Ultimate Software Falls Short Despite Impressive Sales, Profit Growth

By Dan Caplinger Markets Fool.com

Ultimate Software Group (NASDAQ: ULTI) has sought to cash in on the need for smart human resource management tools, tapping into the power of cloud computing to help its clients manage their workforces effectively. The HR business has done well during the current period of long expansion, and coming into Tuesday's fourth-quarter financial report, Ultimate Software investors had extremely ambitious hopes that the specialist would take full advantage of good conditions in the employment market and keep producing extraordinary growth. Yet despite posting good results, Ultimate Software wasn't able to satisfy those high expectations.

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Let's look more closely at Ultimate Software to see how it performed during the quarter and what's ahead for the business in the future.

Image source: Ultimate Software.

Ultimate Software works harder

Ultimate Software's fourth-quarter results certainly didn't look bad by any stretch. Revenue climbed 23% to $210.5 million, which almost exactly matched what most investors were looking to see from the HR cloud company. Adjusted net income gained nearly 13% to $27.8 million, and that worked out to $0.91 per share. Despite being up from the year-ago quarter, that fell short of the consensus forecast among those following the stock by $0.04 per share.

Turning to the details on the company's fundamental performance, Ultimate Software showed only incremental signs of slowing expansion. Recurring revenue, which is a key metric for any cloud-based company, climbed 25% to $175.9 million, and that was only a couple of percentage points slower than the growth rate that Ultimate reported in the previous quarter. Services revenue grew at a slower pace of 17%, but Ultimate has stressed recurring sources of revenue as being especially important. Moreover, with better margin figures, shifting away from services isn't necessarily a bad strategy to follow. Retention figures were impressive, sticking at the 97% level even in the midst of substantial growth.

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Acquisitions have played a key role in Ultimate's success. The company listed its highlights of 2016, which included the purchases of cloud workforce intelligence specialist Kanjoya and business analytics forecaster Vestrics. Also, hundreds of new features in its UltiPro platform helped drive customer satisfaction and made the sales process easier for Ultimate's sales force.

CEO Scott Scherr was especially happy with the year Ultimate had. "Our sales team closed 2016 in the fourth quarter with their strongest quarterly performance in our history," Scherr said. The CEO also noted that the company has boosted its people-records count to about 33 million, and it has hired more than 1,000 over the past year to get the help it needs to serve its growing client base well.

Are storm clouds on the horizon for Ultimate Software?

Ultimate Software has high hopes that the future will be equally bright. Internally, the company is still looking at ways to enhance UltiPro, especially in the realm of incorporating more business analytics that are tailored to the human resources industry. Providing enhanced mobile capabilities has also been a key goal for Ultimate.

Yet even with relatively strong guidance, Ultimate wasn't able to satisfy investors completely. The company believes that its first-quarter sales will come in at about $229 million, with $189 million of that amount coming from recurring sources. Adjusted operating margin of 16% is also likely for the period. For the full 2017 year, Ultimate hopes to grow overall revenue by 24% and recurring revenue by a quarter compared to 2016 levels. Those numbers are consistent with the consensus forecasts among those following the stock, but it looks like investors were expecting even better results than Ultimate was able to deliver.

As a result, Ultimate Software's shares fell sharply after the news came out, falling about 5% in after-hours trading following the announcement. From a fundamental standpoint, however, Ultimate is still capturing its fair share of growth and has plenty of prospects to keep expanding throughout 2017 and beyond.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Ultimate Software Group. The Motley Fool has a disclosure policy.