Ultimate Software Soars Into the Cloud As Earnings Accelerate

By Markets Fool.com


Source: Ultimate Software.

Continue Reading Below

Anyone who has ever hired an employee knows what an administrative hassle it can be. Between complying with countless rules and regulations, getting the financial aspects taken care of, paying the appropriate taxes, and generally ensuring the well-being of a company's entire workforce, many business owners find it impossible to juggle various HR tasks and still have time to run their companies. To make things easier, Ultimate Software Group has a suite of cloud-based software products that can help employers with everything from recruiting and time management to budgeting and managing benefits -- and as the economy has shown increasing signs of strength, growth in the number of jobs available has pointed to even greater opportunities for the company. In its fourth-quarter financial report on Tuesday afternoon, Ultimate extended its long and impressive track record of providing investors with the growth they want to see. Let's take a look at what Ultimate Software's fourth quarter looked like and whether the company can keep expanding this year and into the future.

Ultimate Software, ultimately solid results

Ultimate Software not only produced top-line revenue growth but also turned its expanding business into greater profits. Revenue for the fourth quarter rose 21% to $135.4 million, which was almost exactly what investors had expected to see from the HR-cloud company. Recurring revenues rose at an even faster 24% pace, and with that portion of Ultimate's business making up more than 80% of total revenue, opportunities to bring in new recurring revenue will remain essential. Adjusted earnings of $0.68 per share topped analyst projections by almost a dime, representing growth of about 25% from the year-ago quarter.

Source: Ultimate Software.

Continue Reading Below

For the full year, Ultimate Software's growth was equally impressive. Sales jumped 23% to $505.9 million, and the company earned $2.11 in adjusted earnings per share, up 32% from 2013. Recurring revenue of $419.2 million climbed at a 25% rate from the previous year.

The importance of Ultimate's recurring revenue is even more obvious when you compare it to its services revenue. Sales from services gained 15% for the year, but only 7% in the fourth quarter. More importantly, gross margins for Ultimate's services are far lower than what the company brings in from recurring revenue, making it less attractive as a revenue source.

In addition to its financial results, Ultimate had several accomplishments on the product front. Its UltiPro suite remains the platform on which the company keeps building, but new products such as UltiPro Recruiting and UltiPro Compensation Management widen the scope of what customers can use Ultimate's software to accomplish. Moreover, with predictive analytics like its Retention Predictor, Ultimate is looking to tap the power of available data to tell employers which of their employees they should focus their resources on the most.

CEO Scott Scherr. Source: Ultimate Software.

What can Ultimate expect for 2015?

Ultimate Software prides itself not only on its execution but also in driving customer loyalty. As CEO Scott Scherr noted, "We continued our track record of 96% customer retention, and we grew the number of people-records in our cloud to more than 19 million." With the company having "achieved all of our key objectives," as Scherr put it, Ultimate Software appears to be in a prime position to deliver even greater growth in 2015.

Ultimate's guidance for the coming year confirms that positive assessment. The HR-cloud services provider expects revenue of $145 million in the current quarter, matching analyst expectations, and full-year revenue growth of about 22% is in line with what investors want to see from the company. Maintaining growth rates above 20% will become increasingly difficult as Ultimate grows, but the longer it can do so, the happier investors will be at its ability to stand up to some much-larger rivals in the space.

Source: Ultimate Software.

The main question for Ultimate looking forward is whether rivals ADP and Paychex will come out with cloud-based HR offerings that can catch up to what Ultimate already offers. With a big lead over its competition, though, Ultimate appears poised to keep delivering new advances in its software and services. If all goes well, that could lead to Ultimate poaching more customers from ADP and Paychex, confirming the wisdom of its strategic vision for 2015 and beyond.

The article Ultimate Software Soars Into the Cloud As Earnings Accelerate originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Automatic Data Processing, Paychex, and Ultimate Software Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.