UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

 

 

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Ultimate Software Group, Inc. and subsidiaries (“Ultimate,” “we,” “us” or “our”) is a leading cloud provider of people management solutions, often referred to as human capital management (“HCM”). Ultimate's UltiPro product suite (“UltiPro”) is a comprehensive, engaging solution that has human resources ("HR"), payroll, and benefits management at its core and includes global people management, available in twelve languages with more than 35 country-specific localizations. The solution is delivered via software-as-a-service to organizations based in the United States and Canada, including those with global workforces. UltiPro is designed to deliver the functionality businesses need to manage the complete employment life cycle from recruitment to retirement. We market our UltiPro solutions primarily to global enterprise companies, which we define as companiesorganizations with 2,501 or more than 2,500 employees, including those with 10,000 or more employees; enterprise companies, which we define as those having 1,501-2,500 employees; mid-market companies, which we define as those having 501-1,500501-2,500 employees; and strategic market companies, which we define as those having 300-500100-500 employees. UltiPro is marketed primarily through our global enterprise, enterprise, mid-market and strategic direct sales teams.

The accompanying unaudited condensed consolidated financial statements of Ultimate have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The information in this quarterly report should be read in conjunction with Ultimate’s audited consolidated financial statements and notes thereto included in Ultimate’s Annual Report on Form 10-K for the fiscal year ended December 31, 20152016 filed with the SEC on February 26, 201624, 2017 (the “Form 10-K”).

The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring 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 GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Interim results of operations for the three and six months ended June 30, 20162017 are not necessarily indicative of operating results for the full fiscal year or for any future periods.

The unaudited condensed 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.

Summary of Significant Accounting Policies

Ultimate’s significant accounting policies discussed in Note 3 to its audited consolidated financial statements for the fiscal year ended December 31, 2015,2016, included in the Form 10-K, have not significantly changed.

Fair Value of Financial Instruments

Ultimate's financial instruments, consisting of cash and cash equivalents, investments in marketable securities, funds held for clientscustomers and the related obligations, accounts receivable, accounts payable, capital lease obligations and other borrowings,long-term liabilities, approximated fair value (due to their relatively short maturity) as of June 30, 20162017 and December 31, 2015.2016.

Recently Issued Accounting Standards

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. Realized gains and losses resulting from available-for-sale securities are included in other income, net, in the unaudited condensed consolidated statements of income. There were no significant reclassifications of realized gains and losses on available-for-sale securities to the unaudited condensed consolidated statements of income for the three and six months ended June 30, 20162017 and June 30, 2015.2016.

Gains and losses on the sale of available-for-sale securities are determined using the specific identification method.   There was $154$469 thousand of net unrealized gainloss and $84$145 thousand of net unrealized loss on available-for-sale securities as of June 30, 20162017 and December 31, 2015,2016, respectively.

The amortized cost, net unrealized gain and fair value of our funds held for customers and corporate investments in marketable available-for-sale securities as of June 30, 20162017 and December 31, 20152016 are shown below (in thousands):

(1) Included within available-for-sale securities as of June 30, 20162017 and December 31, 20152016 are corporate investments with fair values of $22.6$12.9 million and $20.1$24.1 million, respectively. Included within available-for-sale securities as of June 30, 20162017 and December 31, 20152016 are funds held for customers with fair values of $149.3$208.9 million and $69.9$148.8 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 June 30, 20162017 are as follows (in thousands):

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, 20152016 are as follows (in thousands):

The amortized cost and fair value of the marketable available-for-sale securities, by contractual maturity, as of June 30, 2017, are shown below (in thousands):

The amortized cost and fair value of the marketable available-for-sale securities, by contractual maturity, as of December 31, 2016, are shown below (in thousands):

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

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 pricesWe have had assets in active markets, include certificates of deposit. Such instruments are generallythe past, and may have assets in the future, classified within Level 1 of the fair value hierarchy. No assets or investments were classified within Level 1 of the fair value hierarchy as of June 30, 2017 or as of December 31, 2016. We did not have any transfers into and out of Level 1 or Level 2 during the three and six months ended June 30, 20162017 or the twelve months ended December 31, 2015.2016. No assets or investments were classified as Level 3 as of June 30, 20162017 or as of December 31, 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 and asset-backed securities owned by Ultimate. Such instruments are generally classified within Level 2 of the fair value hierarchy. Ultimate uses consensus pricing, which is based on multiple pricing sources, to value its fixed income investments. The following table sets forth, by level within the fair value hierarchy, financial assets accounted for at fair value as of June 30, 20162017 and December 31, 20152016 (in thousands):

Assets measured at fair value on a recurring basis were presented in the unaudited condensed consolidated balance sheet as of June 30, 20162017 and the audited consolidated balance sheet as of December 31, 20152016 as short-term and long-term investments in marketable securities. There were no financial liabilities accounted for at fair value as of June 30, 20162017 and December 31, 2015.2016.

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are 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 estimated useful life of the asset or the term of the lease, which range from 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.

Property and equipment as of June 30, 20162017 and December 31, 20152016 consist of the following (in thousands):

Prepaid expenses and other current assets as of June 30, 20162017 and December 31, 20152016 consist of the following (in thousands):

Goodwill

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 since December 31, 20152016 were as follows (in thousands):

__________________________

(1) Represents the goodwill recognized for the Vestrics Acquisition on May 11, 2016. See Note 4 of the Notes to Unaudited Condensed Consolidated Financial Statements.

Intangible Assets

The following tables present our acquired intangible assets as of the dates specified below (in thousands):

____________________________

(1) Represents the impact of the foreign currency translation of the portion of acquired intangible assets that is recorded by our Canadian subsidiary 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).

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 June 30, 2017 and December 31, 2016, were $0.1 million of assets with indefinite lives. Amortization expense for acquired intangible assets was $257 thousand$0.8 million and $504 thousand$1.6 million for the three and six months ended June 30, 2017, respectively, and $0.3 million and $0.5 million for the three and six months ended June 30, 2016, respectively, and $264 thousand and $528 thousand for the three and six months ended June 30, 2015, respectively.

Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted average number of common shares outstanding (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 table is a reconciliation of the shares of Ultimate's issued and outstanding $0.01 par value common stock ("Common Stock") used in the computation of basic and diluted net income per share for the three and six months ended June 30, 20162017 and 20152016 (in thousands):

The financial statements of Ultimate’s foreign subsidiary, The Ultimate Software Group of Canada, Inc. (“Ultimate Canada”), have been translated into U.S. dollars. The functional currency of Ultimate Canada is the Canadian dollar. 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 translation adjustments, representing unrealized gains or losses, are included in accumulated other comprehensive loss, a component of stockholders’ equity. Realized gains and losses resulting from foreign exchange transactions are included in total operating expenses in the unaudited condensed consolidated statements of income. There were no significant reclassifications of realized gains and losses resulting from foreign exchange transactions to the unaudited condensed consolidated statements of income for the three and six months ended June 30, 20162017 and June 30, 2015.2016.

For the three and six months ended June 30, 2017, Ultimate had unrealized translation gains of $0.4 million and $0.6 million, respectively. For the three and six months ended June 30, 2016, Ultimate had unrealized translation gains of $0.1 million and $1.5 million, respectively. For the three and six months ended June 30, 2015, Ultimate had an unrealized translation gain of $0.5 million and an unrealized translation loss of $1.5 million, respectively. Included in accumulated other comprehensive loss, as presented in the accompanying unaudited condensed consolidated balance sheets, are cumulative unrealized translation losses of $6.3 million as of June 30, 20162017 and $7.8$6.9 million as of December 31, 2015.2016.

Summary of Plans

Our Amended and Restated 2005 Equity and Incentive Plan (the “Plan”) authorizes the grant of options (“Options”) to non-employee directors, officers and employees of Ultimate to purchase shares of 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 the Options, the “Awards”).

At the 2016 Annual Meeting of Stockholders, held on May 16, 2016 (the “2016 Annual Meeting”), the stockholders of Ultimate approved the Plan, including an amendment to increase the number of shares of our Common Stock authorized for issuance pursuant to Awards granted under the Plan by 1,090,000 shares. As of June 30, 2016,2017, the aggregate number of shares of Common Stock that were available to be issued under all Awards granted under the Plan was 1,129,085705,353 shares. A complete copy of the Plan is contained in Ultimate's Form 8-K that was filed with the SEC on May 17, 2016.

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

Stock-based compensation for the three and six months ended June 30, 20162017 was $28.6$39.3 million and $55.1$73.1 million, respectively, as compared with stock-based compensation of $21.8$28.6 million and $37.9$55.1 million for the three and six months ended June 30, 2015,2016, respectively. The increases of $6.9$10.6 million and $17.2$18.1 million in stock-based compensation for the three and six month periods, respectively, included increases of $4.1$5.8 million and $11.5$10.5 million, respectively, associated with modifications and terminations made to the Company’s change in control plans in March 2015, February 2016, and February 2016 which significantly reduced the potential payments that could be made under such plans. As previously disclosed, these2017.  These changes were made to better align management's incentives with long-term value creation for our shareholders. As part of the modifications in connection with unwindingthe terminations of the change in control plans, time-based restricted stock awards (vesting over three years) were granted to certain senior officers in March 2015, February 2016, and February 2016.2017.

Net cash proceeds from the exercise of Options were $3.0 million and $4.5 million for the three and six months ended June 30, 2017, respectively, and $1.5 million and $2.7 million, for the three and six months ended June 30, 2016, respectively, and $0.8 million and $2.3 million for the three and six months ended June 30, 2015. There was a $6.5 million and $13.1 million of excess income tax benefit recognized in additional paid-in capital from the realization of stock-based payment deductions during the three and six months ended June 30, 2016, respectively, and $7.1 million and $15.9 million of excess income tax benefit recognized in additional paid-in capital from the realization of stock-based payment deductions during the three and six months ended June 30, 2015, respectively.

Stock Option, Restricted Stock and Restricted Stock Unit Activity

There were no Options granted during the three and six months ended June 30, 2016.2017. The following table summarizes stock option activity (for previously granted Options) for the six months ended June 30, 20162017 (in thousands, except per share amounts):

The aggregate intrinsic value of Options in the table above represents total pretax intrinsic value (i.e., the difference between the closing price of Common Stock on the last trading day of the reporting period and the exercise price times the number of shares) that would have been received by the option holders had all option holders exercised their Options on June 30, 2016.2017. The amount of the aggregate intrinsic value changes, based on the fair value of Common Stock. Total intrinsic value of Options exercised was $18.2 million and $28.1 million for the three and six months ended June 30, 2017, respectively, and $10.4 million and $18.3 million for the three and six months ended June 30, 2016, respectively, and $4.6 million and $14.0 million, for the three and six months ended June 30, 2015, respectively. All previously granted Options were fully vested as of December 31, 2011 and, therefore, no Options vested during the three and six months ended June 30, 20162017 and June 30, 2015,2016, respectively.

As of June 30, 2016,2017, there were no unrecognized compensation costs related to non-vested Options expected to be recognized as all previously granted Options were fully vested as of December 31, 2011.

The following table summarizes restricted stock awards and restricted stock unit awards granted during the three months ended June 30, 20162017 and June 30, 20152016 (in thousands, except per share data)thousands):

The following table summarizes the activity pertaining to Common Stock previously issued under restricted stock awards and restricted stock unit awards which vested during the three months ended June 30, 20162017 and June 30, 20152016 (in thousands, except per share data)thousands):

The following table summarizes restricted stock award and restricted stock unit activity for the six months ended June 30, 20162017 (in thousands, except per share values):

As of June 30, 2016, $137.92017, $141.0 million of total unrecognized compensation costs related to non-vested restricted stock awards were expected to be recognized over a weighted average period of 1.5 years. As of June 30, 2016, $64.82017, $91.7 million of total unrecognized compensation costs related to non-vested restricted stock unit awards were expected to be recognized over a weighted average period of 2.0 years.

The following discussion of the financial condition and results of operations of The Ultimate Software Group, Inc. and its subsidiaries (“Ultimate,” “we,” “us,” or “our”) should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q (this “Form 10-Q”) and in conjunction with Ultimate’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015,2016, filed with the Securities and Exchange Commission (the “SEC”) on February 26, 201624, 2017 (the “Form 10-K”).

Business Overview

Ultimate Software is a leading cloud provider of people management solutions, often referred to as human capital management (“HCM”). solutions with more than 33 million people records in our HCM cloud. Ultimate's UltiPro product suite (“UltiPro”) is a comprehensive, engaging solution that hasincludes human resources ("HR"(“HR”), payroll, talent, and benefitstime and labor management at its core andsolutions that connect people with the information they need to work more effectively. UltiPro also includes global people management, and is available in twelve languages with more than 35 country-specific localizations. The solution is delivered primarily via software-as-a-service ("SaaS") to organizations based in the United States and Canada, including those with global workforces. As of June 30, 2016,2017, we hadhave more than 3,400 organizations as3,700 customers and approximately 30 million people recordswith employees in our HCM cloud.160 countries. We attained our leadership position, we believe, through our focus on unified HCM, people-centric product design, cloud technology, and strong customer relationships.

UltiPro is designed to deliver the functionality businesses need to manage the complete employee life cycle from recruitment to retirement and to facilitate employee engagement with their employers and each other. The solution includes unified feature sets for talent acquisition and onboarding, HR management and compliance, benefits management and online enrollment, payroll, performance management, compensation management with salary planning, budgeting and development of incentive plans, succession management, reporting and analytical decision-making and predictive tools, and time and attendance. UltiPro has role-based features for HR professionals, executives, managers, administrators, and employees whether they are in or out of the office, including access to business-critical information on mobile devices such as the iPhone, iPad, and other smartphones and tablets.

Our customers tell us that UltiPro helps them to streamline talent management, HR and payroll processes to significantly reduce administrative and operational costs while also empowering them to manage the talent in their workforces more strategically. UltiPro provides our customers with tools to analyze workforce trends for better decision making, identify high-performing talent within their organizations, predict who high-performers will be with a high degree of accuracy, find critical information quickly and perform routine business activities efficiently.

Our cloud offering of UltiPro provides Web-based 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. Through UltiPro, we supply and manage the hardware, infrastructure, ongoing maintenance and backup services for our customers. Customer systems are currently managed at four data centers--one located near Atlanta, Georgia, one near Phoenix, Arizona, one near Toronto, Canada, and another near Vancouver, Canada. All data centers are owned and operated by independent third parties.

We market our UltiPro solutions primarily to global enterprise companies, which we define as companiesorganizations with 2,501 or more than 2,500 employees, including those with 10,000 or more employees; enterprise companies, which we define as those having 1,501-2,500 employees; mid-market companies, which we define as those having 501-1,500501-2,500 employees; and strategic market companies, which we define as those having 300-500100-500 employees. UltiPro is marketed primarily through our enterprise, mid-market and strategic direct sales teams. Our mid-market and strategic market 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 global enterprise, enterprise, mid-market and strategic direct sales teams.

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; (iv)(vi) benefits enrollment; (v)(vii) time management; (vi) Select Services which include(viii) payment services (formerly referred to as “tax filing”), managed services and other specific-need services such as filing Affordable Care Act ("ACA") compliance documents for customers; (vii); (ix) wage attachments; and (viii)(x) other optional features (collectively, “Optional Capabilities”).

In the fall of 2015, Ultimate began deploying an ACAa Patient Protection and Affordable Care Act ("ACA") toolkit that enablesenabled 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 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 on-going proactive monitoring and managing of employee eligibility alerts, notices, and penalty responses. 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 in the Healthcare Eligibility Dashboard and via our UltiPro ACA Toolkit.

All Optional Capabilities are priced solely on a subscription basis. Some of the Optional Capabilities are available to global enterprise, enterprise, mid-market and strategic market customers while others are available exclusively to either global enterprise, 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 ("Non-GAAP Operating Income"); and (iii) retention of our customers once our solutions are sold (“Customer Retention”). For the three months ended June 30, 2016,2017, our (i) recurring revenues grew by 27.4%23.1%, compared with the same period in 2015,2016, and (ii) Non-GAAP Operating Income was $37.4$47.0 million, or 20.0%20.9% of total revenues, as compared with $29.7$37.4 million, or 20.2%20.0% of total revenues, for the same period in 2015.2016. For the six months ended June 30, 2016,2017, our (i) recurring revenues grew by 27.8%23.7%, compared with the same period in 2015,2016, and (ii) Non-GAAP Operating Income was $73.4$84.7 million, or 19.6%18.7% of total revenues, as compared with $55.8$73.4 million, or 19.1%19.6% of total revenues, for the same period in 2015.2016. As of June 30, 2016,2017, our Customer Retention, on a trailing twelve-month basis, exceeded 97%was approximately 96% for our recurring revenue cloud customer base, which compares with greater than 96% for the prior year.base. 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 Accounting 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 and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.  Ultimate’s critical accounting estimates, as discussed in "Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations," included in the Form 10-K, have not significantly changed.

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, accounts payable, capital lease obligations and other borrowingslong-term liabilities approximated fair value (due to their relatively short maturity) as of June 30, 20162017 and December 31, 2015.2016.

Results of Operations

The following table sets forth the unaudited condensed consolidated statements of income data of Ultimate, as a percentage of total revenues, for the periods indicated: