TechWeek: Ultimate Software Fighting

Salesforce.com(CRM Quote) isn't exactly the Kleenex of the software world, but it's pretty close to being synonymous with "on demand." And even those in the know look at on-demand, a business model that features subscriptions instead of licenses and software that runs on the vendors' -- not the customers' -- hardware, as being closely related to customer-relationship management.

But Ultimate Software(ULTI Quote), a smallish-cap company that is approaching the $100 million annual sales barrier, is showing that the model may have legs.

Ultimate, which makes a living providing the kind of outsourced payroll services usually associated with companies like ADP(ADP Quote), reported fourth-quarter financials this week, and the results were a lot better than Wall Street had anticipated.

The Weston, Fla., company delivered a profit of $1.8 million, or 7 cents a share, on revenue that increased 21.7% to $25 million. Analysts polled by Thomson First Call were looking for earnings of 5 cents a share on sales of $23.3 million.

Guidance was strong; the company expects to grow revenue by 27% to 30% in 2006, and bookings, called annual recurring revenue by the company, should grow by 20% to 23%. Shares of Ultimate took off on the news late Thursday, and on Friday shares gained $1.45, or 6.8%, to $22.87.

Before the rally, shares were trading at 64 times estimated 2006 earnings and 41 times estimates for 2007. That's rather cheap compared to Salesforce, trading at 164 and 84 times forward earnings, but a lot more expensive than warhorses like Oracle, trading at 16 and 14 times earnings.

It's worth noting that Ultimate gives neither quarterly nor EPS guidance. The reason: "We don't want to be held hostage to fluctuations in those numbers," CEO and founder Scott Scheer said. Instead, he counsels Wall Street to focus on recurring revenue, which he sees as the foundation of his business. Indeed, Ultimate pays its sales reps a premium of 40% for selling on-demand products as opposed to licensed products.