A Disappointing Q2 Doesn't Derail The Bull Thesis On Ultimate Software

Despite a more than 10-percent plunge in The Ultimate Software Group, Inc. ULTI's stock Wednesday, analysts at Canaccord Genuity aren't ready to part with their bullish stance on the stock. The firm's David Hynes maintains a Buy rating on Ultimate Software's stock with a price target lowered from $240 to $225 as shorts are taking a victory lap "for the wrong reason."

Among some of the bullish read-outs from the SaaS company's earnings report is the fact that the company met or exceeded year-to-date bookings objectives across the enterprise, mid-market and strategic segments, Hynes argued. In fact, the average employee size of deals that were inked in the first half of 2017 rose 50 percent from a year ago.

What Went Wrong?

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Meanwhile, Ultimate Software's Perception and Learning products realized early signs of traction as the attach rates for both were roughly 20 percent in just their second full quarter, the analyst continued. Also, the company's marketing metrics were encouraging as "looking to buy leads" were near all-time highs and organic search trends rose 112 percent, which implies a TV advertising campaign is seeing solid returns.

Heading into Ultimate Software's report, investors were likely expecting to see a continuation of sales growth but the company disappointed with a poor performance and a reduction in its sales outlook for the rest of the year. As such, the quarter was indeed a "surprise and a disappointment," but there is more to the story.

"For those with a longer-term view, we'd remind investors that we've seen this exact problem before, back in 2008, when ULTI first started going up-market," the analyst explained. "Time-to-live extended as implementation requirements became more complex, management adjusted the model, and while the stock took its lumps for a period of time, the business emerged with the predictability that we have grown accustomed to."

Ultimate Software is facing the same problem today it did in 2008, and there is no reason not to expect a similar outcome, the analyst concluded. After all, the company is facing a demand issue which is "actually a good problem to have" but may take a few quarters to work through.

At time of publication, shares of Ultimate Software were down 11.22 percent at $201.53.