Ultimate Software Group (ULTI)

Q2 2011 Earnings Call

July 26, 2011 5:00 pm ET

Executives

Scott Scherr - Founder, Chairman of the Board, Chief Executive Officer, President and Chairman of Executive Committee

Mitchell Dauerman - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Analysts

Richard Davis - Canaccord Genuity

Laura Lederman - William Blair & Company L.L.C.

Sachin Jain - Kaufman Bros., L.P.

Patrick Walravens - JMP Securities LLC

Michael Huang - Needham & Company, LLC

Ilya Grozovsky - Morgan Joseph TriArtisan LLC

Brian Schwartz - ThinkEquity LLC

Nathan Schneiderman - Roth Capital Partners, LLC

Richard Baldry - First Albany Capital

Bradley Whitt - Gleacher & Company, Inc.

Matthew Coss - Piper Jaffray Companies

Mark Marcon - Robert W. Baird & Co. Incorporated

Presentation

Operator

Compare to:
Previous Statements by ULTI
» Ultimate Software Group's CEO Discusses Q1 2011 Results - Earnings Call Transcript
» Ultimate Software Group's CEO Discusses Q4 2010 Results - Earnings Call Transcript
» The Ultimate Software Group CEO Discusses Q3 2010 Results - Earnings Call Transcript

Hello, and welcome to Ultimate's Second Quarter 2011 Financial Results Conference Call. [Operator Instructions] Today's conference is being recorded. Your presenters today will be Mr. Scott Scherr, Chief Executive Officer, President and Founder of Ultimate; and Mitchell K. Dauerman, Executive Vice President and Chief Financial Officer.

We will begin with comments from Mitchell Dauerman. Please go ahead.

Mitchell Dauerman

Okay. Thank you, Marvin. Good afternoon, and 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 upon 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 publicly 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 second quarter of 2011. And then, I'll provide financial guidance for the third 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 noncash 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 published on our website.

For the second quarter of 2011, Ultimate reported recurring revenues of $52 million, representing 26% growth over the same quarter last year. Annualized customer retention exceeded 96% for our recurring revenue customer base. Operating income was $6.6 million and our operating margin was 10.3% for the quarter. Non-GAAP net income was $3.8 million or $0.14 per diluted share compared with $2.3 million or $0.09 per diluted share for the same quarter last year.

Our second quarter recurring revenues were $52 million and represent 81% of total revenues compared with 76% for the second quarter of last year. The recurring revenue gross margin of 70.8% was in line with our expectations. Service revenues were $11.8 million, and in comparison to Q1 of this year, reflect the seasonality of W-2 revenues, which were included in Q1. The services gross margin reflect our overall business strategy as we have invested, and we'll continue to invest in our Partners for Life program. License revenues are $400,000 for the quarter and were modestly ahead of our expectations due to the employment-related growth of our on-premise customers. Operating expenses were $30.6 million for the quarter, in line with our expectations. Our operating margins for the second quarter are 10.3% compared with 7.2% last year, was due to the higher contribution from recurring SaaS revenues. Our non-GAAP income tax rate for the quarter was 41%.

Turning to the balance sheet. Total cash and investments and marketable securities were $54 million. On a year-to-date basis, we generated $15.2 million in cash from operations compared with $10 million for the same period last year. We invested $9 million in total capital expenditures on a year-to-date basis, compared to $3.8 million last year. As a reminder, these expenditures included the impact of moving into additional office facility.

We used $7.9 million to acquire approximately 150,000 shares of our common stock during the quarter and for the year-to-date. We have approximately 255,000 shares remaining that are authorized in our buyback program. In addition, we used $1.2 million and $3.6 million for the quarter and the year-to-date period to repurchase shares required for settling employees' tax withholding obligations associated with the restricted stock units divested for the respective periods.

Accounts receivable increased to $46.7 million compared with $42.1 million at the end of June last year. DSOs were 66 days at the end of June 2011 compared to 70 days for the comparable period last year. However, deferred revenues were $73.2 million on June 30, compared with $61.5 million at June 30 last year. As a reminder, deferred revenues in the first half of the year reflects the seasonality in annual maintenance builds.

Long-term deferred revenues were $4.8 million on June 30, 2011, compared with $7.5 million for the same period last year, reflecting the elimination of onetime infrastructure fees in most of our new SaaS contracts as a result of the introduction of the Partners for Life program.

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