Why Ultimate Software Shares Popped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Ultimate Software (NASDAQ: ULTI  ) were screaming "Ultimate!" today, gaining as much as 17% after topping estimates in its quarterly report.

So what: Adjusted earnings per share for the software-as-a-service firm jumped 146%, to $0.32, $0.06 ahead of estimates. Revenue, meanwhile, was up 25%, to $97.9 million, essentially in line with expectations. CEO Scott Scherr credited the strong quarter in part to "a high percentage of new customers continuing to add talent and time management products to their core purchases."

Now what: Ultimate's adjusted EPS figure is actually twice what it should be, as the company doled the equivalent of $4.7 million, or $0.16, in employee stock compensation, a metric that is eliminated in the Non-GAAP accounting that corporations are generally assessed on. Young highly-valued fast-growing companies often use stock compensation to incentivize employees and save on cash, but the effect on shareholders is real, as it dilutes their holdings. I like Ultimate's growth prospects with a foothold in the nascent cloud computing industry, but investors should be mindful of the stock compensation effects, as well as its sky-high P/E.

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