Ultimate Software Group, Inc.
) has a fast-growing customer base and a high customer retention
rate, which should serve this cloud-based solutions provider well
when its reports third-quarter results later this month. Moreover,
this Zacks #1 Rank's (Strong Buy) expected earnings growth rate is
26.0% over the next five years, which is roughly double the 13.7%
expected for the industry.
Solid Recurring Revenue Led to Second Quarter Beat
Ultimate Software Group will report its third-quarter results on
October 30. At the moment, the Zacks Consensus Estimate is at 18
cents per share.
On July 31, 2012, Ultimate Software Group announced second quarter
earnings per share (EPS) of 9 cents, up 200.0% from the year-ago
quarter and ahead of the Zacks Consensus Estimate by 12.5%.
Revenues grew 23.3% year over year to $79.2 million, driven by new
client increases and steady contribution from existing clients (the
customer retention rate was more than 96%). Recurring revenues went
up 24.3%, Service revenues advanced 19.1% and License revenues
The company expects recurring revenue of $68.0 million and total
revenue of $84.0 million in the third quarter, reflecting
sequential growth. For fiscal 2012, recurring revenue is expected
to grow 25.0% year over year while total revenue is expected to
Earnings Estimates Show Firm Y/Y Comps
Over the last 60 days, the Zacks Consensus Estimates for 2012 and
2013 have been maintained at 63 cents and 97 cents, respectively.
The estimate for fiscal 2012 represents an increase of 293.8% from
16 cents reported in fiscal 2011, while the estimate for fiscal
2013 represents a year-over-year increase of 54.0%.
Premium Valuation is Justified
Considering the company's growth prospects, a premium valuation
appears justified. The stock has a PEG ratio of 6.8, compared with
the peer group's 0.7. Ultimate Software is also trading at a P/S
and P/B of 9.14x and 26.38x, respectively, representing a premium
of 168.0% and 440.6% from the peer group averages.
Chart Shows Growth Potential
The 12-month EPS chart clearly shows that both share prices and
earnings have trended upward over the last few years. The current
momentum appears to be driven by the growing client base and price
increases, which are reflected in estimate growth trends.
Currently, the share price is hovering around $90.00. The consensus
estimates for 2012 and 2013 are trending upward. The estimate
revision graph indicates a steep rising trend through fiscal 2015.
As illustrated in the chart below, share prices should increase at
a similar or higher rate than the estimate revision trend.
Ultimate Software Group develops and provides unified human capital
management (HCM) software-as-a-service (SaaS) solutions to various
industrial sectors. The company offers HR, payroll, and talent
management solutions through its flagships UltiPro Enterprise and
UltiPro Workplace software. The company has a strong customer base
of 2,300, as of fiscal year ending 2011. Ultimate Software competes
with Automatic Data Processing Inc. (
), Oracle Corp. (
) and Paychex Inc. (
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