Image source: Ultimate Software.
Companies need help with their human resources needs, and Ultimate Software Group (ULTI +0.00%) has made a profitable and growing business from using cloud-based technology to make HR management easier. Coming into Tuesday's fourth-quarter financial report, Ultimate Software had investors thinking that it would continue to post impressive growth, even though its stock price had pulled back over the past month. Results were extremely strong and suggested that fears about its future were unwarranted. Let's take a closer look at how Ultimate Software fared and what's ahead for the HR cloud company.
Ultimate Software sets new records
Ultimate Software's fourth-quarter results continued the strong momentum we've seen from the company all year. Total revenue rose 26% to $170.7 million, which was slightly higher than what most investors were expecting. After taking out stock-based compensation and intangible amortization, adjusted net income jumped 24% to $24.7 million, and that produced adjusted earnings of $0.68 per share, which topped the consensus forecast by a dime per share.
Recurring revenue remains a key priority for Ultimate Software, and the company succeeded in accelerating its growth in that category with 26% gains that matched the overall growth rate. Services revenue rose at a slightly faster rate of 28%, but its importance has continued to wane in light of the much higher margins that Ultimate Software can reap from its recurring business.
The same cost-management theme that we've seen in several past quarters again came up during the fourth quarter. Sales and marketing costs jumped 57%, and overhead costs also climbed by nearly half. Most of those gains were tied to stock-based compensation expenses, but that speaks to the extent to which Ultimate Software rewards its employees with equity incentives and the strong performance of the stock itself.
CEO Scott Scherr celebrated a strong 2015 for the company. "2015 was another milestone year for Ultimate," Scherr said. "The continuing demand we see in our Enterprise, Mid-Market, and Strategic markets as well as our strong culture, long-tenured leadership, and highly talented workforce all position us well to achieve our 2016 objectives."
How Ultimate Software expects to move forward
One key element that has helped foster Ultimate Software's success in 2015 has been the alliance it made with NetSuite (N +0.00%) early in the year. The partnership with the provider of cloud-based financial, enterprise-resource planning, and omnichannel commerce software gave Ultimate the opportunity to integrate its UltiPro human capital management program into NetSuite's software suite. The result was the opportunity for NetSuite and Ultimate to offer clients a full-service cloud solution to handle a huge swath of their internal management needs. That opened up cross-selling opportunities that helped both businesses.
Ultimate's updated guidance reflected the enthusiasm the company has going forward. For the first quarter, Ultimate sees total sales of $180 million, with about five-sixths of that amount coming from recurring revenue. For the full 2016 year, the company boosted its growth projections by 2 percentage points to 25% for total revenue and by a single percentage point to 26% for recurring revenue. Continued favorable guidance on the operating margin front also shows that Ultimate is working to bring in profitable business.
In the long run, Ultimate Software's success depends on the demand for services related to human resources, and for many companies, that has tended to oscillate upward and downward with the health of the overall economy. If something happens to end recent improvements in employment figures, then Ultimate's gains could be at risk, but for now, the HR cloud company looks poised for further growth.
