ULTI : NASDAQ : US$159.72
Founded in 1990 and based in Weston, Florida, Ultimate is
emerging as a clear leader in the domestic payroll market.
Ultimate’s proprietary HR/payroll applications, which now service
more than 2,300 customers, are targeted primarily at the
domestic middle market, or companies typically with between
200 and 10,000 employees.
All amounts in US$ unless otherwise noted.
Technology — Enterprise Software — Software as a Service
STEADY AS SHE GOES: ANOTHER
EXCELLENT QUARTER; TARGET TO $185
While Ultimate’s success over the decade that we’ve followed the company
might seem both epic and perhaps over-extended, the reality is that the firm
has less than 10% of the addressable North American market. Meanwhile, the
one-two punch of Workday and Ultimate pitching business has begun to
soften up the large, 5,000+ employee market away from ERP firms Oracle and
SAP. This should mean more large deals landing more often for both firms.
For now, barring shocking and unprecedented missteps, we believe there are
few things standing in the way of this firm breaching the $1 billion revenue
mark sometime in mid-to-late 2018. The firm should be able to bring $250
million to the pre-tax line at that point which, with the help of likely balance
sheet cash, could mean a $7-8 billion market cap sometime in 2017; this
implies an 11-15% annual price appreciation from current levels. Our rating
A solid finish to the year: slight upside across the board. ULTI reported
revenues and non-GAAP EPS of $111.9M and $0.54, which were
respectively $1.4M and $0.11 ahead of our estimates (~$0.08 of the EPS
upside was driven by lower tax and a capitalized R&D acceleration).
Recurring revenues grew 23% in the quarter and non-GAAP operating
margins of 20.9% improved 60 bps y-o-y. Quarterly OCF of $19.9M beat
our $13.7M estimate, and for the full year C2013, ULTI grew OCF by 78%.
Outlook: delightfully boring 25% subscription growth and 20% operating
margins. ULTI reiterated previous C2014 guidance for 25% growth on the
subscription line and increased operating margin targets by 100 bps to
20%. We have modestly increased our services revenue estimates on the
heels of the firm’s strong Q4 bookings, and in keeping with revised
margin targets, our C2014 non-GAAP EPS estimate increases $0.11 to