Earnings estimates have been falling for Ultimate Software (ULTI – Snapshot Report) after the company reported its first quarter results on April 28. The drop in consensus has been significant enough to send the stock to a Zacks Rank #5 (Strong Sell), putting it in the bottom 5% of all companies we rank based on earnings momentum.
Meanwhile, shares of Ultimate Software trade at a lofty 115x forward earnings as investors apparently still have very high expectations for the company.
Ultimate Software provides human resources, payroll, and talent management software through a cloud-based, software-as-a-service model. Its flagship product is UltiPro.
The company is headquartered in Weston, Florida and has a market of $4.7 billion.
First Quarter Results
Ultimate Software reported its first quarter results on April 28. Adjusted earnings per share (which excludes amortization of acquired intangibles but includes stock-based compensation expense) came in at $0.15, well below the consensus of $0.27. It was a 38% decrease from adjusted EPS in the same quarter last year.
Total revenues rose 20% to $144.9 million, which was in-line with consensus. Recurring revenues, which represented 82% of total revenues, increased by 22% due to growth from its cloud offering.
Stock-based compensation expense jumped 48% to $16.1 million. Excluding this, non-GAAP operating income increased 11% as the operating margin declined from 19.4% to 18.0% of total revenues.
Meanwhile, free cash flow increased just 5% to $15.1 million. Over the last twelve months, the company has generated $43.2 million in free cash flow versus a market cap of $4,700 million. That equates to a free cash flow yield of less than 1%.
Following the Q1 miss, analysts unanimously revised their estimates lower for both 2015 and 2016. This sent Ultimate Software to a Zacks Rank #5 (Strong Sell).
The 2015 Zacks Consensus Estimate is now $1.25, down from $1.43 before the report. The 2016 consensus has fallen from $1.89 to $1.70 over the same period.
Shares of Ultimate Software have fallen since the Q1 report, but investors apparently still have very high expectations for the company. The stock trades at a lofty 115x 12-month forward estimates, well above the industry median of 21x. And its enterprise value to cash flow ratio is a frothy 76x, well above the industry median of 13x.
The Bottom Line
With falling estimates and premium valuation, investors should consider avoiding Ultimate Software for now.