It has been about a month since the last earnings report for Ultimate Software Group (ULTI). Shares have added about 0.2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Ultimate Software due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Ultimate Software's Q4 Results Benefit From Expanding Clientele, Inks Merger Deal to Go Private
The Ultimate Software Group, Inc. delivered fourth-quarter 2018 non-GAAP earnings of $1.95 per share, surpassing the Zacks Consensus Estimate by a whopping 51 cents. Moreover, the figure soared 75.7% from the year-ago figure.
Revenues increased 21.2% from the year-ago quarter to $304.8 million, outpacing the Zacks Consensus Estimate of $301 million. The reported figure also compares favorably with the higher end of management’s projected estimate of around $300 million.
Increase in recurring revenues drove year-over-year revenue growth. Notably, recurring revenues (accounted for 87.4% of total revenues) grew 24.4% to $266.4 million on a year-over-year basis, surpassing the higher end of management’s guided range of $262-$264 million.
Services revenues (12.6%) grew 2.8% to $38.4 million on a year-over-year basis.
Quarter in Detail
The fourth quarter results benefited from new strategic customer wins. Growing clout of company’s AI platform, Xander, is notable. Further, robust traction of UltiPro solutions including UltiPro Workforce Management and UltiPro Benefits Prime is a tailwind.
Synergies from PeopleDoc acquisition also aided growth. In fact, PeopleDoc buyout was concluded in the previously reported quarter. Notably, PeopleDoc unit is now termed as International Sales. As anticipated; PeopleDoc is aiding the company in bolstering presence across Europe.
Further, the company’s HCM Suite is gaining recognition from the likes of Gartner, Nucleus Research, to mention a few, which is a positive.
Non-GAAP operating income grew 14.3% from the year-ago quarter to $64.1 million in the reported quarter. However, non-GAAP operating margin contracted 130 bps on a year-over-year basis to 21%.
Balance Sheet & Cash Flow
As of Dec 31, 2018, cash, cash equivalents, and marketable securities were approximately $162 million up from $141 million as of Sep 30, 2018.
Ultimate Software generated net cash from operations of $223.9 million during 2018, compared with almost $214 million generated in 2017.
Free cash flow came in at $143.8 million in 2018, compared with $136.4 million reported in 2017.
The company bought back 276,708 shares for $64.8 million shares during 12 months ended Dec 31, 2018, as part of its Stock Repurchase Plan. The company has 1,342,005 shares remaining for repurchase.
Inks a Major Merger Deal
On Feb 4, 2019, Ultimate Software inked an all-cash merger deal worth approximately $11 billion, by which it agrees to be “acquired by an investor group led by Hellman & Friedman.”
Per the conditions of the merger contract, shareholders will be given $331.50 per share (in cash) upon closure.
The purchase price indicates a premium of almost 32% over the company’s “volume-weighted average price during the 30 trading days ending February 1, 2019”. Notably, Ultimate Software stock closed at $277.83 on Feb 1.
The merger is subject to Ultimate Software shareholders approval and other customary regulatory conditions, and is anticipated to conclude in the second quarter of 2019.
Consequently, the company neither held an earnings conference call for the reported quarter nor issued any financial guidance.
Fiscal 2018 Highlights
For the full year, non-GAAP earnings advanced 53.6% year over year to $5.90 per share. The Zacks Consensus Estimate was pegged at $5.39.
In 2018, total revenues grew 21.2% over 2017 to $1.141billion. The Zacks Consensus Estimate was pegged at $1.14 billion. Notably, recurring revenues contributed 87.4% of total revenues.
Ultimate Software reported non-GAAP operating margin of 20.5%, contracting 10 basis points (bps) on a year-over-year basis. Free cash flow margin contracted 190 bps to 12.6% in fiscal 2018.
The company maintained a consistent customer retention rate of 96% in the fiscal year.
The company ended 2018 with a customer base of approximately 5,600 organizations, with a focus on large enterprise, mid- and strategic markets, globally. It reported 48 million people in HCM cloud.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted -12.84% due to these changes.
At this time, Ultimate Software has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of this revision indicates a downward shift. It comes with little surprise Ultimate Software has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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