Why Shares of Ultimate Software Group Dropped Today

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What happened

Shares of human capital management software provider Ultimate Software Group (NASDAQ: ULTI) slumped on Wednesday following a mixed second-quarter report. While revenue surged 20%, it nonetheless missed analyst expectations. This miss, coupled with a guidance cut, sent the stock about 11% lower by 11:20 a.m. EDT.

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So what

Ultimate Software reported second-quarter revenue of $224.7 million, up 20.5% year over year but $3.3 million below the average analyst estimate. Recurring revenue soared 23% year over year to $195.1 million, while services revenue rose 5.3% to $29.5 million.

Ultimate Software founder, president, and CEO Scott Scherr laid out what drove the double-digit growth:

Non-GAAP EPS came in at $0.93, up from $0.76 in the prior-year period and $0.02 higher than analysts were expecting. GAAP EPS was just $0.16, down from $0.20, with the difference due mainly to $39.3 million of stock-based compensation.

Now what

Ultimate Software expects double-digit revenue growth to continue during the third quarter, with the company calling for revenue between $231 million and $235 million, up 17.2% to 19.3% year over year. For the full year, Ultimate Software expects to grow revenue by about 20%, down from previous guidance calling for 24% growth.

Strong revenue growth and non-GAAP earnings growth wasn't enough to keep Ultimate Software stock afloat. With Ultimate Software stock trading for around 200 times GAAP earnings, there's simply no room for error.

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