Ultimate Reports Q3 2015 Financial Results

  • Record Recurring Revenues of $131.8 Million, Up by 23%
  • Record Total Revenues of $155.3 Million, Up by 22%

WESTON, Fla.--()--Ultimate Software (Nasdaq: ULTI), a leading provider of human capital management (HCM) solutions in the cloud, announced today its financial results for the third quarter of 2015. For the quarter ended September 30, 2015, Ultimate reported recurring revenues of $131.8 million, a 23% increase, and total revenues of $155.3 million, a 22% increase, both compared with 2014’s third quarter. GAAP net income for the third quarter of 2015 was $5.9 million, or $0.20 per diluted share, as compared with GAAP net income of $19.7 million, or $0.67 per diluted share, for the third quarter of 2014. Included in GAAP net income for the three and nine months ended September 30, 2014, was a onetime $12.1 million tax credit for research and development activities for federal and state income tax purposes, covering years 1998–2013. There was no such credit for research and development activities for federal and state income tax purposes for the three and nine months ended September 30, 2015.

Non-GAAP net income for the third quarter of 2015, which excludes stock-based compensation expense and amortization of acquired intangible assets, was $20.5 million, or $0.69 per diluted share. Non-GAAP net income for the third quarter of 2014, which excludes stock-based compensation expense, amortization of acquired intangible assets, and an income tax benefit for research and development tax credits, was $14.8 million, or $0.50 per diluted share. See “Use of Non-GAAP Financial Information” below.

“We performed according to plan in this year’s third quarter for both our recurring revenues and total revenues, keeping us on target to achieve our 2015 objectives. Our operating margin came in above projections at 22%, and our customer-retention rate for the rolling 12-month period continued on its consistent track above 96%,” said Scott Scherr, CEO, president, and founder of Ultimate. “We also received certification last month from the Affordable Care Act (ACA) Information Returns Program, allowing us to electronically file required ACA compliance documents with the Internal Revenue Service on behalf of our customers.

“We have a history of exceptional customer satisfaction, and we are pleased that this has been verified once again by independent research firms. In a Nucleus Research note called ‘Anatomy of a Decision: Ultimate Software UltiPro,’ analyst Brent Skinner reported that ‘all of Ultimate Software users with whom Nucleus has spoken say they would again buy from the vendor,’ and ‘most give the vendor an A- or higher for customer support.’ Earlier this month, G2 Crowd published its ‘Fall 2015 Rankings of the Best Recruiting Software, Based on User Reviews,’ and Ultimate was ranked #1 in customer satisfaction. Other recognition during the third quarter included Fortune magazine identifying Ultimate as one of the ‘100 Fastest-Growing Companies in the U.S.,’ the only HCM provider on the list, and Fortune also naming Ultimate to its 2015 list of the ‘100 Best Workplaces for Women.’”

Ultimate’s financial results teleconference will be held today, October 27, 2015, at 5:00 p.m. Eastern time, through Vcall at http://www.investorcalendar.com/IC/CEPage.asp?ID=173510. The call will be available for replay at the same address beginning at 9:00 p.m. Eastern time today. Windows Media Player software is required to listen to the call and can be downloaded from the site. Forward-looking information about future company performance will be discussed during the teleconference call.

Financial Highlights

  • Recurring revenues grew by 23% for the third quarter of 2015 compared with the same period in 2014. The increase was attributable to revenue growth from our cloud offering. Recurring revenues were 85% of total revenues for the third quarter of 2015 versus 84% for 2014’s third quarter.
  • Ultimate’s total revenues for the third quarter of 2015 increased by 22%, as compared with those for the third quarter of 2014.
  • Ultimate’s annualized retention rate, on a rolling 12-month basis, exceeded 96% for its recurring revenue cloud customer base as of September 30, 2015.
  • Cash flows from operating activities for the third quarter of 2015 were $31.9 million, compared with $23.1 million for the same period in 2014. For the nine months ended September 30, 2015, Ultimate generated $75.5 million in cash from operations, compared with $64.1 million for the nine months ended September 30, 2014. The combination of cash, cash equivalents, and marketable securities was $140.4 million as of September 30, 2015, compared with $118.5 million as of December 31, 2014.

Stock Repurchases

During the nine months ended September 30, 2015, we used $31.1 million to acquire 187,469 shares of our $0.01 par value common stock ("Common Stock") under our previously announced stock repurchase plan ("Stock Repurchase Plan"), and we used $12.5 million to acquire 74,534 shares of our Common Stock to settle employees’ tax withholding obligations associated with their restricted stock that vested during the period. We have 595,905 shares available for repurchase under our Stock Repurchase Plan.

Financial Outlook

Ultimate provides the following financial guidance for the 2015 full year and preliminary financial guidance for the 2016 full year:

For the year 2015:

  • Recurring revenues to increase by approximately 23% over 2014,
  • Total revenues to increase by approximately 22% over 2014, and
  • Operating margin, on a non-GAAP basis (discussed below), in excess of 20%.

For the year 2016, preliminary:

  • Recurring revenues to increase by approximately 25% over 2015,
  • Total revenues to increase by approximately 23% over 2015, and
  • Operating margin, on a non-GAAP basis (discussed below), in excess of 21%.

Operating margin expectations were determined on a non-GAAP basis using the methodologies identified under the caption “Use of Non-GAAP Financial Information” in this press release.

Forward-Looking Statements

Certain statements in this press release are, and certain statements on the teleconference call may be, forward-looking statements within the meaning provided under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are made only as of the date hereof. These statements involve known and unknown risks and uncertainties that may cause Ultimate’s actual results to differ materially from those stated or implied by such forward-looking statements, including risks and uncertainties associated with fluctuations in Ultimate’s quarterly operating results, concentration of Ultimate’s product offerings, development risks involved with new products and technologies, competition, 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. Ultimate undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

About Ultimate Software

Ultimate is a leading provider of cloud-based human capital management (HCM) solutions, with more than 20 million people records in the cloud. Ultimate’s award-winning UltiPro delivers HR, payroll, talent, and time and labor management solutions that connect people with the information they need to work more effectively. Founded in 1990, the company is headquartered in Weston, Florida, and employs more than 2,700 professionals. In 2015, for the fourth consecutive year, Ultimate was ranked in the top 25 on FORTUNE’s list of the 100 Best Companies to Work For; recognized by FORTUNE as one of the 100 Fastest-Growing Companies; ranked #7 on Forbes magazine’s list of the 100 Most Innovative Growth Companies; named among the InformationWeek Elite 100, honoring innovation in business technology; and recognized as a “Leader” in Nucleus Research’s HCM Technology Value Matrix. Ultimate has more than 3,000 customers with employees in 160 countries, including Bloomin’ Brands, Culligan International, Feeding America, Major League Baseball, Pep Boys, SUBWAY, Texas Roadhouse, and Yamaha Corporation of America. More information on Ultimate’s products and services for people management can be found at www.ultimatesoftware.com.

UltiPro is a registered trademark of The Ultimate Software Group, Inc. All other trademarks referenced are the property of their respective owners.

THE ULTIMATE SOFTWARE GROUP, INC., AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
   

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2015   2014 2015   2014
Revenues:
Recurring $ 131,768 $ 107,362 $ 375,061 $ 306,888
Services 23,556 20,047 72,147 63,096
License   22   223   522  
Total revenues 155,324   127,431   447,431   370,506  
Cost of revenues:
Recurring 34,856 30,598 101,984 85,974
Services 25,027 21,528 72,966 64,639
License   5   49   88  
Total cost of revenues 59,883   52,131   174,999   150,701  
Gross profit 95,441   75,300   272,432   219,805  
Operating expenses:
Sales and marketing 41,687 28,104 121,645 86,395
Research and development 23,027 21,419 68,331 61,572
General and administrative 19,120   12,172   53,460   34,475  
Total operating expenses 83,834   61,695   243,436   182,442  
Operating income 11,607 13,605 28,996 37,363
Other income (expense):
Interest and other expense (118 ) (104 ) (368 ) (276 )
Other income, net 62   82   165   253  
Total other expense, net (56 ) (22 ) (203 ) (23 )
Income before income taxes 11,551 13,583 28,793 37,340
Provision for income taxes (5,700 ) 6,073   (15,125 ) (4,438 )
Net income $ 5,851   $ 19,656   $ 13,668   $ 32,902  
Net income per share:        
Basic $ 0.20   $ 0.69   $ 0.48   $ 1.16  
Diluted $ 0.20   $ 0.67   $ 0.46   $ 1.12  
Weighted average shares outstanding:
Basic 28,603   28,285   28,592   28,246  
Diluted 29,715   29,306   29,651   29,302  

The following table sets forth the stock-based compensation expense resulting from stock-based arrangements (excluding the income tax effect, or “gross”) and the amortization of acquired intangibles that are recorded in Ultimate’s unaudited condensed consolidated statements of income for the periods indicated (in thousands):

 

For the Three Months
Ended September 30,

 

For the Nine Months Ended
September 30,

2015   2014 2015   2014
Stock-based compensation expense:
Cost of recurring revenues $ 1,655 $ 1,402 $ 4,628 $ 4,024
Cost of services revenues 1,242 1,122 3,710 3,310
Sales and marketing 11,000 5,015 29,534 14,749
Research and development 1,489 1,198 4,579 3,646
General and administrative 6,523   2,613   17,312   7,637
Total non-cash stock-based compensation expense $ 21,909   $ 11,350   $ 59,763   $ 33,366
 
Amortization of acquired intangibles:
General and administrative $ 255   $ 286   $ 783   $ 861
Total amortization of acquired intangibles $ 255   $ 286   $ 783   $ 861
THE ULTIMATE SOFTWARE GROUP, INC., AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
   
As of As of
September 30, December 31,
2015 2014
ASSETS
Current assets:
Cash and cash equivalents $ 122,138 $ 108,298
Investments in marketable securities 6,797 7,862
Accounts receivable, net 119,982 100,218
Prepaid expenses and other current assets 42,904 34,788
Deferred tax assets, net 1,050   965  
Total current assets before funds held for clients 292,871 252,131
Funds held for clients 331,220   759,087  
Total current assets 624,091 1,011,218
Property and equipment, net 111,459 86,595
Goodwill 24,637 25,696
Investments in marketable securities 11,443 2,294
Intangible assets, net 5,507 6,774
Other assets, net 27,374 20,611
Deferred tax assets, net 47,979   37,110  
Total assets $ 852,490   $ 1,190,298  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 6,924 $ 7,418
Accrued expenses 40,532 30,941
Deferred revenue 128,484 109,552
Capital lease obligations 4,224 3,655
Other borrowings 400   567  
Total current liabilities before client fund obligations 180,564 152,133
Client fund obligations 331,220   759,087  
Total current liabilities 511,784 911,220
Deferred revenue 2,847 153
Deferred rent 3,598 2,368
Capital lease obligations 3,528 3,359
Other borrowings 100 400
Deferred income tax liability 753   1,049  
Total liabilities 522,610   918,549  
 
Stockholders’ equity:
Preferred Stock, $.01 par value
Series A Junior Participating Preferred Stock, $.01 par value
Common Stock, $.01 par value 330 327
Additional paid-in capital 455,649 376,609
Accumulated other comprehensive loss (7,087 ) (3,590 )
Accumulated earnings 50,596   36,928  
499,488 410,274
Treasury stock, at cost (169,608 ) (138,525 )
Total stockholders’ equity 329,880   271,749  
Total liabilities and stockholders’ equity $ 852,490   $ 1,190,298  
THE ULTIMATE SOFTWARE GROUP, INC., AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 

For the Nine Months Ended
September 30,

2015   2014
Cash flows from operating activities:
Net income $ 13,668 $ 32,902
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 16,012 14,157
Provision for doubtful accounts 3,390 1,747
Non-cash stock-based compensation expense 59,763 33,366
Income taxes 14,692 3,968
Excess tax benefit from employee stock plan (25,942 ) (20,808 )
Changes in operating assets and liabilities:
Accounts receivable (23,154 ) (4,215 )
Prepaid expenses and other current assets (8,116 ) (5,355 )
Other assets (6,763 ) (1,944 )
Accounts payable (494 ) 1,513
Accrued expenses and deferred rent 10,821 5,928
Deferred revenue 21,626   2,825  
Net cash provided by operating activities 75,503   64,084  
Cash flows from investing activities:
Purchases of marketable securities (14,464 ) (8,335 )
Maturities of marketable securities 6,380 8,096
Net remittances (purchases) of client funds securities 427,867 (116,612 )
Purchases of property and equipment (33,538 ) (31,255 )
Net cash provided by (used in) investing activities 386,245   (148,106 )
Cash flows from financing activities:
Repurchases of Common Stock (31,083 ) (19,981 )
Net proceeds from issuances of Common Stock 3,646 4,629
Excess tax benefits from employee stock plan 25,942 20,808
Shares acquired to settle employee tax withholding liability (12,496 ) (12,181 )
Principal payments on capital lease obligations (3,629 ) (2,996 )
Repayments of other borrowings (467 ) (2,225 )
Net (decrease) increase in client fund obligations (427,867 ) 116,612  
Net cash (used in) provided by financing activities (445,954 ) 104,666  
Effect of exchange rate changes on cash (1,954 ) (515 )
Net increase in cash and cash equivalents 13,840 20,129
Cash and cash equivalents, beginning of period 108,298   79,794  
Cash and cash equivalents, end of period $ 122,138   $ 99,923  
 
Supplemental disclosure of cash flow information:
Cash paid for interest $ 285   $ 235  
Cash paid for taxes $ 540   $ 468  
 
Non-cash investing and financing activities:
Capital lease obligations to acquire new equipment $ 4,367   $ 4,936  
Stock consideration adjustment recorded for acquisitions $   $ (818 )
Stock based compensation for capitalized software $ 2,188   $ 1,107  
THE ULTIMATE SOFTWARE GROUP, INC., AND SUBSIDIARIES
Unaudited Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
(In thousands, except per share amounts)
     

For the Three Months
Ended September 30,

For the Nine Months Ended
September 30,

2015   2014 2015 2014
Non-GAAP operating income reconciliation:
Operating income 11,607 13,605 28,996 37,363
Operating income, as a % of total revenues 7.5 % 10.7 % 6.5 % 10.1 %
Add back:
Non-cash stock-based compensation expense 21,909 11,350 59,763 33,366
Non-cash amortization of acquired intangible assets 255   286   783   861  
Non-GAAP operating income $ 33,771   $ 25,241   $ 89,542   $ 71,590  
Non-GAAP operating income, as a % of total revenues 21.7 % 19.8 % 20.0 % 19.3 %
 
Non-GAAP net income reconciliation:
Net income $ 5,851 $ 19,656 $ 13,668 $ 32,902
Add back:
Non-cash stock-based compensation expense 21,909 11,350 59,763 33,366
Non-cash amortization of acquired intangible assets 255 286 783 861
Income tax effect of above two items (7,488 ) (4,456 ) (20,091 ) (13,176 )
Research and development tax credits   (12,084 )   (12,084 )
Non-GAAP net income $ 20,527   $ 14,752   54,123   $ 41,869  
 
Non-GAAP net income, per diluted share, reconciliation: (1)
Net income, per diluted share $ 0.20 $ 0.67 $ 0.46 $ 1.12
Add back:
Non-cash stock-based compensation expense 0.74 0.38 2.02 1.14
Non-cash amortization of acquired intangible assets 0.01 0.01 0.03 0.03
Income tax effect of above two items (0.26 ) (0.15 ) (0.68 ) (0.45 )
Research and development tax credits   (0.41 )   (0.41 )
Non-GAAP net income, per diluted share $ 0.69   $ 0.50   $ 1.83   $ 1.43  
Shares used in calculation of GAAP and non-GAAP net income per share:
Basic 28,603   28,285   28,592   28,246  
Diluted 29,715   29,306   29,651   29,302  
(1) The non-GAAP net income per diluted share reconciliation is calculated on a diluted weighted average share basis for GAAP net income periods.

Use of Non-GAAP Financial Information

This press release contains non-GAAP financial measures. Ultimate believes that non-GAAP measures of financial results provide 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 these non-GAAP results 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. These measures are used in monthly financial reports prepared for management and in quarterly financial reports presented to Ultimate’s Board of Directors. These measures may be different from non-GAAP financial measures used by other companies.

These non-GAAP measures 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 these non-GAAP financial measures is that they exclude significant expenses that are required by GAAP to be recorded. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by management about which expenses are excluded from the non-GAAP financial measures.

To compensate for these limitations, Ultimate presents its non-GAAP financial measures in connection with its GAAP results. Ultimate strongly urges investors and potential investors in Ultimate’s securities to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures that are included in this press release (under the caption “Unaudited Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures”) and not to rely on any single financial measure to evaluate its business.

Ultimate presents the following non-GAAP financial measures in this press release: non-GAAP operating income, non-GAAP operating income, as a percentage of total revenues (or non-GAAP operating margin), non-GAAP net income and non-GAAP net income, per diluted share. We exclude the following items from these non-GAAP financial measures as appropriate:

Stock-based compensation expense. Ultimate’s non-GAAP financial measures exclude stock-based compensation expense, which consists of expenses for stock options and stock and stock unit awards recorded in accordance with Accounting Standards Codification 718, “Compensation – Stock Compensation.” For the three and nine months ended September 30, 2015, stock-based compensation expense was $21.9 million and $59.8 million, respectively, on a pre-tax basis. For the three and nine months ended September 30, 2014, stock-based compensation expense was $11.4 million and $33.4 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 three and nine months ended September 30, 2015, the amortization of acquired intangible assets was $0.3 million and $0.8 million, respectively. For the three and nine months ended September 30, 2014, the amortization of acquired intangible assets was $0.3 million and $0.9 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.

Research and development tax credits. In accordance with GAAP, net income for the three and nine months ended September 30, 2014, includes an income tax benefit for research and development tax credits for federal and state income tax purposes related to the tax years from 1998 through 2013 for $12.1 million. There was no research and development tax credit for the three and nine months ended September 30, 2015. Research and development tax credits are excluded from Ultimate’s non-GAAP financial measures at this time because they are a tax benefit that relates to prior periods and that Ultimate does not consider part of ongoing operations when assessing its financial performance.

Contacts

Ultimate Software
Mitchell K. Dauerman, 954-331-7369
Chief Financial Officer and Investor Relations
Email: IR@ultimatesoftware.com

Contacts

Ultimate Software
Mitchell K. Dauerman, 954-331-7369
Chief Financial Officer and Investor Relations
Email: IR@ultimatesoftware.com