Ultimate Software Rides Cloud To Lead Workforce Niche

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Maybe the race wasn't to the swift during biblical times, but in the 21st century you'll get left behind in a hurry if you're slow out of the gate with new technologies.

Rivals ofUltimate Software Group ( ULTI ) are finding that out.

Ultimate makes workforce management software designed to help clients better manage employee-related services such as payroll, benefits, recruiting, performance management and time management.

The core product is UltiPro, software that manages the employment life cycle from recruitment to retirement. Ultimate delivers it via the Internet cloud.

That last part -- the cloud -- is what separates Ultimate from others in its industry, analysts say. Ultimate was an early mover in designing an integrated, cloud-based human resources/payroll system, giving it a leg up on rivals who have taken longer to leverage the cloud.

"As the move to the cloud has accelerated, Ultimate has been one of the biggest beneficiaries," said Samad Samana, analyst at FBR Capital Markets. "They are taking a lot of customers away fromADP ( ADP ), Ceridian andPaychex ( PAYX )."

Clout Of The Cloud

Cloud-based systems have several advantages over hardware-based systems, Samana told IBD.

"There is a lower overall cost of ownership because you don't have to purchase hardware," he said. "There's less staff cost in terms of management. And there are more frequent updates to the software, which helps you keep up with the pace of innovation."

Ultimate's ability to trot out new products and innovations has been one of the keys to its consistent financial growth through the years. The company posts double-digit sales and earnings gains with regularity and is expected to keep doing so well into the future.

"The market for Ultimate's solutions is large and growing rapidly. The company has strong, highly regarded products, increasing scale, and a business model that better balances revenue growth and profitability than many SaaS (software as a service) peers," MKM Partners analyst Kevin Buttigieg noted in a report last month initiating coverage on Ultimate with a "buy" rating.

Ultimate boasts 2,700 customers with employees in 150 countries. Its client list features a diverse range of firms, including software makerAdobe Systems ( ADBE ), restaurant operatorsBloomin' Brands ( BLMN ) andTexas Roadhouse (TXRH), auto parts retailerPep Boys (PBY) and Major League Baseball.

Ultimate mainly focuses on two types of customers: enterprise companies, defined as those with more than 1,500 employees, and mid-market companies, or those with around 500 to 1,500 employees.

Ultimate's enterprise sales team, which consists of 75 sales reps, has "an unusually low turnover" rate with an average tenure of 10 years, Barrington Research analyst Jeff Houston noted following Ultimate's third-quarter earnings report on Oct. 28.

He cites several reasons for the low turnover, including "not penalizing successful salespeople by narrowing their territories as well as world-class benefits."

Winning Business

During a conference call with analysts, Ultimate CEO Scott Scherr noted a number of enterprise wins during the company's third quarter, though he didn't divulge the names of the customers. These included a "high-profile" restaurant chain with 18,000 employees, a security company with 6,500 employees and an education services company with 3,600 employees.

While most of Ultimate's business comes from large and mid-sized clients, the company has lately increased its efforts to land more smaller companies of 500 or fewer employees, analyst Houston says.

"Management was clear that it has been selling to companies with fewer than 500 employees for a long time, and that it is just adding more salespeople to target the low end of the market," he noted.

FBR's Samana reckons it will be some time before the move to land more smaller clients begins to have much impact on Ultimate's financial results.

"The move downstream is a newer initiative for them, so it's something where we will see a bigger contribution a couple of years from now," he said. "It's not as big a driver in the near term."

What About Job Gains?

Although analyst Houston says Ultimate stands to benefit as the economy adds jobs, CEO Scherr mentioned on the third-quarter conference call that with new customers being Ultimate Software's biggest growth driver, changes in employment "are not that material" to the overall growth goal.

During the third quarter the company logged revenue of $127.4 million, up 24% from the prior year and just ahead of consensus analyst views. Earnings gained 25% to 50 cents a share, topping estimates by a penny.

Recurring revenue, or revenue that is likely to continue in the future, increased 26% during the quarter.

"The increase was primarily attributable to revenue growth from our cloud offering," Scherr said in a statement.

Analysts polled by Thomson Reuters expect Ultimate to post full-year 2014 earnings of $2.02 a share, up 26% from a year earlier. EPS is seen rising another 22% to $2.46 in 2015.

The company's stock price touched a nearly eight-month high of 156.20 on Tuesday. Shares are up 20% since Oct. 10.

Ultimate is part of IBD's Computer Software-Enterprise group, which ranks No. 7 out of 197 industries tracked. The company has an IBD Composite Rating of 97, which ranks fifth in the group. Three stocks in the group have Composite Ratings of 99:Manhattan Associates (MANH),Paycom Software (PAYC) andSynchronoss Technologies (SNCR).

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

This article appears in: Investing , Investing Ideas
Referenced Symbols: ADP , PAYX , ADBE , BLMN

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