|
ULTIMATE SOFTWARE GROUP INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion of the financial condition and results of operations of
The Ultimate Software Group, Inc. and subsidiaries ("Ultimate," "we," "us," or
"our") should be read in conjunction with the unaudited condensed consolidated
financial statements and notes thereto included elsewhere in this Quarterly
Report on Form 10-Q (this "Form 10-Q") and in Ultimate's Annual Report on Form
10-K for the fiscal year ended December 31, 2011, filed with the Securities and
Exchange Commission (the "SEC") on February 29, 2012 (the "Form 10-K").
Overview
Ultimate is a leading cloud provider of people management solutions.
Ultimate's UltiPro software ("UltiPro") is a comprehensive software as a service
("SaaS")- or cloud-based solution delivered primarily to organizations based in
the United States and Canada and designed to deliver the functionality
businesses need to manage the complete employment life cycle from recruitment to
retirement. UltiPro includes feature sets for talent acquisition and onboarding,
human resources ("HR") management and compliance, benefits management and online
enrollment, payroll, performance management, salary planning and budgeting for
compensation management, succession management, reporting and analytical
decision-making tools, and time and attendance. UltiPro has role-based
self-service capabilities for executives, managers, administrators, and
employees whether they are in or out of the office, including an UltiPro
application for use on mobile devices such as the iPhone and iPad.
Our SaaS offering of UltiPro (the "SaaS Offering") provides Web-based access to
comprehensive human capital management ("HCM") functionality for organizations
that want to simplify delivery and support of their business applications.
12--------------------------------------------------------------------------------
Table of Contents
We have found that our SaaS Offering is attractive to companies that want to
focus on their core competencies to increase sales and profits. Through the SaaS
Offering, we supply and manage the hardware, infrastructure, ongoing maintenance
and backup services for our customers. Customer systems are currently managed at
three data centers-one located in the Miami, Florida area, one in the Atlanta,
Georgia area, and another one in Toronto, Canada. All data centers are owned and
operated by independent third parties. We recently signed an agreement for a new
data center located in Phoenix, Arizona, which we expect will replace the Miami,
Florida data center in the first half of 2013.
UltiPro is marketed as two solution suites, based on company size. UltiPro
Enterprise ("Enterprise") is designed to address the needs of companies with
1,000 or more employees. UltiPro Workplace ("Workplace") is designed for
companies with fewer than 1,000 employees. Both solution suites are delivered
exclusively through SaaS. UltiPro Workplace provides medium-sized and smaller
companies with nearly all the features that larger Enterprise companies have
with UltiPro, plus a bundled services package. Since many companies in this
market do not have information technology staff on their premises to help with
system issues, UltiPro Workplace is designed to give these customers a high
degree of convenience by handling system setup, business rules, and other
situations for customers "behind the scenes." UltiPro is marketed primarily
through our Enterprise and Workplace direct sales teams.
In addition to UltiPro's core HCM functionality, our customers have the option
to purchase a number of additional features on a per-employee-per-month ("PEPM")
basis, which are available to enhance the functionality of UltiPro's core
features and which are based on the particular business needs of the
customers. These optional UltiPro features currently include (i) the talent
management suite of products (recruitment, onboarding, performance management,
salary planning and budgeting for compensation management, and employee
relations tools for managing disciplinary actions, grievances, and succession
management); (ii) benefits enrollment; (iii) time, attendance and scheduling;
(iv) time management; (v) payment services (formerly referred to as "tax
filing"); (vi) wage attachments; and (vii) other optional features
(collectively, "Optional Features"). All Optional Features are priced solely on
a subscription basis. Some of the Optional Features are available to both
Enterprise and Workplace customers while others are available exclusively to
either Enterprise or Workplace customers, and availability is based on the needs
of the respective customers, the number of their employees and the complexity of
their HCM environment.
Our Partners for Life program, introduced in the second half of 2010, is
designed to make it easier for customers to leverage the full scope of UltiPro's
features and reach more users in our customers' organizations. As part of the
Partners for Life program, we changed the pricing method for our services from a
time and materials offering to a fixed fee offering, with the expected objective
of lowering the total cost of services charged to each customer. The incremental
benefit for the Partners for Life program is that we enhance the quality of our
customer relationships and encourage increased customer loyalty, as well as an
enhanced readiness for the customer to be a reference for us.
The key drivers of our business are (i) growth in recurring revenues; (ii)
operating income, excluding primarily non-cash stock-based compensation
("Non-GAAP Operating Income"); and (iii) retention of our customers once our
solutions are sold ("Customer Retention"). For the three months ended
September 30, 2012, our (i) recurring revenues grew by 23%, compared with the
same period in 2011 and (ii) Non-GAAP Operating Income was $14.2 million, or
17.2% of total revenues, as compared with $8.6 million, or 12.7% of total
revenues, for the same period last year. For the nine months ended September 30,
2012, our (i) recurring revenues grew by 23%, compared with the same period in
2011, and (ii) Non-GAAP Operating Income was $30.9 million, or 12.9% of total
revenues, as compared with $20.1 million, or 10.2% of total revenues, for the
same period last year. As of September 30, 2012, our Customer Retention exceeded
96%, on a trailing twelve-month basis. See "Non-GAAP Financial Measures" below.
Our ability to achieve significant revenue growth in the future will depend upon
the success of our direct sales force and our ability to adapt our sales efforts
to address the evolving markets for our products and services. We provide our
sales personnel with comprehensive and continuing training with respect to
technology and market place developments. Aside from sales commissions, we also
provide various incentives to encourage our sales representatives, including
stock-based compensation awards based upon performance.
The HCM market is intensely competitive. We address competitive pressures
through improvements and enhancements to our products and services, the
development of additional features of UltiPro and a comprehensive marketing team
and process that distinguishes Ultimate and its products from the
competition. Our focus on customer service, which enables us to maintain a high
Customer Retention rate, also helps us address competitive pressures.
As our business has grown, we have become increasingly subject to the risks
arising from adverse changes in domestic and global economic conditions. If
general economic conditions were to deteriorate further, we may experience
delays in our sales cycles, increased pressure from prospective customers to
offer discounts and increased pressure from existing customers
13--------------------------------------------------------------------------------
Table of Contents
to renew expiring recurring revenue agreements for lower amounts. We address
continuing economic pressures by, among other things, efforts to control growth
of our operating expenses through the monitoring of controllable costs and
vendor negotiations.
Ultimate has two primary revenue sources: recurring revenues and services
revenues. Subscription revenues from our SaaS Offering and customer support and
maintenance revenues are the primary components of recurring revenues. The
majority of services revenues are derived from implementation services.
Subsequent to the discontinuation of selling perpetual licenses of UltiPro to
new customers, which occurred in 2009, we sell licenses to existing license
customers but only in relation to the customer's employee growth or for Optional
Features if the customer already has a perpetual license for the on-site UltiPro
solutions. As perpetual license agreements were sold in the past, annual
maintenance contracts (priced as a percentage of the related license fee)
accompanied those agreements. Maintenance contracts typically have a one-year
term with annual renewal periods thereafter.
As SaaS units are sold, the recurring revenue backlog associated with the SaaS
Offering grows, enhancing the predictability of future revenue streams. SaaS
revenues include ongoing monthly subscription fees, priced on a PEPM
basis. Revenue recognition for the SaaS Offering is triggered when the customer
processes its first payroll using UltiPro (or goes "Live").
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Ultimate's
critical accounting estimates, as discussed in "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations," included in the
Form 10-K, have not significantly changed, except as disclosed below:
Computer Software Development Costs
Certain computer software development costs are capitalized in the accompanying
unaudited consolidated balance sheets. We follow different accounting guidance
rules for software capitalization purposes, depending on whether the underlying
software is for external use or internal use.
Computer software development costs related to software developed for external
use falls under the accounting guidance of Accounting Standards Codification
("ASC") Topic 985-20, Costs of Software to Be Sold, Leased, or Marketed, in
which capitalization begins upon the establishment of technological feasibility.
For software costs that are capitalized in accordance with ASC Topic 985-20,
technological feasibility is typically established upon completion of a working
model. Capitalization ends and amortization begins when the related developed
software is ready for general release to our customers. Amortization periods for
software capitalized under this subtopic are generally five years. We have begun
amortization for all capitalized software that falls under this guidance.
Capitalized software falling under ASC Topic 985-20 is related to our former
licensed products, which is presented in the unaudited consolidated balance
sheets as capitalized software. There were no research and development expenses
capitalized under ASC Topic 985-20 during the three and nine months ended
September 30, 2012 and September 30, 2011. Annual amortization is based on the
greater of the amount computed using (a) the ratio that current gross revenues
for the related product bears to the total of current and anticipated future
gross revenues for that product or (b) the straight-line method over the
remaining estimated economic life of the product including the period being
reported on. Capitalized software is amortized using the straight-line method
over the estimated useful lives of the assets, which is typically five years.
Ultimate evaluates the recoverability of capitalized software based on estimated
future gross revenues reduced by the estimated costs of completing the products
and of performing maintenance and customer support. If Ultimate's gross revenues
were to be significantly less than its estimates, the net realizable value of
Ultimate's capitalized software would be impaired, which could result in the
write-off of all or a portion of the unamortized balance of such capitalized
software.
Computer software development costs related to software developed for internal
use falls under the accounting guidance of ASC Topic 350-40, Intangibles
Goodwill and Other-Internal Use Software, in which computer software costs are
expensed as incurred during the preliminary project stage and capitalization
begins in the application development stage once the capitalization criteria are
met. Costs associated with post implementation activities are expensed as
incurred. Costs capitalized during the application development stage include
external direct costs of materials and services consumed in developing or
obtaining internal-use software and payroll and payroll-related costs for
employees who are directly associated with and who devote time to the
internal-use computer software. In addition to capitalizing costs for software
(which are used by Ultimate in its general operations, for internal purposes) ,
we also capitalize costs under ASC Topic 350-40 for certain
14--------------------------------------------------------------------------------
Table of Contents
software development projects related to our suite of products sold to our
customers exclusively on a subscription basis under our SaaS Offering of UltiPro
(the "SaaS Offering"). During the three and nine months ended September 30,
2012, we capitalized $2.6 million of computer software development costs related
to a development project to be sold in the future as a SaaS product only. There
were no such costs capitalized in the three and nine months ended September 30,
2011. These capitalized costs are included with property and equipment in the
unaudited consolidated balance sheet. Internal-use software is amortized on a
straight-line basis over its estimated useful life, generally three to five
years, commencing after the software development is substantially complete and
the software is ready for its intended use. At each balance sheet date, we
evaluate the useful lives of these assets and test for impairment whenever
events or changes in circumstances occur that could impact the recoverability of
these assets.
Fair Value of Financial Instruments
Ultimate's consolidated financial instruments, consisting of cash and cash
equivalents, investments in marketable securities, funds held for customers and
the related obligations, accounts receivable, accounts payable, capital lease
obligations and other borrowings, approximated fair value as of September 30,
2012 and December 31, 2011.
Results of Operations
The following table sets forth the unaudited condensed consolidated statements
of income data of Ultimate, as a percentage of total revenues, for the periods
indicated:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2012 2011 2012 2011
Revenues:
Recurring 81.7 % 80.7 % 80.4 % 79.7 %
Services 18.3 18.9 19.2 19.5
License - 0.4 0.4 0.8
Total revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Recurring 23.5 24.4 24.0 23.8
Services 19.9 19.3 19.9 19.9
License - 0.1 0.1 0.2
Total cost of revenues 43.4 43.8 44.0 43.9
Gross Profit 56.6 56.2 56.0 56.1
Operating expenses:
Sales and marketing 20.9 22.1 22.2 24.3
Research and development 17.0 19.6 19.1 19.1
General and administrative 7.5 7.4 7.7 8.3
Total operating expenses 45.4 49.1 49.0 51.7
Operating income 11.2 7.1 7.0 4.4
Other (expense) income:
Interest expense and other (0.2 ) (0.1 ) (0.1 ) (0.2 )
Other income, net 0.1 - - -
Total other expense, net (0.1 ) (0.1 ) (0.1 ) (0.2 )
Income before income taxes 11.1
7.0 6.9 4.2
Provision for income taxes (5.4 ) (5.4 ) (3.4 ) (3.0 )
Net income 5.7 % 1.6 % 3.5 % 1.2 %
15--------------------------------------------------------------------------------
Table of Contents
The following table sets forth the non-cash stock-based compensation expense
resulting from the stock-based arrangements (excluding the income tax effect)
and the amortization of acquired intangibles that are recorded in our unaudited
condensed consolidated statements of income for the periods indicated (in
thousands):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2012 2011 2012 2011
Non-cash stock-based compensation expense:
Cost of recurring revenues $ 658 $ 341 $ 1,809 $ 1,020
Cost of services revenues 688 360 1,854 1,107
Sales and marketing 1,886 1,734 5,332 5,244
Research and development 532 403 1,848 1,197
General and administrative 1,136 902 3,274 2,791Total non-cash stock-based compensation expense $ 4,900 $ 3,740
$ 14,117 $ 11,359
Amortization of acquired intangibles:
General and administrative $ - $ 27 $ - $ 83
Revenues
Our revenues are primarily derived from recurring revenues and services
revenues.
Total revenues increased 22.0% to $82.6 million for the three months ended
September 30, 2012 from $67.8 million for the three months ended September 30,
2011, and 22.2% to $240.1 million for the nine months ended September 30, 2012
from $196.5 million for the nine months ended September 30, 2011.
Recurring revenues, consisting of subscription revenues from our SaaS Offering
and customer support and maintenance revenues, increased 23.4% to $67.5 million
for the three months ended September 30, 2012 from $54.7 million for the three
months ended September 30, 2011 and 23.2% to $193.0 million for the nine months
ended September 30, 2012 from $156.6 million for the nine months ended
September 30, 2011. The increase for the three and nine months ended
September 30, 2012 was primarily due to increased subscription revenues from our
SaaS Offering, partially offset by a decrease in our customer support and
maintenance revenues.
a) Subscription revenues from our SaaS Offering increased 27.3% for the
three months ended September 30, 2012 and 28.0% for the nine months
ended September 30, 2012, both in comparison to the same periods in 2011. This increase was based on the revenue impact of incremental
units sold that have gone Live since September 30, 2011, including the
UltiPro core product and, to a lesser extent, Optional Features of
UltiPro. Recognition of recurring subscription revenues from our SaaS
Offering begins when the related customer goes Live.
b) Maintenance revenues decreased 3.1% for the three months ended September 30, 2012, and by 4.7% for the nine months ended September 30,
2012, both in comparison to the same periods in 2011. The decreases
resulted from the transition of certain customers who were formerly
using UltiPro in connection with the prior purchase of a perpetual
license to using UltiPro under our SaaS Offering, combined with the
impact of attrition in the ordinary course of business, partially
offset by price increases. Maintenance revenues are recognized on a monthly recurring basis as the maintenance contracts renew annually.
Services revenues increased 18.2% to $15.1 million for the three months ended
September 30, 2012 from $12.8 million for the three months ended September 30,
2011, and 20.6% to $46.2 million for the nine months ended September 30, 2012
from $38.3 million for the nine months ended September 30, 2011. The increases
in services revenues for the three- and nine-month periods were primarily due to
additional implementation consulting revenues which were attributable to a
combination of more billable consultants and the increased utilization of
seasoned consultants. In addition, there was a continued shift toward more
implementation consulting revenues from fixed fee arrangements and less
implementation consulting revenues from time and materials arrangements,
principally as a result of the Partners for Life program. The Partners for Life
program changed the method by which we charge customers for our services that
are delivered primarily over the period leading up to the point the customer
goes Live (the "Time to Live Period"). As new sales are generated, we now charge
a fixed fee for services based on the number of the customer's employees, as
compared to our former billing method for new sales, which included charging
customers on a time and materials basis as these services were provided. The
Partners for
16--------------------------------------------------------------------------------
Table of Contents
Life program was designed to lower the total cost of services charged to each
customer primarily over the Time to Live Period for UltiPro and/or Optional
Features. Recognition of implementation consulting revenues related to fixed fee
arrangements under the Partners for Life program is based on the percentage of
completion method associated with implementation milestones achieved.
Cost of Revenues
Cost of revenues primarily consists of the costs of recurring and services
revenues. Cost of recurring revenues primarily consists of costs to provide
maintenance and technical support to Ultimate's customers, the cost of providing
periodic updates and the cost of recurring subscription revenues, including
hosting data center costs and amortization of capitalized software. Cost of
services revenues primarily consists of costs to provide implementation services
and training to Ultimate's customers and, to a lesser extent, costs related to
sales of payroll-related forms and Form W-2 services, as well as costs
associated with certain client reimbursable out-of-pocket expenses.
Total cost of revenues increased 20.9% to $35.8 million for the three months
ended September 30, 2012, from $29.7 million for the three months ended
September 30, 2011. Total cost of revenues increased 22.7% to $105.8 million for
the nine months ended September 30, 2012, from $86.2 million for the nine months
ended September 30, 2011.
Cost of recurring revenues increased 17.4% to $19.4 million for the three months
ended September 30, 2012 from $16.5 million for the three months ended
September 30, 2011, and 23.5% to $57.7 million for the nine months ended
September 30, 2012 from $46.8 million for the nine months ended September 30,
2011. The increases in the cost of recurring revenues for the three- and
nine-month periods were primarily due to increases in both SaaS costs and
customer support and maintenance costs, as described below:
i) The increase in SaaS costs was principally as a result of the growth in
SaaS operations and increased sales, including increased labor costs,
increased hosting data center costs and, to a lesser extent, costs related to our payment services (as we continue to grow that business).
ii) The increase in customer support and maintenance costs was primarily
due to higher labor costs commensurate with the growth in the number of
customers serviced.
Cost of services revenues increased 25.9% to $16.5 million for the three months
ended September 30, 2012 from $13.1 million for the three months ended
September 30, 2011, and 22.3% to $47.8 million for the nine months ended
September 30, 2012 from $39.1 million for the nine months ended September 30,
2011. The increases in cost of services revenues for the three- and nine-month
periods were primarily due to an increase in the cost of implementation. The
increased cost of implementation was primarily from higher labor and related
costs (particularly in association with increased number of billable
consultants) and increased costs of third-party consulting partners.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and benefits, sales
commissions, travel and promotional expenses, and facility and communication
costs for direct sales offices, as well as advertising and marketing costs.
Sales and marketing expenses increased 14.8% to $17.2 million for the three
months ended September 30, 2012 from $15.0 million for the three months ended
September 30, 2011 and by 11.9% to $53.3 million for the nine months ended
September 30, 2012 from $47.6 million for the nine months ended September 30,
2011. The increases in sales and marketing expenses for the three- and
nine-month periods were primarily due to increased labor and related costs
(including higher sales commissions related to increased live units for SaaS
sales), and, to a lesser extent, higher advertising and marketing expenses.
Commissions on SaaS sales are amortized over the initial contract term
(typically 24 months) commencing on the Live date, which corresponds to the
related SaaS subscription revenue recognition.
Research and Development
Research and development expenses consist primarily of software development
personnel costs. Research and development expenses increased 6.1% to $14.1
million for the three months ended September 30, 2012 from $13.3 million for the
three months ended September 30, 2011 and by 21.7% to $45.8 million for the nine
months ended September 30, 2012 from $37.6 million for the nine months ended
September 30, 2011. The increases in research and development expenses for the
three- and nine-month periods were principally due to higher labor and related
costs associated with the ongoing development of UltiPro and Optional Features,
including the impact of increased personnel costs (predominantly from additional
headcount), net of capitalized labor costs, and increased third-party consulting
costs. During the three and nine months ended September
17--------------------------------------------------------------------------------
Table of Contents
30, 2012, we capitalized a total of $2.6 million for internal-use software costs
for a development project that will be offered exclusively as SaaS when it is
eventually ready for its intended use. The majority of these capitalized costs
were direct labor costs associated with the development project. There were no
capitalized labor costs for the three and nine months ended September 30, 2011.
General and Administrative
General and administrative expenses consist primarily of salaries and benefits
of executive, administrative and financial personnel, as well as external
professional fees and the provision for doubtful accounts. General and
administrative expenses increased 24.6% to $6.2 million for the three months
ended September 30, 2012 from $5.0 million for the three months ended
September 30, 2011. General and administrative expenses increased 13.0% to $18.5
million for the nine months ended September 30, 2012 from $16.4 million for the
nine months ended September 30, 2011. The increases in general and
administrative expenses for the three- and nine-month periods were primarily due
to higher labor and related costs, partially offset by a lower provision for
doubtful accounts.
Income Taxes
Income taxes for the three months ended September 30, 2012 and September 30,
2011 included a consolidated provision of $4.5 million and $3.7 million,
respectively. The effective income tax rate for the three months ended
September 30, 2012 and September 30, 2011 was 49.1% and 77.4%,
respectively. Income taxes for the nine months ended September 30, 2012 and
September 30, 2011 included a consolidated provision of $8.2 million and $6.1
million, respectively. The effective income tax rate for the nine months ended
September 30, 2012 and September 30, 2011 was 49.5% and 72.4%, respectively. The
decrease in the effective income tax rate for the three and nine months ended
September 30, 2012 was principally due to a benefit attributable to a decrease
in nondeductible expenses, primarily related to compensation, and a lower ratio
of expected nondeductible expenses to pre-tax income.
At December 31, 2011, we had approximately $113.0 million of net operating loss
carryforwards for Federal income tax reporting purposes available to offset
future taxable income. The $113.0 million was attributable to deductions from
the exercise of non-qualified employee, and non-employee director, stock options
and the vesting of restricted stock units and restricted stock awards, the tax
benefit of which will primarily be credited to paid-in-capital and deferred tax
assets when realized. As a result, the tax benefit associated with stock-based
compensation is included in net operating loss carryforwards but not reflected
in deferred tax assets. The carryforwards expire from 2012 through 2031.
Utilization of such net operating loss carryforwards may be limited as a result
of cumulative ownership changes in Ultimate's equity instruments. As of December
31, 2011, we did not have any net operating loss carryforwards for foreign
income tax reporting purposes available to offset future taxable income. The
Company's U.S. Federal income tax return for the year ended December 31, 2010 is
currently under review by the Internal Revenue Service.
We recognized $21.0 million of deferred tax assets, net of deferred tax
liabilities, as of September 30, 2012. If estimates of taxable income are
decreased, a valuation allowance may need to be provided for some or all
deferred tax assets, which will cause an increase in income tax
expense. Management continues to apply the exception to the comprehensive
recognition of deferred income taxes to the undistributed earnings of our
foreign subsidiary, The Ultimate Software Group of Canada, Inc. ("Ultimate
Canada"). Accordingly, deferred income taxes were not recognized on the
cumulative undistributed earnings of Ultimate Canada, and were not deemed
material.
Liquidity and Capital Resources
In recent years, Ultimate has funded operations from cash flows generated from
operations.
As of September 30, 2012, we had $82.9 million in cash, cash equivalents and
total investments in marketable securities, reflecting a net increase of $27.6
million since December 31, 2011. This $27.6 million increase was primarily due
to cash provided by operations of $32.3 million and proceeds from the issuance
of Common Stock from employee and non-employee director stock option exercises
of $7.6 million, partially offset by cash purchases of property and equipment
(including principal payments on financed equipment) of $14.7 million and cash
used to settle the employee tax withholding liability for vesting of restricted
stock awards and restricted stock units of $5.1 million.
Net cash provided by operating activities was $32.3 million for the nine months
ended September 30, 2012, as compared with $23.6 million for the nine months
ended September 30, 2011. This $8.7 million increase was primarily due to an
increase in cash operating results of $8.4 million, an increase in accrued
expenses of $3.3 million associated with expenses that will be primarily paid in
the near term, a decrease in prepaid expenses and other current assets of $2.2
million principally
18--------------------------------------------------------------------------------
Table of Contents
related to the amortization of prepaid expenses, partially offset by an increase
in accounts receivable, net of the change to deferred revenue, of $4.5 million
and higher vendor payments of $1.8 million.
Net cash used in investing activities was $38.4 million for the nine months
ended September 30, 2012, as compared with $39.2 million for the nine months
ended September 30, 2011. The decrease of $0.8 million was primarily
attributable to a decrease in funds received from and held on behalf of
Ultimate's customers using the UltiPro Payment Services offering ("UltiPro
Payment Services") of $2.3 million, partially offset by an increase in cash
purchases of property and equipment of $1.5 million. During the three and nine
months ended September 30, 2012, we capitalized software development costs
related to a SaaS development project, totaling $2.6 million, which was
classified as property and equipment in accordance with the applicable
accounting guidance. With the exception of the stock-based compensation that was
capitalized of $0.2 million, the capitalized software costs were paid in cash,
since the majority of these costs were direct labor costs.
Net cash provided by financing activities was $32.8 million for the nine months
ended September 30, 2012, as compared with $17.1 million for the nine months
ended September 30, 2011. The $15.7 million increase was primarily related to an
increase of $17.3 million attributable to a decreased amount paid for purchases
of Common Stock under our stock repurchase plan and a $3.2 million increase in
excess tax benefits from stock option exercises and a decrease of $1.2 million
in cash used to settle employee tax withholding liability for vesting of
restricted stock awards and restricted stock units, partially offset by a
decrease of $2.3 million in UltiPro Payment Services, and a $0.9 million
decrease in proceeds from the issuance of Common Stock from stock option
exercises.
Days sales outstanding, calculated on a trailing three-month basis, as of
September 30, 2012 and September 30, 2011, were 64 days and 63 days,
respectively.
Deferred revenues were $85.1 million at September 30, 2012, as compared with
$86.6 million at December 31, 2011. The decrease of $1.5 million in deferred
revenues was primarily due to decreased deferred maintenance revenues, partially
offset by increased deferred SaaS revenues and, to a lesser extent, increased
deferred services revenues. The majority of the total balance in deferred
revenues is related to future recurring revenues, including deferred revenues
related to SaaS.
During the nine months ended September 30, 2012, we purchased perpetual licenses
with third-party vendors totaling $6.5 million, payable over a three-year
period, of which payments totaling $2.5 million were made.
We believe that cash and cash equivalents, investments in marketable securities,
equipment financing, other borrowings and cash generated from operations will be
sufficient to fund our operations for at least the next 12 months. This belief
is based upon, among other factors, management's expectations for future revenue
growth, controlled expenses and collections of accounts receivable.
We did not have any material commitments for capital expenditures as of
September 30, 2012.
Off-Balance Sheet Arrangements
We do not, and as of September 30, 2012 we did not, have any off-balance sheet
arrangements (as that term is defined in applicable SEC rules) that are
reasonably likely to have a current or future material effect on our financial
condition, results of operations, liquidity, capital expenditures or capital
resources.
Quarterly Fluctuations
Our quarterly revenues and operating results have varied significantly in the
past and are likely to vary substantially from quarter to quarter in the future.
Our operating results may fluctuate as a result of a number of factors,
including, but not limited to, increased expenses (especially as they relate to
product development, sales and marketing and the use of third-party
consultants), timing of product releases, increased competition, variations in
the mix of revenues, announcements of new products by us or our competitors and
capital spending patterns of our customers. We establish our expenditure levels
based upon our expectations as to future revenues, and, if revenue levels are
below expectations, expenses can be disproportionately high. A drop in near term
demand for our products could significantly affect both revenues and profits in
any quarter. Operating results achieved in previous fiscal quarters are not
necessarily indicative of operating results for the full fiscal year or for any
future periods. As a result of these factors, there can be no assurance that we
will be able to maintain profitability on a quarterly basis. We believe that,
due to the underlying factors for quarterly fluctuations, quarter-to-quarter
comparisons of Ultimate's operations are not necessarily meaningful and that
such comparisons should not be relied upon as indications of future performance.
19--------------------------------------------------------------------------------
Table of Contents
Forward-Looking Statements
The foregoing Management's Discussion and Analysis of Financial Condition and
Results of Operations and the following Quantitative and Qualitative Disclosures
about Market Risk contain certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). These
forward-looking statements represent our expectations or beliefs, including, but
not limited to, our expectations concerning our operations and financial
performance and condition. Words such as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," and similar expressions are intended
to identify such forward-looking statements. These forward-looking statements
are not guarantees of future performance and are subject to certain risks and
uncertainties that are difficult to predict. Ultimate's actual results could
differ materially from those contained in the forward-looking statements due to
risks and uncertainties associated with fluctuations in our quarterly operating
results, concentration of our product offerings, development risks involved with
new products and technologies, competition, our contractual relationships with
third parties, contract renewals with business partners, compliance by our
customers with the terms of their contracts with us, and other factors disclosed
in Ultimate's filings with the SEC. Other factors that may cause such
differences include, but are not limited to, those discussed in this Form 10-Q
and the Form 10-K, including the risk factors set forth in Part I, Item 1A of
the Form 10-K. Ultimate undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
Non-GAAP Financial Measures
Item 10 (e) of Regulation S-K, "Use of Non-GAAP Financial Measures in Commission
Filings," defines and prescribes the use of non-GAAP financial information. Our
measure of Non-GAAP Operating Income, which excludes non-cash stock-based
compensation and amortization of acquired intangibles, meets the definition of a
non-GAAP financial measure.
Ultimate believes that this non-GAAP measure of financial results provides
useful information to management and investors regarding certain financial and
business trends relating to Ultimate's financial condition and results of
operations. Ultimate's management uses this non-GAAP result to compare
Ultimate's performance to that of prior periods for trend analyses, for purposes
of determining executive incentive compensation, and for budget and planning
purposes. This measure is used in monthly financial reports prepared for
management and in quarterly financial reports presented to Ultimate's Board of
Directors. This measure may be different from non-GAAP financial measures used
by other companies.
This non-GAAP measure should not be considered in isolation or as an alternative
to such measures determined in accordance with generally accepted accounting
principles in the United States (GAAP). The principal limitation of this
non-GAAP financial measure is that it excludes significant expenses that are
required by GAAP to be recorded. In addition, it is subject to inherent
limitations as it reflects the exercise of judgment by management about which
expenses are excluded from the non-GAAP financial measure.
To compensate for these limitations, Ultimate presents its non-GAAP financial
measure in connection with its GAAP result. Ultimate strongly urges investors
and potential investors in Ultimate's securities to review the reconciliation of
its non-GAAP financial measure to the comparable GAAP financial measure that is
included in the table below and not to rely on any single financial measure to
evaluate its business.
We exclude the following items from the non-GAAP financial measure, Non-GAAP
Operating Income, as appropriate:
Stock-based compensation expense. Ultimate's non-GAAP financial measures exclude
stock-based compensation expense, which consists of expenses for stock options
and stock and stock unit awards recorded in accordance with Accounting Standards
Codification 718, "Compensation - Stock Compensation." For the three and nine
months ended September 30, 2012, stock-based compensation expense was $4.9
million and $14.1 million, respectively, on a pre-tax basis. For the three and
nine months ended September 30, 2011, stock-based compensation expense was $3.7
million and $11.4 million, respectively, on a pre-tax basis. Stock-based
compensation expense is excluded from the non-GAAP financial measures because it
is a non-cash expense that Ultimate does not consider part of ongoing operations
when assessing its financial performance. Ultimate believes that such exclusion
facilitates the comparison of results of ongoing operations for current and
future periods with such results from past periods. For GAAP net income periods,
non-GAAP reconciliations are calculated on a diluted weighted average share
basis.
Amortization of acquired intangible assets. In accordance with GAAP, operating
expenses include amortization of acquired intangible assets over the estimated
useful lives of such assets. There was no amortization of acquired intangible
20--------------------------------------------------------------------------------
Table of Contents
assets for the three and nine months ended September 30, 2012. For the three and
nine months ended September 30, 2011, the amortization of acquired intangible
assets was $27 thousand and $83 thousand, respectively. Amortization of acquired
intangible assets is excluded from Ultimate's non-GAAP financial measures
because it is a non-cash expense that Ultimate does not consider part of ongoing
operations when assessing its financial performance. Ultimate believes that such
exclusion facilitates comparisons to its historical operating results and to the
results of other companies in the same industry, which have their own unique
acquisition histories.
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2012 2011 2012 2011
Non-GAAP operating income
reconciliation:
Operating income $ 9,281 $ 4,842 $ 16,761 $ 8,651
Operating income, as a % of
total revenues 11.2 % 7.1 % 7.0 % 4.4 %
Add back:
Non-cash stock-based
compensation expense 4,900 3,740 14,117 11,359
Non-cash amortization of
acquired intangible assets - 27 - 83
Non-GAAP operating income $ 14,181 $ 8,609 $
30,878 $ 20,093
Non-GAAP operating income,
as a % of total revenues 17.2 % 12.7 % 12.9 % 10.2 %
[ Back To TMCnet.com's Homepage ]
|
Call Center/CRM
Info Tech 
IP Communications 
Mobile 
Green 
Satellite 
Robotics 
Internet Telephony Magazine
Click here to read latest issue
CUSTOMER 
Cloud Computing Magazine
Click here to read latest issue
M2M Evolution Magazine
