Long-Term Holders Of Ultimate Software: Use Wednesday's Weakness As Buying Opportunity

Justin Furby of William Blair commented in the earnings report in a research report. The analyst noted that Ultimate Software's recurring revenue grew 25 percent and was nearly $1 million higher than expected but the non-GAAP earnings per share line fell short of expectations for the first time in four years.

Additional Commentary

Ben Axler, the chief information officer and founder of Spruce Point Capital, was a guest on Benzinga's PreMarket Prep Tuesday morning to explain his short thesis against owning the stock.

Furby argued in his report that the earnings miss "was for the right reasons" as the company hired new support and services headcount and also coincided with a record fourth-quarter bookings. These factors did result in pressure on the non-GAAP gross margin and earnings.

Ultimate Software also guided its non-GAAP operating margin to be 16 percent, which is below the Street's estimate of 18 percent as the new hires precede revenue. However, the analyst believes that management is "being more conservative than normal" in this outlook.

In terms of competition, Ultimate Software said that it saw Workday Inc WDAY about 10 percent of the time and won in slightly more than 50 percent of these days.

Finally, Furby believes that Ultimate Software's stock will trade lower due to the "rare" earnings per share miss and disappointing operating margin guidance. However, investors should be focusing on the "bigger story" in the quarter, which was a record booking performance and an "overly conservative" outlook.

"We also see current valuation levels as attractive, with the stock trading at 6.2 times our calendar 2017 revenue, versus the comp group at 7.3 times, and we would use any potential weakness in shares today as a buying opportunity for long-term holders," the analyst concluded.