Ultimate Software Reports Q1 2008 Financial Results

Ultimate Software (Nasdaq:ULTI), a leading provider of end-to-end strategic human resources, payroll, and talent management solutions, announced today its financial results for the first quarter of 2008. For the quarter ended March 31, 2008, Ultimate Software reported total revenues of $43.5 million, an increase of 19% compared with the first quarter of 2007, and recurring revenues of $25.7 million, a 32% increase over the first quarter of the previous year. GAAP net income for the first quarter of 2008 was $0.3 million, or $0.01 per diluted share, versus $1.3 million, or $0.05 per diluted share, for the first quarter of 2007. Pre-tax non-GAAP income for the first quarter of 2008 was $5.1 million, or $0.19 per diluted share, compared to pre-tax non-GAAP income for the first quarter of 2007 of $4.2 million, or $0.15 per diluted share. Non-GAAP net income for the first quarter of 2008 was $3.1 million, or $0.12 per diluted share, compared to non-GAAP net income for the first quarter of 2007 of $4.1 million, or $0.15 per diluted share. Non-GAAP results exclude stock-based compensation expense and amortization of acquired intangible assets. See "Use of Non-GAAP Financial Information.” New annual recurring revenues (ARR) were $8.5 million for the first quarter of 2008, a 41% increase over those for the first quarter of 2007. (See Financial Highlights below for definition.) "We’re off to a good start in 2008. Eighty-five percent of our new Enterprise customers selected Intersourcing, our software-as-a-service model, and attach rates for our talent management solutions, including recruitment, performance management, and time and attendance, were at an all-time high,” said Scott Scherr, CEO, president, and founder of Ultimate Software. "Workplace, our offering for companies with 200 to 700 employees, contributed approximately 15% of the new ARR in the quarter.” Ultimate Software’s financial results teleconference will be held today, April 30, 2008, at 5:00 p.m. Eastern Time, via World Investor Link at http://www.investorcalendar.com/IC/CEPage.asp?ID=128375 . 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 software is required to listen to the call and can be downloaded from the site. Forward-looking information about future company performance may be discussed during the teleconference call. Financial Highlights New ARR attributable to sales during the first quarter of 2008 was $8.5 million. New annual recurring revenues represent the expected one-year value from (i) new sales of the Company’s software-as-a-service offering, Intersourcing (including prorated one-time charges); (ii) maintenance revenues related to new license sales; and (iii) recurring revenues from additional sales to Ultimate Software’s existing client base. Recurring revenues – consisting of maintenance revenues, Intersourcing revenues from our hosted offering of UltiPro, and subscription revenues from per-employee-per-month fees generated by business service providers – grew by 32% for the first quarter of 2008 compared with the same quarter of 2007. Intersourcing revenues and, to a lesser extent, maintenance revenues, were the principal factors in the growth in recurring revenues. The combination of cash, cash equivalents, and marketable securities was $33.5 million as of March 31, 2008. In the first quarter of 2008, the Company generated $10.5 million in cash from operations. During the first quarter of 2008, the Company also repurchased 334,500 shares of the Company’s issued and outstanding $0.01 par value common stock ("Common Stock”) for $9.5 million under its previously announced stock repurchase plan. Days sales outstanding were 63 days at March 31, 2008, representing a reduction of 13 days compared with days sales outstanding at December 31, 2007. 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 the Company’s actual results to differ materially from those stated or implied by such forward-looking statements, including risks and uncertainties associated with fluctuations in the Company’s quarterly operating results, concentration of the Company’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 the Company’s filings with the Securities and Exchange Commission. The Company 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 A leading provider of end-to-end strategic human resources, payroll, and talent management solutions, Ultimate Software markets its award-winning UltiPro products as on-demand services through its software-as-a-service (SaaS) offering, Intersourcing, and as licensed software. Based in Weston, FL, the Company employs approximately 800 professionals who are focused on developing the highest quality products and services. In January 2008, Ultimate Software was the first HR/payroll SaaS provider to be audited and awarded the ISO/IEC 27001:2005 Certification for security management. The Company’s internal technology team won a first place award for its management of Intersourcing from the American Business Awards in 2007, and its customer service team won two first-place awards for service excellence in 2006, one from the Service & Support Professionals Association and another from the American Business Awards. Ultimate Software was ranked #3 on the 2006 and 2007 lists of the Best Medium-Sized Companies to Work For in America by the Great Place to Work Institute, and has approximately 1,600 customers representing diverse industries, including such organizations as The Container Store, Elizabeth Arden, Major League Baseball, The New York Yankees Baseball Team, Nintendo of America, Ruth’s Chris Steak House, and Sony BMG Entertainment. More information on Ultimate Software’s products and services can be found at www.ultimatesoftware.com. UltiPro and Intersourcing are registered trademarks 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 March 31, 2008   2007 Revenues:   Recurring $ 25,696 $ 19,471 Services 14,120 12,187 License   3,653     4,884     Total revenues   43,469     36,542   Cost of revenues: Recurring 6,525 5,499 Services 11,299 10,292 License   428     409   Total cost of revenues   18,252     16,200   Gross profit   25,217     20,342   Operating expenses: Sales and marketing 11,829 8,783 Research and development 8,879 7,171 General and administrative   4,296     3,447   Total operating expenses   25,004     19,401   Operating income 213 941 Other income (expense) Interest and other expense (79 ) (47 ) Other income, net   357     395   Total other income, net   278     348   Income before income taxes: 491 1,289 Provision for income taxes   201     30   Net income $ 290   $ 1,259     Net income per share: Basic $ 0.01   $ 0.05   Diluted $ 0.01   $ 0.05     Weighted average shares outstanding: Basic   24,682     24,527   Diluted   26,460     27,383   The following table sets forth the stock-based compensation expense (excluding the income tax effect, or "gross”) resulting from share-based arrangements and the amortization of acquired intangibles that are recorded in the Company’s unaudited condensed consolidated statements of operations for the periods indicated (in thousands):   For the Three MonthsEnded March 31, 2008   2007 Stock-based compensation: Cost of recurring revenues $ 329 $ 214 Cost of service revenues 679 600 Cost of license revenues 4 2 Sales and marketing 2,053 1,201 Research and development 589 365 General and administrative   921   437 Total non-cash stock-based compensation expense $ 4,575 $ 2,819   Amortization of acquired intangibles: General and administrative $ 46 $ 54   THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)         As of As of March 31, December 31, 2008 2007 ASSETS Current assets: Cash and cash equivalents $ 22,594 $ 17,462 Short-term investments in marketable securities 10,929 17,120 Accounts receivable, net 29,897 34,658 Prepaid expenses and other current assets 11,741 9,801 Deferred tax assets, net 3,516   3,516   Total current assets 78,677 82,557   Property and equipment, net 20,095 18,238 Capitalized software, net 3,608 3,631 Goodwill 4,063 4,063 Long-term investments in marketable securities – 1,298 Other assets, net 10,493 9,365 Long-term deferred tax assets, net 15,803   16,004   Total assets $ 132,739   $ 135,156   LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 7,161 $ 3,528 Accrued expenses 8,801 11,405 Current portion of deferred revenue 43,896 43,262 Current portion of capital lease obligations 1,891 2,002 Current portion of long-term debt 488   572   Total current liabilities 62,237 60,769   Deferred revenue, net of current portion 8,384 8,446 Deferred rent 2,726 2,652 Capital lease obligations, net of current portion 1,621 1,991 Long-term debt, net of current portion 320   320   Total liabilities 75,288   74,178     Stockholders’ equity: Preferred Stock, $.01 par value – – Series A Junior Participating Preferred Stock, $.01 par value – – Common Stock, $.01 par value 264 262 Additional paid-in capital 149,537 143,913 Accumulated other comprehensive income (loss) 13 (18 ) Accumulated deficit (50,081 ) (50,371 ) 99,733 93,786 Treasury Stock, at cost (42,282 ) (32,808 ) Total stockholders’ equity 57,451   60,978   Total liabilities and stockholders’ equity $ 132,739   $ 135,156       THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)     For the Three Months Ended March 31, 2008   2007 Cash flows from operating activities: Net income $ 290 $ 1,259 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,139 1,660 Provision for doubtful accounts 522 324 Non-cash stock-based compensation expense 4,575 2,819 Deferred income taxes 201 – Changes in operating assets and liabilities: Accounts receivable 4,239 321 Prepaid expenses and other current assets (1,940 ) (1,612 ) Other assets (1,174 ) (530 ) Accounts payable 3,633 966 Accrued expenses and deferred rent (2,530 ) (2,347 ) Deferred revenue 572     719   Net cash provided by operating activities 10,527     3,579     Cash flows from investing activities: Purchases of marketable securities (642 ) (6,245 ) Maturities of marketable securities 8,174 4,068 Capitalized software (167 ) (395 ) Acquisition-related expenses – (21 ) Purchases of property and equipment (3,657 )   (2,267 ) Net cash provided by/(used in) investing activities 3,708     (4,860 )   Cash flows from financing activities: Repurchases of Common Stock (9,474 ) (4,405 ) Principal payments on capital lease obligations (583 ) (455 ) Repayments of borrowings of long-term debt (84 ) (126 ) Net proceeds from issuances of Common Stock 1,051     2,257   Net cash used in financing activities (9,090 )   (2,729 )   Effect of foreign currency exchange rate changes on cash (13 ) (2 ) Net increase (decrease) in cash and cash equivalents 5,132 (4,012 ) Cash and cash equivalents, beginning of period 17,462     16,734   Cash and cash equivalents, end of period $ 22,594   $ 12,722     Supplemental disclosure of cash flow information: Cash paid for interest $ 22   $ 25   Cash paid for income taxes $ 29   $ –     Supplemental disclosure of non-cash financing activities: The Company entered into capital lease obligations to acquire new equipment totaling $103 and $648 for the three months ended March 31, 2008 and 2007, respectively. 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 EndedMarch 31, 2008 2007   Non-GAAP operating income reconciliation: Operating income $ 213 $ 941 Operating income as a % of total revenues 0.5 % 2.6 % Add back: Non-cash stock-based compensation 4,575 2,819 Non-cash amortization of acquired intangible assets   46     54   Non-GAAP operating income $ 4,834   $ 3,814   Non-GAAP operating income, as a % of total revenues 11.1 % 10.4 %   Non-GAAP pre-tax income reconciliation: Pre-tax income $ 491 $ 1,259 Add back: Non-cash stock-based compensation 4,575 2,819 Non-cash amortization of acquired intangible assets   46     54   Non-GAAP pre-tax income $ 5,112   $ 4,162     Non-GAAP pre-tax income per diluted share reconciliation: Pre-tax income per diluted share $ 0.02 $ 0.05 Add back: Non-cash stock-based compensation 0.17 0.10 Non-cash amortization of acquired intangible assets   –     –   Non-GAAP pre-tax income per diluted share $ 0.19   $ 0.15     Non-GAAP net income reconciliation: Net income $ 290 $ 1,259 Add back: Non-cash stock-based compensation 4,575 2,819 Non-cash amortization of acquired intangible assets 46 54 Income tax effect   (1,798 )   (66 ) Non-GAAP net income $ 3,113   $ 4,066     Non-GAAP net income per diluted share reconciliation: Net income per diluted share $ 0.01 $ 0.05 Add back: Non-cash stock-based compensation 0.17 0.10 Non-cash amortization of acquired intangible assets – – Income tax effect   (0.06 )   –   Non-GAAP net income per diluted share $ 0.12   $ 0.15     Basic   24,682     24,527   Diluted   26,460     27,383   Use of Non-GAAP Financial Information This press release contains non-GAAP financial measures. Ultimate Software believes that non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to the Company’s financial condition and results of operations. Management of the Company uses these non-GAAP results to compare the Company’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 the Company’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, the Company presents its non-GAAP financial measures in connection with its GAAP results. Ultimate Software strongly urges investors and potential investors in the Company’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 Software presents the following non-GAAP financial measures in this press release: non-GAAP operating income, non-GAAP pre-tax income, non-GAAP net income, non-GAAP pre-tax income per diluted share and non-GAAP net income per diluted share. We exclude the following items from these non-GAAP financial measures as appropriate: Stock-based compensation. The Company’s non-GAAP financial measures exclude stock-based compensation, which consists of expenses for stock options and stock awards recorded in accordance with SFAS 123(R). For the three months ended March 31, 2008, stock-based compensation was $4.6 million on a pre-tax basis. For the three months ended March 31, 2007, stock-based compensation was $2.8 million on a pre-tax basis. Stock-based compensation expenses are excluded in the non-GAAP financial measures because they are non-cash expenses that the Company does not consider part of ongoing operations when assessing its financial performance. The Company believes that such exclusion provides meaningful supplemental information regarding the Company’s operating results because these non-GAAP financial measures facilitate the comparison of results for current and future periods with results from past periods. The dilutive effect of all outstanding options is included in the calculation of pre-tax income and net income 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, 2008, the amortization of acquired intangible assets was $46 thousand. For the three months ended March 31, 2007, the amortization of acquired intangible assets was $54 thousand. Amortization of acquired intangible assets is excluded from the Company’s non-GAAP financial measures because it is a non-cash expense that the Company does not consider part of ongoing operations when assessing its financial performance. The Company 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. Income tax expense. The Company excludes income tax expense in the non-GAAP financial measures because they are predominantly a non-cash expense that the Company does not consider part of ongoing operations when assessing its financial performance. The Company believes that such exclusion provides meaningful supplemental information regarding the Company’s operating results because these non-GAAP financial measures facilitate the comparison of results for current and future periods with results from past periods.