Ultimate has taken advantage of the transition towards the cloud and outpace the industry's slow growth. They have been able to grow revenue double digits, while improving profitability.
Yet, due to their current size and the competitive environment, Ultimate will have a difficult time accelerating revenue growth. This is important due to high growth expectations.
Management is implementing a new mid-market sales team. This sales team is targeting companies with 100 to 500 employees. Yet, the impact of the new sales team will be limited.
Despite a decline of 12.3% YTD, Ultimate's stock is overvalued compared to peers. The stock is trading at a similar valuation to faster-growing companies.
Ultimate should continue to grow double digits, but investors are expecting a significant acceleration of growth. Significant revenue acceleration shouldn't occur, which will result in the stock underperforming.
SAP (SAP -3.9%) investors have a case of sticker shock after the company agreed to pay $8.3B (to be financed through a credit facility) to buy cloud travel/expense management software leader Concur Technologies. The acquisition price is equal to 9.6x Concur's estimated FY15 (ends Sep. '15) sales.
On the other hand, enterprise cloud software names are rallying on hopes of fresh deal activity. CRM +1.5%. N +2.7%. NOW +2.6%. PAYC +5%. ULTI +2.2%. JIVE +1.8%. DWRE +1.8%. MKTO +1.7%.
SAP CEO Bill McDermott proclaims combining Concur's products with Ariba's cloud procurement/B2B marketplace offerings and Fieldglass' cloud labor-management software will help his company redefine "how businesses conduct commerce across goods and services, contingent workforces, travel and entertainment."
McDermott also praises Concur's corporate travel ecosystem, which includes Hertz, Delta, Expedia, Sabre, and many others, and sees an opportunity to create real-time travel collaboration tools running on SAP's Hana in-memory database. SAP notes only 30% of Concur customers are currently SAP clients, yielding plenty of cross-selling opportunities.
Low expectations and a high short interest (11.9M shares as of Aug. 15) are proving a good mix for Veeva (VEEV +18.1%) following its FQ2 beat and guidance hike. Several firms have raised their targets.
Workday (WDAY +5.5%), which sold off yesterday (and took peers down with it) following its FQ2 report, is following Veeva higher. As are Veeva partner Salesforce (CRM +2.1%) and several other cloud software names. NOW +2.9%. CTCT +3.4%. JIVE +2.5%. CSOD +2%. ULTI +1.9%. MKTO +1.9%.
"We like [Veeva's] momentum with new products, the pace of customer deployments, and view the second-half guidance as likely conservative," says Deutsche (Buy).
Pac Crest (Outperform) likes the fact Veeva's billings and subscription revenue each rose over 60% Y/Y, and that its large deal activity also grew. It sees a $5B addressable market for life sciences CRM/content management software.
Ultimate Software (ULTI +7.4%) beat Q2 estimates on the back of a 26% Y/Y increase in recurring revenue (84% of total revenue). The cloud HR software vendor also disclosed on its CC (transcript) it added three new enterprise clients with 10K or more employees; the largest has 40K.
Full-year guidance for 23% revenue growth (25% recurring growth) has been reiterated. Q3 guidance for revenue of $127M is roughly in-line with a $127.3M consensus.
A number of cloud software peers have also rallied. Cloud HR/talent management peers Workday (WDAY +6.5%) and Cornerstone OnDemand (CSOD +5.1%) are among the biggest gainers, but others are also doing quite well. CRM +2.7%. NOW +4.7%. LPSN +5.3%. MKTO +4.1%. CNQR +4.8%. JIVE +3.6%. N +4.2%.
Meanwhile, Pac Crest is reiterating an Outperform for Workday (WDAY +8.8% - competes to an extent with NetSuite) and Splunk (SPLK +5.6%), and thinks the companies, along with Neutral-rated Salesforce (CRM +3.6%), can attract growth investors at current levels. The firm adds the companies are trading below their average price/sales multiples for the last 3 years.
Workday is down 38%, and Splunk 47%, from their respective 52-week highs. But the companies still both go for ~12x FY16E (ends Jan. '16) sales. Price/billings multiples are a bit lower, but still steep.
Several other enterprise cloud software vendors are joining NetSuite, Workday, and Salesforce in rallying on an up day for the Nasdaq. NOW +7.7%. CSOD +5.6%. ULTI +4%. DWRE (a NetSuite rival) +3.2%.
Salesforce (CRM -4.1%) is following the group lower after announcing plans to offer industry-specific cloud software solutions. Pac Crest thinks Salesforce's top-line will benefit, but is cutting its EPS estimates on margin concerns.
Cerner (CERN) expects Q1 revenue of $770M-$810M and EPS of $0.36-$0.37 vs. a consensus of $780.7M and $0.38. 2014 guidance is for revenue of $3.2B-$3.4B and EPS of $1.62-$1.67 vs. a consensus of $3.33B and $1.66. Q1 bookings are expected to total $860M-$930M. Shares +1.3% AH. (Q4 results, PR)
Nanometrics (NANO) expects Q1 revenue of $48M-$54M and EPS of $0.01-$0.13 vs. a consensus of $50.6M and $0.08. Gross margin is expected to be in a range of 48%-50% (compares with a Q4 level of 48.9%). (Q4 results, PR)
Ultimate Software (ULTI) expects Q1 revenue of $119M ($96M recurring), above a $117.9M consensus. Full-year guidance is for revenue to grow 23%, roughly in-line with a 22.9% consensus; recurring revenue is expected to grow 25%. (Q4 results, PR)
Much as consumer Web plays are rising in sympathy with Facebook, enterprise cloud software names are sharply higher after cloud IT service desk software leader ServiceNow (NOW +14.3%) beat Q4 revenue estimates, provided very strong guidance, and reported its deferred revenue/backlog balance rose 59% Y/Y.
Salesforce (CRM +5.5%), Workday (WDAY +5.4%), NetSuite (N +6.2%), Textura (TXTR +9.8%), Cornerstone OnDemand (CSOD +3.6%), Jive Software (JIVE +3.4%), Ultimate Software (ULTI +3.4%), InContact (SAAS +3.9%), Tangoe (TNGO +3.7%), and LivePerson (LPSN +5.4%) are among the winners.
Baird has upgraded ServiceNow to Outperform, and several other firms have upped their PTs. Raymond James (Strong Buy) praises ServiceNow's efforts to expand into complementary markets such as HR automation, grow both its packaged and custom app sales, and to keep taking share from on-premise IT service desk vendors such as CA, BMC Software, H-P, and IBM.
On the CC (transcript), CEO Frank Slootman mentioned ServiceNow's installed base has grown to 2,060 accounts and 400 global 2000 customers. That's up from 1,900 and 360 three months earlier.
He added 80% of customers are now deploying custom apps, and that 20% of the annual contract value recorded in Q4 involved products other than tradition IT service desk licensing.
In creating its list of top investment ideas, Credit Suisse allows its analysts a max of 3 picks over a 6-12 month horizon. Those who don't list a name under $3B in market cap are allowed a "bonus small-cap pick."
Picks are broken down by sector and by analyst, with each allowed a few words for his/her elevator pitch ... a neat read for ideas to keep by your desk.
Additions to the Top Picks list since the last publication in basic materials: CE, FOE, NUE, STLD.
Ultimate Software Group, Inc. is a provider of cloud-based human capital management. Its UltiPro software is a comprehensive, easy-to-use solution delivered primarily over the Internet to organizations based in the United States and Canada.