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Ultimate Reports Q2 2015 Financial Results
[July 28, 2015]

Ultimate Reports Q2 2015 Financial Results


Ultimate Software (Nasdaq: ULTI), a leading provider of Human Capital Management (HCM) solutions in the cloud, announced today its financial results for the second quarter of 2015. For the quarter ended June 30, 2015, Ultimate reported recurring revenues of $124.4 million, a 22% increase, and total revenues of $147.2 million, a 21% increase, both compared with 2014's second quarter. GAAP net income for the second quarter of 2015 was $3.7 million, or $0.12 per diluted share, as compared with GAAP net income of $6.4 million, or $0.22 per diluted share, for the second quarter of 2014.

Non-GAAP net income for the second quarter of 2015, which excludes stock-based compensation expense and amortization of acquired intangible assets, was $18.4 million, or $0.62 per diluted share. Non-GAAP net income for the second quarter of 2014, on a comparable basis, was $13.4 million, or $0.46 per diluted share. See "Use of Non-GAAP Financial Information" below.

"We executed in all areas of our 2015 second-quarter plan, and these results position us well to achieve our 2015 and future goals. Recurring revenues increased by 22% to $124 million and total revenues by 21% to $147 million, both compared with the second quarter of 2014, and our non-GAAP operating margin was above our target at 20%. At the same time, our customer retention rate continued to remain higher than 96% for the trailing 12 months ending June 30, 2015," said Scott Scherr, founder, president and CEO of Ultimate.

"We are honored that third-parties have recognized our achievements in recent months. Forbes ranked Ultimate #7 on its 2015 list of the 'Most Innovative Growth Companies;' FORTUNE ranked us #6 on its list of the "100 Best Workplaces for Millennials in the U.S.;" InformationWeek named us to its Elite 100, a list of the top business technology innovators in the United States; and Nucleus Research once again recognized Ultimate's leadership status in its 2015 HCM Value Matrix. Also, the users of our solutions were responsible for identifying Ultimate as one of two leaders in G2 Crowd's Core HR grid and as #1 in Customer Satisfaction and Market Presence."

Ultimate's financial results teleconference will be held today, July 28, 2015, at 5:00 p.m. Eastern time, through Vcall at http://www.investorcalendar.com/IC/CEPage.asp?ID=173509. 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 22% for the second quarter of 2015 compared with the same period in 2014. The increase was primarily attributable to revenue growth from our cloud offering. Recurring revenues were 84% of total revenues for the second quarter of 2015, which was comparable with 2014's second quarter.
  • Ultimate's total revenues for the second quarter of 2015 increased by 21% as compared with those for the second quarter of 2014.
  • Our operating income for the second quarter of 2015 was $29.7 million, on a non-GAAP basis, as compared with $22.9 million for the second quarter of 2014. Our GAAP operating income for the second quarter of 2015 was $7.6 million as compared with $11.4 million for the second quarter of 2014.
  • Our non-GAAP operating margin for the second quarter of 2015 was 20.2% versus 18.7% for the second quarter of 2014. Our GAAP operating margin was 5.2% for the second quarter of 2015 versus 9.3% for the second 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 June 30, 2015.
  • Net income, on a non-GAAP basis, for the second quarter of 2015 was $18.4 million as compared with $13.4 million for the second quarter of 2014. GAAP net income for the second quarter of 2015 was $3.7 million as compared with $6.4 million for the second quarter of 2014.
  • Cash flows from operating activities for the second quarter of 2015 were $17.6 million, compared with $15.4 million for the same period in 2014. For the six months ended June 30, 2015, Ultimate generated $43.6 million in cash from operations, compared with $41.0 million for the six months ended June 30, 2014. The combination of cash, cash equivalents, and marketable securities was $113.9 million as of June 30, 2015, compared with $118.5 million as of December 31, 2014.
  • Days sales outstanding were 67 days at June 30, 2015, representing a reduction of 1 day compared with days sales outstanding at December 31, 2014.

Stock Repurchases

During the six months ended June 30, 2015, we used $30.7 million to acquire 185,469 shares of our $0.01 par value common stock ("Common Stock") under our previously announced stock repurchase plan ("Stock Repurchase Plan"), and we used $10.8 million to acquire 65,013 shares of our Common Stock to settle employees' tax withholding obligations associated with their restricted stock that vested during the period. We have 597,905 shares available for repurchase under our Stock Repurchase Plan.

Financial Outlook

Ultimate provides the following financial guidance for the third quarter ending September 30, 2015, and full year 2015:

For the third quarter of 2015:

  • Recurring revenues of approximately $132 million,
  • Total revenues of approximately $156 million, and
  • Operating margin, on a non-GAAP basis (discussed below), of approximately 20%.

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%.

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 2,600 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 for the third year in a row as one of Achievers' 50 Most Engaged Workplaces™ in North America; 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 2,800 customers with employees in 160 countries, including Bloomin' Brands, Culligan International, Major League Baseball, Pep Boys, 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

For the Six Months Ended

June 30,

June 30,
2015   2014 2015   2014
Revenues:
Recurring $ 124,407 $ 102,108 $ 243,293 $ 199,526
Services 22,823 19,841 48,591 43,049
License -   48   223   500  
Total revenues 147,230   121,997   292,107   243,075  
Cost of revenues:
Recurring 34,388 28,422 67,128 55,376
Services 23,621 21,037 47,939 43,111
License -   11   49   83  
Total cost of revenues 58,009   49,470   115,116   98,570  
Gross profit 89,221   72,527   176,991   144,505  
Operating expenses:
Sales and marketing 39,195 29,462 79,958 58,291
Research and development 23,906 20,433 45,304 40,153
General and administrative 18,488   11,244   34,340   22,303  
Total operating expenses 81,589   61,139   159,602   120,747  
Operating income 7,632 11,388 17,389 23,758
Other income (expense):
Interest and other expense (135 ) (106 ) (250 ) (172 )
Other income, net 46   96   103   171  
Total other expense, net (89 ) (10 ) (147 ) (1 )
Income before income taxes 7,543 11,378 17,242 23,757
Provision for income taxes (3,886 ) (5,015 ) (9,425 ) (10,511 )
Net income $ 3,657   $ 6,363   $ 7,817   $ 13,246  
Net income per share:        
Basic $ 0.13   $ 0.23   $ 0.27   $ 0.47  
Diluted $ 0.12   $ 0.22   $ 0.26   $ 0.45  
Weighted average shares outstanding:
Basic 28,591   28,252   28,587   28,224  
Diluted 29,591   29,218   29,599   29,284  

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

  For the Six Months Ended

Ended June 30,

June 30,
2015   2014 2015   2014
Stock-based compensation expense:
Cost of recurring revenues $ 1,546 $ 1,382 $ 2,973 $ 2,622
Cost of services revenues 1,186 1,133 2,468 2,188
Sales and marketing 10,751 4,937 18,534 9,734
Research and development 1,842 1,178 3,090 2,448
General and administrative 6,452   2,548   10,789   5,024
Total non-cash stock-based compensation expense $ 21,777   $ 11,178   $ 37,854   $ 22,016
 
Amortization of acquired intangibles:
General and administrative $ 264   $ 286   $ 528   $ 575
Total amortization of acquired intangibles $ 264   $ 286   $ 528   $ 575
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
   
As of As of
June 30, December 31,
2015 2014
ASSETS
Current assets:
Cash and cash equivalents $ 104,276 $ 108,298
Investments in marketable securities 6,543 7,862
Accounts receivable, net 108,701 100,218
Prepaid expenses and other current assets 40,576 34,788
Deferred tax assets, net 983   965  
Total current assets before funds held for clients 261,079 252,131
Funds held for clients 401,283   759,087  
Total current assets 662,362 1,011,218
Property and equipment, net 103,004 86,595
Goodwill 25,226 25,696
Investments in marketable securities 3,129 2,294
Intangible assets, net 6,018 6,774
Other assets, net 25,035 20,611
Deferred tax assets, net 43,458   37,110  
Total assets $ 868,232   $ 1,190,298  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,388 $ 7,418
Accrued expenses 31,652 30,941
Deferred revenue 121,147 109,552
Capital lease obligations 4,303 3,655
Other borrowings 400   567  
Total current liabilities before client fund obligations 164,890 152,133
Client fund obligations 401,283   759,087  
Total current liabilities 566,173 911,220
Deferred revenue 57 153
Deferred rent 2,839 2,368
Capital lease obligations 4,024 3,359
Other borrowings 200 400
Deferred income tax liability 817   1,049  
Total liabilities 574,110   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 423,376 376,609
Accumulated other comprehensive loss (5,061 ) (3,590 )
Accumulated earnings 44,745   36,928  
463,390 410,274
Treasury stock, at cost (169,268 ) (138,525 )
Total stockholders' equity 294,122   271,749  
Total liabilities and stockholders' equity $ 868,232   $ 1,190,298  
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
  For the Six Months Ended
June 30,
2015   2014
Cash flows from operating activities:
Net income $ 7,817 $ 13,246
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 10,589 8,955
Provision for doubtful accounts 1,940 1,096
Non-cash stock-based compensation expense 37,854 22,016
Income taxes 9,312 10,253
Excess tax benefit from employee stock plan (15,910 ) (12,651 )
Changes in operating assets and liabilities:
Accounts receivable (10,423 ) 226
Prepaid expenses and other current assets (5,788 ) (3,154 )
Other assets (4,424 ) (1,263 )
Accounts payable (30 ) 919
Accrued expenses and deferred rent 1,182 644
Deferred revenue 11,499   721  
Net cash provided by operating activities 43,618   41,008  
Cash flows from investing activities:
Purchases of marketable securities (3,816 ) (6,085 )
Maturities of marketable securities 4,300 6,208
Net remittances (purchases) of client funds securities 357,804 (199,674 )
Purchases of property and equipment (21,303 ) (21,014 )
Net cash provided by (used in) investing activities 336,985   (220,565 )
Cash flows from financing activities:
Repurchases of Common Stock (30,743 ) (19,981 )
Net proceeds from issuances of Common Stock 2,340 3,029
Excess tax benefits from employee stock plan 15,910 12,651
Shares acquired to settle employee tax withholding liability (10,752 ) (10,727 )
Principal payments on capital lease obligations (2,436 ) (1,930 )
Repayments of other borrowings (367 ) (2,059 )
Net (decrease) increase in client fund obligations (357,804 ) 199,674  
Net cash (used in) provided by financing activities (383,852 ) 180,657  
Effect of exchange rate changes on cash (773 ) 73  
Net (decrease) increase in cash and cash equivalents (4,022 ) 1,173
Cash and cash equivalents, beginning of period 108,298   79,794  
Cash and cash equivalents, end of period $ 104,276   $ 80,967  
 
Supplemental disclosure of cash flow information:
Cash paid for interest $ 189   $ 152  
Cash paid for taxes $ 332   $ 314  
 
Non-cash investing and financing activities:
Capital lease obligations to acquire new equipment $ 3,749   $ 3,677  
Stock consideration adjustment recorded for acquisitions $ -   $ (818 )
Stock based compensation for capitalized software $ 1,418   $ 649  
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

For the Six Months Ended

June 30,

June 30,
2015   2014 2015 2014
Non-GAAP operating income reconciliation:
Operating income 7,632 11,388 17,389 23,758
Operating income, as a % of total revenues 5.2 % 9.3 % 6.0 % 9.8 %
Add back:
Non-cash stock-based compensation expense 21,777 11,178 37,854 22,016
Non-cash amortization of acquired intangible assets 264   286   528   575  
Non-GAAP operating income $ 29,673   $ 22,852   $ 55,771   $ 46,349  
Non-GAAP operating income, as a % of total revenues 20.2 % 18.7 % 19.1 % 19.1 %
 
Non-GAAP net income reconciliation:
Net income $ 3,657 $ 6,363 $ 7,817 $ 13,246
Add back:
Non-cash stock-based compensation expense 21,777 11,178 37,854 22,016
Non-cash amortization of acquired intangible assets 264 286 528 575
Income tax effect of above two items (7,336 ) (4,464 ) (12,605 ) (8,722 )
Non-GAAP net income $ 18,362   $ 13,363   33,594   $ 27,115  
 
Non-GAAP net income, per diluted share, reconciliation: (1)
Net income, per diluted share $ 0.12 $ 0.22 $ 0.26 $ 0.45
Add back:
Non-cash stock-based compensation expense 0.74 0.38 1.28 0.75
Non-cash amortization of acquired intangible assets 0.01 0.01 0.02 0.02
Income tax effect of above two items (0.25 ) (0.15 ) (0.43 ) (0.29 )
Non-GAAP net income, per diluted share $ 0.62   $ 0.46   $ 1.13   $ 0.93  
Shares used in calculation of GAAP and non-GAAP net income per share:
Basic 28,591   28,252   28,587   28,224  
Diluted 29,591   29,218   29,599   29,284  
(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 six months ended June 30, 2015, stock-based compensation expense was $21.8 million and $37.9 million, respectively, on a pre-tax basis. For the three and six months ended June 30, 2014, stock-based compensation expense was $11.2 million and $22.0 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 six months ended June 30, 2015, the amortization of acquired intangible assets was $0.3 million and $0.5 million, respectively. For the three and six months ended June 30, 2014, the amortization of acquired intangible assets was $0.3 million and $0.6 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.


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