Ultimate Software Takes Business From Competitors

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Leadership by example is sometimes the best way to gain respect and recognition from clients.

Ultimate Software ( ULTI ), a provider of Web-based payroll and human resources services, has placed the customer first since its inception in 1990.

But the company hasn't just been saying it. It's been doing it. It set the example by treating its employees like customers.


"The company is one of the pioneers of software as a service (SaaS)," said Mark Marcon, an analyst at Robert W. Baird. "It started transitioning its solutions to a SaaS model far earlier than the vast majority (of payroll service companies). It has grown very rapidly through providing a SaaS alternative to payroll and HR management services and building a tremendous reputation for excellent client service and customer satisfaction."

How did it stand out in client service?

Employee Focus

"It actually starts with management's focus on their own employees," he noted. "A lot of management teams start by thinking about shareholders and what they need to do there. This management team starts with thinking about 'What do we need to do with our employees?'"

Ultimate Software makes sure it keeps its employees happy. For example, it covers 100% of their health care costs. It also is very good at screening and identifying promising additions to their team and has a very strong culture.

"Typically, there is a strong correlation between satisfied employees and the willingness to provide good customer service," said Marcon. "The people are happy and satisfied, and they want to do their best for their clients. The company is viewed by many as one of the best employers in the country."

Current President and CEO Scott Scherr is Ultimate's founder. Prior to starting the company, he was atAutomatic Data Processing ( ADP ), one of the largest payroll processing and benefits administration companies in the world.

"He became sort of disenchanted with the ADP business model and with the idea of continuing to slice and dice sales territory," said Justin Furby, an analyst at William Blair. "From day one, he started with a focus on a different approach, on a much more customer-centric approach than the big payroll service bureau providers."

Ultimate Software wins more than 90% of competitive deals against major payroll service providers, such as ADP and Ceridian, when it runs its sales process, writes Furby in his research report. "We believe that ADP, which is the largest source of Ultimate Software customers, continues to sell numerous, disjointed products to the market, and we have heard that the number of live Vantage (an ADP product) customers remains relatively small."

Ultimate Software pursues a slightly different demographic from ADP. While ADP has employers anywhere from one to thousands of employees, Ultimate Software does not focus on the small-business market up to 200 employees. Instead, it pursues companies with 200 to 85,000 employees. Its market share is about 5% for the up-to-1,000-employee market and 10% in the enterprise niche for larger employers.

Nevertheless, management has discussed plans to enter the small-business market with up to 500 employees as a third distribution channel.

Its flagship product is UltiPro. It is an all-in-one cloud-based solution, providing employers with payroll administration, tax management, compliance, human resources, benefits administration, talent management, time tracking, performance management, salary budgeting, recruitment, reporting and analytics under one umbrella.

"Instead of having to run multiple reports, like you might have to with ADP, with Ulti it's all under one stack. I think the biggest reason why customers come to them is their unified architecture, where they have all these different products in one stack. Companies can run reports easily," said Furby.

The company's recurring revenue makes up 82% of total revenue. Management expects it to grow at a 25% rate in 2013. This is also the higher-margin portion of revenue, with retention rates above 95%.

The services line revenue is 18% of total revenue and comes from implementation services for new clients. This stream is viewed as less important by investors, and it can fluctuate from quarter to quarter.

One of the risks analysts are naming is competition from new or existing competitors. Aside from the large companies, such as ADP and Ceridian, that may choose to upgrade their solutions,Workday ( WDAY ) is one that investors have been paying attention to.

Different Lineup

However, the focus of Workday is slightly different, analysts point out. The company provides a different product lineup and is also more globally focused, while Ultimate Software's main focus is the U.S. and Canada.

"Workday has made quite a splash," noted Marcon. "Now, Workday and Ultimate aren't directly comparable. There's different elements of emphasis."

Ultimate Software is also building out a next-generation platform. It expects to roll out updated modules of its existing products over the next few years. The first module to be updated is recruiting. The company plans to sell it to new customers in the first half of 2014. Converting existing customers will take place several months later.

"They've been through these transitions before," said Furby. The company successfully went from a DOS-based product to .NET and then from on-premise software to SaaS. "People are going to be watching 'how is that progression' over the next few years in terms of how are they doing with the new technology and how are they doing with transitioning customers from the legacy to the newer technology."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: ADP , ULTI , WDAY

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