TechWeek: Ultimate Software Fighting

In the fourth quarter, annual recurring revenue increased by 43.5% to $5 million, well over Wall Street's estimates. "What is particularly surprising to us is not that management raised guidance, but that they only waited one quarter after giving preliminary 2006 guidance to do so," said analyst Karen Haus of WR Hambrecht in a note to clients. Her company does not have an investment banking relationship with Ultimate.

License revenue, generally the focus of investors, goes right to the income statement and, of course, affects earnings immediately. Subscription revenue -- 70% of new Ultimate customers choose to pay by the month -- is recognized ratably, and like maintenance revenue it keeps coming in as long as the customer stays loyal. And Scheer, who founded Ultimate in 1990 after a stint at ADP, boasts that 97% of his customers stay with him, "including the very first one."

While Ultimate was wowing Wall Street (Haus' headline read "wow") Oracle(ORCL) on Thursday delivered a not-very-surprising update to its guidance that reflects the closing of its $5.85 billion acquisition of Siebel Systems. Morning-after reactions ranged from the mildly disappointed to the mildly upbeat.

Analyst Tony Ursillo, of Loomis & Sayles, was in the slightly unhappy camp, saying he hadn't expected the acquisition to be dilutive in the near term (it knocked a penny off EPS guidance), and said Siebel's contribution to the quarter of just $10 million in license revenue "was weak."

Even so, he noted that at today's low valuations "there isn't all that much downside." His company has a small position in Oracle.

Rick Sherlund of Goldman Sachs, on the other hand, said: "The guidance implied a bit better tone of business for Oracle's core business this quarter, which may be a moderate positive for the stock." Sherlund reinstated his in-line/attractive rating.

"Specifically, guidance implied February quarter license revenues from Oracle would be about $1.071 billion to $1.118 billion (this excludes our estimate of $15 million from Siebel), which compares with our earlier estimate of $1.091 billion, so the high end is a bit more optimistic than our estimate," Sherlund wrote. Goldman has an investment banking relationship with Oracle.

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