Ultimate Reports Q1 2010 Financial Results

Ultimate Software (Nasdaq:ULTI), the leading provider of unified, end-to-end human capital management (HCM) SaaS solutions in North America, announced today its financial results for the first quarter of 2010. For the quarter ended March 31, 2010, Ultimate reported total revenues of $55.7 million, an increase of 14%, and recurring revenues of $39.5 million, a 28% increase, both compared with 2009’s first quarter. GAAP net income for the first quarter of 2010 was $0.3 million, or $0.01 per diluted share, versus a GAAP net loss of $0.4 million, or $0.02 per diluted share, for the first quarter of 2009.

Non-GAAP net income, which excludes stock-based compensation and amortization of acquired intangible assets, was $2.4 million, or $0.09 per diluted share, for the first quarter of 2010 compared with non-GAAP net income of $1.7 million, or $0.07 per diluted share, for the first quarter of 2009. See "Use of Non-GAAP Financial Information” below.

"Our 2010 first quarter recurring revenues were in line with our expectations. We finished the quarter with 1,031 associates and exceeded our operating margin goal by 20%,” said Scott Scherr, CEO, president, and founder of Ultimate.

Ultimate’s financial results teleconference will be held today, April 27, 2010, at 5:00 p.m. Eastern Time, through Vcall at http://www.investorcalendar.com/IC/CEPage.asp?ID=156673. The call will be available for replay at the same address beginning at 9:00 p.m. Eastern Time the same day. Windows Media Player or Real 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

• Ultimate’s total revenues for the first quarter of 2010 increased by 18% compared with the first quarter of 2009, excluding license revenues from 2010 and 2009. Excluding license revenues, the incremental non-GAAP operating margin was 30% for the first quarter of 2010.
• Recurring revenues grew by 28% for the first quarter of 2010 compared with 2009’s first quarter. The increase was primarily attributable to revenue growth from our Software-as-a-Service ("SaaS”) offering. Recurring revenues for the first quarter of 2010 were 71% of total revenues as compared with 63% of total revenues for the same period of last year.
• The operating margin (on a non-GAAP basis) for the first quarter of 2010 was $4.0 million, or 7.2%.
• Ultimate’s annualized retention rate was 96% for its existing recurring revenue customer base.
• The combination of cash, cash equivalents, and marketable securities was $35.1 million as of March 31, 2010, compared with $33.2 million as of December 31, 2009. For the quarter ended March 31, 2010, Ultimate generated $5.0 million in cash from operations and repurchased 120,500 shares of our issued and outstanding $0.01 par value common stock for $3.7 million, under its previously announced stock repurchase plan. As of March 31, 2010, we had 894,075 shares available for repurchase in the future under our stock repurchase plan.
• Days sales outstanding were 61 days at March 31, 2010, representing a reduction of 7 days compared with days sales outstanding at December 31, 2009.

Financial Outlook

2010 Financial Guidance:

Ultimate provides the following financial guidance for the second quarter ending June 30, 2010 and full year 2010:

For the second quarter of 2010:

• Recurring revenues of approximately $41 million;
• Total revenues of approximately $54 million; and
• Operating margins, on a non-GAAP basis (discussed below), of approximately 6%.

For the year 2010:

• Recurring revenues to increase by approximately 27% in 2010 over those in 2009;
• Total revenues to increase by approximately 18% over those in 2009; and
• Operating margins, on a non-GAAP basis (discussed below), to be approximately 10%.

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. Non-cash equity-based compensation expense for 2010 is expected to be between $13.5 million and $14.0 million.

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

The leading provider of unified, end-to-end human capital management Software-as-a-Service ("SaaS”) solutions in North America, Ultimate markets its award-winning UltiPro solution as an on-demand service through SaaS. Based in Weston, FL, Ultimate employs approximately 1,000 professionals who are focused on developing the highest quality products and services. In 2009, Ultimate was awarded first place in the People’s Choice Stevie® competition for Favorite New SaaS Product and was ranked the #1 best medium-sized company to work for in America by the Great Place to Work® Institute for the second consecutive year. In 2008, Ultimate was the first HR/payroll SaaS provider to be audited and awarded the ISO/IEC 27001:2005 Certification for security management and was recognized for having the #1 "Best Product Development Team” in the nation by the American Business Awards. Ultimate has more than 1,900 customers representing diverse industries, including such organizations as The Container Store, Culligan International, Elizabeth Arden, Major League Baseball, The New York Yankees Baseball Team, and Ruth’s Chris Steak House. More information on Ultimate’s products and services 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 following table sets forth the stock-based compensation expense (excluding the income tax effect, or "gross”) resulting from stock-based arrangements and the amortization of acquired intangibles that are recorded in Ultimate’s unaudited condensed consolidated statements of operations for the periods indicated (in thousands):

Use of Non-GAAP Financial Information

This press release contains non-GAAP financial measures. Ultimate believes that non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to Ultimate’s financial condition and results of operations. Ultimate’s management uses these non-GAAP results to compare Ultimate’s 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 Ultimate’s 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 judgments by management about which expenses are excluded from the non-GAAP financial measures.

To compensate for these limitations, Ultimate presents its non-GAAP financial measures in connection with its GAAP results. Ultimate strongly urges investors and potential investors in Ultimate’s securities to review the reconciliation of its 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 its business.

Ultimate presents the following non-GAAP financial measures in this press release: non-GAAP operating income (loss), non-GAAP net income (loss) and non-GAAP net income (loss) per diluted share. We exclude the following items from these non-GAAP financial measures as appropriate:

Stock-based compensation. Ultimate’s non-GAAP financial measures exclude stock-based compensation, which consists of expenses for stock options and stock awards recorded in accordance with ACS 718 (formerly SFAS 123(R)). For the three months ended March 31, 2010, stock-based compensation was $3.4 million on a pre-tax basis. For the three months ended March 31, 2009, stock-based compensation was $3.3 million on a pre-tax basis. Stock-based compensation expenses are excluded from the non-GAAP financial measures because they are non-cash expenses that Ultimate does not consider part of ongoing operations when assessing its financial performance. Ultimate believes that such exclusion provides meaningful supplemental information regarding Ultimate’s operating results because these non-GAAP financial measures facilitate the comparison of results of ongoing operations for current and future periods with such results from past periods. The dilutive effect of all outstanding options is included in the calculation of pre-tax income (loss) and net income (loss) per diluted share on both a GAAP and a non-GAAP 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 months ended March 31, 2010, the amortization of acquired intangible assets was $74 thousand. For the three months ended March 31, 2009, the amortization of acquired intangible assets was $46 thousand. Amortization of acquired intangible assets is excluded from Ultimate’s non-GAAP financial measures because it is a non-cash expense that Ultimate does not consider part of ongoing operations when assessing its financial performance. Ultimate believes that such exclusion facilitates comparisons to its historical operating results and to the results of other companies in the same industry, which have their own unique acquisition histories.