Ultimate Software Keeps Climbing, but Some See Storm Clouds Ahead

By Markets Fool.com


Image: Ultimate Software.

Continue Reading Below

Running a business is a full-time profession, and few entrepreneurs or business executives have the time to deal with the distractions of all the labor laws and regulatory requirements involved in hiring and maintaining a workforce. That's where Ultimate Software Group comes in, with its cloud-based software products and services to offer assistance to time-crunched employers looking to streamline their human-resources management.

Coming into Tuesday afternoon's first-quarter financial report, Ultimate Software had given investors huge gains with its cloud-tapping potential, but after it released its results, the stock gave back some of those advances. Let's look more closely at how Ultimate Software did last quarter, and how it's positioned for the future.

Ultimate Software keeps on growing
Ultimate Software's latest results continued a nice string of growth in sales and profits. First-quarter revenue climbed 20%, to $144.9 million, very nearly matching the expectations of investors following the stock. Recurring revenue, which is Ultimate's priority and makes up the bulk of its overall business, rose at a faster 22% rate, and adjusted earnings of $0.52 per share were up $0.05 from last year's first quarter and met the consensus estimate in the investing community.

Source: Ultimate Software.

Continue Reading Below

As we saw last quarter, Ultimate's best performance came from its recurring revenue sources. Revenue from services climbed at an 11% pace for the quarter, rising sequentially from last quarter's 7% gain; but the cost of generating those revenues eats up almost all of the money the unit brings in. Licensing revenue got cut in half, and now makes up just a fraction of a percent of Ultimate's overall sales.

CEO and founder Scott Scherr was pleased with the company's results over the past quarter, noting that "we executed on all of our principal objectives as planned in the first quarter of this year and laid a strong foundation for us to achieve our future goals." With its ongoing dedication to maximizing customer retention, Ultimate was able to keep its margins high and stay on target in its longer-term strategy.

Will Ultimate Software see growth slow down?
One thing that made Ultimate Software investors nervous was the company's guidance for the second quarter. Revenue projections for $146 million were slightly lower than the $148.4 million that investors are hoping Ultimate will bring in. Longer term, though, Ultimate still thinks it will produce 22% revenue growth throughout 2015, and that's consistent with what those following the stock expect to play out over the course of the year.

In addition, Ultimate has a number of reasons to feel confident about its future. The company celebrated its 25th anniversary last month, bringing more than 1,800 customers to a Las Vegas conference, and announcing its partnership with NetSuite to join forces and offer Ultimate's HR cloud solutions platform as part of NetSuite's broader financials and enterprise resource planning suite of software and services.


Image: Ultimate Software.

Ultimate Software also remains confident in its own stock, buying back a total of almost 148,000 shares for $16.3 million during the quarter. Even with those purchases, Ultimate still has authorization to buy almost 750,000 more shares back under its current repurchase plan.

Even so, traders reacted negatively to Ultimate Software's results, with the stock down 3% in after-hours trading following the announcement. In the long run, though, what matters is for Ultimate to keep making lucrative inroads in the industry, and building up its cloud presence in the key HR market. If it can succeed in doing so, then Ultimate Software should be able to keep growing to become a more important player in the cloud space over time.

The article Ultimate Software Keeps Climbing, but Some See Storm Clouds Ahead originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends NetSuite 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.