Ultimate Software Group Inc. Reports Operating Results (10-Q)

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May 11, 2009
Ultimate Software Group Inc. (ULTI, Financial) filed Quarterly Report for the period ended 2009-03-31.

Ultimate Software is a leader in delivering Web-based payroll and employee management solutions to organizations of all sizes. Ultimate Software's fully integrated award-winning UltiPro suite enables businesses to manage human resources and payroll strategically and cost-effectively benefiting everyone in the organization. Ultimate Software offers application hosting through IBM Global Services and a business-to-business Web portal providing access to value-added resources via the Internet. Ultimate Software Group Inc. has a market cap of $455.48 million; its shares were traded at around $18.75 with and P/S ratio of 2.55.

Highlight of Business Operations:

Cost of recurring revenues increased 36.5% to $8.9 million for the three months ended March 31, 2009 from $6.5 million for the three months ended March 31, 2008. The $2.4 million increase in cost of recurring revenues for the three months ended March 31, 2009 was primarily due to increases in both Intersourcing costs and maintenance costs. The increase in Intersourcing costs was principally due to the growth in Intersourcing operations and increased sales, including higher depreciation and amortization of related computer equipment supporting the hosting operations, increased hosting data center costs and, to a lesser extent, increased labor costs and increased third-party royalty fees for UTA sales. The increase in maintenance costs was primarily related to increased labor costs commensurate with the growth in the Company s customer base.

An income tax benefit of $40 thousand during the three months ended March 31, 2009 was recorded relating to the loss for the same period. An income tax provision of $201 thousand was recorded for the three months ended March 31, 2008 relating to the income for the same period. Net operating loss carryforwards available at December 31, 2008, expiring at various times from 2011 through the year 2028 and which are available to offset future taxable income, approximated $73.9 million. The timing and levels of future profitability may result in the expiration of net operating loss carryforwards before utilization. Additionally, utilization of such net operating losses may be limited as a result of cumulative ownership changes in the Company s equity instruments.

As of March 31, 2009, the Company had $24.5 million in cash, cash equivalents and total investments in marketable securities, reflecting a net increase of $1.5 million since December 31, 2008. This $1.5 million increase was mainly due to cash provided by operating activities of $3.5 million and, to a lesser extent, proceeds from the issuance of Common Stock from stock option exercises during the three months ended March 31, 2009 of $0.4 million, partially offset by an increase in cash purchases of property and equipment and principal payments on financed equipment totaling $1.8 million and increased capitalized software costs of $0.6 million.

Net cash used in investing activities was $2.0 million for the three months ended March 31, 2009 as compared to net cash provided by investing activities of $3.7 million for the three months ended March 31, 2008. The decrease of $5.7 million from the comparable period in 2008 was primarily attributable to a decrease in cash provided from the maturities of marketable securities (net of purchases) of $4.5 million, and an increase of $3.1 million in funds received from and held on behalf of Ultimate s customers using the UltiPro tax filing offering (“UltiPro Tax Filing Customer Funds”), with such funds being invested by the Company in overnight repurchase agreements and, to a lesser extent, an increase in capitalized software costs of $0.5 million, partially offset by a decrease in cash purchases of property and equipment of $2.5 million.

Net cash provided by financing activities was $3.0 million for the three months ended March 31, 2009 as compared to net cash used in financing activities of $9.1 million for the three months ended March 31, 2008. The $12.1 million increase in net cash provided by financing activities was primarily related to a $9.5 million decrease in repurchases of Common Stock pursuant to the Company s stock repurchase plan and an increase of $3.1 million in UltiPro Tax Filing Customer Funds received, partially offset by a $0.4 million decrease in proceeds from the issuance of Common Stock from stock option exercises.

Deferred revenues were $61.3 million at March 31, 2009, as compared to $63.5 million at December 31, 2008. The decrease of $2.2 million in deferred revenues for the 2009 period was primarily due to decreased deferred maintenance as revenues recognized exceeded the billings, which is consistent with prior year comparable periods and decreased deferred services including the timing of contractual obligations (if any). Substantially all of the total balance in deferred revenues is related to future recurring revenues, including deferred revenues related to Intersourcing.

Read the The complete ReportULTI is in the portfolios of Ruane Cunniff of Ruane & Cunniff & Goldfarb Inc, Ron Baron of Baron Funds.