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June 24, 2009
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Ultimate Software Commanding Rich Valuation
Shares of Ultimate Software (ULTI) have been trading higher since its relative recent low of $12.95 on February 27. At current prices, ULTI is trading at a forward P/E of 12.9 times FY2010 EPS estimate and roughly 2.5 times FY2010 EV/Sales. On both measures, the stock is trading at a slightly higher valuation compared to its peer group. However, given its dominant position in the on-demand payroll software market, we consider the shares fairly valued.
During Q1, the company decided to withdraw its guidance of Annual Recurring Revenue (ARR), an important valuation metric for ULTI, which may be interpreted as an attempt by the company to divert attention away from any fundamental weakness. However, that may not be the case, and we may have to wait until Q2 results to evaluate the situation.
Excluding the subscription revenues generated from ULTI's agreement with Ceridian Corporation (which ended in March 2008), recurring revenues grew by 27.4% year over year. The attrition rate remained at a 3% annualized rate. 65% of new enterprise customers in the first quarter came from companies with more than 3,000 employees, which shows the company's growing share in big companies.
We may consider ULTI a good defensive investment, but at more attractive valuations. Nearly 60% of Ultimate's revenue is comprised of a recurring revenue stream that provides solid visibility for sales and earnings. Given the company's visibility for future sales and earnings, we expect limited upside surprises and consider the shares as fairly valued at current levels.
At the same time, demand for Ultimate's products remains strong and bookings continue to grow at a highly impressive annual rate. In Q1, approximately 65% of new customer additions were from companies with over 3,000 employees. We expect ULTI to sustain this trend as larger firms recognize the value in Ultimate's SaaS offerings.
Management had earlier reiterated its guidance for fiscal 2009. The business model for 2009 is based upon acquiring 100 new customers in the enterprise market and 300 new customers in the workplace market. Recurring revenue is expected to grow around 27% - 30%. Total revenues are expected to grow around 13% - 15%.
Read the full analyst report on "ULTI"
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