Markets

Is Ultimate Software On Track To $1 Billion In Sales?

Shutterstock photo

U ltimate Software Group has made no secret of its intention to become a $1 billion company in 2018 -- a lofty goal for a firm that logged just over $500 million in revenue last year and competes against much larger outfits like Oracle and Automated Data Processing ( ADP ).

GivenUltimate 's ( ULTI ) current growth trajectory, however, the goal looks well within reach.

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

Its main product is UltiPro, software that manages the employment life cycle from recruitment to retirement. Ultimate delivers it via the Internet cloud and mainly focuses on two customer types: enterprise companies with 1,000 or more employees, and mid-market companies with fewer than 1,000 employees.

Ultimate competes in the human capital management (HCM) market. It's a crowded field that includes payroll and enterprise resource planning (ERP) software firmsOracle ( ORCL ) andADP ( ADP ) as well asPaychex ( PAYX ) and Ceridian, which is partly owned byFidelity National Financial ( FNF ).

Recurring Revenue Racks Up

Ultimate's ability to compete for business is borne out in its financial results. The company has put together a years-long streak of 20% or better revenue growth. More importantly, it has grown recurring revenue -- business that is likely to continue in the future -- by at least 25% per year for 14 straight years.

The company boasts an excellent IBD Composite Rating of 98 out of a possible 99. Ultimate stock set a new high of 187.79 on Wednesday.

Based on customer surveys, Ultimate's success in landing new business is due to a variety of different factors, says CEO Scott Scherr. Among other things, they include Ultimate's culture, the functionality of its products and the quality of the reporting, analytics and business intelligence that the company's customers receive.

"Our goal is to innovate all the time -- to make the product better all the time and to make the service better all the time," Scherr told IBD.

Ultimate also benefits from its growing brand recognition and its expertise as a payroll provider, especially in the mid-market, notes JPMorgan analyst Mark Murphy.

The company "stands out as one of few SaaS companies growing above 20% with a double-digit operating margin, and it demonstrated impressive business model resilience during the last U.S. recession," Murphy noted in a recent research report. "We expect consistent execution with recurring revenue growth in the low- to mid-20s as we see ample runway for Ultimate to attract a couple hundred new customers per year."

In addition to strong recurring revenue growth, Ultimate also boasts a customer retention rate of around 97%, Scherr says.

"Recurring revenue is the holy grail -- it's what we depend on to maintain our momentum," he said.

"When you have 97% retention of that revenue, it's obviously a good business model," Scherr added. "Our goal now is to become a $1 billion company in 2018, and I think we are firmly on track for that."

In a second-quarter earnings note, Murphy said that Ultimate management can "taste" the $1 billion revenue mark. He cited "strong momentum of bookings, the pace of hiring, evidence of larger deals and excitement around pipelines."

'Best Sales Quarter'

Ultimate reported Q2 recurring revenue of $124.4 million, up 22% from the prior year. Overall revenue climbed 21% to $147.2 million, topping the consensus view of analysts polled by Thomson Reuters. Recurring revenue made up 84% of the total, with the rest coming from support services provided to clients.

Ultimate's quarterly earnings rose 35% to 62 cents a share, also above estimates.

"It was the best sales quarter in our history, which followed Q1, which had been the best in history," Scherr said. "There is definitely momentum in the business right now, and we're just trying to take advantage of that as long as we can."

One way it looks to take advantage is by beefing up its workforce, particularly its sales team.

"We are adding 50 people a month, which says something about our growth," Scherr said.

Once it hires someone, Ultimate has a 93% employee retention rate, he says.

The company gets about 60% of its employees from in-house referrals. The rest are evenly split between Ultimate's postings of jobs on job boards and its Tech Stars and Rising Stars internship program.

Doing Deals With NetSuite

Meanwhile, Ultimate looks for another boost from a partnership that it inked in March withNetSuite (N), a provider of ERP cloud services.

Under terms of the deal, the two companies will integrate Ultimate's UltiPro HCM solution and NetSuite's ERP suite as a way of letting joint customers manage a host of different tasks, including financials, supply chain, CRM, payroll, human relations and talent management.

In addition, NetSuite will refer HCM/payroll opportunities to Ultimate, which will in turn send ERP/financial leads to NetSuite.

The two closed six joint deals during the second quarter. Around 100 joint deals remain in the pipeline. CEO Scherr calls it "the perfect deal" to help both companies.

"They are not in our business, and we are not in their business," he said. "Our businesses complement each other. They built a better mousetrap in what they do, and we built a better mousetrap in what we do. It has a tremendous benefit to us. It helps both companies against a certain type of competition, which is ERP."

Scherr also called the partnership "one of the things that helps us break through $1 billion in 2018."

The bottom line is also forecast to see decent growth. Analysts polled by Thomson Reuters expect Ultimate to increase annual EPS 18% this year and 23% in 2016.

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


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

In This Story

FNF ORCL ADP PAYX

Other Topics

Investing