The Ultimate Software Group's CEO Discusses Q1 2012 Results - Earnings Call Transcript

The Ultimate Software Group (ULTI)

Q1 2012 Earnings Call

April 24, 2012 5:00 pm ET

Executives

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

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

Analysts

Richard K. Baldry - Wunderlich Securities Inc., Research Division

Laura Lederman - William Blair & Company L.L.C., Research Division

Richard H. Davis - Canaccord Genuity, Research Division

Michael Huang - Needham & Company, LLC, Research Division

Mark R. Murphy - Piper Jaffray Companies, Research Division

Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Nathan Schneiderman - Roth Capital Partners, LLC, Research Division

Eric Lemus

Raghavan Sarathy - Dougherty & Company LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Ultimate's First Quarter 2012 Financial Results Conference Call. [Operator Instructions] And today's conference is being recorded. Your presenters today will be Mr. Scott Scherr, Chief Executive Officer, President and Founder of Ultimate; and Mr. Mitchell K. Dauerman, Executive Vice President and Chief Financial Officer. We will begin with comments from Mr. Dauerman. Please go ahead, sir.

Mitchell K. Dauerman

Thank you, Sarah. 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 will 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 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 statement, 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 of 2012, and then I will provide 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 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 quarter, recurring revenues grew by 21.9% to $60.9 million. Total revenues grew by 21.4% to $78.3 million. Operating income increased by 32% to $6.4 million and operating margin expanded to 8.2%. Net income grew to $3.7 million compared with $2.8 million last year. The related net earnings per diluted share was $0.13 compared to $0.10 per diluted share last year.

Before I go into some of the details, I'd like to summarize the quarter's results. As many of you know, there's a strong correlation between the growth of our recurring revenues and our services revenues, and both are tied to go-live dates of our clients. It's the nature of our business, at times, that some live dates push to the next quarter and in other times, we pull some new lives into the quarter due to accelerated activations. In the first quarter this year, our recurring revenues of $60.9 million and services revenues of $17 million exceeded our projections, mostly due to more pulls into the quarter than we expected. At the same time, our operating expenses for Q1 were favorable, resulting in an operating margin of 8.2% that was also higher than our expectations.

As I'll discuss at the end of my comments, we're going to maintain guidance for 2012. The primary reasons are: First, there could be some pushes later in the year; and second, some of the operating expense savings we experienced are timing-related, and we expect them to be incurred later in the year.

Now turning to the details, our recurring revenue gross margin of 69.5% was consistent with our expectations as we continue to make investments in our tax filings and our SaaS infrastructure that we've discussed in the past. The services gross margin was 5.9%, which was impacted favorably by the higher services revenues. As a reminder, Q1 also includes annual revenues related to the production of W-2s for our clients. And these do not occur in any other quarter of the year. We are maintaining our 2% to 5% gross margin guidance for 2012 as we will continue to add billable consultants due to continued sales growth.

The gross margin rate for total revenues was 55.7%. The change from 2011 was related to the expected lower recurring revenues gross margins based upon the planned headcount additions to our tax filing and SaaS infrastructure teams in the beginning of this year.

Operating expenses were $37.1 million for the quarter and were favorable to our expectations. We expect a significant portion of these expense savings to be incurred later this year.

Operating income was $6.4 million, and our operating margin was 8.2% for the quarter compared to $4.9 million and 7.6% for the same quarter last year. The excess margin over our guidance was due to the higher recurring and services revenues, coupled with slightly lower costs. Net income was $3.7 million or $0.13 per diluted share compared with $2.8 million and $0.10 per diluted share for the same quarter last year. Our non-GAAP income tax rate for the quarter was 42%.

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