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Why Shares of Ultimate Software Group Dropped Today

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.

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.

UltiPro. Image source: Ultimate Software Group.

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

Our Sales teams exceeded objectives in our plan for the second quarter while the average size of our new Enterprise clients continued to expand and the numbers of new Mid-Market and Strategic clients joining us grew. Our teams had success with our new products: UltiPro Learning, our person-centric solution for employee learning and development, and UltiPro Perception, our employee survey solution with its portfolio of advanced artificial intelligence technologies that are as sensitive to emotions as they are to statistics.

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.