Ultimate Software Offers Solid Upside for Investors

The company's third quarter revenue rose 22% year over year, and Ultimate has continued to see strong demand for its products and services.
By Rob DeFrancesco ,

Ultimate Software (ULTI) stock is up 38% this year. Given the momentum in the business, there's likely more upside for the provider of cloud-based human capital management (HCM) software. The company, with more than 20 million users in its HCM cloud, is on track to hit its goal of $1 billion in revenue in 2018.

The company's superb growth prospects are similar to those of this promising group of tech stocks.

Ultimate continues to see solid demand from both large and smaller customers for its recruiting, on-boarding, time management and performance management software. It's also exploring a move into learning management to further diversify.

In the third quarter, revenue of $155.3 million rose 22% year over year. That was largely made up of recurring revenue of $131.8 million, which advanced 23%. Per-share earnings of 69 cents beat the consensus estimate by six cents. Gross margin rose slightly year over year to 63.3%. The customer retention rate (over a rolling 12-month period) remains high at 96%.

Ultimate has a strong presence in the mid-market, serving customers with between 501 and 1,500 employees. In that segment, attach rates for the company's on-boarding and time management modules are high, at 91% and 83%, respectively. At the higher end, Ultimate continues to gain traction at much larger organizations, recently winning several new accounts with more than 10,000 employees. It even snagged a grocery chain with more than 23,000 employees.

In the latest quarter, the newer Strategic sales team, which is focused on smaller customers (organizations with 300 to 500 employees), had its best performance ever, with 73% of the sales reps above quota. The results mirrored the market-beating prospects of other up-and-coming stars in the tech sector.

ULTI

data by

YCharts

Down the road, a new partnership with NetSuite, a major player in cloud-based enterprise resource planning (ERP) software, should provide a growth catalyst. In March, the two companies teamed up to integrate their offerings, a move intended to enable customers to more easily manage their back-office functions. Sales reps from Ultimate and NetSuite are now able to cross-sell solutions to each other's customer bases. Ultimate should be the real beneficiary because it gains direct access to NetSuite's 24,000-plus customers. This alliance should pose a competitive threat to cloud-based solutions providers such as ServiceNow.

For Ultimate customers, the direct benefits of the partnership include a single sign-on for employees to access their HCM solutions along with NetSuite applications; seamless movement of new-hire data from the HCM/payroll system to the ERP system for immediate access to other applications; and reduced IT costs in integrating data between the systems.

To continue to drive revenue growth, Ultimate has been building out its sales force. The company entered 2015 with 92 quota-carrying reps. Entering 2016, the rep count will be 25% higher at 115. That will be made up of 40 in the enterprise segment, 41 in mid-market, 32 on the Strategic team and two covering managed services.

In its third-quarter earnings call, the company reaffirmed its revenue guidance of $617 million for 2015. That represented growth of 22%. Looking ahead to next year, Ultimate's top-line growth forecast of 23% translates into revenue of around $759 million, above the consensus estimate of $750.1 million (growth of 21.6%).

With continued operating margin expansion at Ultimate, earnings growth is expected to accelerate. The 2016 consensus EPS estimate of $3.15 indicates growth of 23%, up from growth of 21% expected for this year.

If you're looking for other innovative tech companies on the cusp of explosive growth, click here.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

Loading ...