Ultimate Reports Q2 2013 Financial Results *Record Recurring Revenues of $80.8 Million, Up by 25% *Total Revenues of $97.5 Million, Up by 23% Business Wire WESTON, Fla. -- July 30, 2013 Ultimate Software (Nasdaq: ULTI), a leading cloud provider of people management solutions, announced today its financial results for the second quarter of 2013. For the quarter ended June 30, 2013, Ultimate reported recurring revenues of $80.8 million, a 25% increase, and total revenues of $97.5 million, a 23% increase, both compared with 2012’s second quarter. GAAP net income for the second quarter of 2013 was $4.9 million, or $0.17 per diluted share, versus GAAP net income of $2.7 million, or $0.09 per diluted share, for the second quarter of 2012. Non-GAAP net income, which excludes stock-based compensation, was $9.7 million, or $0.34 per diluted share, for the second quarter of 2013, compared with non-GAAP net income of $5.9 million, or $0.21 per diluted share, for the second quarter of 2012. See “Use of Non-GAAP Financial Information” below. “Our second quarter revenue results were in line with our expectations and our 2013 goals, and our operating margin once again exceeded our expectations,” said Scott Scherr, founder, president, and CEO of Ultimate. “In June, Ultimate celebrated 15 years as a public company. Over the past 15 years, we have grown from a little over 300 employees to 1,735 at the close of this year’s second quarter. Today we support more than 2,500 businesses whose operations span 144 countries. “Ultimate pioneered our industry’s move to the cloud in 2002 by delivering the first HR/payroll software solution on a SaaS basis. Today we continue to lead the human capital management industry providing a full-scope, strategic suite of HR, payroll, time, and talent management solutions.” Ultimate’s financial results teleconference will be held today, July 30, 2013, at 5:00 p.m. Eastern Time, through Vcall at www.investorcalendar.com/IC/CEPage.asp?ID=170359. The call will be available for replay at the same address beginning at 9:00 p.m. Eastern Time today. Windows Media Player software is required to listen to the call and can be downloaded from the site. Forward-looking information about future company performance will be discussed during the teleconference call. Financial Highlights *Recurring revenues grew by 25% for the second quarter of 2013 compared with 2012’s second quarter. The increase was primarily attributable to revenue growth from our cloud offering. Recurring revenues for the second quarter of 2013 were 83% of total revenues as compared with 82% of total revenues for 2012’s second quarter. *Ultimate’s total revenues for the second quarter of 2013 increased by 23% compared with those for the second quarter of 2012. *Our operating income increased 64%, on a non-GAAP basis, for the second quarter of 2013 to $16.8 million as compared with $10.3 million for the same period of 2012. Our non-GAAP operating margin was 17.2% for the second quarter of 2013 versus 13.0% for the second quarter of 2012. *Ultimate’s annualized retention rate exceeded 96% for its existing recurring revenue customer base as of June 30, 2013. *The combination of cash, cash equivalents, and marketable securities was $91.1 million as of June 30, 2013, compared with $69.4 million as of December 31, 2012. Cash flows from operating activities for the quarter ended June 30, 2013, were $14.4 million, compared with $8.3 million for the same period of 2012. For the six months ended June 30, 2013, Ultimate generated $32.5 million in cash from operations compared with $22.7 million for the six months ended June 30, 2012. *Days sales outstanding were 66 days at June 30, 2013, representing a reduction of five days compared with days sales outstanding at December 31, 2012. Stock Repurchases *During the six months ended June 30, 2013, we used $6.7 million to acquire 68,926 shares of our Common Stock to settle the employee tax withholding liability resulting from the vesting of our employees' restricted stock holdings. *As of June 30, 2013, we had 946,165 shares available for repurchase in the future under our previously announced Stock Repurchase Plan. Financial Outlook Ultimate provides the following financial guidance for the third quarter ending September 30, 2013, and full year 2013: For the third quarter of 2013: *Recurring revenues of approximately $84.0 million, *Total revenues of approximately $103.0 million, and *Operating margin, on a non-GAAP basis (discussed below), of approximately 18%. For the year 2013: *Recurring revenues to increase by approximately 25% over those of 2012, *Total revenues to increase by approximately 23% over those of 2012, and *Operating margin, on a non-GAAP basis (discussed below), of approximately 17%. Operating margin expectations were determined on a non-GAAP basis using the methodologies identified under the caption “Use of Non-GAAP Financial Information” in this press release. Non-cash stock-based compensation expense for 2013 is expected to be approximately $37.5 million. Forward-Looking Statements Certain statements in this press release are, and certain statements on the teleconference call may be, forward-looking statements within the meaning provided under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are made only as of the date hereof. These statements involve known and unknown risks and uncertainties that may cause Ultimate’s actual results to differ materially from those stated or implied by such forward-looking statements, including risks and uncertainties associated with fluctuations in Ultimate’s quarterly operating results, concentration of Ultimate’s product offerings, development risks involved with new products and technologies, competition, 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 Securities and Exchange Commission. Ultimate undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. About Ultimate Ultimate is a leading cloud provider of people management solutions, with more than 10 million people records in the cloud. Built on the belief that people are the most important ingredient of any business, Ultimate’s award-winning UltiPro delivers HR, payroll, time, and talent management solutions that seamlessly connect people with the information and resources they need to work more effectively. Founded in 1990, the company is headquartered in Weston, Florida, and has more than 1,700 professionals focused on developing the highest quality solutions and services. In 2013, Ultimate was ranked #9 on FORTUNE'S “100 Best Companies to Work For” list, and Minyanville Media Inc. named Ultimate among the top 10 most ethical businesses in the United States. In its Cloud Buyer’s Bill of Rights Certification, Constellation Research awarded Ultimate its highest level of certification. Ultimate has more than 2,500 customers with employees in 144 countries, including Adobe Systems Incorporated, Culligan International, Major League Baseball, Pep Boys, and Texas Roadhouse. More information on Ultimate's products and services for people management can be found at www.ultimatesoftware.com. UltiPro is a registered trademark of The Ultimate Software Group, Inc. All other trademarks referenced are the property of their respective owners. THE ULTIMATE SOFTWARE GROUP, INC., AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) For the Three Months Ended For the Six Months Ended June 30, June 30, 2013 2012 2013 2012 Revenues: Recurring $ 80,754 $ 64,636 $ 158,836 $ 125,509 Services 16,392 14,010 35,837 31,034 License 323 531 713 915 Total revenues 97,469 79,177 195,386 157,458 Cost of revenues: Recurring 22,543 19,235 44,371 38,339 Services 18,030 14,843 37,758 31,366 License 73 120 163 208 Total cost of 40,646 34,198 82,292 69,913 revenues Gross profit 56,823 44,979 113,094 87,545 Operating expenses: Sales and marketing 22,672 17,472 45,582 36,109 Research and 16,864 15,989 32,994 31,685 development General and 8,285 6,126 17,212 12,271 administrative Total operating 47,821 39,587 95,788 80,065 expenses Operating income 9,002 5,392 17,306 7,480 Other (expense) income: Interest and other (56 ) (101 ) (136 ) (176 ) expense Other income, net 6 30 47 43 Total other expense, (50 ) (71 ) (89 ) (133 ) net Income before income 8,952 5,321 17,217 7,347 taxes Provision for income (4,050 ) (2,668 ) (7,795 ) (3,670 ) taxes Net income $ 4,902 $ 2,653 $ 9,422 $ 3,677 Net income per share: Basic $ 0.18 $ 0.10 $ 0.34 $ 0.14 Diluted $ 0.17 $ 0.09 $ 0.33 $ 0.13 Weighted average shares outstanding: Basic 27,735 26,655 27,606 26,524 Diluted 28,875 28,281 28,812 28,194 The following table sets forth the stock-based compensation expense resulting from stock-based arrangements (excluding the income tax effect, or “gross”) and the amortization of acquired intangibles that are recorded in Ultimate’s unaudited condensed consolidated statements of operations for the periods indicated (in thousands): For the Three Months Ended For the Six Months Ended June 30, June 30, 2013 2012 2013 2012 Stock-based compensation expense: Cost of recurring $ 973 $ 638 $ 1,837 $ 1,151 revenues Cost of services 864 665 1,824 1,166 revenues Sales and marketing 3,185 1,772 6,281 3,446 Research and 816 692 1,586 1,316 development General and 1,940 1,096 3,847 2,138 administrative Total non-cash stock-based $ 7,778 $ 4,863 $ 15,375 $ 9,217 compensation expense THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) As of As of June 30, December 31, 2013 2012 ASSETS Current assets: Cash and cash equivalents $ 81,193 $ 58,817 Investments in marketable securities 7,934 9,223 Accounts receivable, net 70,713 70,774 Prepaid expenses and other current assets 29,931 25,949 Deferred tax assets, net 1,372 1,372 Total current assets before funds held for 191,143 166,135 clients Funds held for clients 443,875 281,007 Total current assets 635,018 447,142 Property and equipment, net 46,684 38,068 Capitalized software, net 205 508 Goodwill 3,025 3,025 Investments in marketable securities 1,947 1,311 Other assets, net 16,033 16,687 Deferred tax assets, net 19,487 18,543 Total assets $ 722,399 $ 525,284 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 6,368 $ 7,584 Accrued expenses 18,522 15,055 Deferred revenue 93,142 90,674 Capital lease obligations 2,764 2,968 Other borrowings 2,258 2,311 Total current liabilities before client fund 123,054 118,592 obligations Client fund obligations 443,875 281,007 Total current liabilities 566,929 399,599 Deferred revenue 881 1,302 Deferred rent 2,622 2,777 Capital lease obligations 2,094 2,469 Other borrowings 926 2,601 Income taxes payable 1,866 1,866 Total liabilities 575,318 410,614 Stockholders’ equity: Preferred Stock, $.01 par value — — Series A Junior Participating Preferred Stock, — — $.01 par value Common Stock, $.01 par value 319 314 Additional paid-in capital 289,898 266,130 Accumulated other comprehensive (loss) income (675 ) 109 Accumulated deficit (23,917 ) (33,339 ) 265,625 233,214 Treasury stock, at cost (118,544 ) (118,544 ) Total stockholders’ equity 147,081 114,670 Total liabilities and stockholders’ equity $ 722,399 $ 525,284 THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) For the Six Months Ended June 30, 2013 2012 Cash flows from operating activities: Net income $ 9,422 $ 3,677 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and 7,742 6,352 amortization Provision for doubtful 1,131 411 accounts Non-cash stock-based 15,375 9,217 compensation expense Income taxes 7,679 3,525 Excess tax benefits from (8,623 ) (3,302 ) employee stock plan Changes in operating assets and liabilities: Accounts receivable (1,070 ) 2,108 Prepaid expenses and other (3,982 ) (1,511 ) current assets Other assets 654 (746 ) Accounts payable (1,216 ) 1,377 Accrued expenses and 3,312 3,321 deferred rent Deferred revenue 2,047 (1,713 ) Net cash provided by 32,471 22,716 operating activities Cash flows from investing activities: Purchases of marketable (6,800 ) (7,385 ) securities Maturities of marketable 7,452 5,997 securities Net purchases of client (162,868 ) (39,024 ) funds securities Purchases of property and (14,069 ) (7,448 ) equipment Net cash used in investing (176,285 ) (47,860 ) activities Cash flows from financing activities: Net proceeds from issuances 5,706 5,298 of Common Stock Excess tax benefits from 8,623 3,302 employee stock plan Shares acquired to settle employee tax withholding (6,693 ) (4,328 ) liability Principal payments on (1,803 ) (1,613 ) capital lease obligations Other borrowings (1,728 ) Net increase in client fund 162,868 39,024 obligations Net cash provided by 166,973 41,683 financing activities Effect of foreign currency exchange rate changes on (783 ) (76 ) cash Net increase in cash and 22,376 16,463 cash equivalents Cash and cash equivalents, 58,817 46,149 beginning of period Cash and cash equivalents, $ 81,193 $ 62,612 end of period Supplemental disclosure of cash flow information: Cash paid for interest $ 176 $ 138 Cash paid for income taxes $ 265 $ 272 Supplemental disclosure of non-cash financing activities: Ultimate entered into capital lease obligations to acquire new equipment totaling $1.2 million and $2.4 million for the six months ended June 30, 2013 and 2012, respectively. THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES Unaudited Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures (In thousands, except per share amounts) For the Three Months Ended For the Six Months Ended June 30, June 30, 2013 2012 2013 2012 Non-GAAP operating income reconciliation: Operating income $ 9,002 $ 5,392 $ 17,306 $ 7,480 Operating income, as a % 9.2 % 6.8 % 8.9 % 4.8 % of total revenues Add back: Non-cash stock-based 7,778 4,863 15,375 9,217 compensation expense Non-GAAP $ 16,780 $ 10,255 $ 32,681 $ 16,697 operating income Non-GAAP operating income, as a % 17.2 % 13.0 % 16.7 % 10.6 % of total revenues Non-GAAP net income reconciliation: Net income $ 4,902 $ 2,653 $ 9,422 $ 3,677 Add back: Non-cash stock-based 7,778 4,863 15,375 9,217 compensation expense Income tax (2,978 ) (1,608 ) (5,894 ) (3,286 ) effect Non-GAAP net $ 9,702 $ 5,908 $ 18,903 $ 9,608 income Non-GAAP net income, per diluted share, reconciliation: (1) Net income, per $ 0.17 $ 0.09 $ 0.33 $ 0.13 diluted share Add back: Non-cash stock-based 0.27 0.17 0.53 0.33 compensation expense Income tax (0.10 ) (0.05 ) (0.20 ) (0.12 ) effect Non-GAAP net income, per $ 0.34 $ 0.21 $ 0.66 $ 0.34 diluted share Shares used in calculation of GAAP and non-GAAP net income per share: Basic 27,735 26,655 27,606 26,524 Diluted 28,875 28,281 28,812 28,194 (1) The non-GAAP net income per diluted share reconciliation is calculated on a diluted weighted average share basis for GAAP net income periods. Use of Non-GAAP Financial Information This press release contains non-GAAP financial measures. Ultimate believes that non-GAAP measures of financial results provide 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 these non-GAAP results 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. These measures are used in monthly financial reports prepared for management and in quarterly financial reports presented to Ultimate’s Board of Directors. These measures may be different from non-GAAP financial measures used by other companies. These non-GAAP measures 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 these non-GAAP financial measures is that they exclude significant expenses that are required by GAAP to be recorded. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by management about which expenses are excluded from the non-GAAP financial measures. To compensate for these limitations, Ultimate presents its non-GAAP financial measures in connection with its GAAP results. Ultimate strongly urges investors and potential investors in Ultimate’s securities to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures that are included in this press release (under the caption “Unaudited Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures”) and not to rely on any single financial measure to evaluate its business. Ultimate presents the following non-GAAP financial measures in this press release: non-GAAP operating income, non-GAAP operating income, as a percentage of total revenues (or non-GAAP operating margin), non-GAAP net income and non-GAAP net income, per diluted share. We exclude the following item from these non-GAAP financial measures 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 six months ended June30, 2013, stock-based compensation expense was $7.8 million and $15.4 million, on a pre-tax basis. For the three and six months ended June30, 2012, stock-based compensation expense was $4.9 million and $9.2 million, 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. Contact: Ultimate Software, Weston Mitchell K. Dauerman, 954-331-7369 Chief Financial Officer and Investor Relations IR@ultimatesoftware.com
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