Cloud computing has become a force to be reckoned with in the technology industry, and companies of all sizes are looking for ways to take advantage of readily available remote IT resources in order to make it easier for themselves and their clients to operate efficiently. Ultimate Software Group (ULTI) has aimed itself at tackling the needs of human capital management, and any client with human resources needs stands to benefit from Ultimate's platforms and applications used to deal with common HR demands.
Coming into Tuesday's second-quarter financial report, Ultimate Software investors were looking to see the company sustain its positive momentum. Ultimate's numbers were fairly encouraging, and it looks like the opportunities the HR specialist has for future expansion are only getting larger.
More records for Ultimate Software
Ultimate Software's second-quarter results included some more record performance. Total revenue rose by 21% to $271.2 million, which sustained its 20%-plus growth rate for another quarter. Adjusted net income rose an even more impressive 45% to $40.9 million, and that produced adjusted earnings of $1.32 per share, topping the consensus forecast among investors by $0.04 per share.
Ultimate has done a good job of adopting the typical cloud philosophy of getting most of its revenue from recurring subscription-based revenue. The company posted a 23% rise in recurring revenue, hitting a new record for that metric, and Ultimate now gets all but about 12% of its sales from recurring sources. Services-related sales were at a slower 7% rate compared to the prior-year period, reflecting the lack of emphasis Ultimate has placed on providing one-off assistance.
Customer loyalty has also been a key part of Ultimate's success. For the quarter, retention rates came in at 96%, sustaining the strong levels that the company has generated in recent periods.
Accolades kept coming in for Ultimate's business savvy. The company's customer service department was named the best among companies with at least 2,500 employees by Customer Sales and Service World Awards, and Fortune named it the best workplace for millennials for the second year in a row. Glassdoor and partner Battery Ventures also added a positive view of Ultimate, ranking it No. 2 among public cloud-computing companies to work for.
CEO Scott Scherr lauded the company's accomplishments. "We had a strong second quarter," Scherr said, "achieving all of our top-line financial objectives, keeping us on track to reach our 2018 target of $1 billion in total revenues, and laying the foundation for our future." The CEO pointed to new-business generation as well as strong customer retention as equal contributors toward Ultimate's success.
What's next for Ultimate Software?
An essential component of its future prospects will be its recently announced and completed acquisition of PeopleDoc. Announced in early July and closing later in the same month, the PeopleDoc acquisition adds to Ultimate's global scope, bringing on 1,000 customers with users in 180 different countries. Based in France but with offices in key global business centers including Germany, the U.K., and the U.S., PeopleDoc has a human-resources service delivery platform that should help enhance the features that Ultimate already offers to its own customer base.
The deal will have an impact on sales growth, and that was reflected in new guidance from Ultimate. The company now sees full-year total revenue rising 21%, up three percentage points from its previous projections, with recurring revenue growth similarly climbing to 23%. For the third quarter, total sales of $286 million to $288 million will get a $6 million boost from the PeopleDoc purchase, and recurring revenue will make up $250 million to $252 million of that total.
Ultimate Software's shareholders seemed comfortable with those numbers; although the stock oscillated in both directions immediately following the announcement, shares have generally stayed relatively flat over the few days since then. In the long run, demand for cloud computing shows few signs of slowing, and smart, strategic moves like the PeopleDoc acquisition could help Ultimate keep its edge over competitors in the HR cloud space.