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Ultimate Reports Q2 2016 Financial Results

July 26, 2016 4:00 PM

WESTON, Fla.--(BUSINESS WIRE)-- 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 ended June 30, 2016. Ultimate reported recurring revenues of $158.5 million, a 27% increase, and total revenues of $186.5 million, a 27% increase, both compared with 2015’s second quarter. GAAP net income for the second quarter of 2016 was $1.7 million, or $0.06 per diluted share, as compared with GAAP net income of $3.7 million, or $0.12 per diluted share, for the second quarter of 2015.

Non-GAAP net income for the second quarter of 2016, which excludes stock-based compensation expense and amortization of acquired intangibles, was $22.7 million, or $0.76 per diluted share. Non-GAAP net income for the second quarter of 2015 was $18.4 million, or $0.62 per diluted share. See “Use of Non-GAAP Financial Information” below.

“We had a strong second quarter. We executed on all of our key financial objectives and delivered the best quarter in our history for new-business contracts, and our year-over-year customer retention rate again exceeded 97%,” said Scott Scherr, founder, president, and CEO of Ultimate.

“It is a great honor that our UltiPro solution was awarded the highest overall customer satisfaction rating among a field of 96 solutions in the Summer 2016 Core HR Software Grid report by G2 Crowd, the world’s leading business-software review platform. UltiPro earned a score of 98% for customer satisfaction, exceeding the category average of 56%, with satisfaction scores determined by reviews from software users. We are also pleased to be ranked #8 on Forbes’ 2016 ‘Most Innovative Growth Companies’ list and named ‘Best Customer Service Department of the Year’ by Network Products Guide in its 2016 IT World awards, both announced in the second quarter.”

Ultimate’s financial results teleconference will be held today, July 26, 2016, at 5:00 p.m. Eastern time, at www.investorcalendar.com/event/174854. 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

Stock Repurchases

The combination of cash, cash equivalents, and corporate marketable securities was $104.9 million as of June 30, 2016, compared with $129.4 million as of December 31, 2015.

During the six months ended June 30, 2016, we used a combined total of $48.3 million in relation to the purchase of our common stock, $0.01 par value common stock (“Common Stock”) and to settle employee taxes for restricted stock vestings — $29.7 million to acquire 190,400 shares of our outstanding Common Stock under our previously announced stock repurchase plan (the “Stock Repurchase Plan”), and $18.6 million to acquire 117,877 shares of our Common Stock to settle employees’ tax withholding obligations associated with their restricted stock that vested during the period. We have 1,342,005 shares available for repurchase under our Stock Repurchase Plan.

Financial Outlook

Ultimate provides the following financial guidance for the third quarter ending September 30, 2016, and full year 2016:

For the third quarter of 2016:

For the year 2016:

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 approximately 30 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 3,300 professionals. In 2016, Fortune ranked Ultimate #1 on its list of 10 Best Large Workplaces in Technology and #15 on Fortune’s 100 Best Companies to Work For list, Ultimate’s fifth consecutive year to be ranked in the top 25. Ultimate was also ranked #8 on Forbes magazine’s list of the 100 Most Innovative Growth Companies and ranked #1 in customer satisfaction in G2 Crowd’s Summer 2016 Core HR Software Grid report, based on user reviews. In 2015, Ultimate was recognized by Fortune as one of the 100 Fastest-Growing Companies; named among InformationWeek’s Elite 100, honoring innovation in business technology; and recognized as a “Leader” in Nucleus Research’s HCM Technology Value Matrix. Ultimate has more than 3,400 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

June 30,

For the Six Months Ended

June 30,

2016 2015 2016 2015
Revenues:
Recurring $ 158,479 $ 124,407 $ 311,230 $ 243,516
Services 28,058 22,823 62,521 48,591
Total revenues 186,537 147,230 373,751 292,107
Cost of revenues:
Recurring 42,951 34,388 82,408 67,177
Services 29,342 23,621 62,146 47,939
Total cost of revenues 72,293 58,009 144,554 115,116
Gross profit 114,244 89,221 229,197 176,991
Operating expenses:
Sales and marketing 54,548 39,195 111,130 79,958
Research and development 29,053 23,906 56,568 45,304
General and administrative 22,180 18,488 43,709 34,340
Total operating expenses 105,781 81,589 211,407 159,602
Operating income 8,463 7,632 17,790 17,389
Other income (expense):
Interest and other expense (180 ) (135 ) (364 ) (250 )
Other income, net 102 46 205 103
Total other expense, net (78 ) (89 ) (159 ) (147 )
Income before income taxes 8,385 7,543 17,631 17,242
Provision for income taxes (6,708 ) (3,886 ) (13,519 ) (9,425 )
Net income $ 1,677 $ 3,657 $ 4,112 $ 7,817
Net income per share:
Basic $ 0.06 $ 0.13 $ 0.14 $ 0.27
Diluted $ 0.06 $ 0.12 $ 0.14 $ 0.26
Weighted average shares outstanding:
Basic 28,895 28,591 28,860 28,587
Diluted 29,893 29,591 29,927 29,599

Stock-based Compensation

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 June 30,

For the Six Months Ended

June 30,

2016 2015 2016 2015
Stock-based compensation expense:
Cost of recurring revenues $ 2,168 $ 1,546 $ 4,098 $ 2,973
Cost of services revenues 1,476 1,186 3,021 2,468
Sales and marketing 15,015 10,751 28,683 18,534
Research and development 1,920 1,842 3,767 3,090
General and administrative 8,064 6,452 15,488 10,789
Total non-cash stock-based compensation expense $ 28,643 $ 21,777 $ 55,057 $ 37,854
Amortization of acquired intangibles:
General and administrative $ 257 $ 264 $ 504 $ 528
Total amortization of acquired intangibles $ 257 $ 264 $ 504 $ 528

Stock-based compensation for the three and six months ended June 30, 2016 was $28.6 million and $55.1 million, respectively, as compared with stock-based compensation for the three and six months ended June 30, 2015 of $21.8 million and $37.9 million, respectively. The increases in stock-based compensation for the three and six months ended June 30, 2016 included an increase of $4.1 million and $11.5 million, respectively, associated with modifications made to the Company’s change in control plans in March 2015 and February 2016, which significantly reduced the potential payments that could be made under such plans. As previously disclosed, 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 the unwinding of the change in control plans, time-based restricted stock awards (vesting over three years) were granted to certain senior officers in March 2015 and February 2016.

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
As of As of
June 30, December 31,
2016 2015
ASSETS
Current assets:
Cash and cash equivalents $ 82,318 $ 109,325
Investments in marketable securities 15,673 10,780
Accounts receivable, net 147,167 130,106
Prepaid expenses and other current assets 53,280 46,804
Deferred tax assets, net 851 883
Total current assets before funds held for clients 299,289 297,898
Funds held for clients 930,790 923,308
Total current assets 1,230,079 1,221,206
Property and equipment, net 153,135 125,492
Goodwill 29,173 24,410
Investments in marketable securities 6,918 9,278
Intangible assets, net 10,840 5,167
Other assets, net 39,009 31,107
Deferred tax assets, net 48,874 48,909
Total assets $ 1,518,028 $ 1,465,569
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 8,889 $ 7,395
Accrued liabilities 39,833 42,097
Deferred revenue 156,329 142,793
Capital lease obligations 5,101 4,488
Other borrowings 200 400
Total current liabilities before client fund obligations 210,352 197,173
Client fund obligations 931,249 923,366
Total current liabilities 1,141,601 1,120,539
Deferred revenue 2,660 2,934
Deferred rent 4,140 3,719
Capital lease obligations 4,354 3,665
Deferred income tax liability 824 646
Total liabilities 1,153,579 1,131,503
Stockholders’ equity:
Preferred Stock, $.01 par value — —
Series A Junior Participating Preferred Stock, $.01 par value — —
Common Stock, $.01 par value 336 333
Additional paid-in capital 517,912 463,609
Accumulated other comprehensive loss (6,179 ) (7,829 )
Accumulated earnings 63,739 59,627
575,808 515,740
Treasury stock, at cost (211,359 ) (181,674 )
Total stockholders’ equity 364,449 334,066
Total liabilities and stockholders’ equity $ 1,518,028 $ 1,465,569
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

For the Six Months Ended

June 30,

2016 2015
Cash flows from operating activities:
Net income $ 4,112 $ 7,817
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 12,575 10,589
Provision for doubtful accounts 2,136 1,940
Non-cash stock-based compensation expense 55,057 37,854
Income taxes 13,281 9,312
Net amortization of premiums and accretion of discounts on available-for-sale securities 277 —
Excess tax benefit from employee stock plan (13,130 ) (15,910 )
Changes in operating assets and liabilities:
Accounts receivable (19,097 ) (10,423 )
Prepaid expenses and other current assets (6,476 ) (5,788 )
Other assets (7,902 ) (4,424 )
Accounts payable 1,494 (30 )
Accrued liabilities and deferred rent (2,843 ) 1,182
Deferred revenue 12,992 11,499
Net cash provided by operating activities 52,476 43,618
Cash flows from investing activities:
Purchases of property and equipment (33,643 ) (21,303 )
Purchases of marketable securities (138,157 ) (3,816 )
Maturities of marketable securities 56,130 4,300
Payments for acquisitions (9,125 ) —
Net purchases of client funds securities 71,972 357,804
Net cash (used in) provided by investing activities (52,823 ) 336,985
Cash flows from financing activities:
Repurchases of Common Stock (29,685 ) (30,743 )
Net proceeds from issuances of Common Stock 2,729 2,340
Excess tax benefits from employee stock plan 13,130 15,910
Withholding taxes paid related to net share settlement of equity awards (18,564 ) (10,752 )
Principal payments on capital lease obligations (2,810 ) (2,436 )
Repayments of other borrowings (200 ) (367 )
Net increase in client fund obligations 7,883 (357,804 )
Net cash used in financing activities (27,517 ) (383,852 )
Effect of exchange rate changes on cash 857 (773 )
Net decrease in cash and cash equivalents (27,007 ) (4,022 )
Cash and cash equivalents, beginning of period 109,325 108,298
Cash and cash equivalents, end of period $ 82,318 $ 104,276
Supplemental disclosure of cash flow information:
Cash paid for interest $ 208 $ 189
Cash paid for taxes $ 1,223 $ 332
Non-cash investing and financing activities:
Capital lease obligations to acquire new equipment $ 4,112 $ 3,749
Cash held in escrow for acquisition $ 1,000 $ —
Stock based compensation for capitalized software $ 1,958 $ 1,418
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 June 30,

For the Six Months Ended

June 30,

2016 2015 2016 2015
Non-GAAP operating income reconciliation:
Operating income $ 8,463 $ 7,632 17,790 17,389
Operating income, as a % of total revenues 4.5 % 5.2 % 4.8 % 6.0 %
Add back:
Non-cash stock-based compensation expense 28,643 21,777 55,057 37,854
Non-cash amortization of acquired intangible assets 257 264 504 528
Non-GAAP operating income $ 37,363 $ 29,673 $ 73,351 $ 55,771
Non-GAAP operating income, as a % of total revenues 20.0 % 20.2 % 19.6 % 19.1 %
Non-GAAP net income reconciliation:
Net income $ 1,677 $ 3,657 $ 4,112 $ 7,817
Add back:
Non-cash stock-based compensation expense 28,643 21,777 55,057 37,854
Non-cash amortization of acquired intangible assets 257 264 504 528
Income tax effect of above two items (7,834 ) (7,336 ) (15,026 ) (12,605 )
Non-GAAP net income $ 22,743 $ 18,362 $ 44,647 $ 33,594
Non-GAAP net income, per diluted share, reconciliation: (1)
Net income, per diluted share $ 0.06 $ 0.12 $ 0.14 $ 0.26
Add back:
Non-cash stock-based compensation expense 0.96 0.74 1.85 1.28
Non-cash amortization of acquired intangible assets 0.01 0.01 0.02 0.02
Income tax effect of above two items (0.27 ) (0.25 ) (0.52 ) (0.43 )
Non-GAAP net income, per diluted share $ 0.76 $ 0.62 $ 1.49 $ 1.13
Shares used in calculation of GAAP and non-GAAP net income per share:
Basic 28,895 28,591 28,860 28,587
Diluted 29,893 29,591 29,927 29,599

_________________________

(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, 2016, stock-based compensation expense was $28.6 million and $55.1 million, respectively, on a pre-tax basis. 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. 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, 2016, the amortization of acquired intangible assets was $0.3 million and $0.5 million, respectively. 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. 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.

Ultimate Software

Mitchell K. Dauerman, 954-331-7369

Chief Financial Officer and Investor Relations

[email protected]

Source: Ultimate Software

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