Market Overview

Ultimate Reports Q2 2018 Financial Results, Closes PeopleDoc Acquisition

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  • Record Recurring Revenues of $239.5 million, Up by 23%
  • Total Revenues of $271.2 million, Up by 21%

Ultimate Software (NASDAQ:ULTI), a leading provider of human capital
management (HCM) solutions in the cloud, announced today our financial
results for the second quarter ended June 30, 2018. Ultimate reported
recurring revenues of $239.5 million, a 23% increase, and total revenues
of $271.2 million, a 21% increase, both compared with 2017's second
quarter. GAAP net income for the second quarter of 2018 was $13.7
million, or $0.44 per diluted share, as compared with GAAP net income of
$4.5 million, or $0.15 per diluted share, for the second quarter of 2017.

Non-GAAP net income for the second quarter of 2018 was $40.9 million, or
$1.32 per diluted share, as compared with non-GAAP net income for 2017's
second quarter of $28.2 million, or $0.92 per diluted share. For further
discussion of our non-GAAP financial measures, see "Use of Non-GAAP
Financial Information" below.

"We had a strong second quarter, achieving all of our top-line financial
objectives, keeping us on track to reach our 2018 target of $1 billion
in total revenues, and laying the foundation for our future. At the same
time, we delivered the best quarter in our history for new-business
contracts, and our year-over-year customer retention rate was
approximately 96% for the trailing 12 months ending June 30, 2018," said
Scott Scherr, founder, president, and CEO of Ultimate.

"Our Customer Service department received the Gold award for being the
#1 Customer Service Department of the Year for companies with
2,500 employees or more by Customer Sales and Service World Awards. In
June, Fortune magazine ranked Ultimate #1 on its 100 Best Workplaces
for Millennials
list for 2018, our second consecutive year at the
top. In addition, Ultimate was ranked #2 on the 25 Highest-Rated
Public Cloud Computing Companies to Work For
 list by Battery
Ventures, a global investment firm, and Glassdoor, one of the world's
largest job and recruiting websites, and we were ranked #2 on the Best
Workplaces in Canada
list for 2018 by Great Place to Work," added
Scherr.

"Earlier in July, Ultimate entered into a binding Letter of Intent with
the controlling shareholders of PeopleDoc for the purpose of acquiring
the company, and we completed that acquisition on July 27, 2018. A
cloud-based pioneer in global HR Service Delivery, PeopleDoc is based in
Paris, France, with additional offices in Germany, the UK, Finland, the
Netherlands, Canada, and the United States. PeopleDoc has more than
1,000 customers with users in 180 countries. Adding its global HR
Service Delivery platform to our offerings will further our mission to
enhance our customers' employee experience with new, person-centric
features, such as an online employee help center, HR case management,
and employee file management," said Scherr.

Ultimate's financial results teleconference will be held today, July 31,
2018, at 5:00 p.m. Eastern time, at http://www.investorcalendar.com/event/22106.
The call will be available for replay at the same address beginning at
9:00 p.m. Eastern time today. Windows Media Player software is required
to listen to the call and can be downloaded from the site.
Forward-looking information about future company performance will be
discussed during the teleconference call.

Financial Highlights

  • For 2018's second quarter, recurring revenues from our cloud offering
    grew by 23% over the same period in 2017, and recurring revenues were
    88% of total revenues, as compared with 87% of total revenues for the
    second quarter of 2017.
  • Ultimate's total revenues for 2018's second quarter increased by 21%
    versus those for the 2017's second quarter.
  • Ultimate's annualized retention rate, on a rolling 12-month basis, was
    approximately 96% for our recurring revenue cloud customer base as of
    June 30, 2018.
  • Cash flows from operating activities for the six months ended June 30,
    2018, were $118.1 million, compared with $89.5 million for the same
    period of 2017. Our operating cash flow margin for the six months
    ended June 30, 2018, was 21.6%, compared with 19.7% for the same
    period of 2017.
  • Free cash flows were $77.0 million for the six months ended June 30,
    2018, compared with $46.0 million for the same period of 2017. Our
    free cash flow margin was 14.1% for the six months ended June 30,
    2018, compared with 10.1% for the same period of 2017.

Stock Repurchases

The combination of cash, cash equivalents, and corporate marketable
securities was $188.1 million as of June 30, 2018, compared with $165.1
million as of December 31, 2017.

During the six months ended June 30, 2018, we used $51.8 million to
acquire 227,588 shares of our common stock, $0.01 par value common stock
("Common Stock") to settle employees' tax withholding obligations
associated with their restricted stock that vested during the period. We
have 1,342,005 shares available for repurchase under our Stock
Repurchase Plan.

Financial Outlook

For the third quarter of 2018:

  • Recurring revenues of approximately $250 to $252 million, including
    approximately $5 million as a result of the PeopleDoc acquisition,
  • Total revenues of approximately $286 to $288 million, including
    approximately $6 million as a result of the PeopleDoc acquisition, and
  • Operating margin, on a non-GAAP basis (discussed below), to be
    approximately 20%. Excluding the impact of the acquisition of
    PeopleDoc, we would expect our operating margin, on a non-GAAP basis
    (discussed below), to be approximately 21% for the third quarter of
    2018.

For the year 2018:

  • Recurring revenues to increase by approximately 23% over 2017,
    including the impact of the PeopleDoc acquisition,
  • Total revenues to increase by approximately 21% over 2017, including
    the impact of the PeopleDoc acquisition, and
  • Operating margin, on a non-GAAP basis (discussed below), of
    approximately 21%, including the impact of the PeopleDoc acquisition.

Operating margin expectations were determined on a non-GAAP basis using
the methodologies identified under the caption "Use of Non-GAAP
Financial Information" in this press release.

We have not reconciled our forward-looking operating margin on a
non-GAAP basis to the corresponding GAAP financial measure, as permitted
by Item 10(e)(1)(i)(B) of Regulation S-K. Such reconciliation would
require unreasonable effort at this time to estimate and quantify with a
reasonable degree of certainty various necessary GAAP components,
including, for example, those related to stock-based compensation or
others that may arise during the year. In particular, stock-based
compensation is impacted by factors that are outside of the Company's
control and can be difficult to predict. The actual amount of
stock-based compensation expense, for the year ending December 31, 2018,
will have a significant impact on our operating margin on a GAAP basis.

Forward-Looking Statements

Certain statements in this press release are, and certain statements on
the teleconference call may be, forward-looking statements within the
meaning provided under the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are made only as of the date
hereof. These statements involve known and unknown risks and
uncertainties that may cause Ultimate's actual results to differ
materially from those stated or implied by such forward-looking
statements, including risks and uncertainties associated with
fluctuations in Ultimate's quarterly operating results, concentration of
Ultimate's product offerings, development risks involved with new
products and technologies, competition, contract renewals with business
partners, compliance by our customers with the terms of their contracts
with us, and other factors disclosed in Ultimate's filings with the
Securities and Exchange Commission. Ultimate undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise.

About Ultimate Software

Ultimate is a leading provider of cloud-based human capital management
solutions, with approximately 40 million people records in the Ultimate
cloud. Our award-winning UltiPro delivers HR, payroll, talent, and time
and labor management solutions that connect people with the information
they need to work more effectively. Founded in 1990, Ultimate is
headquartered in Weston, Florida, and employs approximately 4,500
professionals. In 2018, Ultimate ranked #3 on Fortune's prestigious 100
Best Companies to Work For
list, our seventh consecutive year in the
top 25; #1 on its Best Workplaces in Technology list for the
third year in a row; and #1 on its 100 Best Workplaces for Millennials
list, our second year at the top. Also in 2018, PEOPLE magazine ranked
Ultimate #3 on its 50 Companies That Care list. In 2017, Forbes
ranked Ultimate #7 on its list of 100 Most Innovative Growth Companies.
Ultimate's Customer Services organization was recognized as the #1 Customer
Service Department of the Year
for companies with 2,500 employees or
larger by Customer Sales and Service World Awards in 2018, and by the
National Customer Service Association as Service Organization of the
Year
in the Large Business category in 2017. Ultimate has
approximately 4,400 customers with employees in 160 countries, including
Bloomin' Brands, Culligan International, Feeding America, Red Roof Inn,
SUBWAY, Texas Roadhouse, and Yamaha Corporation of America. More
information on Ultimate's products and services for people management
can be found at www.ultimatesoftware.com.

UltiPro is a registered trademark of The Ultimate Software Group, Inc.
All other trademarks referenced are the property of their respective
owners.

   

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

 

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2018   2017 2018   2017
Revenues:
Recurring $ 239,458 $ 195,147 $ 476,045 $ 385,128
Services 31,704   29,545   71,872   68,055  
Total revenues 271,162 224,692 547,917 453,183
Cost of revenues:
Recurring 66,623 52,539 129,488 102,608
Services 35,949   31,715   77,857   71,346  
Total cost of revenues 102,572   84,254   207,345   173,954  
Gross profit 168,590   140,438   340,572   279,229  
Operating expenses:
Sales and marketing 66,207 67,015 137,404 136,375
Research and development 50,004 34,997 96,978 71,155
General and administrative 32,270   31,472   63,992   61,676  
Total operating expenses 148,481   133,484   298,374   269,206  
Operating income 20,109 6,954 42,198 10,023
Other income (expense):
Interest and other expense (100 ) (165 ) (297 ) (445 )
Other income, net 794   81   1,179   307  
Total other income (expense), net 694   (84 ) 882   (138 )
Income before income taxes 20,803 6,870 43,080 9,885
(Provision) benefit for income taxes (7,123 ) (2,341 ) (8,406 ) 1,884  
Net income $ 13,680   $ 4,529   $ 34,674   $ 11,769  
Net income per share:
Basic $ 0.45   $ 0.15   $ 1.14   $ 0.40  
Diluted $ 0.44   $ 0.15   $ 1.11   $ 0.38  
Weighted average shares outstanding:
Basic 30,619   29,751   30,512   29,645  
Diluted 31,113   30,623   31,164   30,639  
 

Stock-based Compensation, Amortization of
Acquired Intangibles, and Transaction Costs Related to Business
Combinations

The following table sets forth the stock-based compensation expense
resulting from stock-based arrangements (excluding the income tax
effect, or "gross"), the amortization of acquired intangibles, and
transaction costs related to business combinations that are recorded in
Ultimate's unaudited condensed consolidated statements of income for the
periods indicated and are included within the Unaudited Reconciliation
of Non-GAAP Financial Measures to GAAP Financial Measures in this press
release (in thousands):

   

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2018   2017 2018   2017
Stock-based compensation expense:
Cost of recurring revenues $ 3,994 $ 2,981 $ 7,426 $ 5,797
Cost of services revenues 2,362 1,935 4,735 3,924
Sales and marketing 17,074 19,785 33,412 37,196
Research and development 4,241 3,134 7,550 5,911
General and administrative 6,486   11,443   14,231   20,316
Total non-cash stock-based compensation expense $ 34,157   $ 39,278   $ 67,354   $ 73,144
 
Amortization of acquired intangibles:
General and administrative $ 783   $ 776   $ 1,569   $ 1,556
Total amortization of acquired intangibles $ 783   $ 776   $ 1,569   $ 1,556
 
Transaction costs related to business combinations:
General and administrative $ 1,120   $   $ 1,120   $
Total transaction costs related to business combinations $ 1,120   $   $ 1,120   $
 

Stock-based compensation expense associated with modifications and
terminations made to the Company's change-in-control plans in March
2015, February 2016, and February 2017, is shown in the table below (in
thousands). As previously disclosed, these changes were made to better
align management's incentives with long-term value creation for our
shareholders. As part of the modifications in connection with the
terminations of the change-in-control plans, time-based restricted stock
awards (vesting over three years) were granted to certain senior
officers in March 2015, February 2016 and February 2017.

   

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2018   2017 2018   2017
Stock-based compensation expense:
Stock-based compensation expense $ 23,857 $ 22,433 $ 43,846 42,245
Stock-based compensation expense related to CIC Modifications 10,300   16,845   23,508   30,899
Total non-cash stock-based compensation expense $ 34,157   $ 39,278   $ 67,354   $ 73,144
 
   

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 
As of June 30, 2018

As of December 31,
2017

ASSETS
Current assets:
Cash and cash equivalents $ 184,855 $ 155,685
Investments in marketable securities 3,274 9,434
Accounts receivable, net 195,247 190,989
Deferred contract costs, prepaid expenses and other current assets 78,116   71,602  
Total current assets before funds held for customers 461,492 427,710
Funds held for customers 624,110   563,062  
Total current assets 1,085,602 990,772
Property and equipment, net 274,841 243,664
Goodwill 35,484 35,808
Intangible assets, net 19,227 20,862
Deferred contract costs and other assets, net 114,623 53,409
Deferred tax assets, net 30,242   32,696  
Total assets $ 1,560,019   $ 1,377,211  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,125 $ 16,099
Accrued expenses and other liabilities 93,990 60,394
Deferred revenue 212,997 197,088
Capital lease obligations 6,511   5,474  
Total current liabilities before customer funds obligations 327,623 279,055
Customer funds obligations 625,511   564,031  
Total current liabilities 953,134 843,086
Deferred revenue 1,431 1,773
Deferred rent 8,695 5,349
Capital lease obligations 6,346 4,477
Other long-term liabilities 2,375 4,250
Deferred income tax liability 380   251  
Total liabilities 972,361   859,186  
 
Stockholders' equity:
Preferred Stock, $.01 par value
Series A Junior Participating Preferred Stock, $.01 par value
Common Stock, $.01 par value 353 348
Additional paid-in capital 629,156 609,160
Accumulated other comprehensive loss (7,013 ) (5,912 )
Accumulated earnings 176,521   125,788  
799,017 729,384
Treasury stock, at cost (211,359 ) (211,359 )
Total stockholders' equity 587,658   518,025  
Total liabilities and stockholders' equity $ 1,560,019   $ 1,377,211  
 
 

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 
For the Six Months Ended June 30,
2018   2017
Cash flows from operating activities:
Net income $ 34,674 $ 11,769
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 19,068 16,551
Provision for doubtful accounts 4,836 3,364
Non-cash stock-based compensation expense 67,353 73,144
Income taxes 7,618 (2,394 )
Net amortization of premiums and accretion of discounts on
available-for-sale securities
(269 ) 262
Changes in operating assets and liabilities:
Accounts receivable (9,094 ) (10,044 )
Deferred contract costs, prepaid expenses and other current assets (28,831 ) (10,557 )
Deferred contract costs and other assets (13,956 ) (3,563 )
Accounts payable (1,974 ) 316
Accrued expenses, other liabilities and deferred rent 24,997 (2,333 )
Deferred revenue 13,657   12,979  
Net cash provided by operating activities 118,079   89,494  
Cash flows from investing activities:
Purchases of property and equipment (41,062 ) (43,540 )
Purchases of marketable securities (168,199 ) (122,625 )
Proceeds from sales and maturities of marketable securities 99,553 73,069
Net change in money market securities and other cash equivalents
held to satisfy customer funds obligations
13,795   35,684  
Net cash used in investing activities (95,913 ) (57,412 )
Cash flows from financing activities:
Net proceeds from issuances of Common Stock 2,923 4,541
Shares acquired to settle employee tax withholding liabilities (51,766 ) (34,745 )
Principal payments on capital lease obligations (3,217 ) (3,148 )
Payments of other long-term liabilities (1,875 )
Net change in customer funds obligations 61,480   25,238  
Net cash provided by (used in) financing activities 7,545   (8,114 )
Effect of exchange rate changes on cash (541 ) 298  
Net increase in cash and cash equivalents 29,170 24,266
Cash and cash equivalents, beginning of period 155,685   73,773  
Cash and cash equivalents, end of period $ 184,855   $ 98,039  
 
Supplemental disclosure of cash flow information:
Cash paid for interest $ 270   $ 238  
Cash paid for taxes $ 3,617   $ 1,048  
 
Non-cash investing and financing activities:
Capital lease obligations to acquire new equipment $ 6,123   $ 4,119  
Stock based compensation for capitalized software $ 1,782   $ 2,021  
Software agreement $   $ 6,500  
 
   

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

Unaudited Reconciliation of Non-GAAP Financial Measures to GAAP
Financial Measures

(In thousands, except per share amounts)

 

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2018   2017 2018   2017
Non-GAAP operating income, as a % of total revenues
reconciliation:
Operating income $ 20,109 $ 6,954 $ 42,198 $ 10,023
Operating income, as a % of total revenues 7.4 % 3.1 % 7.7 % 2.2 %
Add back:
Non-cash stock-based compensation expense 34,157 39,278 67,354 73,144
Non-cash amortization of acquired intangible assets 783 776 1,569 1,556
Transaction costs related to business combinations 1,120     1,120    
Non-GAAP operating income $ 56,169   $ 47,008   $ 112,241   $ 84,723  
Non-GAAP operating income, as a % of total revenues 20.7 % 20.9 % 20.5 % 18.7 %
 
Non-GAAP net income reconciliation:
Net income $ 13,680 $ 4,529 $ 34,674 $ 11,769
Add back:
Non-cash stock-based compensation expense 34,157 39,278 67,354 73,144
Non-cash amortization of acquired intangible assets 783 776 1,569 1,556
Transaction costs related to business combinations 1,120 1,120
Income tax effect of above items (8,799 ) (16,432 ) (23,269 ) (35,439 )
Non-GAAP net income $ 40,941   $ 28,151   $ 81,448   $ 51,030  
 
Non-GAAP net income, per diluted share, reconciliation: (1)
Net income, per diluted share $ 0.44 $ 0.15 $ 1.11 $ 0.38
Add back:
Non-cash stock-based compensation expense 1.10 1.28 2.16 2.39
Non-cash amortization of acquired intangible assets 0.03 0.03 0.05 0.06
Transaction costs related to business combinations 0.04 0.04
Income tax effect of above items (0.29 ) (0.54 ) (0.75 ) (1.17 )
Non-GAAP net income, per diluted share $ 1.32   $ 0.92   $ 2.61   $ 1.66  
Shares used in calculation of GAAP and non-GAAP net income per share:
Basic 30,619   29,751   30,512   29,645  
Diluted 31,113   30,623   31,164   30,639  
 

_________________________

(1) The non-GAAP net income per diluted share reconciliation is
calculated on a diluted weighted average share basis for GAAP net income
periods.

Use of Non-GAAP Financial Information

This press release contains non-GAAP financial measures. We believe that
non-GAAP measures of financial results provide useful information to
management and investors regarding certain financial and business trends
relating to our financial condition and results of operations.
Management uses these non-GAAP results to compare our performance to
that of prior periods for trend analyses, for purposes of determining
executive incentive compensation, and for budget and planning purposes.
These measures are used in monthly financial reports prepared for
management and in quarterly financial reports presented to our Board of
Directors. These measures may be different from non-GAAP financial
measures used by other companies.

These non-GAAP measures should not be considered in isolation or as an
alternative to such measures determined in accordance with generally
accepted accounting principles in the United States (GAAP). The
principal limitation of these non-GAAP financial measures is that they
exclude significant expenses that are required by GAAP to be recorded.
In addition, they are subject to inherent limitations as they reflect
the exercise of judgment by management about which expenses are excluded
from the non-GAAP financial measures.

To compensate for these limitations, we present our non-GAAP financial
measures in connection with its GAAP results. We strongly urge investors
and potential investors in our securities to review the reconciliation
of our non-GAAP financial measures to the comparable GAAP financial
measures that are included in this press release (under the caption
"Unaudited Reconciliation of Non-GAAP Financial Measures to GAAP
Financial Measures") and not to rely on any single financial measure to
evaluate our business.

We present the following non-GAAP financial measures in this press
release: non-GAAP operating income, as a percentage of total revenues
(or non-GAAP operating margin), non-GAAP net income and non-GAAP net
income, per diluted share. We exclude the following items from these
non-GAAP financial measures as appropriate:

Stock-based compensation expense. Our non-GAAP financial measures
exclude stock-based compensation expense, which consists of expenses for
stock-based arrangements recorded in accordance with Accounting
Standards Codification 718, "Compensation – Stock Compensation." For the
three and six months ended June 30, 2018, stock-based compensation
expense was $34.2 million and $67.4 million, respectively, on a pre-tax
basis. For the three and six months ended June 30, 2017, stock-based
compensation expense was $39.3 million and $73.1 million, respectively,
on a pre-tax basis. Stock-based compensation expense is excluded from
the non-GAAP financial measures because it is a non-cash expense that we
do not consider part of ongoing operations when assessing our financial
performance. We believe that such exclusion facilitates the comparison
of results of ongoing operations for current and future periods with
such results from past periods. For GAAP net income periods, non-GAAP
reconciliations are calculated on a diluted weighted average share basis.

Amortization of acquired intangible assets. In accordance with
GAAP, operating expenses include amortization of acquired intangible
assets over the estimated useful lives of such assets. For the three and
six months ended June 30, 2018, the amortization of acquired intangible
assets was $0.8 million and $1.6 million, respectively. For the three
and six months ended June 30, 2017, the amortization of acquired
intangible assets was $0.8 million and $1.6 million, respectively.
Amortization of acquired intangible assets is excluded from our non-GAAP
financial measures because it is a non-cash expense that we do not
consider part of ongoing operations when assessing our financial
performance. We believe that such exclusion facilitates comparisons to
our historical operating results and to the results of other companies
in the same industry, which have their own unique acquisition histories.

Transaction costs related to business combinations. In accordance
with GAAP, operating expenses include transaction costs for third-party
professional services received in connection with business combinations.
As we do not acquire or dispose of businesses on a predictable basis,
the terms of each business combination are unique and can vary
significantly from other business combinations. Significant expenses can
be incurred in connection with a business combination that we would not
have otherwise incurred in the periods presented as part of our
continuing operations. For both the three and six months ended June 30,
2018, the transaction costs incurred related to business combinations
was $1.1 million. There were no transaction costs incurred related to
business combinations for the three and six months ended June 30, 2017.
Transaction costs related to business combinations are excluded from
Ultimate's non-GAAP financial measures because it is an expense that
Ultimate does not consider part of ongoing operations when assessing our
financial performance. Ultimate believes that such exclusion facilitates
comparisons to our historical operating results and to the results of
other companies in the same industry, which have their own unique
business combination histories.

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