Ultimate Software Downgraded, Victim Of A 'High-Class' Problem

Singling out one main reason for The Ultimate Software Group, Inc. ULTI's mixed quarter and tempered forward guidance, Deutsche Bank said mix shift skewing to larger customers will, in the near term, slow revenue growth and pressure margins.

Accordingly, the firm downgraded the shares of the company. The firm, however, feels the mix shift is good longer term.

Analyst Nandan Amladi noted the company reported second-quarter earnings of 93 cents per share, exceeding the estimate of 90 cents, thanks to lower expenses (see his track record here). However, revenues of $224.7 million trailed the estimate of $228 million due to longer go-lives with larger enterprise and midmarket customers.

The firm also noted that the company lowered its full year recurring revenue growth guidance to 22 percent from 25+ percent previously and operating margin guidance to 19 percent from 21 percent. The company blamed the tempered expectations to delays at customer sites.

Meanwhile, Deutsche Bank termed the company's revenue target of $1 billion for 2018 and $2 billion for 2022, record bookings during the quarter, average customer size growth, both in Enterprise and Mid-market, a jump in inbound web traffic and leads and higher attach rates across the suite as positives.

The firm also said the increase in the company's share of partner implementations from 6 percent to over 20 percent would help margin expansion. Additionally, the firm made note of the healthy end-market.

Deutsche Bank now models over $1 billion revenues for 2018 but with only modest margin leverage.

"ULTI's reputation for delivering like clockwork was dented tonight and we move to the sidelines until growth returns to the mid-20s target and leverage returns to the model," the firm said.

As such, Deutsche Bank downgraded shares of Ultimate Software from Buy to Hold and lowered its price target for the shares from $230 to $210.

At last check, shares of Ultimate Software were down 11.24 percent at $201.47.