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Ultimate Software: Mature Software Company Quietly Powering Ahead

Gary Alexander profile picture
Gary Alexander


  • Ultimate Software continued its outperformance in Q2, with results beating analyst expectations on both the top and bottom line.
  • Most notably, the company's 23% y/y growth in recurring revenues marked solid overachievement relative to the company's guidance for "at least 20% y/y" growth.
  • Free cash flow in the first half of the year also grew 67% y/y, as Ultimate Software improves its operating margins.
  • While no longer the growth stalwart that it used to be, Ultimate Software remains a profit-focused story with GAAP earnings up more than 3x year over year.

Precious few SaaS software companies have reached the age of maturity. By that, I mean most SaaS companies are still in their hyper-growth stages: with growth in the 30-40% range, an unpredictable revenue trend, and a focus on "growth at all costs" that prioritizes investments in sales headcount expansion rather than profitability.

No doubt this is the right move for high-growth companies, within SaaS especially - landing recurring revenue deals that can provide steady income streams for multiple years is worth running at a loss in the near term. But over the past year, these high-growth SaaS companies have become immensely popular (and one could say, overvalued) in the markets, especially with the addition of overhyped IPOs like Avalara (AVLR), a sales tax compliance software company that shot up when the Supreme Court ruled unfavorably against Wayfair (W) on the subject of sales taxes, or Zscaler (ZS), which pioneered a "security-as-a-service" model to cybersecurity. With the spotlight so squarely focused on these types of names, older SaaS companies that have gone through their growth phases and emerged as a slower-growing, yet more stable and more profitable company, have been largely ignored.

Ultimate Software (NASDAQ:ULTI) is an example of one of these old-school SaaS names that have been left in the dust. With its growth rate in the low 20s, Ultimate Software has largely moved out of the mainstream, which is a shame as its underlying fundamentals have never been stronger. The company just reported Q2 results that featured a respectable boost in recurring revenues.

Earlier in the year, Ultimate Software guided to a "minimum of 20% y/y" growth in recurring revenues. This quarter, it posted recurring revenue growth three points above that guided minimum, at 23% y/y - and in addition, it upped its outlook to 23% y/y growth in recurring revenues. No, that's not as impressive as newer, smaller SaaS companies that are posting

This article was written by

Gary Alexander profile picture
With combined experience of covering technology companies on Wall Street and working in Silicon Valley, and serving as an outside adviser to several seed-round startups, Gary Alexander has exposure to many of the themes shaping the industry today. He has been a regular contributor on Seeking Alpha since 2017. He has been quoted in many web publications and his articles are syndicated to company pages in popular trading apps like Robinhood.

Analyst’s Disclosure: I am/we are long ULTI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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