Ultimate Software Group (ULTI) Q3 2011 Earnings Call October 25, 2011 5:00 pm ET Executives Scott Scherr - Founder, Chairman of the Board, Chief Executive Officer, President and Chairman of Executive Committee Mitchell K. Dauerman - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer Analysts Brian J. Schwartz - ThinkEquity LLC, Research Division Laura Lederman - William Blair & Company L.L.C., Research Division Mark R. Murphy - Piper Jaffray Companies, Research Division Eric Lemus Michael Huang - Needham & Company, LLC, Research Division Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division Brad Reback - Oppenheimer & Co. Inc., Research Division Ilya Grozovsky - Morgan Joseph TriArtisan LLC, Research Division Nathan Schneiderman - Roth Capital Partners, LLC, Research Division Unknown Analyst - Richard K. Baldry - Wunderlich Securities Inc., Research Division Michael B. Nemeroff - Morgan Keegan & Company, Inc., Research Division Presentation Operator
I'm going to begin by reviewing our financial results for the third quarter of 2011, and then I'll provide financial guidance for the fourth quarter and preliminary guidance for 2012. 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 third quarter 2011, Ultimate reported recurring revenues of $54.7 million, representing 24% growth over the same quarter last year. Operating income was $8.6 million and our operating margin was 12.7% for the quarter. Non-GAAP net income was $4.9 million or $0.18 per diluted share compared with $3.5 million and $0.13 per diluted share for the same quarter last year. Our third quarter recurring revenues of $54.7 million represent 81% of total revenues compared with 77% for the third quarter of last year. The recurring revenue gross margin of 70.4% was in line with our expectations. Service revenues were $12.8 million. The Services gross margin reflects our overall business strategy as we have invested and will continue to invest in our Partners for Life program. Operating expenses were $30.2 million for the quarter, slightly better than our expectations, and our operating margin for the third quarter was 12.7% compared with 10.1% last year due to a higher contribution from recurring SaaS revenues. Our non-GAAP income tax rate for the quarter was 42.3%, bringing our expected annual tax rate up to 41.6% from 41%. Turning to the balance sheet. Total cash and investments and marketable securities were $52.2 million. On a year-to-date basis, we generated $23.6 million in cash from operations, compared with $16.3 million for the same period last year, representing a 45% increase. We invested $13 million in capital expenditures on a year-to-date basis compared with $6.1 million last year. We used $9.4 million to acquire approximately 197,000 shares of our common stock during the quarter and $17.3 million to acquire approximately 347,000 shares for the year-to-date period. Today, we announced the expansion of our stock repurchase plan to buy 1 million shares. We have approximately 1,058,000 shares remaining authorized in our buyback program.
Accounts receivable increased to $46.6 million compared to $42.8 million at the end of September last year. DSOs were 63 days at the end of September 2011, compared with 69 days for the comparable period last year. Current deferred revenues were $75.6 million on September 30, compared with $63.8 million at September 30 of last year.Long-term deferred revenues were $3.8 million at September 30, 2011, compared with $6.6 million last year, reflecting the elimination of onetime infrastructure fees in our SaaS contracts as a result of the introduction of the Partners for Life program. Next, I'd like to frame our guidance for Q4 '11 and for 2012. For the third quarter in a row, our bookings growth was significantly higher than the prior year. This has been fueled in large part by an increasing percentage of our sales coming from large customers. With a higher concentration of larger deals in our backlog, we now have a significant amount of bookings that will go live in late 2012 and early 2013. The combination of these items allows us to attain our 2012 recurring revenue goal with a higher degree of visibility than in the past and also gives us enhanced confidence in our revenue growth potential in 2013. Read the rest of this transcript for free on seekingalpha.com