The Ultimate Software Group, Inc. Q1 2010 Earnings Call Transcript

The Ultimate Software Group, Inc. Q1 2010 Earnings Call Transcript
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The Ultimate Software Group, Inc. (ULTI)

Q1 2010 Earnings Call

April 26, 2010 5:00 pm ET

Executives

Scott S. Scherr – Chairman of the Board, President & Chief Executive Officer

Mitchell K. Dauerman – Chief Financial Officer, Executive Vice President & Treasurer

Analysts

Richard K. Baldry – Canaccord Adams

Laura Lederman – William Blair & Company

Ilya Grozovsky – Morgan Joseph

Terry Tillman – Raymond James & Associates

Bradley G. Whitt – Broadpoint AmTech

Raghaven Sarathy – Dougherty & Company

Michael Nemeroff – Wedbush Morgan Securities

Nathan Schneiderman – Roth Capital Partners

David E. Cohen – JP Morgan

Brad Reback – Oppenheimer

Presentation

Operator

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Previous Statements by ULTI
» Ultimate Software Group Q4 2009 Earnings Call Transcript
» The Ultimate Software Group Q3 2009 Earnings Call Transcript
» The Ultimate Software Group, Inc. Q2 2009 Earnings Call Transcript

Welcome to Ultimate Software’s first quarter 2010 financial results conference call. At this time all participants are in a listen only mode. Today’s conference is being recorded. Your presenters today will be Mr. Scott Scherr, Chief Executive Officer, President and Founder of Ultimate Software and Mitchell K. Dauerman, Executive Vice President and Chief Financial Officer. We will now begin with comments from Mitchell Dauerman.

Mitchell K. Dauerman

Thank you for your interest in Ultimate Software. Before we begin, please be aware that we will be discussing our business outlook and we’ll be making other forward-looking statements regarding our current expectations of future events and the future financial performance of the company. These forward-looking statements are based on information available to us as of today’s date and are subject to risks and uncertainties.

We encourage you to review our filings with the SEC at

www.SEC.gov

for additional information on risk factors that could cause actual results to differ materially from our current expectations. We assume no duty or obligation to publically update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

I’m going to begin by reviewing our financial results for the first quarter 2010 and then I’ll provide financial guidance for the second quarter. Unless otherwise noted, our discussion will be on a non-GAAP basis for all costs, gross margins, operating and net income as well as EPS when comparing to the same period in the prior year. The primary difference between GAAP and non-GAAP financial information is non-GAAP, non-cash stock based compensation. Please refer to the reconciliation of our financial information on a GAAP basis to that on a non-GAAP basis included in the press release and published on our website.

For the first quarter of 2010, Ultimate recorded total revenues of $55.7 million and recurring revenues of $39.5 million. Non-GAAP net income for the first quarter 2010 was $2.4 million or $0.09 per diluted share and GAAP net income was $300,000 or $0.01 per diluted share. As I mentioned, our recurring revenues were $39.5 million, representing a 28% increase over the same quarter 2009.

Recurring revenues represented 71% of total revenues this quarter compared to 63% for the first quarter of last year. The recurring revenue gross margin of 71.6% was slightly ahead of our expectation. As we mentioned last quarter, the Q1 recurring revenue gross margin of $28.3 million continued to exceed our total operating expenses which were $27.5 million. The annualized retention rate was 96% for our recurring revenue customer base. The marginal change in this rate was due to increased M&A activity and business failures from some of our customers.

Service revenues for Q1 were $15.6 million and our services gross margin was 17.6%. Both were more than our expectations mostly due to higher than expected W2 revenues. Our guidance for Q2 takes in to consideration that W2 revenues are generated only in Q1 of each year and therefore it is typical that service revenues will decline from Q1 to Q2. License revenues were $600,000 for the quarter. There were no new perpetual license sales in Q1 however, there were purchases of licenses for complimentary products from existing licensed based clients. We expect license revenues to be nominal for the balance of the year.

Our total gross margin rate for the quarter was 56.6%. Operating expenses were $27.5 million, a little better than our expectations with a portion of the savings coming from timing related items. Our operating margins for the quarter were 7.2% and were ahead our expectations of 6% and this was driven mostly by higher revenues and slightly lower operating expenses than expected. Excluding the impact of license revenues, total revenues for Q1 grew by 18% and the incremental operating margin expanded by 30% or 430 basis points. Our non-GAAP income tax rate for the quarter was 41%.

Turning to the balance sheet, total cash and marketable securities were $35.1 million at March 31. For the quarter, we generated $5 million in cash from operations, we invested $2.1 million in cap ex. Free cash flow was $2.9 million or $0.11 per diluted share as compared to $900,000 or $0.04 per diluted share in the first quarter of 2009. As part of our stock repurchase program we used $3.7 million in the quarter to acquire a 120,500 shares of our common stock. We have slightly over 894,000 shares authorized and available for repurchase as of today.

Accounts receivable increased to $37.9 million compared to $32 million at the end of March last year. DSOs were 61 days at the end of March 2010 consistent with March of last year. Deferred revenues were $67.2 million on March 31

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compared to $61.3 million a year ago. As a reminder, deferred revenue in the first quarter reflects the seasonality in annual maintenance billings in which it is typically that maintenance revenues recognized in the income statement will exceed the annual maintenance billings recorded as deferred revenue on the balance sheet. In addition, deferred revenues also reflect the change in contractual implementation services which tend to fluctuation from one period to the next as well as changes in our billing practices which we discussed on the last quarter’s earnings call.

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