What: Shares of The Ultimate Software Group (NASDAQ:ULTI), a provider of cloud-based human capital management solutions, jumped on Wednesday after the company reported its third-quarter results. At 3 p.m. Wednesday, the stock was up about 7.5%.
So what: Ultimate Software reported quarterly revenue of $155.3 million, up 22% year-over-year, and less than $1 million short of the average analyst estimate. $131.8 million of this revenue was recurring, a 23% year-over-year increase, with the remaining revenue derived from services. License revenue fell to zero during the quarter, as the company has shifted to a subscription-based business model.
Non-GAAP EPS came in at $0.69 for the quarter, up from $0.50 in the third quarter of 2014 and $0.06 better than analysts were expecting. On a GAAP basis, operating income slumped by 15% year-over-year, driven by a 36% increase in operating expenses.
"We performed according to plan in this year's third quarter for both our recurring revenues and total revenues, keeping us on target to achieve our 2015 objectives. Our operating margin came in above projections at 22%, and our customer-retention rate for the rolling 12-month period continued on its consistent track above 96%," said CEO Scott Scherr.
Now what: For the full year, Ultimate Software expects its recurring and total revenues to increase by 23% and 22% respectively, with a non-GAAP operating margin in excess of 20%. Growth is expected to accelerate a bit in 2016, with the company guiding for a 25% increase in recurring revenue and a 23% increase in total revenue. The company also guided for an improvement in profitably, with its non-GAAP operating margin expected to grow to 21% in 2016.
It was a solid quarter for Ultimate Software, with the company posting strong growth, and guiding for even stronger growth in 2016. GAAP expenses are rising quickly, driven by a near-doubling of stock-based compensation expense during the third quarter, but the company's growth continues to impress investors.
Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Ultimate Software Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.