 2017 Form 10-Q, during 2017, we experienced an elongation in our Time-to-Live periods for our sales in our backlog (i.e., those which had not gone Live yet) for our enterprise sales, as well as our mid-market sales, which caused our expected 2017 revenues (both recurring and services) to be less than our original projections. The extension of the Time-to-Live periods does not change the overall value of recurring revenues or our fixed fee implementations (included with services revenues) from these customers and is essentially a timing issue. We do not believe 36

33As previously discussed in our second quarter 2017 Form 10-Q, during 2017, we experienced an elongation in our Time-to-Live periods for our sales in our backlog (i.e., those which had not gone Live yet) for our enterprise sales, as well as our mid-market sales, which caused our expected 2017 revenues (both recurring and services) to be less than our original projections. The extension of the Time-to-Live periods does not change the overall value of recurring revenues or our fixed fee implementations (included with services revenues) from these customers and is essentially a timing issue. We do not believe that our Time-to-Live periods will elongate beyond our 2017 experience and have factored the revised Time-to-Live periods into our 2018 revenue expectations.

that our Time-to-Live periods will elongate beyond our 2017 experience and have factored the revised Time-to-Live periods into our 2018 revenue expectations.

Cost of Revenues

Total cost of revenues increased 17.9% to $353.7 million for 2017, from $300.1 million for 2016.

Cost of recurring revenues increased 21.9% to $210.6 million for 2017 from $172.7 million for 2016. The $37.9 million increase in the cost of recurring revenues for the year was primarily due to increases in both cloud costs and Customer Support costs, as described below, and, to a lesser extent, increased amortization of capitalized software costs from the development project to be sold in the future as a cloud product only (the "Development Project") which resulted from other product modules becoming available for their intended use during the last half of 2017.


•	For the year ended December 31, 2017, the increases in cloud costs were principally as a result of the growth in cloud operations from increased sales, including increased labor costs and, to a lesser extent, increased variable costs associated with our cloud operations.


•	The increase in Customer Support costs for the year ended December 31, 2017 was primarily due to higher labor costs commensurate with the growth in the number of cloud customers serviced.

Cost of services revenues increased 12.3% to $143.1 million for 2017 from $127.4 million for 2016. The $15.7 million increase in cost of services revenues was primarily due to an increase in the cost of implementation, including higher labor and related costs and the increased use of third-party implementation partners.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and benefits, sales commissions, travel and promotional expenses, and facility and communication costs for direct sales offices, as well as advertising and marketing costs. Sales and marketing expenses increased 20.2% to $269.8 million for 2017 from $224.4 million for 2016. The $45.4 million increase in sales and marketing during 2017 was primarily due to increased labor and related costs (including the impact of an increase in sales personnel, primarily in our mid-market and strategic sales channels, and higher sales commissions) and higher advertising and marketing expenses, which included media advertising. Included in the increased labor and related costs for 2017 was a portion of certain non-cash, stock-based compensation expenses relating to the revisions and terminations of our change in control plans ("CIC Plans"). ~~Commissions~~Prior to the adoption of Topic 606 on January 1, 2018, commissions on subscription-based cloud sales were are amortized over the initial contract term (typically 24 to 36 months) typically commencing on the Live date~~, which corresponds with the related cloud revenue recognition~~.

Research and Development

Research and development expenses consist primarily of software development personnel costs. Research and development expenses increased 24.8% to $150.6 million in 2017 from $120.7 million in 2016. The $29.9 million increase in research and development expenses during 2017 was principally due to higher labor and related costs associated with the ongoing development of UltiPro and Optional Capabilities, including the impact of increased personnel costs (predominantly from additional headcount), net of capitalized labor costs. For the years ended December 31, 2017 and 2016, we capitalized $52.6 million (including $4.0 million in non-cash stock-based compensation) and $37.9 million (including $3.9 million in non-cash stock-based compensation), respectively, of computer software development costs related to the Development Project. The capitalized costs for the Development Project were primarily from direct labor costs and, to a lesser extent, third party consulting fees for the years ended December 31, 2017 and 2016. For the years ended December 31, 2017 and 2016, there was $4.4 million and $1.2 million, respectively, of amortization associated with certain product modules of the Development ~~Project which were ready for their intended use. The amortization of capitalized software is included in cost of recurring revenues.~~

Project which were ready for their intended use. The amortization of capitalized software is included in cost of recurring revenues.

General and Administrative

General and administrative expenses consist primarily of salaries and benefits of executive, administrative and financial personnel, as well as facility costs, external professional fees and the provision for doubtful accounts. General and administrative expenses increased by 29.3% to $122.1 million for 2017 from $94.4 million for 2016. The $27.7 million increase in general and administrative expenses during 2017 was primarily due to higher labor and related costs, including increased personnel to support Ultimate's growth in operations, an increase in professional fees, an increase in facility costs to support the growth in headcount, and a portion of certain non-cash, stock-based compensation expenses for the revisions and terminations of our CIC Plans.

administrative expenses increased by 29.3% to $122.1 million for 2017 from $94.4 million for 2016. The $27.7 million increase in general and administrative expenses during 2017 was primarily due to higher labor and related costs, including increased personnel to support Ultimate's growth in operations, an increase in professional fees, an increase in facility costs to support the growth in headcount, and a portion of certain non-cash, stock-based compensation expenses for the revisions and terminations of our CIC Plans.

Provision for Income Taxes

In 2017, based on pre-tax income, we had income tax expense of $30.1 million as compared with $12.2 million in 2016. The increase in income tax expense of $17.9 million was attributable to the revaluation of the net deferred tax asset balance from the reduction in federal statutory tax rates per the enactment of the federal Tax Cut and Jobs Act (the "Tax Act"), passed in December 2017. The Tax Act made broad and complex changes to the U.S. tax code including but not limited to reducing the federal statutory tax rate from 35% to 21%, effective January 1, 2018. During the quarter ended December 31, 2017, we adjusted the statutory federal and state income tax rates to our net deferred tax assets. The remaining increase to income tax expense was due to an increase in non-deductible expenses, primarily stock-based compensation, and a resulting higher ratio of non-deductible expenses to pre-tax income. Ultimate recorded $4.5 million and $4.0 million of research and development tax credit carryforwards during the years ended December 31, 2017 and December 31, 2016, respectively.

Comparison of Fiscal Years Ended December 31, 2016 and 2015

Revenues

Total revenues, primarily consisting of recurring and services revenues, increased 26.4% to $781.3 million for 2016 from $618.1 million for 2015.

Recurring revenues increased 26.7% to $654.2 million for 2016 from $516.4 million for 2015. The increase in recurring revenues for 2016 was primarily based on the revenue impact of incremental units sold to customers that have gone Live since December 31, 2015, including the UltiPro core product and, to a lesser extent, Optional Capabilities of UltiPro. Cloud subscription revenues are recognized as recurring revenues over the initial contract period, as those services are delivered, typically commencing with the Live date.

Our Customer Retention rate for our recurring revenue cloud customers was approximately 97% at the end of 2016 which compared with in excess of 97% for the prior year comparable period. The impact on recurring revenues of UltiPro units sold has been a gradual increase from one reporting period to the next, based on the incremental effect of revenue recognition of the subscription fees over the terms of the related contracts as sales in backlog go Live.

Services revenues increased 25.0% to $127.1 million for 2016 from $101.7 million for 2015. The increase in services revenues for the year was primarily due to additional implementation revenues from incremental billable consultants to support increased sales, particularly from our mid-market and strategic market sales channels and, to a lesser extent, as a result of increased fixed fee implementations primarily in association with interfaces with UltiPro. In addition, other services revenues increased primarily from additional print services provided to our customers (which occurred in the first quarter of 2016).

Cost of Revenues

Cost of revenues consists of the costs of recurring and services revenues. Cost of recurring revenues primarily consists of costs to provide Customer Support services to cloud customers, the cost of providing periodic updates and the cost of recurring subscription revenues, including hosting data center costs and, to a lesser extent, amortization of capitalized software. Cost of services revenues primarily consists of costs to provide implementation services and training to Ultimate’s customers and, to a lesser extent, costs related to sales of payroll-related forms, time clocks and print services, as well as costs associated with certain client reimbursable out-of-pocket expenses.

Total cost of revenues increased 25.8% to $300.1 million for 2016, from $238.5 million for 2015.

Cost of recurring revenues increased 24.6% to $172.7 million for 2016 from $138.6 million for 2015. The $34.1 million increase in the cost of recurring revenues for the year was primarily due to increases in both cloud costs and Customer Support costs, as described below:

• For the year ended December 31, 2016, the increases in cloud costs were principally as a result of the growth in cloud operations from increased sales, including increased labor costs and, to a lesser extent, increased variable costs associated with our cloud operations.

• The increase in Customer Support costs for the year ended December 31, 2016 was primarily due to higher labor costs commensurate with the growth in the number of cloud customers serviced.

Cost of services revenues increased 27.5% to $127.4 million for 2016 from $99.9 million for 2015. The $27.5 million increase in cost of services revenues was primarily due to an increase in the cost of implementation, including higher labor and related costs, particularly in association with the increased number of implementation consultants and the increased use of third-party implementation partners.

Sales and Marketing

Sales and marketing expenses consist primarily of salaries and benefits, sales commissions, travel and promotional expenses, and facility and communication costs for direct sales offices, as well as advertising and marketing costs. Sales and marketing expenses increased 32.3% to $224.4 million for 2016 from $169.7 million for 2015. The $54.8 million increase in sales and marketing during 2016 was primarily due to increased labor and related costs (including the impact of an increase in sales personnel, primarily in our mid-market and strategic sales channels, and higher sales commissions) and higher advertising and marketing expenses, which included media advertising. Included in the increased labor and related costs for the 2016 year was a portion of certain non-cash, stock-based compensation expenses relating to the revisions and terminations of our CIC Plans. Commissions on subscription-based cloud sales are amortized over the initial contract term (typically 24 to 36 months) typically commencing on the Live date, which corresponds with the related cloud revenue recognition.

Research and Development

Research and development expenses consist primarily of software development personnel costs. Research and development expenses increased 28.8% to $120.7 million in 2016 from $93.7 million in 2015. The $27.0 million increase in research and development expenses during 2016 was principally due to higher labor and related costs associated with the ongoing development of UltiPro and Optional Capabilities, including the impact of increased personnel costs (predominantly from additional headcount), net of capitalized labor costs. For the years ended December 31, 2016 and 2015, we capitalized $37.9 million (including $3.9 million in non-cash stock-based compensation) and $26.3 million (including $3.0 million in non- cash stock-based compensation), respectively, of computer software development costs related to the Development Project. The capitalized costs for the Development Project were primarily from direct labor costs and, to a lesser extent, third party consulting fees for the years ended December 31, 2016 and 2015. For each of 2016 and 2015, we recognized $1.1 million of amortization costs which were associated with a particular product module, of the Development Project, UltiPro Recruiting, which was ready for its intended use during the second quarter of 2014. In addition, another product module of the Development Project, UltiPro Onboarding, became ready for its intended use in mid-December 2016; the amortization related to the commencement of the amortization for UltiPro Onboarding was insignificant for the 2016 year. The amortization of capitalized software is included in cost of recurring revenues.

General and Administrative

General and administrative expenses consist primarily of salaries and benefits of executive, administrative and financial personnel, as well as external professional fees and the provision for doubtful accounts. General and administrative expenses increased by 29.5% to $94.4 million for 2016 from $72.9 million for 2015. The $21.5 million increase in general and administrative expenses during 2016 was primarily due to higher labor and related costs, including increased personnel to support Ultimate's growth in operations, an increase in facility costs to support growth in headcount, including our Weston, Florida headquarter locations, increased professional fees and a portion of certain non-cash, stock-based compensation expenses for the revisions and terminations of our CIC Plans.

Provision for Income Taxes

In 2016, based on pre-tax income, we had income tax expense of $12.2 million as compared to $28.8 million in 2015. The decrease in income tax expense of $16.6 million was primarily due to the early adoption of ASU 2016-09 (see Note 3 in Notes to Consolidated Financial Statements), partially offset by an increase in non-deductible expenses, primarily stock based compensation, and a resulting higher ratio of non-deductible expenses to pre-tax income. Ultimate recorded $4.0 million and $3.2 million of research and development tax credit carryforwards during the years ended December 31, 2016 and December 31, 2015, respectively.

Quarterly Results of Operations

The following table sets forth certain unaudited quarterly results of operations for each of the quarters in the years ended December 31, ~~2017~~2018 and ~~2016~~2017. In management’s opinion, this unaudited information has been prepared on the same basis as the audited consolidated financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented. ~~The unaudited quarterly results of operations for the first three quarters of 2017 and each of the quarters in the year ended December 31, 2016, were revised in connection with~~

an immaterial correction of prior period financial statements. See Note 17 in our Notes to Consolidated Financial Statements for further discussion.

This information should be read in conjunction with Ultimate’s Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-K.

Our quarterly revenues and operating results have varied significantly in the past and are likely to vary substantially from quarter to quarter in the future. Our operating results may fluctuate as a result of a number of factors, including, but not limited to, increased expenses (especially as they relate to product development, sales and marketing and the use of third-party consultants), timing of product releases, increased competition, variations in the mix of revenues, announcements of new products by us or our competitors and capital spending patterns of our customers. We establish our expenditure levels based upon our expectations as to future revenues, and, if revenue levels are below expectations, expenses can be disproportionately high. A drop in near term demand for our products could significantly affect both revenues and profits in any quarter. Operating results achieved in previous fiscal quarters are not necessarily indicative of operating results for the full fiscal years or for any future periods. As a result of these factors, there can be no assurance that we will be able to achieve or maintain profitability on a quarterly basis. We believe that, due to the underlying factors for quarterly fluctuations, quarter-to-quarter comparisons of Ultimate’s operations are not necessarily meaningful and that such comparisons should not be relied upon as indications of future performance.

3738

Quarters Ended

Dec 31, ~~2017~~2018

Sep 30, ~~2017~~2018

Jun 30, ~~2017~~2018

Mar 31, ~~2017~~2018

Dec 31, ~~2016~~2017

Sep 30, ~~2016~~2017

Jun 30, ~~2016~~2017

Mar 31, ~~2016~~2017

(In thousands, except per share data)

(Unaudited)

Revenues:

Recurring

~~214~~266,~~112~~444

~~203~~254,~~059~~580

~~195~~239,~~147~~458

~~189~~236,~~981~~587

~~175~~214,~~944~~112

~~167~~203,~~025~~059

~~158~~195,~~479~~147

~~152~~189,~~751~~981

Services

3738,~~319~~359

33,~~054~~247

2931,~~545~~704

3840,~~510~~168

3437,~~605~~319

2933,~~966~~054

2829,~~058~~545

3438,~~463~~510

Total revenues

~~251~~304,~~431~~803

~~236~~287,~~113~~827

~~224~~271,~~692~~162

~~228~~276,~~491~~755

~~210~~251,~~549~~431

~~196~~236,~~991~~113

~~186~~224,~~537~~692

~~187~~228,~~214~~491

Cost of revenues:

Recurring

5572,~~394~~434

5271,~~558~~243

5266,~~539~~623

5062,~~069~~865

4655,~~173~~394

4452,~~095~~558

4252,~~951~~539

3950,~~457~~069

Services

3540,~~659~~141

3640,~~136~~571

3135,~~715~~949

3941,~~631~~908

3335,~~218~~659

3236,~~069~~136

2931,~~342~~715

3239,~~804~~631

Total cost of revenues

91112,~~053~~575

88111,~~694~~814

84102,~~254~~572

89104,~~700~~773

7991,~~391~~053

7688,~~164~~694

7284,~~293~~254

7289,~~261~~700

Gross profit

~~160~~192,~~378~~228

~~147~~176,~~419~~013

~~140~~168,~~438~~590

~~138~~171,~~791~~982

~~131~~160,~~158~~378

~~120~~147,~~827~~419

~~114~~140,~~244~~438

~~114~~138,~~953~~791

Operating expenses:

Sales and marketing

6875,~~339~~812

6572,~~066~~077

6766,~~015~~207

6971,~~360~~197

5868,~~074~~339

5565,~~212~~066

5467,~~548~~015

5669,~~582~~360

Research and development

4155,~~013~~588

3851,~~415~~163

3450,~~997~~004

3646,~~158~~974

3241,~~383~~013

3138,~~699~~415

2934,~~053~~997

2736,~~515~~158

General and administrative

3037,~~983~~939

2937,~~459~~261

3132,~~472~~270

3031,~~204~~722

2530,~~439~~983

2529,~~284~~459

2231,~~180~~472

2130,~~529~~204

Total operating expenses

~~140~~169,~~335~~339

~~132~~160,~~940~~501

~~133~~148,~~484~~481

~~135~~149,~~722~~893

~~115~~140,~~896~~335

~~112~~132,~~195~~940

~~105~~133,~~781~~484

~~105~~135,~~626~~722

Operating income

2022,~~043~~889

1415,~~479~~512

620,~~954~~109

322,~~069~~089

1520,~~262~~043

814,~~632~~479

86,~~463~~954

93,~~327~~069

Other (expense) income:

Other income (expense):

Interest expense and other, net

(~~129~~128

)

(~~239~~268

)

(~~165~~100

)

(~~280~~197

)

(~~174~~129

)

(~~179~~239

)

(~~180~~165

)

(~~184~~280

)

Other income, net

34922

571,353

81794

~~226~~385

~~135~~34

~~111~~57

~~102~~81

~~103~~226

Total other expense, net

(95

)

(182

)

(84

)

(54

)

(39

)

(68

)

(78

)

(81

)

Total other income (expense), net

794

1,085

694

188

(95

)

(182

)

(84

)

(54

)

Income before income taxes

1923,~~948~~683

1416,~~297~~597

620,~~870~~803

322,~~015~~277

1519,~~223~~948

814,~~564~~297

86,~~385~~870

93,~~246~~015

Provision for income taxes

(22,005

)

(9,954

)

(2,341

)

4,225

(2,873

)

(4,000

)

(2,463

)

(2,839

)

(Provision) benefit for income taxes

(10,303

)

488

(7,123

)

(1,283

)

(22,005

)

(9,954

)

(2,341

)

4,225

Net income (loss)

(213,~~057~~380

)

417,~~343~~085

413,~~529~~680

720,~~240~~994

12(2,~~350~~057

)

4,~~564~~343

54,~~922~~529

67,~~407~~240

Earnings (loss) per share:

Basic

(0.0743

)

0.1555

0.1545

0.2569

(0.4207

)

0.1615

0.2015

0.2225

Diluted

(0.0742

)

0.1454

0.1544

0.2467

(0.4107

)

0.1514

0.2015

0.2124

Weighted average shares outstanding:

Basic

3031,~~021~~304

2931,~~848~~077

2930,~~751~~619

2930,~~538~~404

2930,~~200~~021

2829,~~977~~848

2829,~~895~~751

2829,~~825~~538

Diluted

3031,~~021~~976

3031,~~770~~775

3031,~~623~~113

3031,~~497~~105

30,~~469~~021

30,~~475~~770

30,~~240~~623

30,~~108~~497

Seasonality

We have experienced, and may experience in the future, seasonality in our business, and our business, operating results and financial condition may be affected by such trends in the future. Ultimate's quarterly revenues and operating results have varied significantly in the past and are likely to vary substantially from quarter to quarter in the future. Revenues have historically increased at higher rates in the fourth quarter of the year and at lower rates in the next succeeding quarter. We believe such seasonality is due to a number of factors, including our quota-based compensation arrangements, typical of those used in software companies, and year-end budgetary pressures on our customers. We believe that the seasonal trend that Ultimate has experienced in the past may continue in the foreseeable future.

3839

Liquidity and Capital Resources

In recent years, we have funded operations primarily from cash flows generated from operations.

As of December 31, ~~2017~~2018, we had $~~165~~162.10 million in cash, cash equivalents and short-term corporate investments in marketable securities, reflecting a net ~~increase~~decrease of $753.81 million since December 31, ~~2016~~2017. The ~~increase~~total ~~was~~decrease ~~primarily~~in ~~attributable to~~ cash ~~provided~~was byprimarily ~~operations~~from of $~~214~~74.04 million ~~and proceeds from the issuances~~ of ~~our~~cash ~~common~~used ~~stock~~for ~~from~~the ~~employee~~acquisition ~~and non-employee director stock option exercises~~ of ~~$6.6 million~~PeopleDoc, ~~partially offset by~~ cash purchases of property and equipment (including principal payments on financed equipment) of $8380.96 million ~~(which~~primarily ~~includes~~consisting of $4850.65 million ofin capitalized labor costs (excluding non-cash stock-based compensation of $3.5M) and third party consulting ~~costs~~fees, paid in cash, associated with the Development Project), and cash used to settle the employee tax withholding liability for vesting of restricted stock awards and restricted stock units of $6864.08 million, partially offset by cash provided by operations of $223.9 million and proceeds from the issuances of Common Stock from employee and nonemployee director stock option exercises of $3.3 million.

Our operating cash inflows primarily consist of payments received from our UltiPro customers. Our operating cash outflows primarily consist of cash we invest in personnel and infrastructure to support the anticipated growth of our business, payments to vendors related to our operations, payments under arrangements with third party vendors who provide hosting infrastructure services in connection with UltiPro, related sales and marketing costs, other costs of operations, as well as systems development and programming costs. Net cash provided by operating activities increased $549.59 million during ~~2017~~2018 as compared with ~~2016~~2017. This increase was primarily due to an increase in operating income (after adjusting for the impact of non-cash expenses) of $4351.81 million, partially offset by cash paid for working capital, ~~including~~of ~~prepaid~~$38.2 ~~commissions (short- and long-term) in association with increased sales~~million.

Net cash used in investing activities was $~~162~~209.79 million for ~~2017~~2018 as compared with net cash ~~provided~~used byin investing activities of $~~358~~162.27 million for ~~2016~~2017. The $~~520~~50.93 million ~~decrease~~in cash paid from ~~2016~~2017 was primarily attributable to acash ~~decrease~~paid of $~~575~~74.04 million infor ~~client~~the acquisition of PeopleDoc, partially offset by a net change in funds received from our customers using the UltiPro payment services offering (“UltiPro Payment Services”), ~~a decrease in maturities~~ of ~~marketable securities of~~ $253.09 million and an increase in ~~cash~~the ~~purchases~~maturities of ~~property~~marketable ~~and~~securities ~~equipment~~ of $882.23 million (~~including~~which anincludes ~~increase of $14.7 million of capitalized labor costs and, to a lesser extent, third party consulting costs, paid in cash, associated with~~ the ~~Development~~maturities ~~Project),~~for ~~partially offset by a decrease in~~ the ~~purchases~~period of ~~marketable securities of~~ $39189.72 million ~~(which~~of ~~includes~~marketable ~~$208.8~~securities ~~million~~originally ofpurchased with funds held for customers ~~being invested~~ in ~~marketable securities in~~ addition to our corporate funds). We invest our customer funds in available for sale securities inalong ~~addition~~with to our corporate funds in accordance with our internal investment strategies. The portfolio predominantly consists of investment grade securities with long-term ratings of AAA and AA+ and short-term ratings A-1/P-1. Customer funds not invested in available for sale securities, temporarily held by us as a result of our UltiPro Payment Services, are invested in U.S. Government money market funds that invest in short-term, high quality money market instruments which consist of U.S. Treasury and U.S. Government Agency obligations and repurchase agreements collateralized by such obligations. The money market funds are rated AAA by Standard & Poor's and Aaa by Moody's. Any residual customer funds are held primarily in our bank accounts.

Net cash ~~provided~~used byin financing activities was $2915.85 million for ~~2017~~2018 as compared with net cash ~~used~~provided inby financing activities of $~~553~~29.78 million for ~~2016~~2017. The $~~583~~45.52 million ~~increase~~use in net cash ~~provided~~for by financing activities was primarily related to ana ~~increase~~decrease of $~~554~~3.62 million in ~~UltiPro~~cash ~~Payment~~used ~~Services~~to ~~client~~settle ~~fund~~employee ~~obligations~~tax withholding liabilities upon the vesting of their restricted stock awards and restricted stock unit awards, a ~~decrease~~net use of $2942.74 million in ~~cash~~customer ~~used~~funds obligations for ~~the~~our ~~repurchases~~UltiPro ofPayment ~~shares~~Services, ofan ~~Common~~increase ~~Stock~~in ~~under~~cash ~~our~~for ~~Stock~~the ~~Repurchase~~payments ~~Plan,~~of ~~partially~~other ~~offset~~liabilities byof $3.7 million, a decrease of $23.52 million ~~increase~~ in cash ~~used~~proceeds tofrom ~~settle~~the ~~employee~~issuance ~~tax~~of ~~withholding~~our ~~liabilities~~Common Stock for ~~the~~stock ~~vesting~~option exercises, and in principal payments on capital lease obligations of ~~restricted~~$0.9 ~~stock~~million.

Days sales outstanding (“DSO”), calculated on a trailing three-month basis, as of December 31, ~~2017~~2018 were 7072 days as compared with 7170 days as of December 31, ~~2016~~2017. ~~The decrease of one day was associated with stronger collections.~~

Deferred revenues were $~~198~~239.9 million at December 31, ~~2017~~2018, as compared with $~~174~~198.09 million at December 31, ~~2016. The increase of $24.9 million in deferred revenues for~~ 2017 ~~was primarily~~ due to higher deferred ~~cloud~~recurring revenues ~~mainly~~as ~~attributable~~a toresult of increased sales.

We believe that cash and cash equivalents, investments in marketable securities, equipment financing, other borrowings and cash generated from operations will be sufficient to fund our operations for at least the next 12 months. This belief is based upon, among other factors, management’s expectations for future revenue growth, controlled expenses and collections of accounts receivable.

As of December 31, ~~2017~~2018, we did not have any material commitments for capital expenditures, except for anticipated capitalized costs associated with the Development Project.

3940

Off-Balance Sheet Arrangements

We do not, and, as of December 31, ~~2017~~2018, we did not, have any off-balance sheet arrangements (as that term is defined in applicable SEC rules) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Non-GAAP Financial Measures

Item 10 (e) of Regulation S-K, "Use of Non-GAAP Financial Measures in Commission Filings," defines and prescribes the use of non-GAAP financial information. Our measure of Non-GAAP Operating Income, which excludes non-cash stock-based compensation, amortization of acquired intangibles, and transaction costs related to business combinations meets the definition of a non-GAAP financial measure.

Ultimate believes that this non-GAAP measure of financial results provides useful information to management and investors regarding certain financial and business trends relating to Ultimate's financial condition and results of operations. Ultimate's management uses this non-GAAP result to compare Ultimate's performance to that of prior periods for trend analyses, for purposes of determining executive incentive compensation, and for budget and planning purposes. This measure is used in monthly financial reports prepared for management and in quarterly financial reports presented to Ultimate's Board of Directors. This measure may be different from non-GAAP financial measures used by other companies.

This non-GAAP measure should not be considered in isolation or as an alternative to such measures determined in accordance with generally accepted accounting principles in the United States (GAAP). The principal limitation of this non-GAAP financial measure is that it excludes significant expenses that are required by GAAP to be recorded. In addition, it is subject to inherent limitations as it reflects the exercise of judgment by management about which expenses are excluded from the non-GAAP financial measure.

To compensate for these limitations, Ultimate presents its non-GAAP financial measure in connection with its GAAP result. Ultimate strongly urges investors and potential investors in Ultimate's securities to review the reconciliation of its non-GAAP financial measure to the comparable GAAP financial measure that is included in the table below and not to rely on any single financial measure to evaluate its business.

We exclude the following items from the non-GAAP financial measure, Non-GAAP Operating Income, as appropriate:

Stock-based compensation expense. Ultimate's non-GAAP financial measure of Non-GAAP Operating Income excludes non-cash stock-based compensation expense, which consists of expenses for restricted stock and stock unit awards recorded in accordance with Accounting Standards Codification 718, “Compensation - Stock Compensation.” For the years ended December 31, ~~2017~~2018, ~~2016~~2017 and ~~2015~~2016, stock-based compensation expense was $~~146~~140.4 million, $~~113~~146.94 million and $82113.49 million, respectively, on a pre-tax basis. Stock-based compensation expense is excluded from the non-GAAP financial measures because it is a non-cash expense that Ultimate does not consider part of ongoing operations when assessing its financial performance. Ultimate believes that such exclusion facilitates the comparison of results of ongoing operations for current and future periods with such results from past periods. For GAAP net income periods, non-GAAP reconciliations are calculated on a diluted weighted average share basis.

Amortization of acquired intangible assets. In accordance with GAAP, operating expenses include amortization of acquired intangible assets over the estimated useful lives of such assets. For the years ended December 31, ~~2017~~2018, ~~2016~~2017 and ~~2015~~2016, the amortization of acquired intangible assets was $310.1 million, $13.1 million and $1.01 million, respectively. Amortization of acquired intangible assets is excluded from Ultimate's non-GAAP financial measures because it is a non-cash expense that Ultimate does not consider part of ongoing operations when assessing its financial performance. Ultimate believes that such exclusion facilitates comparisons to its historical operating results and to the results of other companies in the same industry, which have their own unique acquisition histories.

Transaction costs related to business combinations. In accordance with GAAP, operating expenses include transaction costs for third-party professional services incurred in connection with business combinations. As we do not acquire or dispose of businesses on a predictable basis, the terms of each business combination are unique and can vary significantly from other business combinations. Significant expenses can be incurred in connection with a business ~~combination~~combinations that we would not have otherwise incurred in the periods presented as part of our continuing operations. For the year ended December 31, ~~2017~~2018 there were no$3.1 ~~transactions~~million of transaction costs incurred related to business ~~combinations~~combination. For the year ended December 31, ~~2016~~2017, there were ~~$0.9~~no ~~million of~~ transaction costs incurred related to business combinations. For the year ended December 31, ~~2015~~2016 there were no

4041

$0.9 million of transaction costs incurred related to business combinations. Transaction costs related to business combinations are excluded from Ultimate's non-GAAP financial measures because it is an expense that Ultimate does not consider part of ongoing operations when assessing its financial performance. Ultimate believes that such exclusion facilitates comparisons to its historical operating results and to the results of other companies in the same industry, which have their own unique business combination histories.

	For the Year Ended
	2017			2016			2015
	2018			2017			2016
Non-GAAP operating income reconciliation:
Operating income	$	4480,~~546~~596		$	4144,~~684~~546		$	4341,~~318~~684
Operating income, as a % of total revenues	4.7.1		%	54.37		%	75.03		%
Add back:
Non-cash stock-based compensation expense	~~146~~140,~~427~~353			~~113~~146,~~877~~427			82113,~~416~~877
Non-cash amortization of acquired intangible assets	310,~~129~~107			13,~~115~~129			1,~~034~~115
Transaction costs related to business combinations	—3,059			~~874~~—			—874
Non-GAAP operating income	$	~~194~~234,~~102~~115		$	~~157~~194,~~550~~102		$	~~126~~157,~~768~~550
Non-GAAP operating income, as a % of total revenues	20.65		%	20.26		%	20.52		%

Contractual Obligations

As of December 31, ~~2017~~2018, Ultimate’s outstanding contractual cash obligations were as follows (in thousands):

Payments Due by Period

Total

Less Than 1 Year

1-3 Years

4-5 Years

More than 5 Years

Capital lease obligations (1)

912,~~951~~756

56,~~474~~787

45,~~477~~969

—

Other long-term obligations (2)

6372,~~643~~228

1617,~~151~~359

2830,~~783~~458

1714,~~867~~157

~~842~~10,254

Other long-term liabilities (3)

84,~~902~~792

—

Total contractual cash obligations

8289,~~496~~776

3028,~~527~~938

3336,~~260~~427

1714,~~867~~157

~~842~~10,254

_________________________

(1) We lease certain computer equipment under non-cancelable agreements, which are accounted for as capital leases and expire at various dates through ~~2020~~2021. See Note 13 of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K for information regarding capital lease obligations.


(2)	Included in other long-term obligations were Ultimate’s leases for corporate office space and certain equipment under non-cancelable operating lease agreements expiring at various dates.

(3) Ultimate has an income tax payable related to the unrecognizable benefit of an uncertain tax position. As of the date of this report, it is not reasonable to estimate the timing of this payment. Ultimate does not have any other long-term liabilities as of December 31, ~~2017~~2018.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

In the ordinary course of Ultimate’s operations, we are exposed to certain market risks, primarily interest rate risk and foreign currency risk. Risks that are either non-financial or non-quantifiable, such as political, economic, tax, or regulatory risks, are not included in the following assessment of our market risks.

Interest Rate Risk. Ultimate is subject to financial market risks, including changes in interest rates which influence the valuations of our fixed income investment portfolio. Changes in interest rates could also impact Ultimate’s anticipated interest income from interest-bearing cash accounts, or cash equivalents and investments in marketable securities. We manage financial market risks, including interest rate risks, in accordance with our investment guideline objectives, including:


•	Maximum safety of principal;


•	Maintenance of appropriate liquidity for regular cash needs;


•	Maximum yields in relationship to guidelines and market conditions;


•	Diversification of risks; and


•	Fiduciary control of all investments.

Ultimate targets its fixed income investment portfolio to have maturities of 24 months or less. Investments are held to enhance the preservation of capital and not for trading purposes.

Cash equivalents consist of money market accounts with original maturities of less than three months. Short-term investments include obligations of U.S. government agencies, asset-backed securities and corporate debt securities. Corporate debt securities include commercial paper which, according to Ultimate’s investment guidelines, must carry minimum short-term ratings of P-1 by Moody’s Investor Service, Inc. (“Moody’s”) and A-1 by Standard & Poor’s Ratings Service, a Division of The McGraw-Hill Companies, Inc. (“S&P”). Other corporate debt obligations must carry a minimum rating of A-2 by Moody’s or A by S&P. Asset-backed securities must carry a minimum AAA rating by Moody’s and S&P with a maximum average life of two years at the time of purchase.

As of December 31, ~~2017~~2018, total corporate investments in available-for-sale marketable securities were $910.47 million. As of December 31, ~~2017~~2018, total investments with customer funds in available-for-sale marketable securities were $~~208~~284.83 million.

As of December 31, ~~2017~~2018, virtually all of the investments in Ultimate’s corporate portfolio and portfolio of investments with customer funds were at fixed rates (with a weighted average interest rate of 12.47% and 12.65% per annum, respectively).

To illustrate the potential impact of changes in interest rates, Ultimate has performed an analysis based on its December 31, ~~2017~~2018 consolidated balance sheet and assuming no changes in its investments. Under this analysis, an immediate and sustained 100 basis point increase in the various base rates would result in a decrease in the fair value of Ultimate’s corporate portfolio of approximately $2321 thousand over the next 12 months and a decrease in the fair value of Ultimate’s portfolio of investments with customer funds of approximately of $12.31 million over the next 12 months. An immediate and sustained 100 basis point decrease in the various base rates would result in an increase in the fair value of Ultimate’s corporate portfolio of approximately $2321 thousand over the next 12 months and an increase in the fair value of Ultimate’s portfolio of investments with customer funds of approximately $12.31 million over the next 12 months.

Foreign Currency Risk. Ultimate has foreign currency risks related to its revenue and operating expenses denominated in currencies other than the U.S. dollar. Management does not believe movements in the foreign currencies in which Ultimate transacts business will materially affect future net income.

4243

Item 8. Financial Statements and Supplementary Data

INDEX

	Page(s)
Report of Independent Registered Public Accounting Firm	4445
Consolidated Balance Sheets as of December 31, 2017 and 2016	45
Consolidated Balance Sheets as of December 31, 2018 and 2017	46
Consolidated Statements of Income for the Years Ended December 31, 2017, 2016 and 2015	46
Consolidated Statements of Income for the Years Ended December 31, 2018, 2017 and 2016	47
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015	47
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017 and 2016	48
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015	48
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018, 2017 and 2016	49
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015	50
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016	51
Notes to Consolidated Financial Statements	5253

4344

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

The Ultimate Software Group, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of The Ultimate Software Group, Inc. and subsidiaries (the Company) as of December 31, ~~2017~~2018 and ~~2016~~2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, ~~2017~~2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, ~~2017~~2018 and ~~2016~~2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, ~~2017~~2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, ~~2017~~2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated ~~February~~March 261, ~~2018~~2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for revenues and related costs for the year ended December 31, 2018 due to the adoption of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), effective January 1, 2018.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2002.

Fort Lauderdale, FLFlorida

~~February~~March 261, ~~2018~~2019

~~Certified Public Accountants~~45

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	As of December 31,
	2017			2016
	2018			2017
	(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	~~155~~151,~~685~~247		$	73155,~~773~~685
Investments in marketable securities	910,~~434~~741			159,~~541~~434
Accounts receivable, net of allowance for doubtful accounts of $900 for 2017 and 2016	190,989			162,240
Accounts receivable, net of allowance for doubtful accounts of $1,650 for 2018 and $900 for 2017	238,768			190,989
Prepaid expenses and other current assets	7190,~~602~~761			6171,~~901~~602
Deferred tax assets, net	—			1,125
Total current assets before funds held for customers	491,517			427,710
Total current assets before funds held for customers	427,710			314,580
Funds held for customers	618,206			563,062
Funds held for customers	563,062			465,167
Total current assets	1,109,723			990,772
Total current assets	990,772			779,747
Property and equipment, net	302,939			243,664
Property and equipment, net	243,664			179,558
Goodwill	219,904			35,808
Goodwill	35,808			35,322
Intangible assets, net	144,411			20,862
Investments in marketable securities	—			8,547
Other assets, net	129,108			53,409
Intangible assets, net	20,862			23,860
Deferred tax assets, net	14,632			32,696
Other assets, net	53,409			47,432
Total assets	$	1,920,717		$	1,377,211
Deferred tax assets, net	32,696			60,222
Total assets	$	1,377,211		$	1,134,688
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	16,~~099~~058		$	1316,~~519~~099
Accrued expenses and other liabilities	60154,~~394~~383			5060,~~973~~394
Deferred revenue	~~197~~238,~~088~~940			~~171~~197,~~669~~088
Capital lease obligations	56,~~474~~303			5,~~056~~474
Total current liabilities before customer funds obligations	~~279~~415,~~055~~684			~~241~~279,~~217~~055
Customer funds obligations	~~564~~619,~~031~~230			~~466~~564,~~423~~031
Total current liabilities	~~843~~1,~~086~~034,914			~~707~~843,~~640~~086
Deferred revenue	1,~~773~~009			21,~~307~~773
Deferred rent	58,~~349~~472			65,~~022~~349
Capital lease obligations	45,~~477~~739			34,~~985~~477
Other long-term liabilities	~~4,250~~500			—4,250
Deferred income tax liability	~~251~~25,105			~~519~~251
Total liabilities	~~859~~1,~~186~~075,739			~~720~~859,~~473~~186
Commitments and contingencies (Note 16)
Commitments and contingencies (Note 17)
Stockholders’ equity:
Series A Junior Participating Preferred Stock, $.01 par value, 500,000 shares authorized, no shares issued	—			—
Preferred Stock, $.01 par value, 2,000,000 shares authorized, no shares issued	—			—
Common Stock, $.01 par value, 50,000,000 shares authorized, 34,787,986 and 34,003,036 shares issued in 2017 and 2016, respectively	348			340
Common Stock, $.01 par value, 50,000,000 shares authorized, 35,985,995 and 34,787,986 shares issued in 2018 and 2017, respectively	360			348
Additional paid-in capital	~~609~~863,~~160~~030			~~520~~609,~~524~~160
Accumulated other comprehensive loss	(514,~~912~~574		)	(75,~~023~~912		)
Accumulated earnings	~~125~~207,~~788~~521			~~111~~125,~~733~~788
	729,384			625,574
	1,056,337			729,384
Treasury stock, 4,657,995 shares, at cost, for 2017 and 2016	(211,359		)	(211,359		)
Treasury stock, 4,657,995 shares, at cost, for 2018 and 2017	(211,359		)	(211,359		)
Total stockholders’ equity	~~518~~844,~~025~~978			~~414~~518,~~215~~025
Total liabilities and stockholders’ equity	$	1,~~377~~920,~~211~~717		$	1,~~134~~377,~~688~~211

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

4546

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	For the Years Ended December 31,
	2017			2016			2015
	2018			2017			2016
	(in thousands, except per share data)
Revenues:
Recurring	$	~~802~~997,~~300~~066		$	~~654~~802,~~199~~300		$	~~516~~654,~~400~~199
Services	~~138~~143,~~429~~478			~~127~~138,~~092~~429			~~101~~127,~~681~~092
Total revenues	~~940~~1,~~729~~140,544			~~781~~940,~~291~~729			~~618~~781,~~081~~291
Cost of revenues:
Recurring	~~210~~273,~~560~~165			~~172~~210,~~676~~560			~~138~~172,~~587~~676
Services	~~143~~158,~~140~~569			~~127~~143,~~433~~140			99127,~~948~~433
Total cost of revenues	~~353~~431,~~700~~734			~~300~~353,~~109~~700			~~238~~300,~~535~~109
Gross profit	~~587~~708,~~029~~810			~~481~~587,~~182~~029			~~379~~481,~~546~~182
Operating expenses:
Sales and marketing	~~269~~285,~~781~~293			~~224~~269,~~416~~781			~~169~~224,~~664~~416
Research and development	~~150~~203,~~583~~729			~~120~~150,~~650~~583			93120,~~671~~650
General and administrative	~~122~~139,~~119~~192			94122,~~432~~119			7294,~~893~~432
Total operating expenses	~~542~~628,~~483~~214			~~439~~542,~~498~~483			~~336~~439,~~228~~498
Operating income	4480,~~546~~596			4144,~~684~~546			4341,~~318~~684
Other (expense) income:
Other income (expense):
Interest expense and other, net	(~~813~~693		)	(~~717~~813		)	(~~491~~717		)
Other income, net	~~397~~3,458			~~451~~397			~~256~~451
Total other expense, net	(416		)	(266		)	(235		)
Total other income (expense), net	2,765			(416		)	(266		)
Income before income taxes	4483,~~130~~361			4144,~~418~~130			4341,~~083~~418
Provision for income taxes	(3018,~~075~~221		)	(1230,~~178~~075		)	(2812,~~825~~178		)
Net income	$	1465,~~055~~140		$	2914,~~240~~055		$	1429,~~258~~240
Net income per share:
Basic	$	02.4711		$	10.0147		$	01.5001
Diluted	$	02.4606		$	0.9646		$	0.4896
Weighted average shares outstanding:
Basic	2930,~~791~~854			2829,~~976~~791			28,~~634~~976
Diluted	3031,~~799~~578			30,~~414~~799			2930,~~721~~414

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

4647

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

	For the Years Ended December 31,
	2017			2016			2015
	2018			2017			2016
Net income	$	1465,~~055~~140		$	2914,~~240~~055		$	1429,~~258~~240
Other comprehensive (loss) income:
Unrealized loss on investments in marketable available for sale securities	(558		)	(61		)	(56		)
Unrealized gain (loss) on investments in marketable available for sale securities	366			(558		)	(61		)
Unrealized gain (loss) on foreign currency translation adjustments	1,529			843			(4,195		)
Unrealized (loss) gain on foreign currency translation adjustments	(8,882		)	1,529			843
Other comprehensive income (loss), before tax	971			782			(4,251		)
Other comprehensive (loss) income, before tax	(8,516		)	971			782
Income tax benefit related to items of other comprehensive income	140			24			12
Income tax (provision) benefit related to items of other comprehensive income	(146		)	140			24
Other comprehensive income (loss), net of tax	$	1,111		$	806		$	(4,239	)
Other comprehensive (loss) income, net of tax	$	(8,662	)	$	1,111		$	806
Comprehensive income	$	1556,~~166~~478		$	3015,~~046~~166		$	1030,~~019~~046

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

4748

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)

	Common Stock			Additional Paid -in Capital			Accumulated Other Comprehensive(Loss) Income			AccumulatedEarnings		Treasury Stock				Total Stockholders’Equity
	Shares	Amount										Shares	Amount
Balance, December 31, 2014	32,723	$	327	$	376,609		$	(3,590	)	$	28,489	4,217	$	(138,525	)	$	263,310
Net income	—	—		—			—			14,258		—	—			14,258
Unrealized loss on investments inmarketable securities available-for-sale, net of tax	—	—		—			(44		)	—		—	—			(44		)
Unrealized loss on foreign exchange	—	—		—			(4,195		)	—		—	—			(4,195		)
Shares acquired to settle employee tax withholding liability	—	—		(34,989		)	—			—		—	—			(34,989		)
Excess tax benefits from employee stock plan	—	—		31,859			—			—		—	—			31,859
Repurchases of Common Stock	—	—		—			—			—		251	(43,149		)	(43,149		)
Stock consideration for acquisitions	13	1		—			—			—		—	—			1
Issuances of Common Stock from exercises of stock options	189	2		4,701			—			—		—	—			4,703
Issuances of Common Stock from restricted stock releases	336	3		—			—			—		—	—			3
Non-cash stock-based compensation expense	—	—		85,429			—			—		—	—			85,429
Balance, December 31, 2015	33,261	$	333	$	463,609		$	(7,829	)	$	42,747	4,468	$	(181,674	)	$	317,186
Cumulative impact of adoption of ASU 2016-09	—	—		—			—			39,746		—	—			39,746
Net income	—	—		—			—			29,240		—	—			29,240
Unrealized loss on investments in marketable securities available-for-sale, net of tax	—	—		—			(37		)	—		—	—			(37		)
Unrealized loss on investments inmarketable securities available-for-sale, net of tax	—	—		—			(37		)	—		—	—			(37		)
Unrealized gain on foreign exchange	—	—		—			843			—		—	—			843
Unrealized loss on foreign exchange	—	—		—			843			—		—	—			843
Shares acquired to settle employee tax withholding liability	—	—		(65,522		)	—			—		—	—			(65,522		)
Repurchases of Common Stock	—	—		—			—			—		190	(29,685		)	(29,685		)
Stock consideration for acquisitions	7	—		—			—			—		—	—			—
Issuances of Common Stock from exercises of stock options	183	2		4,657			—			—		—	—			4,659
Issuances of Common Stock from restricted stock releases	552	5		—			—			—		—	—			5
Non-cash stock-based compensation expense	—	—		117,780			—			—		—	—			117,780
Balance, December 31, 2016	34,003	$	340	$	520,524		$	(7,023	)	$	111,733	4,658	$	(211,359	)	$	414,215
Net loss	—	—		—			—			14,055		—	—			14,055
Net income	—	—		—			—			14,055		—	—			14,055
Unrealized loss on investments in marketable securities available-for-sale, net of tax	—	—		—			(418		)	—		—	—			(418		)
Unrealized gain on foreign exchange	—	—		—			1,529			—		—	—			1,529
Shares acquired to settle employee tax withholding liability	—	—		(68,034		)	—			—		—	—			(68,034		)
Issuances of Common Stock from exercises of stock options	230	2		6,563			—			—		—	—			6,565
Issuances of Common Stock from restricted stock releases	555	6		—			—			—		—	—			6
Non-cash stock-based compensation expense	—	—		150,107			—			—		—	—			150,107
Balance, December 31, 2017	34,788	$	348	$	609,160		$	(5,912	)	$	125,788	4,658	$	(211,359	)	$	518,025
Cumulative impact of adoption of Topic 606	—	—		—			—			16,593			—			16,593
Net income	—	—		—			—			65,140		—	—			65,140
Unrealized gain on investments in marketable securities available-for-sale, net of tax	—	—		—			220			—		—	—			220

	Common Stock			Additional Paid -in Capital			Accumulated Other Comprehensive(Loss) Income			AccumulatedEarnings		Treasury Stock				Total Stockholders’Equity
	Shares	Amount										Shares	Amount
Unrealized loss on investments in marketable securities available-for-sale, net of tax	—	—		—			(418		)	—		—	—			(418		)
Unrealized gain on foreign exchange	—	—		—			1,529			—		—	—			1,529
Shares acquired to settle employee tax withholding liability	—	—		(68,034		)	—			—		—	—			(68,034		)
Issuances of Common Stock from exercises of stock options	230	2		6,563			—			—		—	—			6,565
Issuances of Common Stock from restricted stock releases	555	6		—			—			—		—	—			6
Non-cash stock-based compensation expense	—	—		150,107			—			—		—	—			150,107
Balance, December 31, 2017	34,788	$	348	$	609,160		$	(5,912	)	$	125,788	4,658	$	(211,359	)	$	518,025

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.



	Common Stock			Additional Paid -in Capital			Accumulated Other Comprehensive (Loss) Income			Accumulated Earnings		Treasury Stock				Total Stockholders’ Equity
	Shares	Amount		Additional Paid -in Capital			Accumulated Other Comprehensive (Loss) Income			Accumulated Earnings		Shares	Amount			Total Stockholders’ Equity
Unrealized loss on foreign exchange	—	—		—			(8,882		)	—		—	—			(8,882		)
Shares acquired to settle employee tax withholding liability	—	—		(64,806		)	—			—		—	—			(64,806		)
Stock consideration for acquisitions	595	6		172,159			—			—		—	—			172,165
Issuances of Common Stock from exercises of stock options	114	1		3,322			—			—		—	—			3,323
Issuances of Common Stock from restricted stock releases	489	5		—			—			—		—	—			5
Non-cash stock-based compensation expense	—	—		143,195			—			—		—	—			143,195
Balance, December 31, 2018	35,986	$	360	$	863,030		$	(14,574	)	$	207,521	4,658	$	(211,359	)	$	844,978

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the Years Ended December 31,
	2017			2016			2015
	2018			2017			2016
	(in thousands)
Cash flows from operating activities:
Net income	$	1465,~~055~~140		$	2914,~~240~~055		$	1429,~~258~~240
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	3449,~~055~~217			2734,~~098~~055			2127,~~738~~098
Provision for doubtful accounts	57,~~727~~855			35,~~213~~727			43,~~687~~213
Non-cash stock-based compensation expense	~~146~~140,~~427~~353			~~113~~146,~~877~~427			82113,~~416~~877
Income taxes	2816,~~607~~131			1128,~~208~~607			2811,~~180~~208
Net amortization of premiums and accretion of discounts on available-for-sale securities	~~308~~(666		)	~~755~~308			—755
Changes in operating assets and liabilities:
Accounts receivable	(3448,~~476~~231		)	(3534,~~004~~476		)	(3435,~~575~~004		)
Prepaid expenses and other current assets	(937,~~704~~515		)	(149,~~973~~704		)	(1214,~~016~~973		)
Other assets	(527,~~977~~495		)	(165,~~325~~977		)	(1016,~~496~~325		)
Accounts payable	2(5,~~580~~136		)	52,~~850~~580			~~(23~~5,850		)
Accrued expenses and deferred rent	731,~~498~~633			7,~~403~~498			127,~~507~~403
Deferred revenue	2432,~~885~~585			2724,~~179~~885			3627,~~022~~179
Net cash provided by operating activities	~~213~~223,~~985~~871			~~159~~213,~~521~~985			~~142~~159,~~698~~521
Cash flows from investing activities:
Purchases of marketable securities	(~~168~~279,~~006~~926		)	(~~207~~168,~~676~~006		)	(91207,~~528~~676		)
Maturities of marketable securities	~~121~~204,~~857~~140			~~123~~121,~~895~~857			11123,~~711~~895
Payments for acquisitions	(174,~~000~~420		)	(251,~~636~~000		)	—(25,636		)
Net change in money market securities and other cash equivalents held to satisfy customer funds obligations	~~(37~~20,~~959~~370		)	~~537~~(37,~~077~~959		)	~~(94~~537,~~306~~077		)
Purchases of property and equipment, including capitalized software development	(7780,~~594~~062		)	(6977,~~415~~594		)	(5069,~~634~~415		)
Net cash (used in) provided by investing activities	(~~162~~209,~~702~~898		)	~~358~~(162,~~245~~702		)	~~(224~~358,~~757~~245		)
Cash flows from financing activities:
Repurchases of Common Stock	—			~~(29,685~~—		)	(4329,~~149~~685		)
Net proceeds from issuances of Common Stock	63,~~565~~323			46,~~659~~565			4,~~703~~659
Shares acquired to settle employee tax withholding liabilities	(6864,~~034~~806		)	(6568,~~522~~034		)	(3465,~~989~~522		)
Principal payments on capital lease obligations	(65,~~340~~422		)	(56,~~831~~340		)	(45,~~810~~831		)
Repayments of other borrowings	—(3,750		)	~~(400~~—		)	(~~567~~400		)
Net increase (decrease) in customer fund obligations	9755,~~608~~200			~~(456~~97,~~943~~608		)	~~164~~(456,~~279~~943		)
Net cash provided by (used in) financing activities	29,799			(553,722		)	85,467
Net cash (used in) provided by financing activities	(15,455		)	29,799			(553,722		)
Effect of exchange rate changes on cash	~~830~~(2,956		)	~~404~~830			~~(2,381~~404		)
Net increase (decrease) in cash and cash equivalents	81,912			(35,552		)	1,027
Net (decrease) increase in cash and cash equivalents	(4,438		)	81,912			(35,552		)
Cash and cash equivalents, beginning of year	73155,~~773~~685			~~109~~73,~~325~~773			~~108~~109,~~298~~325
Cash and cash equivalents, end of year	$	~~155~~151,~~685~~247		$	73155,~~773~~685		$	~~109~~73,~~325~~773

Supplemental disclosure of cash flow information:
Cash paid for interest	$	498	$	426	$	371
Cash paid for taxes	$	2,192	$	1,758	$	815
Non-cash investing and financing activities:
Capital lease obligations to acquire new equipment	$	7,250	$	6,719	$	5,949
Cash held in escrow for business combinations	$	—	$	3,600	$	—
Software agreement	$	6,500	$	—	$	—
Stock based compensation for capitalized software	$	4,003	$	3,903	$	3,013

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.



Supplemental disclosure of cash flow information:
Cash paid for interest	$	596	$	498	$	426
Cash paid for taxes	$	7,581	$	2,192	$	1,758

Non-cash investing and financing activities:
Capital lease obligations to acquire new equipment	$	9,091	$	7,250	$	6,719
Cash held in escrow for business combinations	$	—	$	—	$	3,600
Software agreement	$	—	$	6,500	$	—
Stock-based compensation for capitalized software	$	3,533	$	4,003	$	3,903

The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations

With offices in the United States, Canada, France, Germany, England, and Singapore, The Ultimate Software Group, Inc. and subsidiaries (“Ultimate,” “we,” “us” or “our”) is a leading provider of cloud-based human capital management solutions, often referred to as human capital management (“"HCM”") and employee experience solutions. Ultimate's UltiPro product suite (“UltiPro”) is a comprehensive, engaging solution that has human resources ("HR"), ~~payroll,~~ and ~~benefits~~payroll ~~management~~ at its core and includes benefits management, talent acquisition, talent management, time management, and global people management, functionality available in 14 languages with ~~more~~61 ~~than 37~~ country-specific localizations. ~~The~~Ultimate also offers a-la-carte employee experience solutions, such as HR Service Delivery and "Perception," an employee-sentiment analysis solution. isUltimate's solutions are delivered via software-as-a-service ("SaaS"), now more commonly known as ~~the~~ cloud computing ~~model~~, to organizations ~~based~~with employees in the United States, ~~and~~ Canada, ~~including~~Europe, ~~those~~Asia ~~with~~Pacific, ~~global~~and ~~workforces.~~other ~~UltiPro~~global ~~is designed to deliver the functionality businesses need to manage the complete employment life cycle from recruitment to retirement~~locations. We market our UltiPro solutions primarily to enterprise companies, which we define as organizations with 2,501 or more employees, including those with 10,000 oremployees ~~more~~and ~~employees~~larger; mid-market companies, which we define as those having 501-2,500 employees; and strategic market companies, which we define as those having 100-500 employees. ~~UltiPro is marketed primarily through our enterprise, mid-market and strategic direct sales teams.~~

2. Basis of Presentation, Consolidation and the Use of Estimates

The accompanying consolidated financial statements of Ultimate have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).

The consolidated financial statements included herein reflect all adjustments, which are, in the opinion of Ultimate’s management, necessary for a fair presentation of the information for the periods presented. The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, ~~and~~ liabilities, ~~and~~revenues, ~~disclosure~~costs ~~of contingent assets~~ and ~~liabilities~~expenses ~~at the date of the financial statements~~ and ~~the~~related ~~reported amounts of revenues and expenses during the reporting period~~disclosures. Such estimates include, but are not limited to, revenue recognition, income taxes, ~~the~~and ~~allowance for doubtful accounts,~~ the valuation of deferred tax assets and ~~long-lived~~the measurement of intangible assets, ~~among~~acquired ~~others~~through ~~discussed~~business ~~below~~combinations. ~~Actual~~ Our actual results could differ from those estimates.

The consolidated financial statements reflect the financial position and operating results of Ultimate and include its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

3. Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Cash and Cash Equivalents

All highly liquid instruments with an original maturity of three months or less when acquired are considered cash equivalents and are comprised of interest-bearing accounts.

Accounts Receivable

Accounts receivable are principally from end-users of Ultimate’s products. We maintain an allowance for doubtful accounts at an amount estimated to be sufficient to provide adequate protection against losses resulting from collecting less than full payment on accounts receivable. AJudgment ~~considerable amount of judgment~~ is required when the realization of receivables is assessed, including assessing the probability of collection and current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in a further impairment of their ability to make payments, an additional provision for doubtful accounts may be required. We charge off uncollectible amounts against the allowance for doubtful accounts in the period in which we determine they are uncollectible.

Funds Held for Customers and Customers’ Funds Obligations

Ultimate ~~has the right to market and distribute an independent third party’~~'s ~~tax~~UltiPro ~~filing~~Payment Services solution ~~that~~allows ~~Ultimate~~companies ~~has~~to ~~branded~~meet ~~UltiPro~~all ~~Payment~~Federal, ~~Services. Ultimate’s~~state, ~~UltiPro~~and ~~Payment~~local ~~Services~~payroll ~~offering~~tax ~~provides~~filing ~~payment services to our customers~~obligations. These payment services are being sold directly by us to our customers only on a per-employee-per-month (“PEPM”) basis in conjunction with UltiPro, our core product. In connection with our UltiPro Payment Services product, we receive funds from our customers and hold such funds for purposes of paying the appropriate taxing authorities on behalf of such customers. We invest a portion of our customer funds in available for sale securities in addition to our corporate funds in accordance with our internal investment strategies. The portfolio predominantly consists of investment grade securities with long-term ratings of AAA and AA+ and short-term ratings A-1/P-1. These funds held for customers and the corresponding customer funds obligations are included in current assets and current liabilities, respectively, in our consolidated balance sheets as of December 31, 2018 and 2017. We have reported the cash flows for purchases of securities with funds received from

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~~as of December 31, 2017 and 2016. We have reported the cash flows for purchases of securities with funds received from~~ UltiPro Payment Services customers in the investing activities section of the consolidated statements of cash flows for the years ended December 31, ~~2017~~2018, ~~2016~~2017 and ~~2015~~2016. We have reported the cash flows related to the funds received and paid on behalf of such customers to the applicable taxing authorities in the financing activities section of the consolidated statements of cash flows for the years ended December 31, ~~2017~~2018, ~~2016~~2017 and ~~2015~~2016. The associated PEPM fees for UltiPro Payment Services are included in recurring revenues in the consolidated statements of income for the years ended December 31, ~~2017~~2018, ~~2016~~2017 and ~~2015~~2016. The associated interest earned was not material for the years ended December 31, ~~2017~~2018, ~~2016~~2017 and ~~2015~~2016.

Fair Value of Financial Instruments

Ultimate’s financial instruments, consisting of cash and cash equivalents, investments in marketable securities, funds held for customers and the related obligations, accounts receivable, and accounts payable, ~~and capital lease obligations,~~ approximated fair value (due to their relatively short maturity) as of December 31, ~~2017~~2018 and ~~2016~~2017.

Funds Held for Customers and Corporate Investments

We classify our investments in marketable securities with readily determinable fair values as available-for-sale. Available-for-sale securities consist of debt ~~and equity~~ securities not classified as trading securities or as securities to be held to maturity. Unrealized gains and losses, net of tax, on available-for-sale securities are reported as a net amount in accumulated other comprehensive (loss) income in stockholders’ equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Interest earned on investments from funds held for customers is included in recurring revenue and was not material in the years presented. If the fair value of an available-for-sale debt security is below its amortized cost, Ultimate assesses whether we intend to sell the security or if it is more likely than not we will be required to sell the security before recovery. If either of those two conditions are met, Ultimate would recognize a charge in earnings equal to the entire difference between the security's amortized cost basis and its fair value. If we do not intend to sell a security or it is not more likely than not that it will be required to sell the security before recovery, the unrealized loss is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in accumulated other comprehensive (loss) income.

Deferred Contract Costs, Prepaid Expenses and Other Current Assets

Ultimate’s consolidated financial statements include deferred contract costs, prepaid expenses and other current assets ~~which include prepaid commissions on cloud sales~~. Prepaid expenses are amortized over the life of the asset (typically within one year). ~~and~~Deferred contract costs primarily relate to prepaid commissions on ~~cloud~~UltiPro sales which are amortized over ~~the~~7 ~~initial~~years, ~~contract~~on ~~term~~a ~~(typically~~systematic ~~24-36~~basis, ~~months)~~ typically commencing on the day the customer processes its first live payroll using UltiPro (also referred to as going “Live”). The period of amortization takes into consideration the contract terms, ~~which~~our customer life and technological changes for our UltiPro product while the systemic basis of amortization corresponds with the ~~related~~pattern ~~cloud~~of ~~revenue~~transfer ~~recognition~~of goods and services to which the asset relates. Ultimate does not pay sales commissions for subscription contracts beyond the initial term of the contract; therefore, there are no renewal commissions incurred for contracts in their renewal periods. The portion of prepaid commissions that extends beyond one year is classified in other assets, net, in the consolidated balance sheets as of December 31, ~~2017~~2018 and ~~2016~~2017.

Long-Lived Assets

We evaluate the carrying value of long-lived assets when indicators of impairment exist. For the year ended December 31, 2017, no such events or circumstances were identified. The carrying value of a long-lived asset is considered impaired when the undiscounted expected future cash flows from such asset (or asset group) are separately identifiable and less than the asset’s (or asset group’s) carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. For the years ended December 31, 2017, 2016 and 2015, we recorded no impairment of our long-lived assets.

Property and Equipment

Property and equipment is stated at cost, net of accumulated depreciation and amortization. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets, which range from 2 to 15 years. Leasehold improvements and assets under capital leases are amortized over the shorter of the life of the asset or the term of the lease over periods ranging from approximately 3 to 15 years. Maintenance and repairs are charged to expense when incurred; betterments are capitalized. Upon the sale or retirement of assets, the cost, accumulated depreciation and amortization are removed from the accounts and any gain or loss is recognized.

Computer Software Development Costs

Computer software development costs related to software developed for internal use falls under the accounting guidance of ASC Topic 350-40, Intangibles Goodwill and Other–Internal Use Software, in which computer software costs are expensed as incurred during the preliminary project stage and capitalization begins in the application development stage once the capitalization criteria are met. Costs associated with post implementation activities are expensed as incurred. Costs capitalized during the application development stage include external direct costs of materials and services consumed in developing or obtaining internal-use software and payroll and payroll-related costs for employees who are directly associated with, and who devote time to, the internal-use computer software. In addition to capitalizing costs for software (which are used by us in our general operations, for internal purposes), we also capitalize costs under ASC Topic 350-40 for certain software development projects related to our suite of products sold to our customers exclusively on a subscription basis under our SaaS offering of UltiPro.

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the capitalization criteria are met. Costs associated with post implementation activities are expensed as incurred. Costs capitalized during the application development stage include external direct costs of materials and services consumed in developing or obtaining internalLong-~~use~~Lived software and payroll and payroll-related costs for employees who are directly associated with, and who devote time to, the internal-use computer software. In addition to capitalizing costs for software (which are used by us in our general operations, for internal purposes), we also capitalize costs under ASC Topic 350-40 for certain software development projects related to our suite of products sold to our customers exclusively on a subscription basis under our SaaS offering of UltiPro. Assets

We evaluate the carrying value of long-lived assets when indicators of impairment exist. For the year ended December 31, 2018, no such events or circumstances were identified. The carrying value of a long-lived asset is considered impaired when the undiscounted expected future cash flows from such asset (or asset group) are separately identifiable and less than the asset’s (or asset group’s) carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. For the years ended December 31, 2018, 2017 and 2016, we recorded no impairment of our long-lived assets.

Goodwill and Intangible Assets

Deferred Revenue

Deferred revenue is primarily comprised of deferrals of recurring revenues for cloud services which are recognized over the initial term of the related contract as the services are performed, typically 24-36 months, commencing with the related Live date; and implementation consulting services for which the services have not yet been rendered which are primarily recognized prior to the respective Live date.

Guarantees

The standard commercial terms in our sales contracts for UltiPro include an indemnification clause that indemnifies the customer against certain liabilities and damages arising from any claims of patent, copyright, or other proprietary rights of any third party. Due to the nature of the intellectual property indemnification provided to our customers, we cannot estimate the fair value, or determine the total nominal amount, of the indemnification until such time as a claim for such indemnification is made. In the event of a claim made against us under such provision, we evaluate estimated losses for such indemnification considering such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, Ultimate has not had any claims made against it under such provision and, accordingly, has not accrued any liabilities related to such indemnifications in its consolidated financial statements.

Segment Information

Public companies are required to report selected information about operating segments in annual and interim financial reports to shareholders, as well as related disclosures about an enterprise’s business segments, products, services, geographic areas and major customers. Ultimate operates its business as a single segment and is comprised as a single reporting unit.

Revenue Recognition

We recognize revenues in accordance with Accounting Standards Update No. 2009-13, “Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”). We use the relative selling price method to allocate the total consideration to units of accounting in a multiple element arrangement. We allocate revenue in an arrangement using the estimated selling price (“ESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) of selling price.

VSOE is the price charged when the same or similar product or service is sold separately. We define VSOE as a median price of recent stand-alone transactions that are priced within a narrow range.

TPE is determined based on the prices charged by our competitors for a similar deliverable when sold separately. However, due to the difficulty in obtaining sufficient information on competitor pricing and differences in our product offerings when compared with those of our peers, we generally are unable to reliably determine TPE.

ESP is our best estimate of the selling price of an element in a transaction. If we are unable to establish selling price using either VSOE or TPE, we will use ESP in our allocation of arrangement consideration. The objective of ESP is to determine the price at which we would transact business if the product or service were sold by us on a stand-alone basis. Our determination of ESP involves the use of a customary discount from the list (or book) price for each element, with the discounted price applied within a narrow range. The customary discount is derived from historical data that has been analyzed to determine trends and patterns. We analyze the customary discount used for determining ESP on no less than an annual basis.

We evaluate each deliverable in our arrangements to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone value to our customers. Our products and services continue to qualify as separate units of accounting under ASU 2009-13.

There are two major elements in our multiple element arrangements for the delivery of our UltiPro offering, which are recurring revenues (i.e., cloud subscription revenues) and services revenues (mostly implementation consulting services).

For multiple element arrangements, the consideration allocated to cloud subscription revenues is recognized as recurring revenues over the initial contract period, as those subscription-based services are delivered, typically commencing with the Live date of the related product. The consideration allocated to fixed fee implementation consulting services in multiple element arrangements is recognized as services revenues on a percentage of completion basis, using reasonably dependable estimates with respect to milestones achieved (in relation to progression through implementation phases), by product.

Single element arrangements typically consist of renewals for cloud subscriptions and implementation consulting services sold on a time and materials basis. Under these single element arrangements, cloud subscription revenues are recognized over the related renewal period, as the services are delivered, and implementation consulting services are recognized as the related time and materials services are performed.

We recognize revenues when all of the following criteria are met:

• persuasive evidence of an arrangement exists;

• delivery has occurred;

• the fees are fixed and determinable; and

• collection is considered probable.

Recurring Revenues

Recurring revenues primarily consist of subscription revenues recognized from our customers' use of UltiPro after they have gone Live.

ii) Effective January 1, 2015, we no longer have maintenance revenues associated with our Legacy customers. Since the time we announced that we would stop supporting our Legacy product in 2012, we successfully converted the majority of our Legacy customers to the cloud. Those customers that did not convert terminated.

The pricing for the three elements that pertain to recurring revenues (i.e., hosting services, the right to use UltiPro and maintenance of UltiPro (as described above) is bundled. Since these three bundled elements are components of recurring revenues in the consolidated statements of income, allocation of selling price to each of the three elements is not necessary and they are not reported separately. Selling price, which is established through VSOE, for the bundled elements, as a whole, is determined on the basis of renewal pricing, without taking into consideration potential price increases or potential changes in the number of employees of the customer in the future due to the uncertainties surrounding these potential occurrences. These bundled elements are provided on an ongoing basis, represent undelivered elements and are recognized on a monthly basis as the related services are performed, commencing once the customer goes Live.

Services Revenues

Services revenues primarily include revenues from fees charged for implementation consulting services in connection with the implementation of our product solutions and, to a much lesser extent, fees for other services, including the provision of payroll-related forms, sales of time clocks and the printing of W-2 forms for certain customers, as well as certain client reimbursable out-of-pocket expenses.

~~Our~~Revenue multiple element contracts contain recurring cloud revenues and implementation consulting services priced on a fixed fee basis. Time and materials implementation consulting services are sold as stand-alone sales not directly related to the basic implementation of the cloud product. The total arrangement consideration is allocated to services elements in the arrangement based on relative selling prices, using the prices established when the services are sold on a stand-alone basis. Selling price is established through ESP for fixed fee implementation consulting services that are included in our multiple element contracts.Recognition

~~Revenues~~Effective ~~from~~January ~~implementation~~1, ~~consulting~~2018, ~~services~~we ~~sold~~recognize onrevenues ain ~~fixed-fee~~accordance ~~basis~~with ~~are~~Topic ~~recognized~~606. ~~using~~The ~~the~~core ~~percentage~~principle of ~~completion~~Topic ~~accounting~~606 ~~method. Percentage~~is ofthat ~~completion~~revenue is ~~measured~~recognized atupon ~~each~~transfer ~~reporting~~of ~~date~~control ~~based~~of onpromised ~~progress~~products ~~made~~or services to ~~date~~customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. To achieve the core principle of Topic 606, we perform the following steps:

~~Revenues~~1) Identify ~~from~~the ~~implementation consulting services, billed on a time and materials basis~~ contract(~~at an hourly rate~~s), ~~are~~with ~~recognized~~a ~~as these services are performed. Other services are recognized as the product is shipped or as the services are rendered, depending on the specific terms of the related arrangement.~~customer;

~~Goodwill~~2) Identify ~~and~~the ~~Intangible~~performance ~~Assets~~obligations in the contract;

~~The~~3) Determine ~~purchase price of an acquired company is allocated between intangible assets and~~ the ~~net~~transaction ~~tangible assets of the acquired business with the residual of the purchase~~ price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments and estimates can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.;

At4) Allocate ~~December 31, 2017, our goodwill totaled $35.8 million and our identifiable net intangible assets totaled $20.9 million. We assess~~ the ~~impairment~~transaction ofprice goodwill of our reporting unit annually, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to ~~determine whether it is more likely than not that~~ the ~~fair~~performance ~~value~~obligations ofin the ~~reporting~~contract; unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit's carrying value is compared to its fair value. We consider both market and discounted cash flow approaches to determine the fair value of the reporting unit. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a future impairment of goodwill at the reporting unit. We conducted our annual impairment test of goodwill as of December 31, 2017, and 2016. As a result of this test, we determined that no adjustment to the carrying value of goodwill for our reporting unit was required.

We5) Recognize ~~evaluate~~revenue ~~our~~when ~~amortizable intangible assets for impairment whenever events~~ (or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset or group of assets. The amount of any impairment is measured as) ~~the~~we ~~difference~~satisfy ~~between the carrying value and the fair value of the impaired asset. We also evaluate the estimated remaining useful lives of intangible assets and whether events or changes in circumstances warrant~~ a ~~revision~~performance ~~to the remaining periods of amortization~~obligation. Assumptions and estimates about future values and remaining useful lives of our intangible assets are complex and subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends and internal factors such as changes in our business strategy and our internal forecasts.

The significant majority of our two major revenue sources, recurring and services, is derived from contracts with customers. Recurring revenues are primarily related to our subscription-based SaaS performance obligations. Services revenues are primarily related to implementation services for our SaaS customers (including stand-alone services billed on a time and materials basis) and, to a much lesser extent, fees for other services, including the provision of payroll-related forms, sales of time clocks and the printing of W-2 and Affordable Care Act ("ACA") forms for certain customers, as well as certain client reimbursable out-of-pocket expenses ("Other Services"). Fees charged to subscription-based SaaS performance obligations are each priced on a per-employee-per-month (“PEPM”) basis for a given calendar month based on usage, and fees charged for implementation services are typically priced on a fixed fee basis for activating the product offering. Our SaaS subscription revenues are satisfied over time, because they are simultaneously received and consumed by the customer. Our activation services revenues are satisfied over time because they are simultaneously received and consumed by the customer.

Our SaaS performance obligations are each priced based on the number of active customer employees, as of the signing of the contract, at the contract PEPM rate over the initial contract term. Our activation services are based on a fixed fee charged to our customers. There is typically no variable consideration related to our SaaS performance obligations or our activation services, nor do they include a significant financing component, non-cash consideration, or consideration payable to a customer. Our SaaS performance obligations are typically billed quarterly in advance while our activation services are billed over the implementation period.

Our SaaS arrangements include multiple performance obligations and transaction price allocations are based on the stand-alone selling price ("SSP") for each performance obligation. There is an observable input for SSP for each of the SaaS performance obligations. Since activation services do not have directly observable pricing, the SSP is estimated using market conditions and observable inputs, which is calculated based on historical average discounts off our standard price list.

For our performance obligations, the consideration allocated to cloud subscription revenues is recognized as recurring revenues, typically using the output method, over the initial contract period, as those subscription-based services are consumed, typically commencing with the date the customer processes their first live payroll using UltiPro (referred to as going "Live"). The consideration allocated to activation services is recognized as services revenues based on the proportion performed, using reasonably dependable estimates (in relation to progression through activation phases), by product. Activation services are performed by our implementation consultants and, to a lesser extent, third party implementation partners. For activation services performed by third party implementation partners, we act as the principal and report revenues on a gross basis, meaning the amounts billed to customers are recorded as services revenues, and related expenses incurred are recorded as cost of services revenues. We control the activation services performed by third party implementation partners and act as principal because we are ultimately responsible to our customers and have full discretion in establishing prices.

Customers also enter into contracts for services billed on a time and materials basis and Other Services. Time and materials services are satisfied over time because the customer simultaneously receives and consumes the benefit as we perform. Services revenues for time and materials work are recognized in the period performed. Fees from Other Services substantially include the provision of payroll-related forms, sales of time clocks and printing services for certain customers. For these Other Services, revenue is recognized at a point in time, upon shipment which is when control of the goods and services transfers to the customer.

Cost of Revenues

Cost of revenues primarily consists of the costs of recurring and services revenues. Cost of recurring revenues primarily consists of costs to provide maintenance and technical support to our customers, the cost of providing periodic updates and the cost of recurring subscription revenues, including amortization of capitalized software. Cost of services revenues primarily consists of costs to provide implementation consulting services and, to a lesser degree, training to our ~~customers, costs related to sales of payroll-related forms, time clocks and costs associated with certain client reimbursable out-of-pocket expenses.~~

customers, costs related to sales of payroll-related forms, time clocks and costs associated with certain client reimbursable out-of-pocket expenses.

Stock-Based Compensation

Our Amended and Restated 2005 Equity and Incentive Plan (the “Plan”) authorizes the grant of options to non-employee directors, officers and employees of Ultimate to purchase shares of Ultimate’s Common Stock. The Plan also authorizes the grant to such persons of restricted and non-restricted shares of Common Stock, stock appreciation rights, stock units and cash performance awards (collectively, together with stock options, the “Awards”). Prior to the adoption of the Plan, options to purchase shares of Common Stock were issued under our Nonqualified Stock Option Plan (the “Prior Plan”). Beginning in 2009, we began making grants to employees of restricted stock units in lieu of stock options.

56As of December 31, 2018, the aggregate number of shares of Common Stock that were available to be issued under all Awards granted under the Plan was 1,706,906 shares.

As of December 31, 2017, the aggregate number of shares of Common Stock that were available to be issued under all Awards granted under the Plan was 819,893 shares.

The Plan provides broad discretion to the Compensation Committee of the Board of Directors to create appropriate equity incentives for directors, officers and employees of Ultimate. The Plan is intended to attract and retain talented employees and align employee and stockholder interests.

For purposes of calculating and accounting for stock-based compensation expense (“SBC”) in accordance with ASC 718, “Compensation – Stock Compensation” (“ASC 718”) for restricted stock awards and restricted stock units, we measure compensation based on the closing market price of our Common Stock at the date of grant and it is recognized on a straight-line basis over the vesting period. We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The weighted-average forfeiture rate is based on historical data.

In accordance with ASC 718, Ultimate capitalizes the portion of SBC expense attributed to personnel whose labor costs are being capitalized pursuant to ASC Topic 350-40, Intangibles Goodwill and Other-Internal Use Software, related to software development. The following table summarizes SBC recognized by the Company (in thousands):

	For the Years Ended December 31,
	2017		2016		2015
	2018		2017		2016
SBC - Statements of income	$	~~146~~140,~~427~~353	$	~~113~~146,~~877~~427	$	82113,~~416~~877
SBC - Capitalized software	43,~~003~~533		34,~~903~~003		3,~~013~~903
SBC - Statements of stockholders' equity	$	~~150~~143,~~430~~886	$	~~117~~150,~~780~~430	$	85117,~~429~~780

Rental Costs Incurred in Relation to a Construction Period

We have incurred rental costs associated with operating leases during construction periods. Rental costs incurred during a construction period are costs incurred for the right to control the use of a leased asset during and after construction of a leased asset. Since there is no distinction between the right to use a leased asset during the construction period and the right to use that asset after the construction period, rental costs associated with ground or building operating leases that are incurred during a construction period are recognized as rental expense on a straight-line basis.

Income Taxes

We are subject to federal, foreign and state corporate income taxes. We account for income taxes using an asset and liability approach under which deferred income taxes are provided based upon enacted tax laws and rates applicable to the periods in which the taxes become payable. The federal Tax Cuts and Jobs Act (the "Tax Act”) was enacted on December 22, 2017. The impact of implementing the Tax Act to our deferred income tax expense was reflected during the fourth quarter of 2017.

We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.

We assess the likelihood that Ultimate will be able to recover its deferred tax assets. Management considers all available evidence, both positive and negative, including historical levels of pre-tax book income, expiration of net operating losses, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies, as well as current tax laws and interpretation of current tax laws, in assessing the need for a valuation allowance. If recovery is not likely, we record a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. The available positive evidence at December 31, 2017 included, among other factors, three years of cumulative historical pre-tax book income and a projection of future pre-tax book income and taxable income sufficient to realize all of our remaining deferred tax assets. As a result of our analysis of all available evidence, both positive and negative, we believe that it is more likely than not that the results of future operations will generate sufficient taxable income to realize all of the deferred tax assets as of December 31, 2017. See Note 14 for further discussion.

ASC 740, "Income Taxes" ("ASC 740") provides guidance on the related de-recognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. Our accounting policy is to record the tax effects of a change in the opening balance of the unrecognized tax benefits (including unrecognized tax benefits related to prior-period discontinued operations) in current-period income (loss) from continuing operations. We recognize interest and penalties accrued related to unrecognized tax benefits as components of our income tax provision. We did not have

~~any~~recovery ~~interest~~is ~~and~~not ~~penalties~~likely, ~~accrued~~we ~~upon~~record ~~the~~a ~~adoption~~valuation ofallowance ~~ASC~~against ~~740,~~the ~~and,~~deferred astax ofassets ~~December 31,~~that ~~2017 and 2016,~~ we ~~did~~estimate will not ~~have~~ultimately ~~any~~be ~~interest and penalties accrued related to unrecognized tax benefits~~recoverable.

~~Reimbursable~~For ~~Out~~US based deferred tax assets, the available positive evidence at December 31, 2018 included, among other factors, three years of cumulative historical pre-Oftax book income and a projection of future pre-~~Pocket~~tax ~~Expenses~~book income and taxable income. As a result of our analysis of all available evidence, both positive and negative, we believe that it is more likely than not that the results of future operations will generate sufficient taxable income to realize all of the deferred tax assets as of December 31, 2018. As such, there was no valuation allowance on US based deferred assets for the years ended December 31, 2018 and 2017.

~~Reimbursable~~In ~~out-of-pocket~~evaluating ~~expenses~~valuation allowance for foreign based deferred tax assets, due to negative evidence which ~~are~~includes ~~included~~history inof ~~services~~losses ~~revenues~~for ~~and~~both ~~cost~~the ofUK ~~services~~subsidiary, ~~revenues~~PeopleDoc inUK ~~our~~Ltd., ~~accompanying~~and ~~consolidated~~the ~~statements~~German ofsubsidiary, ~~income~~PeopleDoc GMBH, ~~were~~it $2was determined that it would not be more likely than not that the deferred tax assets would be ultimately recoverable.2 The ~~million~~valuation allowance balance at December 31, 2018 was $21.47 million and represents an increase in the valuation allowance of $10.92 million. ~~for~~See ~~2017,~~Note ~~2016~~14 ~~and~~for ~~2015,~~further ~~respectively~~discussion.

Recently Adopted Accounting Standards

Topic 606

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“Topic 606”). Topic 606 supersedes the revenue requirements in ASU Topic 605, Revenue Recognition ("Topic 605") and requires the recognition of revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services and includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which discusses the deferral of incremental costs of obtaining a contract with a customer, including the period of amortization of such costs. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. Collectively, we refer to Topic 606 and Subtopic 340-40 as the "new standard."

Effective January 1, 2018, we adopted the requirements of the new standard, utilizing the modified retrospective method of transition with the new standard applied to all customer contracts that were not completed on the effective date of the new standard. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, as detailed below.

The impact of adopting the new standard on our revenues resulted in an immaterial increase to deferred revenue but also resulted in a material impact on current and non-current other assets, as a result of the amortization period over which deferred contract costs to obtain related subscription contracts are recognized. Under Topic 605, we deferred incremental commission costs to obtain a contract and amortized those costs over the initial term of the related subscription contract, which

is generally 2-3 years. During our assessment of the new standard, we did not identify any incremental contract costs from what was capitalized under Topic 605. We analyzed our customer contract term periods and our customer life, taking into consideration technological changes for our UltiPro product offering, and based on our assessment of the new standard, we amortize the deferred contract costs over 7 years on a systematic basis, consistent with the pattern of transfer of the goods or services to which the asset relates.

The cumulative effect of the changes made to our January 1, 2018 balance sheet for the adoption of the new standard were as follows (in thousands):



	Balance as of December 31, 2017		Adjustments Due to Adoption of Topic 606			Balance as of January 1, 2018
Assets
Deferred contract costs, prepaid expenses and other current assets	$	71,602	$	(22,318	)	$	49,284
Total current assets	990,772		(22,318		)	968,454
Deferred contract costs and other assets, net	53,409		47,259			100,668
Deferred tax assets, net	32,696		(6,268		)	26,428
Total assets	$	1,377,211	$	18,673		$	1,395,884
Liabilities
Deferred revenue	$	197,088	$	1,909		$	198,997
Total current liabilities	843,086		1,909			844,995
Deferred income tax liability	251		170			421
Total liabilities	859,186		2,079			861,265
Stockholders' Equity
Accumulated earnings	125,788		16,594			142,382
Total stockholders' equity	518,025		16,594			534,619
Total liabilities and stockholders' equity	$	1,377,211	$	18,673		$	1,395,884

In accordance with the requirements of the new standard, the disclosure for the quantitative effect and the significant changes between the reported results under the new standard and those that would have been reported under legacy GAAP (i.e., Topic 605) on our audited consolidated income statement and balance sheet was as follows (in thousands):



	For the Twelve Months Ended December 31, 2018
	As Reported - Topic 606		Balances Without Adoption of Topic 606		Effect of Change Higher/(Lower)
Income Statement
Revenues
Recurring revenues	$	997,066	$	998,708	$	(1,642	)

Operating Expenses
Sales and marketing	285,293		306,424		(21,131		)

Net income	$	65,140	$	45,651	$	19,489



	As of December 31, 2018
	As Reported - Topic 606		Balances Without Adoption of Topic 606		Effect of Change Higher/(Lower)
Balance Sheet
Assets
Deferred contract costs, prepaid expenses and other current assets	$	90,761	$	111,190	$	(20,429	)
Deferred contract costs and other assets, net	129,108		$	62,607	66,501
Deferred tax assets, net	14,632		27,620		(12,988		)
Liabilities
Deferred revenue	238,940		235,942		2,998
Stockholders' Equity
Accumulated earnings	207,521		171,439		36,082

ASU 2018-02

In April 2018, we adopted Accounting Standards Update ("ASU") No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," ("ASU 2018-02"). ASU 2018-02 allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive income to retained earnings. The unaudited condensed consolidated balance sheets reflect the reclassification out of accumulated other comprehensive income. The Company's policy for releasing disproportionate income tax effects from accumulated other comprehensive income utilizes the aggregate approach. The adoption of ASU 2018-02 did not have an impact on our unaudited condensed consolidated statements of income or cash flows.

Recently Issued Accounting Standards

ASC 606

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("Topic 606)”. Topic 606 supersedes the revenue requirements in ASU Topic 605, Revenue Recognition ("Topic 605") and requires the recognition of revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services and includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers, which discusses the deferral of incremental costs of obtaining a contract with a customer, including the period of amortization of such costs. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Collectively, we refer to Topic 606 and Subtopic 340-40 as the "new standard". Topic 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation, among others.

Topic 606 is effective for Ultimate on January 1, 2018 using either of two transition methods including several practical expedients: (1) full retrospective method, in which the new standard would be applied to each prior reporting period presented or (2) the modified retrospective method, in which the cumulative effect of initially applying the new standard would be recognized at the date of initial application and providing certain additional disclosures as defined per the new standard. Ultimate has selected the modified retrospective method with the new standard applied to all contracts that were not completed on the effective date of January 1, 2018.

We began assessing the new standard in 2016 and continued our assessment in 2017 to address the potential impact that Topic 606 could have on our consolidated financial statements. Our assessment of the impact included an evaluation of the five step process including, but not limited to, identifying the customer contract population, identifying the performance obligations in those customer contracts, determining the contract transaction price and allocating this amount to each performance obligation, and selecting the measurement methods to recognize revenue in a manner that depicts the transfer of control to the customer of each identified performance obligation. We have identified changes to our accounting policies and practices and controls to support the new revenue recognition standard. Implementation of the policy and control changes are in progress along with continuing our assessment of potential changes to our disclosures under the new guidance.

We anticipate this standard will not have a material impact on the way we recognize revenues, however, the standard will have a material impact on our consolidated balance sheet, upon adoption, as a result of the period of benefit in which deferred incremental commission costs to obtain related subscription is recognized. Under current GAAP, we defer incremental commission costs to obtain a contract and amortize those costs over the initial term of the related subscription contract, which is generally 2-3 years. Based on our assessment, the period of benefit and, therefore, amortization period has changed to 7 years under the new standard, representing the period of benefit and the estimated useful life of the underlying software used to provide our subscription-based recurring services. The change in amortization period of deferred incremental commission costs will result in an adjustment ranging from $23 million to $27 million in the opening balance sheet amounts as of January 1, 2018.

ASU 2016-02

In February 2016, the FASB issued ASU 2016-02, "Leases" ("ASU 2016-02"). This guidance, toas ~~increase~~amended by subsequent ASU's on the topic, improves transparency and comparability among ~~organizations~~companies by recognizing ~~lease~~right of use (ROU) assets and lease liabilities on the ~~consolidated~~ balance sheet and by disclosing key information about leasing arrangements. ASU ~~The new standard~~ No. 2016-02 is effective for ~~Ultimate~~public onbusiness ~~January~~entities 1,for ~~2019~~annual ~~and~~periods, ~~early~~including ~~adoption~~interim isperiods ~~permitted.~~within ~~The~~those ~~standard~~annual ~~requires~~periods, ~~lessees~~beginning ~~and~~after ~~lessors~~December to15, ~~recognize~~2018, ~~and~~with ~~measure~~early ~~leases~~adoption atpermitted. ~~the~~We ~~beginning~~will ofadopt ASU ~~the~~No. 2016-02 in ~~earliest~~our ~~period~~fiscal ~~presented~~year ~~using~~beginning aJanuary ~~modified~~1, ~~retrospective~~2019, ~~approach.~~and Wewill ~~are~~use ~~still~~the inalternative ~~the~~transition ~~process~~method ofprovided ~~evaluating~~by the ~~effect~~FASB ~~that~~ in ASU ~~2016~~No. 2018-0211, ~~will~~“Leases ~~have~~(Topic on842): ~~our~~Targeted ~~consolidated~~Improvements”, ~~financial~~with ~~statements~~no ~~and~~restatement ~~related~~of ~~disclosures~~comparative periods.

58The new standard provides optional practical expedients in transition. We expect to only elect the "package of practical expedients" where, under the new standard, prior conclusions about lease identification, lease classification and initial direct costs do not need to be reassessed. The new standard also provides practical expedients for ongoing accounting and we do not expect to elect any of these practical expedients on adoption. We continue to assess the impact of the new standard and believe it will have a material effect on the consolidated balance sheet due to the recognition of ROU assets and lease liabilities related to real estate and office equipment operating leases. On adoption, the expected impact includes the recognition of additional operating lease liabilities ranging from $55 million to $60 million and ROU assets, net of uncollected lease incentives, ranging from $52 million to $57 million. The new standard is not expected to have a material effect on consolidated net income or consolidated cash flows.

~~Recently~~ASU ~~Adopted Accounting Standards~~2018-15

In August 2018, the FASB issued ASU ~~2015~~No. 2018-1715, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force).” ASU No. 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): "Balance Sheet Classification of Deferred Taxes" ("ASU 2015-17”). ASU 2015-17 requires entities to offset all deferred tax assets and liabilities (and valuation allowances) for each tax-paying jurisdiction within each tax-paying component and present the net deferred tax as a single noncurrent amount in a classified balance sheet. Effective January 1, 2017 the Company adopted ASU 2015-17. Subsequent to adoption, all deferred tax assets and deferred tax liabilities are presented as noncurrent on the consolidated balance sheet. The changes have been applied prospectively as permitted by the ASU and prior years have not been restated. The adoption of this ASU does not have a material effect on the Company's results of operations, financial condition or liquidity.60

internal-use software license). This guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. This guidance is applicable to the Company’s fiscal year beginning January 1, 2020. The Company is currently evaluating the potential effects of this guidance on its consolidated financial statements.

4. Business Combinations

2018 Business Combinations

Acquisition of PeopleDoc SAS

On July 26, 2018, Ultimate, PeopleDoc SAS, a simplified joint-stock company (société par actions simplifiée) organized under the laws of France (“PeopleDoc”) and certain shareholders of PeopleDoc, entered into a Share Purchase Agreement (the “Purchase Agreement”) and on July 27, 2018, the parties consummated the transactions contemplated by the Purchase Agreement and Ultimate acquired PeopleDoc. PeopleDoc, a pioneer in HR Service Delivery, is based in Paris, France and has more than 1,000 customers with users in 180 countries. The addition of the PeopleDoc HR Service Delivery platform will further Ultimate's mission to improve the employee experience by offering new, person-centric features, such as an online employee help center, HR case management, and employee file management.

Pursuant to the Purchase Agreement, Ultimate acquired all of the capital stock of PeopleDoc for aggregate consideration valued at $295.9 million, subject to post-closing adjustments, paid with a combination of cash and shares of Ultimate common stock.

The following table summarizes the calculation of consideration transferred and deferred under the transaction (in thousands of USD):



	Note	Amount
Calculation of consideration
Cash consideration:
Cash paid to PeopleDoc shareholders	(a)	$	74,420
Deferred cash consideration	(b)	49,336
Actual cash consideration		$	123,756
Share consideration:
Share consideration paid to PeopleDoc shareholders	(c)	$	173,329
Marketability of deferred stock consideration	(d)	$	(1,164	)
Actual share consideration		172,165
Fair value of total consideration transferred		$	295,921

(a) Initial cash consideration paid to PeopleDoc shareholders per the Purchase Agreement at the closing of the transaction.
(b) Deferred cash consideration to be paid on the first anniversary of the closing date of the transaction.
(c) Share consideration paid to PeopleDoc shareholders per the Purchase Agreement at the time of closing the transaction. Share consideration paid to PeopleDoc shareholders consists of 595,445 shares at the closing stock price of $282.74 in addition to a restricted stock award with a fair value of $5.1 million at the acquisition date.
(d) Reflects a marketability adjustment to the deferred stock consideration.

Under ASC 805, generally all assets acquired and liabilities assumed are recorded at their acquisition date fair value. The consolidated financial statements include various assumptions related to the purchase price allocation of the assets acquired and liabilities assumed of PeopleDoc based on management's best estimates of fair value.

The purchase price allocation for the PeopleDoc acquisition is complete and has been allocated based on estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The following table represents the allocation of the purchase price for PeopleDoc to the acquired identifiable assets, assumed liabilities and goodwill (in thousands of USD):



Description	Note	Amount
Current assets	(a)	$	15,581
Property and equipment, net	(a)	1,489
Other non-current assets	(a)	1,010
Identifiable intangible assets	(b)	136,800
Goodwill	(c)	188,880
Total current liabilities	(a), (d)	(14,713		)
Deferred revenue	(a)	(6,900		)
Deferred tax liability, net	(e)	(26,226		)
Total purchase price		$	295,921

(a) Represents fair value of assets and liabilities assumed as part of the transaction based on the closing balance sheet provided by PeopleDoc.
(b) Fair value of identifiable intangible assets consisted primarily of developed technology of $77 million estimated using the relief from royalty method and customer relationships of $59 million estimated using the multi period excess earnings method
(c) Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets acquired and liabilities assumed. Goodwill recorded is attributable to the expected synergies to be realized when combining the operations of this entity into our existing operations. Goodwill from this transaction is not deductible for tax purposes.
(d) Included in total current liabilities was assumed debt of $4.8 million as of the closing of the transaction. As of December 31, 2018, the assumed debt was fully extinguished.
(e) Reflects the recognition of a deferred tax asset and deferred tax liability as of the acquisition date for the taxable and deductible temporary differences between the financial reporting values of assets acquired and liabilities assumed and the tax bases of those assets and liabilities.

The results of operations from this acquisition have been included in our consolidated financial statements since the closing of the PeopleDoc acquisition. Pro forma results of operations have not been presented because the effects of this business combination were not deemed material to our consolidated results of operations. The transaction costs associated with this acquisition for the year ended December 31, 2018 were approximately $3.1 million and were recorded in general and administrative expense.

2016 Business Combinations

During the third quarter of 2016, we completed the acquisition of Kanjoya, Inc. ("Kanjoya"), a California corporation (the “Kanjoya Acquisition”), located in San Francisco, California. During the second quarter of 2016, we completed the acquisition of substantially all of the assets of Capital Analytics, Inc. (d/b/a Vestrics) (hereinafter referred to as "Vestrics") (the “Vestrics Acquisition”), a Delaware limited liability company located in North Carolina. The Kanjoya Acquisition and the Vestrics Acquisition (the “2016 Acquisitions”) were not deemed ~~insignificant~~material to the audited consolidated financial statements on an individual basis and in the aggregate.

Acquisition of Kanjoya, Inc.

On September 29, 2016, pursuant to a merger agreement with Kanjoya, we acquired Kanjoya in exchange for $19.6 million, of which $16.9 million was paid in cash during the ~~twelve~~year ~~months~~ ended December 31, 2016 while the remaining $2.6 million is being held in escrow, and is included in accrued liabilities on our consolidated balance sheet. We recorded the Kanjoya Acquisition using the acquisition method of accounting and recognized assets and liabilities assumed at their fair value as of the date of acquisition. Based on the valuation, the significant classes of assets and liabilities to which we allocated the purchase price of Kanjoya were acquired intangibles for a total of $13.6 million, consisting of $12.1 million for developed technology, $1.5 million for customer relationships, and goodwill for the balance of $6.4 million. Pursuant to the Kanjoya Acquisition we assumed working capital, net, totaling $0.4 million. The fair value of the acquired developed technology was estimated using the cost approach. In accordance with GAAP, direct costs related to the acquisition were expensed as incurred. Kanjoya is a leading cloud workforce intelligence provider for enterprises. Based upon the technology acquired, we launched UltiPro Perception, a feature-set that enables businesses to identify and analyze attitudes and performance traits of their employees, managers, and teams from surveys and other sources of employee feedback. Kanjoya's workforce has joined Ultimate and will serve to establish an additional research and development hub for us in San Francisco.

The results of operations from this acquisition have been included in our consolidated financial statements since the closing of the Kanjoya Acquisition. Pro forma results of operations have not been presented because the effects of this business combination were not deemed significant to our audited consolidated results of operations.62

The results of operations from this acquisition have been included in our consolidated financial statements since the closing of the Kanjoya Acquisition. Pro forma results of operations have not been presented because the effects of this business combination were not deemed material to our audited consolidated results of operations.

Acquisition of Capital Analytics, Inc., d/b/a Vestrics

On May 11, 2016 (the "Vestrics Closing Date"), pursuant to an asset purchase agreement with Vestrics, we acquired certain assets and liabilities in exchange for $10.1 million, of which $1.0 million and $9.1 million was paid in cash during the years ended December 31, 2017 and 2016, respectively. We recorded the Vestrics Acquisition using the acquisition method of accounting and recognized assets and liabilities assumed at their fair value as of the date of acquisition. The valuation of Vestrics has been completed and the significant classes of assets and liabilities to which we allocated the purchase price were goodwill of $4.3 million (which includes working capital, net, totaling $0.2 million, which was assumed pursuant to the Vestrics Acquisition) and identifiable intangible assets of $6.0 million related to developed technology. In accordance with GAAP, direct costs related to the acquisition were expensed as incurred. Vestrics’ predictive technology enables a company to identify and analyze the connections between its investments in human capital and the performance-related business results of those investments. We will leverage Vestrics’ technology as we continue to expand our analytics capabilities across UltiPro. The fair value of the acquired developed technology was estimated using the cost approach. Identifiable intangible assets were assigned a total weighted-average amortization period of 7.0 years. Since the developed predictive technology acquired pursuant to the Vestrics Acquisition will be included in the Development Project currently being capitalized as internal-use software to be offered as a cloud product in the future, amortization of the Vestrics developed technology will begin when it is ready for its intended use.

59The results of operations from this acquisition have been included in our audited consolidated financial statements since the Vestrics Closing Date. Pro forma results of operations have not been presented because the effects of this business combination were not deemed material to our audited consolidated results of operations.

pursuant to the Vestrics Acquisition will be included in the Development Project currently being capitalized as internal-use software to be offered as a cloud product in the future, amortization of the Vestrics developed technology will begin when it is ready for its intended use.

The results of operations from this acquisition have been included in our audited consolidated financial statements since the Vestrics Closing Date. Pro forma results of operations have not been presented because the effects of this business combination were not deemed significant to our audited consolidated results of operations.

5. Funds Held for Customers, Corporate Investments in Marketable Securities and Fair Value of Financial Instruments

We classify our investments in marketable securities with readily determinable fair values as available-for-sale. Available-for-sale securities consist of debt ~~and equity~~ securities not classified as trading securities or as securities to be held to maturity. Unrealized gains and losses, net of tax, on available-for-sale securities are reported as a net amount in accumulated other comprehensive loss in stockholders’ equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Included in accumulated other comprehensive loss was a $~~704~~162 thousand net unrealized ~~loss~~gain and $~~145~~704 thousand net unrealized loss on available-for-sale securities at December 31, ~~2017~~2018 and December 31, ~~2016~~2017, respectively. Realized gains and losses resulting on available-for-sale securities are included in other (expense) income, net, in the consolidated statements of income. There were no significant reclassifications of realized gains and losses on available-for-sale securities to the consolidated statements of income for the years ended December 31, ~~2017~~2018, ~~2016~~2017 and ~~2015~~2016.

The amortized cost, net unrealized (loss) gain and fair value of our investments in marketable available-for-sale securities as of December 31, ~~2017~~2018 and December 31, ~~2016~~2017 are shown below (in thousands):

~~Funds held for customers and corporate investments as of December 31, 2017 and December 31, 2016 are shown below (in thousands):~~63

	As of December 31, 2017							As of December 31, 2016
	Amortized Cost		Net Unrealized (Loss)			Fair Value (1)		Amortized Cost		Net Unrealized (Loss)			Fair Value (1)
Type of issue:
Funds held for customers – money market securities and other cash equivalents	$	354,312	$	—		$	354,312	$	316,353	$	—		$	316,353
Available-for-sale securities:
Corporate debentures – bonds	2,848		(4		)	2,844		10,175		(3		)	10,172
Commercial paper	—		—			—		1,446		—			1,446
U.S. Agency bonds	209,443		(693		)	208,750		148,939		(125		)	148,814
U.S. Treasury bills	5,876		(6		)	5,870		9,586		(18		)	9,568
Asset-Backed Securities	721		(1		)	720		2,901		1			2,902
Total corporate investments and funds held for customers	$	573,200	$	(704	)	$	572,496	$	489,400	$	(145	)	$	489,255

Funds held for customers and corporate investments as of December 31, 2018 and December 31, 2017 are shown below (in thousands):



	As of December 31, 2018							As of December 31, 2017
	Amortized Cost		Net Unrealized (Loss) Gain			Fair Value (1)		Amortized Cost		Net Unrealized (Loss)			Fair Value (1)
Type of issue:
Funds held for customers – money market securities and other cash equivalents	$	333,942	$	—		$	333,942	$	354,312	$	—		$	354,312
Available-for-sale securities:
Corporate debentures – bonds	4,469		(2		)	4,467		2,848		(4		)	2,844
Commercial paper	2,687		—			2,687		—		—			—
U.S. Agency bonds	284,099		165			284,264		209,443		(693		)	208,750
U.S. Treasury bills	2,240		—			2,240		5,876		(6		)	5,870
Asset-Backed Securities	1,348		(1		)	1,347		721		(1		)	720
Total corporate investments and funds held for customers	$	628,785	$	162		$	628,947	$	573,200	$	(704	)	$	572,496

_________________

(1) Included within available-for-sale securities as of December 31, ~~2017~~2018 and ~~2016~~2017 are corporate investments with fair values of $910.47 million and $249.14 million, respectively. Included within available-for-sale securities as of December 31, ~~2017~~2018 and ~~2016~~2017 are funds held for customers with fair values of $~~208~~284.83 million and $~~148~~208.8 million, respectively. All available-for-sale securities were included in Level 2 of the fair value hierarchy.

The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a period of less than and greater than 12 months as of December 31, 2018 are as follows (in thousands):



	Securities in unrealized loss position less than 12 months					Securities in unrealized loss position greater than 12 months					Total
	Gross unrealized losses			Fair market value		Gross unrealized losses			Fair market value		Gross unrealized losses			Fair market value
Corporate debentures – bonds	$	(2	)	$	3,521	$	—		$	—	$	(2	)	$	3,521
U.S. Agency bonds	(39		)	14,957		(133		)	45,246		(172		)	60,203
U.S. Treasury bills	—			2,239		—			—		—			2,239
Asset-Backed Securities	(1		)	1,347		—			—		(1		)	1,347
Total	$	(42	)	$	22,064	$	(133	)	$	45,246	$	(175	)	$	67,310



	Securities in unrealized loss position less than 12 months					Securities in unrealized loss position greater than 12 months					Total
	Gross unrealized losses			Fair market value		Gross unrealized losses			Fair market value		Gross unrealized losses			Fair market value
Corporate debentures – bonds	$	(1	)	$	699	$	—		$	—	$	(1	)	$	699
U.S. Agency bonds	(408		)	74,940		(285		)	133,811		(693		)	208,751
U.S. Treasury bills	—			—		(6		)	5,869		(6		)	5,869
Asset-Backed Securities	—			—		—			—		—			—
Total	$	(409	)	$	75,639	$	(291	)	$	139,680	$	(700	)	$	215,319

	Securities in unrealized loss position less than 12 months					Securities in unrealized loss position greater than 12 months					Total
	Gross unrealized losses			Fair market value		Gross unrealized losses			Fair market value		Gross unrealized losses			Fair market value
Corporate debentures – bonds	$	(1	)	$	699	$	—		$	—	$	(1	)	$	699
Commercial paper	—			—		—			—		—			—
U.S. Agency bonds	(408		)	74,940		(285		)	133,811		(693		)	208,751
U.S. Treasury bills	—			—		(6		)	5,869		(6		)	5,869
Asset-Backed Securities	—			—		—			—		—			—
Total	$	(409	)	$	75,639	$	(291	)	$	139,680	$	(700	)	$	215,319

The amortized cost and fair value of the marketable available-for-sale securities by contractual maturity at December 31, 2018 are shown below (in thousands):

		Securities in unrealized loss position less than 12 months						Securities in unrealized loss position greater than 12 months				Total
	As of December 31, 2018
		Gross unrealized losses				Fair market value		Gross unrealized losses		Fair market value		Gross unrealized losses			Fair market value
	Amortized Cost				Fair Value
Corporate debentures – bonds		$	(4	)		$	6,125	$	—	$	—	$	(4	)	$	6,125
Due in one year or less	$	196,128			$	196,102
Commercial paper		—				—		—		—		—			—
Due after one year	98,714				98,903
U.S. Agency bonds		(131		)		118,810		—		—		(131		)	118,810
Total	$	294,842			$	295,005
U.S. Treasury bills		(18		)		9,568		—		—		(18		)	9,568
Asset-Backed Securities		(1		)		751		—		—		(1		)	751
Total		$	(154	)		$	135,254	$	—	$	—	$	(154	)	$	135,254

The amortized cost and fair value of the marketable available-for-sale securities by contractual maturity at December 31, 2017 are shown below (in thousands):

	As of December 31, 2017
	Amortized Cost		Fair Value
Due in one year or less	$	173,517	$	173,075
Due after one year	45,371		45,109
Total	$	218,888	$	218,184

We classify and disclose fair value measurements in one of the following three categories of fair value hierarchy:


Level 1:	Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities.


Level 2:	Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.


Level 3:	Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Our assets that are measured by management at fair value on a recurring basis are generally classified within Level 1 or Level 2 of the fair value hierarchy. The types of instruments valued based on quoted market prices in active markets include most money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy. We did not have any transfers into and out of Level 1 and Level 2 during the years ended December 31, ~~2017~~2018, ~~2016~~2017 and ~~2015~~2016.

The types of instruments valued by management, based on quoted prices in less active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency, include corporate debentures and bonds, commercial paper, U.S. agency bonds, and U.S. Treasury bills. Such instruments are generally classified within Level 2 of the fair value hierarchy. We use consensus pricing, which is based on multiple pricing sources, to value our fixed income investments.

61The following table sets forth, by level within the fair value hierarchy, financial assets accounted for at fair value as of December 31, 2018 and December 31, 2017 (in thousands):

fair value hierarchy. We use consensus pricing, which is based on multiple pricing sources, to value our fixed income investments.



	As of December 31, 2018								As of December 31, 2017
	Total		Quoted Prices in Active Markets (Level 1)		Other Observable Inputs (Level 2)		Un- Observable Inputs (Level 3)		Total		Quoted Prices in Active Markets (Level 1)		Other Observable Inputs (Level 2)		Un- Observable Inputs (Level 3)
Corporate debentures and bonds	$	4,467	$	—	$	4,467	$	—	$	2,844	$	—	$	2,844	$	—
Commercial paper	2,687		—		2,687		—		—		—		—		—
U.S. Agency bonds	284,264		—		284,264		—		208,750		—		208,750		—
U.S. Treasury bills	2,240		—		2,240		—		5,870		—		5,870		—
Asset-Backed Securities	1,347		—		1,347		—		720		—		720		—
Total	$	295,005	$	—	$	295,005	$	—	$	218,184	$	—	$	218,184	$	—

~~The~~Assets ~~following~~and ~~table~~liabilities ~~sets~~measured ~~forth,~~at byfair ~~level~~value ~~within~~on a recurring basis were presented in the ~~fair~~consolidated ~~value~~balance ~~hierarchy~~sheets as of December 31, 2018 and as of December 31, 2017 as short-term and long-term investments in marketable securities. There were no financial ~~assets~~liabilities accounted for at fair value as of December 31, ~~2017~~2018 and December 31, ~~2016 (in thousands):~~2017.

	As of December 31, 2017								As of December 31, 2016
	Total		Quoted Prices in Active Markets(Level 1)		Other Observable Inputs(Level 2)		Un- Observable Inputs(Level 3)		Total		Quoted Prices in Active Markets(Level 1)		Other Observable Inputs(Level 2)		Un- Observable Inputs(Level 3)
Corporate debentures and bonds	$	2,844	$	—	$	2,844	$	—	$	10,172	$	—	$	10,172	$	—
Commercial paper	—		—		—		—		1,446		—		1,446		—
U.S. Agency bonds	208,750		—		208,750		—		148,814		—		148,814		—
U.S. Treasury bills	5,870		—		5,870		—		9,568		—		9,568		—
Asset-Backed Securities	720		—		720		—		2,902		—		2,902		—
Total	$	218,184	$	—	$	218,184	$	—	$	172,902	$	—	$	172,902	$	—

Assets and liabilities measured at fair value on a recurring basis were presented in the consolidated balance sheets as of December 31, 2017 and as of December 31, 2016 as short-term and long-term investments in marketable securities. There were no financial liabilities accounted for at fair value as of December 31, 2017 and December 31, 2016.

6. Allowance for Doubtful Accounts

We have established an allowance for doubtful accounts based on a review of the current status of existing accounts receivable by customer and historical experience.

The activity within the allowance for doubtful accounts was as follows (in thousands):

	For the Years Ended December 31,
	2017			2016			2015
	2018			2017			2016
Balance at beginning of year	$	900		$	900		$	~~675~~900
Charged to expense	57,~~727~~855			35,~~213~~727			43,~~687~~213
Write-offs	(57,~~727~~105		)	(35,~~213~~727		)	(43,~~462~~213		)
Balance at end of year	$	~~900~~1,650		$	900		$	900

7. Deferred Contract Costs, Prepaid Expenses and Other Current Assets

~~Prepaid~~Deferred contract costs, prepaid expenses and other current assets consist of the following (in thousands):

	As of December 31,
	2017		2016
	2018		2017
Prepaid commissions on cloud sales	$	38,519	$	29,842
Deferred contract costs	$	40,750	$	38,519
Other prepaid expenses	20,088		16,753
Prepaid expenses	33,681		20,088
Other current assets	1216,~~995~~330		1512,~~306~~995
Total prepaid expenses and other current assets	$	71,602	$	61,901
Total deferred contract costs, prepaid expenses and other current assets	$	90,761	$	71,602

Deferred contract costs are primarily related to deferred sales commissions that are incremental and recoverable costs of obtaining a customer contract, and these costs are amortized on a systemic basis over 7 years. Current deferred contract costs were $40.8 million and $38.5 million as of December 31, 2018 and December 31, 2017, respectively.

Non-current deferred contract costs to be recognized beyond the next twelve months, as included in other assets, net were $116.1 million and $45.5 million as of December 31, 2018 and December 31, 2017, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.

8. Property and Equipment, net

Property and equipment, net consists of the following (in thousands):



	As of December 31,
	2018		2017
Computer equipment	$	212,215	$	185,034
Internal-use software	234,531		178,093
Leasehold improvements	55,299		43,556
Furniture and fixtures	23,001		19,817
Building	2,100		2,100
Land	655		655
Property and equipment	527,801		429,255
Less: accumulated depreciation and amortization	224,862		185,591
Property and equipment, net	$	302,939	$	243,664

	As of December 31,
	2017		2016
Computer equipment	$	185,034	$	166,420
Internal-use software	178,093		113,407
Leasehold improvements	43,556		36,095
Furniture and fixtures	19,817		16,932
Building	2,100		1,074
Land	655		655
Property and equipment	429,255		334,583
Less: accumulated depreciation and amortization	185,591		155,025
Property and equipment, net	$	243,664	$	179,558

Depreciation and amortization expense on property and equipment, including depreciation and amortization expense on property and equipment under capital leases, totaled $39.9 million, $31.2 million and $25.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Depreciation and amortization expense on property and equipment, including depreciation and amortization expense on property and equipment under capital leases, totaled $31.2 million, $25.5 million and $20.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Included in property and equipment, net, is computer equipment acquired under capital leases as follows (in thousands):

	As of December 31,
	2017		2016
Computer equipment	$	58,831	$	51,581
Less: accumulated amortization	48,963		43,732
Computer equipment, net	$	9,868	$	7,849

Capital leases entered into and included in property and equipment totaled $7.3 million, $6.7 million and $5.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.



	As of December 31,
	2018		2017
Computer equipment	$	67,391	$	58,831
Less: accumulated amortization	51,845		48,963
Computer equipment, net	$	15,546	$	9,868

Capital leases entered into and included in property and equipment totaled $9.1 million, $7.3 million and $6.7 million for the years ended December 31, 2018, 2017 and 2016, respectively.

See Note 10 in the Notes to Consolidated Financial Statements for further discussion of computer software development costs related to internal-use software which is included in property and equipment, net.

9. Foreign Currency

The financial statements of Ultimate’s foreign subsidiaries have been translated into U.S. dollars. The functional currency of our wholly-owned ~~subsidiary~~subsidiaries, The Ultimate Software Group of Canada, Inc. (“Ultimate Canada”), isThe ~~the~~Ultimate ~~Canadian~~Software ~~dollar~~Group of Asia, PTE. LTD. ("Ultimate Asia") and PeopleDoc SAS ("PeopleDoc"), have been translated into U.S. dollars. Assets and liabilities are translated into U.S. dollars at period-end exchange rates. Income and expenses are translated at the average exchange rate for the reporting period. The resulting non-cash foreign currency translation adjustments, representing unrealized gains or losses, are included in consolidated stockholders’ equity as a component of accumulated other comprehensive ~~income~~ (loss) income. We did not have any realized gains and losses resulting from foreign exchange transactions during the years ended December 31, ~~2017~~2018, ~~2016~~2017 and ~~2015~~2016. Included in accumulated other comprehensive ~~income~~ (loss), income as presented in the accompanying consolidated balance sheets, are $514.43 million of unrealized translation losses at December 31, ~~2017~~2018 and $65.94 million of unrealized translation losses at December 31, ~~2016~~2017. There were no significant reclassifications of realized gains and losses resulting from foreign exchange transactions to the consolidated statements of income for the years ended December 31, ~~2017~~2018, ~~2016~~2017 and ~~2015~~2016.

10. Computer Software Development Costs

WeComputer ~~previously~~software ~~capitalized~~development costs related to software ~~costs~~developed infor ~~accordance~~internal ~~with~~use ~~Accounting~~falls ~~Standards~~under ~~Codification~~the ("accounting guidance of ASC") Topic ~~985~~350-2040, ~~Costs~~Intangibles ofGoodwill and Other-Internal Use Software. toThese Becapitalized ~~Sold,~~costs ~~Leased,~~are orincluded ~~Marketed~~with property and equipment in the consolidated balance sheets and purchases of property and equipment in the consolidated statements of cash flows. ~~Those~~ ~~capitalized~~Internal-use software ~~costs~~is ~~were~~amortized ~~fully~~on ~~amortized~~a asstraight-line ofbasis ~~December 31~~over its estimated useful life, ~~2013.~~generally three to seven years, commencing after the software development is substantially complete and the software is ready for its intended use.

~~Computer~~For the years ended December 31, 2018 and 2017, we capitalized $54.0 million (including $3.5 million in non-cash stock-based compensation) and $52.6 million (including $4.0 million in non-cash stock-based compensation), respectively, of computer software development costs related to ~~software~~an ~~developed~~internal-use development project for ~~internal~~our ~~use~~UltiPro ~~falls~~product ~~under~~offering (the ~~accounting~~"Development ~~guidance~~Project"). ofThe ~~ASC~~capitalized ~~Topic~~costs ~~350-40~~for the Development Project were primarily from direct labor costs and, ~~Intangibles~~to ~~Goodwill~~a lesser extent, third party consulting fees. For 2018, 2017 and ~~Other-Internal~~2016, ~~Use~~we ~~Software~~recognized $9.9 ~~These~~million, ~~capitalized~~$4.4 million and $1.2 million, respectively, of amortization costs ~~are~~which ~~included~~were associated with ~~property~~certain ~~and~~product ~~equipment~~modules inof the ~~consolidated~~Development ~~balance~~Project ~~sheets~~which ~~and~~were ~~purchases~~ready offor ~~property~~their ~~and~~intended ~~equipment~~use. inFor the ~~consolidated~~year ~~statements~~ended ofDecember ~~cash~~31, ~~flows~~2018, we capitalized $2.4 ~~Internal~~million of computer software development costs related to other internal-use development projects. These projects are not ready for their intended use and, therefore, no amortization costs have been recognized in 2018. The amortization of capitalized software is ~~amortized~~included onin acost ~~straight-line~~of ~~basis~~recurring ~~over~~revenues. ~~its~~At ~~estimated~~each ~~useful~~balance ~~life~~sheet date, ~~generally~~we evaluate the useful lives of these assets and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

three to seven years, commencing after the software development is substantially complete and the software is ready for its intended use.

For the years ended December 31, 2017 and 2016, we capitalized $52.6 million (including $4.0 million in non-cash stock-based compensation) and $37.9 million (including $3.9 million in non-cash stock-based compensation), respectively, of computer software development costs related to an internal-use development project for our UltiPro product offering (the "Development Project"). The capitalized costs for the Development Project were primarily from direct labor costs and, to a lesser extent, third party consulting fees. For 2017, 2016 and 2015, we recognized $4.4 million, $1.2 million and $1.1 million, respectively, of amortization costs which were associated with certain product modules of the Development Project which were ready for their intended use. The amortization of capitalized software is included in cost of recurring revenues. At each balance sheet date, we evaluate the useful lives of these assets and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

Capitalized computer software development costs and accumulated amortization of capitalized software, developed for internal use, were as follows (in thousands):

	As of December 31,
	2017			2016		2015
	2018			2017		2016
Computer software development costs	$	~~178~~234,~~093~~531		~~113~~178,~~407~~093		75113,~~529~~407
Less: accumulated amortization	(717,~~283~~155		)	(27,~~925~~283	)	(12,~~742~~925	)
Computer software development costs, net	~~170~~217,~~810~~376			~~110~~170,~~482~~810		73110,~~787~~482

11. Earnings Per Share

Earnings per share calculations require a dual presentation — “basic” and “diluted.” Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted average number of common shares (the denominator) for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

The following is a reconciliation of the shares used in the computation of basic and diluted net income per share (in thousands):

	For the Years Ended December 31,
	2017	2016	2015
	2018	2017	2016
Basic weighted average shares outstanding	2930,~~791~~854	2829,~~976~~791	28,~~634~~976
Effect of dilutive equity instruments (1)	~~1,008~~724	1,~~438~~008	1,~~087~~438
Dilutive shares outstanding	3031,~~799~~578	30,~~414~~799	2930,~~721~~414
Anti-dilutive equity instruments (1)	—1,448	24—	1924

_________________

(1) Includes options to purchase shares of Common Stock and other stock-based awards outstanding.

12. Goodwill and Intangible Assets

Goodwill represents the excess of cost over the net tangible and identifiable intangible assets of acquired businesses. Goodwill amounts are not amortized, but rather tested for impairment at least annually. Identifiable intangible assets acquired in business combinations are recorded based upon fair value at the date of acquisition and amortized over their estimated useful lives.

The changes in the carrying value of goodwill were as follows (in thousands):



	As of December 31,
	2018			2017
Goodwill, beginning of year	$	35,808		$	35,322
Goodwill from PeopleDoc Acquisition (1)	188,880			—
Translation adjustment (2)	(4,784		)	486
Goodwill, end of year	$	219,904		$	35,808

	As of December 31,
	2017		2016
Goodwill, beginning of year	$	35,322	$	24,410
Goodwill from Vestrics Acquisition (1)	—		4,305
Goodwill from Kanjoya Acquisition (2)	—		6,394
Translation adjustment (3)	486		213
Goodwill, end of year	$	35,808	$	35,322

_________________

(1) Represents the goodwill ~~recognized~~ for the ~~Vestrics~~acquisition ~~Acquisition on May 11, 2016. See Note 4~~ of ~~the~~PeopleDoc ~~Notes~~acquired toon ~~Consolidated~~July ~~Financial~~27, ~~Statements~~2018.

(2) Represents the ~~goodwill~~impact ~~recognized~~of ~~for~~the foreign currency translation of the ~~Kanjoya~~portion ~~Acquisition~~of ongoodwill ~~September~~that ~~29,~~is ~~2016~~recorded by our foreign subsidiaries whose functional currency is also its local currency. ~~See~~Such ~~Note~~goodwill 4is oftranslated ~~the~~into ~~Notes~~U.S. dollars using exchange rates in effect at period end. Adjustments related to ~~Consolidated~~foreign ~~Financial~~currency ~~Statements~~translation are included in other comprehensive (loss) income.

(3) Represents the impact of the foreign currency translation of the portion of goodwill that is recorded by our Canadian subsidiary whose functional currency is also its local currency. Such goodwill is translated into U.S. dollars using exchange rates in effect at period end. Adjustments related to foreign currency translation are included in other comprehensive income (loss).68

Our amortizable intangible assets net carrying amount and estimated useful lives are as follows (in thousands):

As of December 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Cumulative Translation Adjustment (1)			Net Carrying Amount		Weighted Average Remaining Useful Life
Developed technology	$	100,300	$	(10,888	)	$	(2,993	)	$	86,419	6.4
Customer relationships	63,600		(5,117		)	(1,208		)	57,275		9.4
Trademark	800		(65		)	(18		)	717		4.6
	$	164,700	$	(16,070	)	$	(4,219	)	$	144,411	7.6
As of December 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Cumulative Translation Adjustment (1)			Net Carrying Amount		Weighted Average Remaining Useful Life
Developed technology	$	23,300	$	(4,355	)	$	(895	)	$	18,050	6.0
Customer relationships	4,700		(2,004		)	—			2,696		4.5
Non-compete agreements	300		(300		)	—			—		0.0
	$	28,000	$	(6,359	)	$	(895	)	$	20,746	5.9
	$	28,300	$	(6,659	)	$	(895	)	$	20,746	5.9
As of December 31, 2016
	Gross Carrying Amount		Accumulated Amortization			Cumulative Translation Adjustment (1)			Net Carrying Amount		Weighted Average Remaining Useful Life
Developed technology	$	23,300	$	(2,036	)	$	(1,026	)	$	20,238	6.7
Customer relationships	4,700		(1,194		)	—			3,506		5.3
Non-compete agreements	300		(300		)	—			—		0.0
	$	28,300	$	(3,530	)	$	(1,026	)	$	23,744	6.5

_________________

(1) Represents the impact of the foreign currency translation of the portion of acquired intangible assets that is recorded by our ~~Canadian~~foreign ~~subsidiary~~subsidiaries whose functional currency is also its local currency. Such intangible assets are translated into U.S. dollars using exchange rates in effect at period end. Adjustments related to foreign currency translation are included in other comprehensive ~~income~~ (loss) income.

Acquired intangible assets are amortized over their estimated useful life, generally three to ten years, in a manner that reflects the pattern in which the economic benefits are consumed. ~~Included in acquired intangible assets as of December 31, 2017, were $0.1 million of assets with indefinite lives. There were no assets, with indefinite lives, as of December 31, 2015.~~ Amortization expense for acquired intangible assets was $310.1 million, $13.1 million and $1.01 million for the years ended December 31, ~~2017~~2018, ~~2016~~2017 and ~~2015~~2016. Future amortization expense for acquired intangible assets is as follows, as of December 31, ~~2017~~2018 (in thousands):



Year	Amount
2019	$	19,982
2020	19,996
2021	19,573
2022	19,573
2023	19,469
Thereafter	45,818
Total	$	144,411

Year	Amount
2018	$	3,149
2019	3,452
2020	3,353
2021	2,896
2022	2,896
Thereafter	5,000
Total	$	20,746

13. Capital Lease Obligations

We lease certain equipment under non-cancelable agreements, which are accounted for as capital leases and expire at various dates through ~~2020~~2021. Interest rates on these leases are 4.255% to 56.25%. The scheduled lease payments of the capital lease obligations are as follows as of December 31, ~~2017~~2018 (in thousands):

Year	Amount
2018	$	5,832
2019	$	6,787
2019	3,494
2020	4,409
2020	1,143
2021	1,560
	10,469
	12,756
Less amount representing interest	(~~518~~714		)
Lease obligations reflected as current ($5,474) and non-current ($4,477)	$	9,951
Lease obligations reflected as current ($6,303) and non-current ($5,739)	$	12,042

14. Income Taxes

For the year ended December 31, ~~2017~~2018, the income tax provision of $3018.12 million was based on book income from operations before income taxes of $4483.14 million net of $9 million book loss from foreign operations. For the year ended December 31, ~~2016~~2017, the income tax provision of $1230.21 million was based on book income from operations before income taxes of $4144.41 million. For the year ended December 31, ~~2015~~2016, the income tax provision of $2812.82 million was based on a book income from operations before income taxes of $4341.14 million. Deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

On December 22, 2017, the federal government passed the federal Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act made broad and complex changes to the U.S. tax code including but not limited to reducing the federal statutory tax rate from 35% to 21%, effective January 1, 2018. Accounting Standards Codification ("ASC") 740, "Income Taxes" ("ASC 740"), requires companies to recognize the effect of tax law changes in the period of enactment. During the quarter ended December 31, 2017, we adjusted the statutory federal and state income tax rates to our deferred tax assets and liabilities. AsThe abalances ~~result~~ of the ~~statutory~~deferred ~~rate~~tax ~~decrease,~~assets weand ~~had~~liabilities awere ~~reduction~~remeasured inand ~~our~~an ~~net~~$8.8 million reduction to deferred tax ~~asset~~assets ~~balance~~was ofrecorded ~~$8.8~~during ~~million~~the quarter ended December 31, 2017. We recorded $8.7 million of the $8.8 million reduction in our net deferred tax asset balance to our provision for income taxes in our consolidated statement of income and $0.1 million to our consolidated statements of comprehensive income.

The income tax provision consists of the following (in thousands):



	For the Year Ended December 31,
	2018			2017			2016
Current taxes:
Federal	$	(489	)	$	(209	)	$	34
State and local	(5,490		)	(230		)	(170		)
Foreign	(1,523		)	(1,070		)	(856		)
Deferred taxes, net
Federal	(10,509		)	(26,693		)	(8,858		)
State and local	(2,908		)	(2,099		)	(2,478		)
Foreign	2,698			226			150
Income tax provision	$	(18,221	)	$	(30,075	)	$	(12,178	)

	For the Year Ended December 31,
	2017			2016			2015
Current taxes:
Federal	$	(209	)	$	34		$	(26,111	)
State and local	(230		)	(170		)	(6,021		)
Foreign	(1,070		)	(856		)	(200		)
Deferred taxes, net
Federal	(26,693		)	(8,858		)	2,673
State and local	(2,099		)	(2,478		)	627
Foreign	226			150			207
Income tax provision	$	(30,075	)	$	(12,178	)	$	(28,825	)

The income tax provision is different from that which would be obtained by applying the statutory federal income tax rate of 21% for 2018 to income from continuing operations before income taxes and tax rate of 35% for 2017 and 2016 to income from continuing operations before income taxes as a result of the following (in thousands):

The income tax provision is different from that which would be obtained by applying the statutory federal income tax rate of 35% to income from continuing operations before income taxes as a result of the following (in thousands):70

	For the Year Ended December 31,
	2017			2016			2015
	2018			2017			2016
Income tax provision at statutory federal tax rate	$	(1517,~~446~~506	)	$	(1415,~~490~~446	)	$	(1514,~~079~~490	)
State and local income taxes, net of the federal benefit	(16,~~514~~635		)	(1,~~720~~514		)	(31,~~506~~720		)
Non-deductible expenses	(2614,~~196~~373		)	(2026,~~715~~196		)	(1320,~~673~~715		)
Change in tax rates	374			216			117
Foreign jurisdictions rate differential	250			374			216
Recognition of excess tax benefit	188,~~415~~972			2018,~~966~~415			—20,966
Research credit, federal benefit	47,~~688~~045			34,~~727~~688			3,~~239~~727
Enactment of Tax Cuts and Jobs Act	~~(9,750~~—		)	—(9,750		)	—
Other, net	(646		)	(162		)	77
IRS audit settlement	4,123			—			—
Income tax provision	$	(30,075	)	$	(12,178	)	$	(28,825	)
Other, net	(97		)	(646		)	(162		)
Income tax provision	$	(18,221	)	$	(30,075	)	$	(12,178	)

67Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. One of the significant provisions of the Tax Act, passed December 22, 2017, is the reduction of the federal corporate tax rate to 21% effective January 1, 2018. In accordance with ASC 740, a company must remeasure its deferred tax assets and liabilities to reflect the enacted rates as of that date. The balances of the deferred tax assets and liabilities were remeasured and an $8.8 million reduction to deferred tax assets was recorded during the quarter ended December 31, 2017. Significant components of our deferred tax assets and liabilities at December 31, 2018 and 2017 were as follows (in thousands):

Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. One of the significant provisions of the Tax Act, passed December 22, 2017, is the reduction of the federal corporate tax rate to 21% effective January 1, 2018. In accordance with ASC 740, a company must remeasure its deferred tax assets and liabilities to reflect the enacted rates as of that date. The balances of the deferred tax assets and liabilities were remeasured and an $8.8 million reduction to deferred tax assets was recorded in this period. Significant components of our deferred tax assets and liabilities at December 31, 2017 and 2016 were as follows (in thousands):



	As of December 31,
	2018			2017
Deferred tax assets:
Net operating losses	$	2,504		$	34,771
Tax credit carryforwards	1,639			1,807
Research credit	35,014			27,559
Deferred revenue	259			497
Accruals not currently deductible	4,158			1,137
Allowance for doubtful accounts	454			238
Charitable contributions	1,868			1,729
Stock-based compensation	13,646			9,851
Deferred rent adjustment	3,239			2,128
Foreign deferred tax assets	1,673			—
Gross deferred tax assets	$	64,454		$	79,717
Less: valuation allowance	(1,673		)	—
Net deferred tax assets	62,781			79,717
Deferred tax liabilities:
Property and equipment	$	(35,843	)	$	(47,022	)
Deferred commissions	(12,306		)	—
Foreign, primarily acquired intangible assets, net	(25,105		)	(250		)
Gross deferred tax liabilities	(73,254		)	(47,272		)
Net deferred tax (liabilities) assets	$	(10,473	)	$	32,445

	As of December 31,
	2017			2016
Deferred tax assets:
Net operating losses	$	34,771		$	60,026
Tax credit carryforwards	1,807			911
Research credit	27,559			22,768
Deferred revenue	497			918
Accruals not currently deductible	1,137			1,012
Allowance for doubtful accounts	238			338
Charitable contributions	1,729			1,777
Stock-based compensation	9,851			20,261
Deferred rent adjustment	2,128			3,081
Deferred tax assets	$	79,717		$	111,092
Deferred tax liabilities:
Property and equipment	$	(47,022	)	$	(49,745	)
Foreign, primarily acquired intangible assets	(250		)	(519		)
Gross deferred tax liabilities	(47,272		)	(50,264		)
Net deferred tax assets	$	32,445		$	60,828

On July 27, 2018, Ultimate Software Group acquired 100% of the stock of PeopleDoc (SAS). PeopleDoc (SAS) consisted of a consolidated group of companies which includes the French Parent company (PeopleDoc (SAS)), a UK subsidiary (PeopleDoc UK LTD), a German subsidiary (PeopleDoc GMBH), and a US subsidiary (PeopleDoc, Inc). Purchase accounting deferred balances related to the fair value adjustments (excluding goodwill) were recorded as Statutory to GAAP adjustments. A net deferred tax liability of $26.3 million was recorded inclusive of a valuation allowance of $1.5 million related to the UK and German subsidiaries.

Certain accounting standards related to revenue recognition and accounting for commissions were adopted effective January 1, 2018. We established a deferred tax asset of $0.5 million and a deferred tax liability of $7.0 million attributable to deferred revenue and deferred contract costs respectively upon adoption of Revenue from Contracts with Customers (Topic 606) and Sub-Topic 340-40, Other assets and Deferred Costs - Contracts from Customers.

Ultimate considers all available evidence, both positive and negative, including historical levels of pre-tax book income, expiration of net operating loss carryforwards, expectations and risks associated with estimates of future taxable income, ongoing prudent and feasible tax planning strategies and reversal of deferred tax liabilities in assessing the need for the valuation allowance. If it is not more likely than not that we will recover our deferred tax assets, we will increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable.

~~The~~For US based deferred tax assets, the available positive evidence at December 31, ~~2017~~2018 included, among other factors, three years of cumulative historical pre-tax book income and a projection of future pre-tax book income and taxable income. As a result of our analysis of all available evidence, both positive and negative, we believe that it is more likely than not that the results of future operations will generate sufficient taxable income to realize all of the deferred tax assets as of December 31, ~~2017~~2018. As such, there was no valuation allowance on US based deferred assets for the years ended December 31, ~~2017~~2018 and ~~2016~~2017.

~~During~~In ~~the~~evaluating ~~fourth~~valuation ~~quarter~~allowance offor ~~2017,~~foreign asbased ~~part of the evaluation of net~~ deferred tax assets, ~~for~~due ~~implementing~~to ~~the~~negative ~~Tax~~evidence ~~Act,~~which ~~immaterial~~includes ~~errors~~history ~~were~~of ~~discovered~~losses infor ~~the~~both ~~reporting of~~ the ~~GAAP~~UK ~~deferred~~subsidiary, ~~income~~PeopleDoc ~~tax~~UK ~~expense~~

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