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The Ultimate Software: Ultimate Reports Q1 2016 Financial Results

The following excerpt is from the company's SEC filing.

Record Recurring Revenues of

$152.8 Million

, Up by

Record Total Revenues of

$187.2 Million

Weston, FL,

April 26, 2016

— Ultimate Software (Nasdaq: ULTI), a leading provider of human capital management (HCM) solutions in the cloud, announced today its financial results for the

quarter ended

March 31, 2016

. Ultimate reported recurring revenues of

$152.8 million

increase, and total revenues of

$187.2 million

increase, both compared with

quarter. GAAP net income for the

quarter of

$ 2.4 million

per diluted share, as compared with GAAP net income of

$4.2 million

per diluted share, for the

Non-GAAP net income for the first quarter of 2016, which excludes stock-based compensation expense and amortization of acquired intangibles, was

$21.9 million

per diluted share. Non-GAAP net income for the

$15.2 million

per diluted share. See “Use of Non-GAAP Financial Information” below.

“Once again, achieving all of our goals as planned in the first quarter has put us in a strong position to execute on our future objectives. Recurring revenues were nearly $153 million, up by more than 28%, and total revenues were $187 million, up by 29%, both compared with Q1 2015. At the same time, our non-GAAP operating margin came in on the positive side of our targeted 19%, and our year-over-year customer retention rate again exceeded 97%,” said Scott Scherr, founder, president, and CEO of Ultimate.

“In early March, we were honored to be ranked #15 on

Fortune’s

2016 100 Best Companies to Work For list, marking our fifth consecutive year in the top 25. Ultimate’s identity and strategic approach as a company have been focused on culture and putting ‘People First’ since the company’s beginning, and will continue to drive our strategic direction. Also in March, more than 2,000 HR and business professionals attended our annual Connections customer conference in Las Vegas, where we featured more than 60 breakout sessions and workshops aimed at ‘Inspiring Engagement’ in employees”.

Ultimate’s financial results teleconference will be held today,

, at 5:00 p.m. Eastern time, at

http://www.investorcalendar.com/IC/CEPage.asp?ID=174853

The call will be available for replay at the same address beginning at 9:00 p.m. Eastern time today. Windows Media Player software is required to listen to the call and can be downloaded from the site. Forward-looking information about future company performance will be discussed during the teleconference call.

Financial Highlights

Recurring revenues from our cloud offering grew by

as compared with the same period in

. Recurring revenues were 82% of total revenues for the first quarter of 2016 and for the first quarter of 2015.

Ultimate’s total revenues for the

increased by

, as compared with those for the

Ultimate’s annualized retention rate, on a rolling 12-month basis, exceeded 97% for its recurring revenue cloud customer base as of

, which compares with greater than 96% for the same period of the prior year.

Cash flows from operating activities for the

$32.1 million

, compared with

$26.1 million

Stock Repurchases

The combination of cash, cash equivalents, and corporate marketable securities was

$103.8 million

$129.4 million

December 31, 2015

During the

months ended

, we used

$29.7 million

to acquire 190,400 shares of our Common Stock under our previously announced stock repurchase plan (the "Stock Repurchase Plan"), and we used

$17.9 million

to acquire 114,253 shares of our outstanding $0.01 par value common stock ("Common Stock") to settle employees’ tax withholding obligations associated with their restricted stock that vested during the period.

On April 25, 2016, Ultimate's Board of Directors extended our Stock Repurchase Plan further by authorizing the repurchase of up to 1,000,000 additional shares of our Common Stock. We have 1,342,005 shares available for repurchase under our Stock Repurchase Plan.

Financial Outlook

Ultimate provides the following financial guidance for the second quarter ending June 30, 2016, and full year 2016:

For the second quarter of 2016:

Recurring revenues of approximately $158 million,

Total revenues of approximately $187 million, and

Operating margin, on a non-GAAP basis (discussed below), of approximately 20%.

For the year 2016:

Recurring revenues to increase by approximately 26% over 2015,

Total revenues to increase by approximately 26% over 2015, and

Operating margin, on a non-GAAP basis (discussed below), of approximately 21%.

Operating margin expectations were determined on a non-GAAP basis using the methodologies identified under the caption “Use of Non-GAAP Financial Information” in this press release.

Forward-Looking Statements

Certain statements in this press release are, and certain statements on the teleconference call may be, forward-looking statements within the meaning provided under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are made only as of the date hereof. These statements involve known and unknown risks and uncertainties that may cause Ultimate’s actual results to differ materially from those stated or implied by such forward-looking statements, including risks and uncertainties associated with fluctuations in Ultimate’s quarterly operating results, concentration of Ultimate’s product offerings, development risks involved with new products and technologies, competition, contract renewals with business partners, compliance by our customers with the terms of their contracts with us, and other factors disclosed in Ultimate’s filings with the Securities and Exchange Commission. Ultimate undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

About Ultimate Software

Ultimate is a leading provider of cloud-based human capital management (HCM) solutions, with more than 25 million people records in the cloud. Ultimate’s award-winning UltiPro delivers HR, payroll, talent, and time and labor management solutions that connect people with the information they need to work more effectively. Founded in 1990, the company is headquartered in Weston, Florida, and employs more than 3,000 professionals. In 2016,

Fortune

ranked Ultimate #1 on its list of 10 Best Large Workplaces in Technology and #15 on

100 Best Companies to Work For list, the fifth consecutive year to be ranked in the top 25. In 2015, Ultimate was recognized by

as one of the 100 Fastest-Growing Companies; ranked #7 on

Forbes

magazine’s list of the 100 Most Innovative Growth Companies; named among

InformationWeek's

Elite 100, honoring innovation in business technology; and recognized as a “Leader” in Nucleus Research’s HCM Technology Value Matrix. Ultimate has approximately 3,200 customers with employees in 160 countries, including Bloomin’ Brands, Culligan International, Feeding America, Major League Baseball, Pep Boys, SUBWAY, Texas Roadhouse, and Yamaha Corporation of America. More information on Ultimate’s products and services for people management can be found at

www.ultimatesoftware.com

UltiPro is a registered trademark of The Ultimate Software Group, Inc. All other trademarks referenced are the property of their respective owners.

Contact:

Mitchell K. Dauerman

Chief Financial Officer and Investor Relations

Phone: 954-331-7369

Email: IR@ultimatesoftware.com

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

For the Three Months Ended March 31,

Revenues:

152,751

119,109

Services

34,463

25,768

187,214

144,877

Cost of revenues:

39,457

32,789

32,804

24,318

Total cost of revenues

72,261

57,107

Gross profit

114,953

87,770

Operating expenses:

Sales and marketing

56,582

40,763

Research and development

27,515

21,398

General and administrative

21,529

15,852

Total operating expenses

105,626

78,013

Operating income

Other income (expense):

Interest and other expense

Other income, net

Total other expense, net

Income before income taxes

Provision for income taxes

(6,811

(5,539

Net income

Net income per share:

Diluted

Weighted average shares outstanding:

28,825

28,583

29,833

29,567

Stock-based Compensation

The following table sets forth the stock-based compensation expense resulting from stock-based arrangements (excluding the income tax effect, or “gross”) and the amortization of acquired intangibles that are recorded in Ultimate’s unaudited condensed consolidated statements of income for the periods indicated (in thousands):

Stock-based compensation expense

Cost of recurring revenues

Cost of services revenues

13,668

Total non-cash stock-based compensation expense

26,414

16,077

Amortization of acquired intangibles:

Total amortization of acquired intangibles

Stock-based compensation for the first quarter of 2016 was $26.4 million, as compared with stock-based compensation of $16.1 million, for the first quarter of 2015. The $10.3 million increase in stock-based compensation included an increase of $7.4 million associated with modifications made to the Company’s change in control plans in March 2015 and February 2016, which significantly reduced the potential payments that could be made under such plans. As previously disclosed, these changes were made to better align management's incentives with long-term value creation for our shareholders. As part of the modifications in connection with the unwinding of the change in control plans, time-based restricted stock awards (vesting over three years) were granted to certain senior officers in March 2015 and February 2016.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

December 31,

ASSETS

Current assets:

Cash and cash equivalents

83,372

109,325

Investments in marketable securities

12,944

10,780

Accounts receivable, net

139,964

130,106

Prepaid expenses and other current assets

48,536

46,804

Deferred tax assets, net

Total current assets before funds held for clients

285,655

297,898

Funds held for clients

1,312,428

923,308

1,598,083

1,221,206

Property and equipment, net

141,508

125,492

Goodwill

24,873

24,410

Intangible assets, net

Other assets, net

34,253

31,107

48,901

48,909

Total assets

1,860,173

1,465,569

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

Accrued expenses

46,498

42,097

Deferred revenue

147,064

142,793

Capital lease obligations

Other borrowings

Total current liabilities before client fund obligations

208,572

197,173

Client fund obligations

1,312,671

923,366

1,521,243

1,120,539

Deferred rent

Deferred income tax liability

Total liabilities

1,534,411

1,131,503

Stockholders’ equity:

Preferred Stock, $.01 par value

Series A Junior Participating Preferred Stock, $.01 par value

Common Stock, $.01 par value

Additional paid-in capital

480,961

463,609

Accumulated other comprehensive loss

(6,237

(7,829

Accumulated earnings

62,062

59,627

537,121

515,740

Treasury stock, at cost

(211,359

(181,674

Total stockholders’ equity

325,762

334,066

Total liabilities and stockholders’ equity

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Cash flows from operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

Provision for doubtful accounts

Non-cash stock-based compensation expense

Income taxes

Net amortization of premiums and accretion of discounts on available-for-sale securities

Excess tax benefit from employee stock plan

(6,590

(8,845

Changes in operating assets and liabilities:

(11,164

(1,732

(1,878

(3,146

(2,168

Accrued expenses and deferred rent

Net cash provided by operating activities

32,059

26,055

Cash flows from investing activities:

Purchases of property and equipment

(17,621

(10,941

Purchases of marketable securities

(98,913

(1,765

Maturities of marketable securities

18,985

Payments for acquisitions

Net purchases of client funds securities

(309,419

(88,085

Net cash used in investing activities

(406,968

(98,968

Cash flows from financing activities:

Repurchases of Common Stock

(29,685

(6,191

Net proceeds from issuances of Common Stock

Excess tax benefits from employee stock plan

Withholding taxes paid related to net share settlement of equity awards

(17,883

(10,068

Principal payments on capital lease obligations

(1,359

(1,184

Repayments of other borrowings

Net increase in client fund obligations

389,305

Net cash provided by financing activities

348,116

80,958

Effect of exchange rate changes on cash

(1,069

Net (decrease) increase in cash and cash equivalents

(25,953

Cash and cash equivalents, beginning of period

108,298

Cash and cash equivalents, end of period

115,274

Supplemental disclosure of cash flow information:

Cash paid for interest

Cash paid for taxes

Non-cash investing and financing activities:

Capital lease obligations to acquire new equipment

Stock based compensation for capitalized software

Unaudited Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures

Non-GAAP operating income reconciliation:

Operating income, as a % of total revenues

Add back:

Non-cash amortization of acquired intangible assets

35,988

26,098

Non-GAAP operating income, as a % of total revenues

Non-GAAP net income reconciliation:

Income tax effect of above two items

(7,192

(5,267

21,904

15,234

Non-GAAP net income, per diluted share, reconciliation: (1)

Net income, per diluted share

Shares used in calculation of GAAP and non-GAAP net income per share:

_________________________

The non-GAAP net income per diluted share reconciliation is calculated on a diluted weighted average share basis for GAAP net income periods.

This press release contains non-GAAP financial measures. Ultimate believes that non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to Ultimate’s financial condition and results of operations. Ultimate’s management uses these non-GAAP results to compare Ultimate’s performance to that of prior periods for trend analyses, for purposes of determining executive incentive compensation, and for budget and planning purposes. These measures are used in monthly financial reports prepared for management and in quarterly financial reports presented to Ultimate’s Board of Directors. These measures may be different from non-GAAP financial measures used by other companies.

These non-GAAP measures should not be considered in isolation or as an alternative to such measures determined in accordance with generally accepted accounting principles in the United States (GAAP). The principal limitation of these non-GAAP financial measures is that they exclude significant expenses that are required by GAAP to be recorded. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by management about which expenses are excluded from the non-GAAP financial measures.

To compensate for these limitations, Ultimate presents its non-GAAP financial measures in connection with its GAAP results. Ultimate strongly urges investors and potential investors in Ultimate’s securities to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures that are included in this press release (under the caption “Unaudited Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures”) and not to rely on any single financial measure to evaluate its business.

Ultimate presents the following non-GAAP financial measures in this press release: non-GAAP operating income, non-GAAP operating income, as a percentage of total revenues (or non-GAAP operating margin), non-GAAP net income and non-GAAP net income, per diluted share. We exclude the following items from these non-GAAP financial measures as appropriate:

Stock-based compensation expense.

Ultimate’s non-GAAP financial measures exclude stock-based compensation expense, which consists of expenses for stock options and stock and stock unit awards recorded in accordance with Accounting Standards Codification 718, “Compensation – Stock Compensation.” For the

three months

, stock-based compensation expense was

, on a pre-tax basis. For the

March 31, 2015

, on a pre-tax basis. Stock-based compensation expense is excluded from the non-GAAP financial measures because it is a non-cash expense that Ultimate does not consider part of ongoing operations when assessing its financial performance. Ultimate believes that such exclusion facilitates the comparison of results of ongoing operations for current and future periods with such results from past periods. For GAAP net income periods, non-GAAP reconciliations are calculated on a diluted weighted average share basis.

Amortization of acquired intangible assets.

In accordance with GAAP, operating expenses include amortization of acquired intangible assets over the estimated useful lives of such assets. For the

, the amortization of acquired intangible assets was

$0.2 million

. For the

$0.3 million

. Amortization of acquired intangible assets is excluded from Ultimate’s non-GAAP financial measures because it is a non-cash expense that Ultimate does not consider part of ongoing operations when assessing its financial performance. Ultimate believes that such exclusion facilitates comparisons to its historical operating results and to the results of other companies in the same industry, which have their own unique acquisition histories.

The above information was disclosed in a filing to the SEC. To see the filing, click here.

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Other recent filings from the company include the following:

Additional definitive proxy soliciting materials and Rule 14(a)(12) material - April 6, 2016