form_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
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¨ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission file number: 0-24347
THE ULTIMATE SOFTWARE GROUP, INC.
(Exact name of Registrant as specified in its charter)
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Delaware |
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65-0694077 |
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(State or other jurisdiction of incorporation) |
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(I.R.S. Employer Identification No.) |
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or organization |
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2000 Ultimate Way, Weston, FL |
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33326 |
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(Address of principal executive offices) |
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(Zip Code) |
(954) 331 - 7000
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No ¨
Indicate by check mark whether registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such period that the registrant was required to
submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
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Large accelerated filer þ |
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Accelerated filer ¨ |
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Non-accelerated filer ¨ |
(Do not check if a smaller reporting company) |
Smaller reporting company ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of July 31, 2009, there were 24,612,901 shares of the Registrant’s Common Stock, par value $0.01, outstanding.
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
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Item 1 – Financial Statements: |
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1 |
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2 |
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3 |
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4 |
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5-10 |
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11-14 |
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15 |
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15 |
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Part II – Other Information: |
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16 |
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16 |
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16 |
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16 |
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17 |
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Certifications |
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18 |
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Item 1 – Financial Statements |
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THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES |
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UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS |
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(Dollars in thousands, except share and per share data) |
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As of |
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As of |
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June 30, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
29,723 |
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$ |
17,200 |
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Short-term investments in marketable securities |
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1,598 |
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5,805 |
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Accounts receivable, net of allowance for doubtful accounts of
$700 for 2009 and 2008 |
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33,816 |
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38,302 |
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Prepaid expenses and other current assets |
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15,435 |
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16,011 |
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Deferred tax assets, net |
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3,533 |
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3,533 |
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Total current assets before funds held for customers |
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84,105 |
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80,851 |
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Funds held for customers |
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7,437 |
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5,863 |
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Total current assets |
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91,542 |
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86,714 |
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Property and equipment, net |
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21,358 |
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22,984 |
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Capitalized software, net |
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5,139 |
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5,642 |
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Goodwill |
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3,316 |
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2,906 |
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Other assets, net |
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11,477 |
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11,668 |
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Long-term deferred tax assets, net |
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17,483 |
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17,343 |
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Total assets |
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$ |
150,315 |
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$ |
147,257 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
3,422 |
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$ |
7,200 |
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Accrued expenses |
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10,832 |
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12,701 |
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Current portion of deferred revenue |
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54,414 |
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54,687 |
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Current portion of capital lease obligations |
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1,987 |
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2,034 |
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Current portion of long-term debt |
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320 |
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320 |
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Total current liabilities before customer funds obligations |
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70,975 |
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76,942 |
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Customer funds obligations |
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7,437 |
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5,863 |
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Total current liabilities |
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78,412 |
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82,805 |
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Deferred revenue, net of current portion |
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8,075 |
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8,807 |
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Deferred rent |
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3,280 |
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3,054 |
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Capital lease obligations, net of current portion |
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1,516 |
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1,519 |
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Total liabilities |
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91,283 |
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96,185 |
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Stockholders’ equity: |
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Preferred Stock, $.01 par value, 2,000,000 shares authorized, no shares issued or outstanding |
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– |
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– |
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Series A Junior Participating Preferred Stock, $.01 par value, 500,000 shares authorized, no shares issued or outstanding |
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– |
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– |
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Common Stock, $.01 par value, 50,000,000 shares authorized, 27,034,837 and 26,796,169 shares issued in 2009 and 2008, respectively |
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270 |
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268 |
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Additional paid-in capital |
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172,881 |
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164,574 |
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Accumulated other comprehensive loss |
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(608 |
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(1,002 |
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Accumulated deficit |
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(54,011 |
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(53,268 |
) |
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118,532 |
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110,572 |
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Treasury stock, 2,533,575 shares, at cost, for 2009 and 2008 |
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(59,500 |
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(59,500 |
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Total stockholders’ equity |
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59,032 |
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51,072 |
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Total liabilities and stockholders’ equity |
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$ |
150,315 |
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$ |
147,257 |
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The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
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(In thousands, except per share amounts) |
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For the Three Months |
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For the Six Months |
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Ended June 30, |
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Ended June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenues: |
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Recurring |
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$ |
32,623 |
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$ |
25,377 |
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$ |
63,511 |
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$ |
51,073 |
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Services |
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13,409 |
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13,165 |
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29,339 |
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27,285 |
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License |
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1,274 |
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2,957 |
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3,275 |
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6,610 |
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Total revenues |
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47,306 |
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41,499 |
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96,125 |
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84,968 |
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Cost of revenues: |
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Recurring |
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9,567 |
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7,002 |
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18,473 |
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13,527 |
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Services |
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11,112 |
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10,580 |
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23,439 |
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21,879 |
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License |
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261 |
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464 |
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598 |
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892 |
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Total cost of revenues |
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20,940 |
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18,046 |
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42,510 |
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36,298 |
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Gross profit |
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26,366 |
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23,453 |
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53,615 |
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48,670 |
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Operating expenses: |
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Sales and marketing |
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12,884 |
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11,236 |
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26,719 |
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23,065 |
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Research and development |
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9,582 |
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9,299 |
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18,920 |
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18,178 |
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General and administrative |
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4,331 |
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4,405 |
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8,888 |
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8,701 |
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Total operating expenses |
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26,797 |
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24,940 |
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54,527 |
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49,944 |
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Operating loss |
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(431 |
) |
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(1,487 |
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(912 |
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(1,274 |
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Other income (expense): |
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Interest expense and other |
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(38 |
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(61 |
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(82 |
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(140 |
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Other income, net |
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39 |
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222 |
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111 |
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579 |
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Total other income, net |
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1 |
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161 |
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29 |
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439 |
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Loss before benefit for income taxes |
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(430 |
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(1,326 |
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(883 |
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(835 |
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Benefit for income taxes |
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100 |
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575 |
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140 |
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374 |
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Net loss |
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$ |
(330 |
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$ |
(751 |
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$ |
(743 |
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$ |
(461 |
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Net loss per share: |
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Basic |
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$ |
(0.01 |
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$ |
(0.03 |
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$ |
(0.03 |
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$ |
(0.02 |
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Diluted |
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$ |
(0.01 |
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$ |
(0.03 |
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$ |
(0.03 |
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$ |
(0.02 |
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Weighted average shares outstanding: |
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Basic |
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24,414 |
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24,670 |
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24,354 |
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24,676 |
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Diluted |
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24,414 |
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24,670 |
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24,354 |
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24,676 |
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The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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(In thousands) |
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For the Six Months |
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Ended June 30, |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(743 |
) |
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$ |
(461 |
) |
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Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization |
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5,914 |
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4,483 |
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Provision for doubtful accounts |
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528 |
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|
944 |
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Non-cash stock-based compensation expense |
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6,590 |
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8,033 |
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Deferred income taxes |
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(140 |
) |
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(374 |
) |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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3,958 |
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1,591 |
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Prepaid expenses and other current assets |
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576 |
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(2,219 |
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Other assets |
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98 |
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(1,512 |
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Accounts payable |
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(3,778 |
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3,179 |
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Accrued expenses and deferred rent |
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(1,418 |
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(1,601 |
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Deferred revenue |
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(1,005 |
) |
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1,455 |
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Net cash provided by operating activities |
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10,580 |
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13,518 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(2,109 |
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(8,111 |
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Purchases of marketable securities |
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(1,090 |
) |
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(642 |
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Maturities of marketable securities |
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5,295 |
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14,022 |
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Net purchases of securities with customer funds |
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(1,574 |
) |
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(1,876 |
) |
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Capitalized software |
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(631 |
) |
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(889 |
) |
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Net cash (used in) provided by investing activities |
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(109 |
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2,504 |
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Cash flows from financing activities: |
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Repurchases of common stock |
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– |
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(17,674 |
) |
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Principal payments on capital lease obligations |
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(1,226 |
) |
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(1,098 |
) |
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Net increase in customer fund obligations |
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1,574 |
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1,876 |
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Repayments of borrowings of long-term debt |
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– |
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(168 |
) |
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Net proceeds from issuances of common stock |
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1,719 |
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4,460 |
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Net cash provided by (used in) financing activities |
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2,067 |
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(12,604 |
) |
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Effect of exchange rate changes on cash |
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(15 |
) |
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(10 |
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Net increase in cash and cash equivalents |
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12,523 |
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|
3,408 |
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Cash and cash equivalents, beginning of period |
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17,200 |
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17,462 |
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Cash and cash equivalents, end of period |
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$ |
29,723 |
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$ |
20,870 |
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| |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest |
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$ |
73 |
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$ |
39 |
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Cash paid for income taxes |
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$ |
128 |
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$ |
227 |
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Supplemental disclosure of non-cash financing activities: |
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- The Company entered into capital lease obligations to acquire new equipment totaling $1.2 million and $0.1 million for the six |
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months ended June 30, 2009 and June 30, 2008, respectively. |
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- The Company entered into an agreement to purchase certain source code from a third-party vendor for $2.0 million, of which |
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$0.5 million was paid during each of the six months ended June 30, 2009 and June 30, 2008. |
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The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
(In thousands)
| |
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Common Stock |
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Additional Paid-in |
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Accumulated Other Comprehensive |
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Accumulated |
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Total Stockholders’ |
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| |
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Capital |
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Loss |
|
|
Deficit |
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|
|
|
|
|
|
|
Equity |
|
|
|
|
|
26,796 |
|
|
$ |
268 |
|
|
$ |
164,574 |
|
|
$ |
(1,002 |
) |
|
$ |
(53,268 |
) |
|
|
2,534 |
|
|
$ |
(59,500 |
) |
|
$ |
51,072 |
|
|
Net loss |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(743 |
) |
|
|
– |
|
|
|
– |
|
|
|
(743 |
) |
|
Unrealized loss on investments in marketable securities available for sale |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(1 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(1 |
) |
|
Unrealized gain on foreign currency translation adjustments |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
395 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
395 |
|
|
Comprehensive loss |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(349 |
) |
|
Issuances of Common Stock from exercises of stock options |
|
|
239 |
|
|
|
2 |
|
|
|
1,717 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1,719 |
|
|
Non-cash stock-based compensation |
|
|
– |
|
|
|
– |
|
|
|
6,590 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
6,590 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2009 |
|
|
27,035 |
|
|
$ |
270 |
|
|
$ |
172,881 |
|
|
$ |
(608 |
) |
|
$ |
(54,011 |
) |
|
|
2,534 |
|
|
$ |
(59,500 |
) |
|
$ |
59,032 |
|
The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
|
|
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
The Ultimate Software Group, Inc. and subsidiaries (“Ultimate” or the “Company”) designs, markets, implements and supports human resources (“HR”), payroll and talent management solutions principally in the United States and Canada. Ultimate’s UltiPro software (“UltiPro”) is
a comprehensive Internet-based solution designed to deliver the functionality businesses need to manage the complete employment life cycle from recruitment to retirement. Ultimate’s solutions are available in two suites based on company size. UltiPro Enterprise (“Enterprise”) was developed to address the needs of large and very large companies (700 or more employees and including companies as large as 15,000 employees and larger) and UltiPro Workplace (“Workplace”)
was developed for medium-sized and smaller companies (200 to 700 employees). UltiPro is marketed primarily through the Company’s Enterprise and Workplace direct sales teams.
2. Basis of Presentation, Consolidation and the Use of Estimates
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with
U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The information in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the SEC on March 2, 2009 (the “Form 10-K”).
The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring adjustments) which are, in the opinion of the Company’s management, necessary for a fair presentation of the information for the periods presented. The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Interim results of operations for the three and six months ended June 30, 2009 and June 30, 2008 are not necessarily indicative of operating results for the full fiscal years
or for any future periods.
The unaudited condensed consolidated financial statements reflect the financial position and operating results of the Company and include its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements reflect certain reclassifications from cash flows from financing activities to cash flows from investing activities for net purchases of securities from customer funds to conform to the 2009 presentation.
3. Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Summary of Significant Accounting Policies
The Company’s significant accounting policies discussed in Note 3 to its audited consolidated financial statements for the fiscal year ended December 31, 2008, included in the Form 10-K, have not significantly changed.
Recently Adopted Accounting Pronouncements
In June 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) No. 107-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. 107-1”), which increased the frequency of fair value disclosures to a quarterly basis instead of an annual
basis. FSP No. 107-1 relates to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet at fair value. FSP No. 107-1 was effective for interim reporting periods ending after June 15, 2009. The Company’s financial instruments, consisting of cash and cash equivalents, investments in marketable securities, funds held for customer and the related obligations, accounts receivable, accounts payable, and capital lease obligations,
approximated fair value as of June 30, 2009 and December 31, 2008.
.
In June 2009, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events” (“SFAS No. 165”). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are
issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. SFAS No. 165 was effective for interim or annual reporting periods ending after June 15, 2009. The Company evaluated events that occurred subsequent to June 30, 2009, through the financial statement issue
date of August 10, 2009, and determined that there were no recordable or reportable subsequent events.
In June 2009, the Company adopted FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. 157-4”). FSP 157-4 provides guidance on how to determine the fair value of assets
and liabilities under SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), in the current economic environment and reemphasizes that the objective of a fair value measurement remains the determination of an exit price. If the Company were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and the Company may conclude
that a change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP No. 157-4 did not have an impact on the Company’s unaudited condensed consolidated financial statements.
In June 2009, the Company adopted FSP SFAS No. 115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, (“FSP SFAS No. 115-2” and “SFAS No. 124-2”). FSP No. SFAS 115-2 and SFAS No. 124-2 modify the requirements for recognizing other-than-temporarily impaired
debt securities and revise the existing impairment model for such securities by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. FSP SFAS No. 115-2 and SFAS No. 124-2 did not have an impact on the Company’s unaudited condensed consolidated financial statements.
In January 2009, the Company adopted FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amended the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under
FASB Statement No. 142, “Goodwill and Other Intangible Assets.” This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP No. 142-3 did not have an impact on the Company’s unaudited condensed consolidated financial statements.
In January 2009, the Company adopted SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51” (“SFAS No. 160”). SFAS No. 141R changed
how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS No. 160 changed the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 141R and SFAS No. 160 were effective for the Company beginning in the first quarter of 2009. SFAS No. 141R and SFAS No. 160 will only affect the Company if the Company
makes an acquisition after December 31, 2008. For the six months ended June 30, 2009, neither SFAS No. 141R nor SFAS No. 160 had an impact on the Company’s unaudited condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement FASB Statement No. 162” (“SFAS No. 168” or the “Codification”). SFAS No. 168 will become the source of authoritative GAAP recognized
by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non SEC accounting and reporting standards. All other non-grandfathered non –SEC accounting literature not included in the Codification will become non-authoritative. This
Statement is effective for financial statements issued for interim and annual periods after September 15, 2009. FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”), which became effective on November 13, 2008, identified the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. SFAS
No. 162 arranged these sources of GAAP in a hierarchy for users to apply accordingly. Once the Codification is in effect, all of its content will carry the same level of authority. The GAAP hierarchy will be modified to include only two levels of GAAP: authoritative and non-authoritative. As a result, SFAS No. 168 replaces SFAS No. 162 to indicate this change to the GAAP hierarchy. The Company is reviewing the Codification and will implement it as required,
in the Company’s Form 10-Q for the three-month period ended September 30, 2009.
4. Investments in Marketable Securities and Fair Value of Financial Instruments
The Company classifies its investments in marketable securities with readily determinable fair values as securities available-for-sale in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and FASB Staff Position No. 115-1, “The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments.” The Company has classified all investments in marketable securities as available-for-sale. Securities available-for-sale consist of debt and equity securities not classified as trading securities or as securities to be held to maturity. Unrealized gains and losses on securities available-for-sale are reported as a net amount in accumulated other comprehensive income or loss in stockholders’ equity until realized. Gains and losses
on the sale of securities available-for-sale are determined using the specific identification method. Included in accumulated other comprehensive loss were $3 thousand and $4 thousand of unrealized gain on securities available-for-sale at June 30, 2009 and December 31, 2008, respectively.
The amortized cost, net unrealized gain and fair value of the Company’s investments in marketable securities available-for-sale at June 30, 2009 and December 31, 2008 are shown below (in thousands):
| |
|
As of June 30, 2009 |
|
|
As of December 31, 2008 |
|
| |
|
|
|
|
Net |
|
|
|
|
|
|
|
|
Net |
|
|
|
|
| |
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
|
Amortized |
|
|
Unrealized |
|
|
Fair |
|
| |
|
Cost |
|
|
Gain |
|
|
Value |
|
|
Cost |
|
|
Gain |
|
|
Value |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debentures – bonds |
|
$ |
805 |
|
|
$ |
3 |
|
|
$ |
808 |
|
|
$ |
4,306 |
|
|
$ |
2 |
|
|
$ |
4,308 |
|
|
Commercial paper |
|
|
300 |
|
|
|
– |
|
|
|
300 |
|
|
|
995 |
|
|
|
2 |
|
|
|
997 |
|
|
Certificates of deposit |
|
|
490 |
|
|
|
– |
|
|
|
490 |
|
|
|
500 |
|
|
|
–– |
|
|
|
500 |
|
|
Total investments |
|
$ |
1,595 |
|
|
$ |
3 |
|
|
$ |
1,598 |
|
|
$ |
5,801 |
|
|
$ |
4 |
|
|
$ |
5,805 |
|
The amortized cost and fair value of the fixed income securities by contractual maturity at June 30, 2009 and December 31, 2008 are shown below (in thousands):
| |
|
As of June 30, 2009 |
|
|
As of December 31, 2008 |
|
| |
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
| |
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
1,595 |
|
|
$ |
1,598 |
|
|
$ |
5,801 |
|
|
$ |
5,805 |
|
|
Total |
|
$ |
1,595 |
|
|
$ |
1,598 |
|
|
$ |
5,801 |
|
|
$ |
5,805 |
|
The Company adopted SFAS No. 157 effective January 1, 2008 for financial assets and liabilities measured at fair value on a recurring basis. SFAS No. 157 applies to all financial assets and liabilities that are being measured and reported on a fair value basis. There was no impact from the adoption of SFAS No. 157 on
the unaudited condensed consolidated financial statements. SFAS No. 157 establishes a framework for management’s measurement of fair value and expands disclosure about fair value measurements. The statement requires fair value measurements to be classified and disclosed in one of the following three categories of the fair value hierarchy:
|
|
Level 1: |
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities. |
|
|
Level 2: |
Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly. |
|
|
Level 3: |
Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. |
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any
|
|
input that is significant to the fair value measurement. |
The Company’s assets that are measured by management at fair value on a recurring basis are generally classified within Level 1 or Level 2 of the fair value hierarchy. The types of instruments valued based on quoted market prices in active markets include most money market securities and certificates of deposit. Such
instruments are generally classified within Level 1 of the fair value hierarchy.
The types of instruments valued by management based on quoted prices in less active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency, include the Company’s corporate debentures, bonds, commercial paper and asset-backed securities. Such instruments are generally
classified within Level 2 of the fair value hierarchy. The Company uses consensus pricing, which is based on multiple pricing sources, to value its fixed income investments.
The following table sets forth, by level within the fair value hierarchy, financial assets and liabilities accounted for at fair value and subject to the disclosure requirements of SFAS No. 157 as of June 30, 2009 and December 31, 2008 (in thousands):
| |
|
As of June 30, 2009 |
|
|
As of December 31, 2008 |
|
| |
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
| |
|
|
|
|
Prices in |
|
|
Other |
|
|
Un- |
|
|
|
|
|
Prices in |
|
|
Other |
|
|
Un- |
|
| |
|
|
|
|
Active |
|
|
Observable |
|
|
Observable |
|
|
|
|
|
Active |
|
|
Observable |
|
|
Observable |
|
| |
|
|
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
| |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Corporate debenture bonds |
|
$ |
808 |
|
|
$ |
– |
|
|
$ |
808 |
|
|
$ |
– |
|
|
$ |
4,308 |
|
|
$ |
– |
|
|
$ |
4,308 |
|
|
$ |
– |
|
|
Commercial paper |
|
|
300 |
|
|
|
– |
|
|
|
300 |
|
|
|
– |
|
|
|
997 |
|
|
|
– |
|
|
|
997 |
|
|
|
– |
|
|
Certificates of deposit |
|
|
490 |
|
|
|
490 |
|
|
|
– |
|
|
|
– |
|
|
|
500 |
|
|
|
500 |
|
|
|
– |
|
|
|
– |
|
|
Total |
|
$ |
1,598 |
|
|
$ |
490 |
|
|
$ |
1,108 |
|
|
$ |
– |
|
|
$ |
5,805 |
|
|
$ |
500 |
|
|
$ |
5,305 |
|
|
$ |
– |
|
Assets and liabilities measured at fair value on a recurring basis were presented in the unaudited condensed consolidated balance sheet as of June 30, 2009 and in the audited consolidated balance sheet as of December 31, 2008 as short-term investments in marketable securities. There were no financial liabilities accounted for at
fair value and subject to the disclosure requirements of SFAS No. 157 as of June 30, 2009 and December 31, 2008.
5. Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which range from two to twenty years. Leasehold improvements and assets under capital leases are amortized over the shorter of the
estimated useful life of the asset or the term of the lease, which range from two to fifteen years. Maintenance and repairs are charged to expense when incurred; betterments are capitalized. Upon the sale or retirement of assets, the cost, accumulated depreciation and amortization are removed from the accounts and any gain or loss is recognized.
Property and equipment consist of the following (in thousands):
| |
|
As of |
|
|
As of |
|
| |
|
June 30,
2009 |
|
|
December 31, 2008 |
|
|
Property and equipment |
|
$ |
69,477 |
|
|
$ |
65,934 |
|
|
Less: accumulated depreciation and amortization |
|
|
48,119 |
|
|
|
42,950 |
|
| |
|
$ |
21,358 |
|
|
$ |
22,984 |
|
6. Earnings Per Share
SFAS No. 128, “Earnings Per Share,” requires dual presentation of earnings per share — “basic” and “diluted.” Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted average number of common shares outstanding (the denominator) for the
period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
The following is a reconciliation of the shares used in the computation of basic and diluted net income (loss) per share (in thousands):
| |
|
For the Three Months
Ended June 30, |
|
|
For the Six Months
Ended June 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Basic weighted average shares outstanding |
|
|
24,414 |
|
|
|
24,670 |
|
|
|
24,354 |
|
|
|
24,676 |
|
|
Effect of dilutive equity instruments |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
Dilutive weighted average shares outstanding |
|
|
24,414 |
|
|
|
24,670 |
|
|
|
24,354 |
|
|
|
24,676 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase shares of Common Stock and other stock-based awards outstanding which are not included in the calculation of diluted income (loss) per share because their impact is anti-dilutive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
6,317 |
|
|
|
5,804 |
|
|
|
6,361 |
|
|
|
5,802 |
|
7. Comprehensive Income (Loss)
SFAS No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”), establishes standards for the reporting and display of comprehensive income (loss) and its components in the Company’s unaudited condensed consolidated financial statements. The objective of SFAS No. 130 is to report a measure (comprehensive income
(loss)) of all changes in equity of an enterprise that result from transactions and other economic events in a period other than transactions with owners. Accumulated other comprehensive loss, as presented in the accompanying unaudited condensed consolidated balance sheets, consists of unrealized gains and losses on securities available-for-sale and foreign currency translation adjustments, recorded net of any related income tax.
Comprehensive income (loss) for the periods presented was as follows (in thousands):
| |
|
For the Three Months
ended June 30, |
|
|
For the Six Months
ended June 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Net loss |
|
$ |
(330 |
) |
|
$ |
(751 |
) |
|
|
(743 |
) |
|
$ |
(461 |
) |
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investments in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable securities available-for-sale |
|
|
2 |
|
|
|
(21 |
) |
|
|
(1 |
) |
|
|
23 |
|
|
Unrealized gain (loss) on foreign currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
translation adjustments |
|
|
456 |
|
|
|
3 |
|
|
|
395 |
|
|
|
(10 |
) |
|
Comprehensive income (loss) |
|
$ |
128 |
|
|
$ |
(769 |
) |
|
$ |
(349 |
) |
|
$ |
(448 |
) |
8. Foreign Currency
The financial statements of the Company’s foreign subsidiaries have been translated into U.S. dollars. The functional currency of The Ultimate Software Group of Canada, Inc. is the Canadian dollar and the functional currency of The Ultimate Software Group UK Limited is the British pound. Assets and liabilities
(including related goodwill) are translated into U.S. dollars at period-end exchange rates. Income and expenses are translated at the average exchange rate for the reporting period. The resulting translation adjustments, representing unrealized gains or losses, are included in stockholders’ equity as a component of accumulated other comprehensive loss. Realized gains and losses resulting from foreign exchange transactions are included in total operating expenses in the unaudited
condensed consolidated statements of operations. For the three and six months ended June 30, 2009, the Company had unrealized translation gains of $456 thousand and $395 thousand, respectively. For the three months ended June 30, 2008, the Company had an unrealized translation gain of $3 thousand and for the six months ended June 30, 2008, the Company had an unrealized translation loss of $10 thousand. Included in accumulated other comprehensive loss, as presented in the accompanying unaudited condensed
consolidated balance sheets, is $0.6 million of unrealized translation losses at June 30, 2009 and $1 million of unrealized translation losses at December 31, 2008.
9. Stock-Based Compensation
The Company’s Amended and Restated 2005 Equity and Incentive Plan (the “Plan”) authorizes the grant of options to non-employee directors, officers and employees of the Company to purchase shares of the Company’s Common Stock. The Plan also authorizes the grant to such persons of restricted and non-restricted
shares of Common Stock, stock appreciation rights, stock units and cash performance awards (collectively, together with stock options, the “Awards”). Prior to the adoption of the Plan, options to purchase shares of Common Stock were issued under the Company’s Nonqualified Stock Option Plan (the “Prior Plan”). Beginning in 2009, the Company commenced making grants to employees of restricted stock units in lieu of stock options.
At the 2009 Annual Meeting of Stockholders, held on May 12, 2009 (the “2009 Annual Meeting”), the stockholders of the Company approved the Plan, as proposed to be amended to increase the number of shares of the Company’s Common Stock authorized for issuance pursuant to Awards granted under the Plan by 500,000 shares. The
aggregate number of shares of Common Stock previously authorized for issuance under all Awards granted under the Plan and Prior Plan was 12,000,000 shares. As of June 30, 2009, the aggregate number of shares of Common Stock authorized under the Plan and the Prior Plan was 12,500,000 and the aggregate number of shares of Common Stock that were available to be issued under all Awards granted under the Plan was 1,349,451 shares. A complete copy of the Plan is contained in the Company’s
Form 8-K that was filed with the SEC on May 18, 2009.
The following table sets forth the non-cash stock-based compensation expense resulting from stock-based arrangements that was recorded in the Company’s unaudited condensed consolidated statements of operations for the periods indicated (in thousands):
| |
|
For the Three Months
Ended June 30, |
|
|
For the Six Months
Ended June 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Non-cash stock-based compensation expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of recurring revenues |
|
$ |
171 |
|
|
$ |
169 |
|
|
$ |
336 |
|
|
$ |
498 |
|
|
Cost of services revenues |
|
|
324 |
|
|
|
406 |
|
|
|
668 |
|
|
|
1,086 |
|
|
Cost of license revenues |
|
|
– |
|
|
|
3 |
|
|
|
– |
|
|
|
7 |
|
|
Sales and marketing |
|
|
1,747 |
|
|
|
1,560 |
|
|
|
3,534 |
|
|
|
3,613 |
|
|
Research and development |
|
|
308 |
|
|
|
352 |
|
|
|
610 |
|
|
|
941 |
|
|
General and administrative |
|
|
724 |
|
|
|
950 |
|
|
|
1,439 |
|
|
|
1,870 |
|
|
Total non-cash stock-based compensation expense |
|
$ |
3,274 |
|
|
$ |
3,440 |
|
|
$ |
6,587 |
|
|
$ |
8,015 |
|
Included in capitalized software in the Company’s unaudited condensed consolidated balance sheets at June 30, 2009 and December 31, 2008 was $3 thousand and $30 thousand, respectively, in stock-based compensation expense related to capitalized software during the periods then ended. The amounts capitalized would have otherwise
been charged to research and development expense.
Net cash proceeds from the exercise of stock options were $1.3 million and $1.7 million for the three and six months ended June 30, 2009, respectively, and $3.4 million and $4.5 million for the three and six months ended June 30, 2008, respectively. There was no income tax benefit realized from stock option exercises during the three and
six months ended June 30, 2009 and June 30, 2008.
Stock Option, Restricted Stock and Restricted Stock Unit Activity
There were no stock options granted during the six months ended June 30, 2009. The following table summarizes stock option activity (for previously granted stock options) for the six months ended June 30, 2009 (in thousands, except per share amounts):
| |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
|
|
|
Average |
|
|
|
|
| |
|
|
|
|
Weighted |
|
|
Remaining |
|
|
Aggregate |
|
| |
|
|
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
Stock Options |
|
Shares |
|
|
Exercise Price |
|
|
Term (in Years) |
|
|
Value |
|
|
Outstanding at December 31, 2008 |
|
|
4,965 |
|
|
$ |
16.86 |
|
|
|
6.02 |
|
|
$ |
16,140 |
|
|
Granted |
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(204 |
) |
|
|
8.44 |
|
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(100 |
) |
|
|
24.14 |
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009 |
|
|
4,661 |
|
|
$ |
17.07 |
|
|
|
5.67 |
|
|
$ |
40,211 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2009 |
|
|
3,893 |
|
|
$ |
14.99 |
|
|
|
5.11 |
|
|
$ |
39,481 |
|
The aggregate intrinsic value of stock options in the table above represents total pretax intrinsic value (i.e., the difference between the closing price of the Company’s Common Stock on the last trading day of the reporting period and the exercise price, times the number of shares) that would have been received by the option holders
had all option holders exercised their options on June 30, 2009. The amount of the aggregate intrinsic value changes based on the fair value of the Company’s Common Stock. Total intrinsic value of options exercised was $1.6 million and $2.2 million for the three and six months ended June 30, 2009, respectively, and $9.3 million and $ 12.0 million for the three and six months ended June 30, 2008, respectively. Total fair value of options vested during the three and six months
ended June 30, 2009 was $0.5 million and $3.7 million, respectively, and $0.5 million and $ 4.5 million for the six months ended June 30, 2008, respectively.
As of June 30, 2009, $5.5 million of total unrecognized compensation costs related to non-vested stock options is expected to be recognized over a weighted average period of 1.47 years.
The following table summarizes restricted stock and restricted stock unit activity for the six months ended June 30, 2009 (in thousands, except per share amounts):
| |
|
Restricted Stock Awards |
|
|
Restricted Stock Unit Awards |
|
| |
|
|
|
|
Weighted |
|
|
|
|
| |
|
|
|
|
Average |
|
|
|
|
| |
|
|
|
|
Grant Date |
|
|
|
|
| |
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Outstanding at December 31, 2008 |
|
|
1,361 |
|
|
$ |
23.09 |
|
|
|
45 |
|
|
Granted |
|
|
20 |
|
|
|
16.48 |
|
|
|
169 |
|
|
Vested |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
Released |
|
|
(35 |
) |
|
|
15.90 |
|
|
|
|
|
|
Forfeited or expired |
|
|
– |
|
|
|
– |
|
|
|
(4 |
) |
|
Outstanding at June 30, 2009 |
|
|
1,346 |
|
|
$ |
23.18 |
|
|
|
210 |
|
As of June 30, 2009, $16.3 million of total unrecognized compensation costs related to non-vested restricted stock Awards is expected to be recognized over a weighted average period of 2.2 years. As of June 30, 2009, $2.1 million of total unrecognized compensation costs related to non-vested restricted stock unit Awards is expected
to be recognized over a weighted average period of 2.3 years.
The following discussion of the financial condition and results of operations of The Ultimate Software Group, Inc. and its subsidiaries (“Ultimate” or the “Company”) should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report
on Form 10-Q (the “Form 10-Q”).
The Company’s significant accounting policies discussed in Note 3 to its audited consolidated financial statements for the fiscal year ended December 31, 2008, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission (the “SEC”)
on March 2, 2009 (the “Form 10-K”), have not significantly changed.
Executive Summary
Ultimate designs, markets, implements and supports human resources (“HR”), payroll and talent management solutions principally in the United States and Canada.
Ultimate’s UltiPro software (“UltiPro”) is a comprehensive Internet-based solution designed to deliver the functionality businesses need to manage the complete employment life cycle from recruitment to retirement.
Ultimate’s software-as-a-service (“SaaS”) offering, branded “Intersourcing” (the “Intersourcing Offering”), provides on-line access to comprehensive human capital management functionality for organizations that need to simplify the information technology (“IT”) support requirements of
their business applications. Through the Intersourcing Offering, Ultimate provides the hardware, infrastructure, ongoing maintenance and backup services for its customers at two data centers located in the Miami, Florida and Atlanta, Georgia areas. Both data centers are owned and operated by a third party, Quality Technology Services (“QTS”). QTS is one of the largest privately-held providers of data center facilities and management services in the United States.
UltiPro is available as two solution suites based on company size. UltiPro Enterprise (“Enterprise”) was developed to address the needs of large and very large companies (700 or more employees and including companies as large as 15,000 employees and larger) and is delivered as either SaaS or an on-premise solution. UltiPro
Workplace (“Workplace”) was developed for companies in the mid-market (200 to 700 employees) and is delivered exclusively as SaaS. UltiPro Workplace provides medium-sized and smaller companies with nearly all the features that larger Enterprise companies have with UltiPro, plus a bundled service package. Since many companies in this market do not have IT staff on their premises to help with system issues, UltiPro Workplace is designed to give these customers a high degree of convenience
by handling system setup, business rules, and other situations for customers “behind the scenes.” UltiPro is marketed primarily through the Company’s Enterprise and Workplace direct sales teams.
In addition to UltiPro’s core HR/payroll functionality, the Company’s customers have the option to purchase a number of additional features on a per-employee-per-month (or “PEPM”) basis, which are available to enhance the functionality of UltiPro’s core features based on certain business needs of the customers. These
optional UltiPro features currently include (i) the talent management suite of products; (ii) benefits enrollment; (iii) time, attendance and scheduling; (iv) time management; (v) tax filing; (vi) wage attachments; and (vii) other optional features (collectively, “Optional Features”). All Optional Features are individually priced solely on a subscription basis with some of the Optional Features available to both Enterprise and Workplace customers while others are available exclusively to either Enterprise
or Workplace customers, based on the needs of the respective customers, including their employee size and the complexity of their HR/payroll environment.
Ultimate has two primary revenue sources: recurring revenues and services revenues. Intersourcing revenues and maintenance revenues are the primary components of the Company’s recurring revenues. Ultimate’s annualized retention rate for its existing recurring revenue customer base was 97% as of
June 30, 2009. The majority of services revenues are derived from implementation services and, to a lesser extent, training services. In addition to recurring revenues and services revenues, Ultimate has marketed UltiPro on a perpetual license basis since its inception, through which it has recognized license revenues. For the three and six months ended June 30, 2009, license revenues, as a percentage of total revenues, represented 2.7% and 3.4%, respectively, as compared to 7.1% and 7.8% for the three
and six months ended June 30, 2008, respectively.
On February 5, 2009, Ultimate announced that after April 1, 2009 it no longer intended to sell its on-site UltiPro solutions on a perpetual license basis. However, the Company continues to sell on-site UltiPro solutions on a subscription basis (priced and billed to customers on a PEPM basis). The Company may have additional license
revenues attributable to contractual arrangements with existing license customers which primarily relate to growth provisions for the underlying employee base and/or the contractual rights of existing license customers to purchase Optional Features of UltiPro. After the elimination of sales of perpetual licenses to new customers, the variable costs associated with new customer licenses, such as sales commissions, are also eliminated. As a result of the discontinued sales of perpetual licenses to new customers,
certain fixed third-party costs that were formerly allocated to costs of license revenues (in proportion to their contribution to the total sales mix) were shifted to costs of recurring revenues. When perpetual license agreements were sold, annual maintenance contracts (priced as a percentage of the related license fee) accompanied those agreements. Maintenance contracts typically have a one-year term with annual renewal periods thereafter. The Company has historically maintained a strong
customer retention rate for its renewal maintenance agreements and does not foresee its decision to discontinue sales of perpetual license agreements to new customers to materially affect its future maintenance revenues (as they relate to existing license customers).
As Intersourcing units are sold, the recurring revenue backlog associated with Intersourcing grows, enhancing the predictability of future revenue streams. Intersourcing sales include a one-time upfront (or setup) fee, priced on a per-employee basis, and ongoing monthly fees, priced on a PEPM basis. Revenue recognition
for Intersourcing is triggered when the related customer processes its first payroll (or goes “Live”). When an Intersourcing customer goes Live, the related upfront fees are recognized as recurring subscription revenues ratably over the term of the related contract (typically 24 months) and the Company begins recognizing the associated ongoing monthly PEPM fees as recurring subscription revenues.
Critical Accounting Estimates
The preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s critical accounting estimates, as discussed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Form 10-K, have not significantly changed.
Results of Operations
The following table sets forth the unaudited condensed consolidated statements of operations data of the Company, as a percentage of total revenues, for the periods indicated.
| |
|
For the Three Months |
|
|
For the Six Months |
|
| |
|
Ended June 30, |
|
|
Ended June 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring |
|
|
69.0 |
% |
|
|
61.2 |
% |
|
|
66.1 |
% |
|
|
60.1 |
% |
|
Services |
|
|
28.3 |
|
|
|
31.7 |
|
|
|
30.5 |
|
|
|
32.1 |
|
|
License |
|
|
2.7 |
|
|
|
7.1 |
|
|
|
3.4 |
|
|
|
7.8 |
|
|
Total revenues |
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
|
100.0 |
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring |
|
|
20.2 |
|
|
|
16.9 |
|
|
|
19.2 |
|
|
|
15.9 |
|
|
Services |
|
|
23.5 |
|
|
|
25.5 |
|
|
|
24.4 |
|
|
|
25.7 |
|
|
License |
|
|
0.6 |
|
|
|
1.1 |
|
|
|
0.6 |
|
|
|
1.0 |
|
|
Total cost of revenues |
|
|
44.3 |
|
|
|
43.5 |
|
|
|
44.2 |
|
|
|
42.6 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
27.2 |
|
|
|
27.1 |
|
|
|
27.8 |
|
|
|
27.2 |
|
|
Research and development |
|
|
20.3 |
|
|
|
22.4 |
|
|
|
19.7 |
|
|
|
21.4 |
|
|
General and administrative |
|
|
9.1 |
|
|
|
10.6 |
|
|
|
9.2 |
|
|
|
10.2 |
|
|
Total operating expenses |
|
|
56.6 |
|
|
|
60.1 |
|
|
|
56.7 |
|
|
|
58.8 |
|
|
Operating loss |
|
|
(0.9 |
) |
|
|
(3.6 |
) |
|
|
(0.9 |
) |
|
|
(1.4 |
) |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and other |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
Other income, net |
|
|
0.1 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
|
0.7 |
|
|
Total other income, net |
|
|
0.0 |
|
|
|
0.4 |
|
|
|
0.0 |
|
|
|
0.5 |
|
|
Loss before income taxes |
|
|
(0.9 |
) |
|
|
(3.2 |
) |
|
|
(0.9 |
) |
|
|
(0.9 |
) |
|
Benefit for income taxes |
|
|
0.2 |
|
|
|
1.4 |
|
|
|
0.1 |
|
|
|
0.4 |
|
|
Net loss |
|
|
(0.7 |
) % |
|
|
(1.8 |
) % |
|
|
(0.8 |
) % |
|
|
(0.5 |
) % |
The following table sets forth the non-cash stock-based compensation expense (excluding the income tax effect) resulting from the stock based arrangements and the amortization of acquired intangibles that are recorded in the Company’s unaudited condensed consolidated statements of operations for the periods indicated (in thousands):
| |
|
For the Three Months
Ended June 30, |
|
|
For the Six Months
Ended June 30, |
|
| |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
Stock-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of recurring revenues |
|
|
171 |
|
|
|
169 |
|
|
|
336 |
|
|
|
498 |
|
|
Cost of services revenues |
|
|
324 |
|
|
|
406 |
|
|
|
668 |
|
|
|
1,086 |
|
|
Cost of license revenues |
|
|
– |
|
|
|
3 |
|
|
|
– |
|
|
|
7 |
|
|
Sales and marketing |
|
|
1,747 |
|
|
|
1,560 |
|
|
|
3,534 |
|
|
|
3,613 |
|
|
Research and development |
|
|
308 |
|
|
|
352 |
|
|
|
610 |
|
|
|
941 |
|
|
General and administrative |
|
|
724 |
|
|
|
950 |
|
|
|
1,439 |
|
|
|
1,870 |
|
|
Total non-cash stock-based compensation expense |
|
$ |
3,274 |
|
|
$ |
3,440 |
|
|
$ |
6,587 |
|
|
$ |
8,015 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of acquired intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$ |
46 |
|
|
$ |
46 |
|
|
$ |
93 |
|
|
$ |
93 |
|
Revenues
The Company’s revenues are derived from recurring revenues, services revenues and, to a lesser extent, license revenues. The Company’s significant revenue recognition policies, as discussed in Note 3 to its audited consolidated financial statements for the fiscal year ended December 31, 2008, included in the Form 10-K,
have not changed.
Total revenues, consisting of recurring, services and license revenues, increased 14.0% to $47.3 million for the three months ended June 30, 2009 from $41.5 million for the three months ended June 30, 2008, and 13.1% to $96.1 million for the six months ended June 30, 2009 from $85.0 million for the six months ended June 30, 2008.
Recurring revenues increased 28.6 % to $32.6 million for the three months ended June 30, 2009 from $25.4 million for the three months ended June 30, 2008, and 24.4% to $63.5 million for the six months ended June 30, 2009 from $51.1 million for the six months ended June 30, 2008. The increases for the three and six months ended June 30, 2009
were primarily due to increases in Intersourcing revenues and, to a lesser extent, maintenance revenues (discussed below).
|
|
a) |
Intersourcing revenues increased 41.6% and 40.5% for the three and six months ended June 30, 2009, respectively, in comparison to the same periods in 2008. The increase in Intersourcing revenues is based on the revenue impact of incremental units sold that have gone Live since June 30, 2008, including the UltiPro core product and, to a lesser extent, Optional Features of UltiPro. Intersourcing revenues from
the Workplace solution in 2009 also contributed to the year-over-year growth, particularly since this solution was introduced late in 2007 and was ramping up in 2008. Recognition of recurring revenues for Intersourcing sales commences upon Live date. |
|
|
b) |
Maintenance revenues from past license sales increased 1.4% and 2.9% for the three and six months ended June 30, 2009, in comparison to the same periods of 2008, due to additional maintenance fees resulting from cumulative net increases in the customer base subsequent to June 30, 2008 due to incremental license sales since such date. Maintenance revenues are recognized over the initial term of the related
license contract, which is typically 12 months, and then on a monthly recurring basis thereafter as the maintenance contracts renew annually. |
Services revenues increased 1.9% to $13.4 million for the three months ended June 30, 2009 from $13.2 million for the three months ended June 30, 2008, and 7.5% to $29.3 million for the six months ended June 30, 2009 from $27.3 million for the six months ended June 30, 2008. The increases for the three and six months ended June 30, 2009 were
mainly due to an increase in implementation revenues principally attributable to additional billable hours from Ultimate’s revenue-generating consultants for Enterprise sales, an increase in the blended net rate per hour and, to a lesser extent, higher implementation revenues recognized for Workplace sales.
License revenues decreased 56.9% to $1.3 million for the three months ended June 30, 2009 from $3.0 million for the three months ended June 30, 2008. For the six months ended June 30, 2009, license revenues decreased 50.5% to $3.3 million from $6.6 million for the six months ended June 30, 2008. The decreases in
the three and six month periods ended June 30, 2009 were principally due to the Company’s decision not to sell perpetual licenses to new customers after April 1, 2009.
Cost of Revenues
Cost of revenues primarily consists of the costs of recurring and services revenues. Cost of recurring revenues primarily consists of costs to provide maintenance and technical support to the Company’s customers, the cost of providing periodic updates and the cost of recurring subscription revenues, including amortization of capitalized
software. Cost of services revenues primarily consists of costs to provide implementation services and training to the Company’s customers and, to a lesser degree, costs related to sales of payroll-related forms and costs associated with certain client reimbursable out-of-pocket expenses.
Total cost of revenues increased 16% to $20.9 million for the three months ended June 30, 2009 from $18.0 million for the three months ended June 30, 2008, and 17.1% to $42.5 million for the six months ended June 30, 2009 from $36.3 million for the six months ended June 30, 2008.
Cost of recurring revenues increased 36.6% to $9.6 million for the three months ended June 30, 2009 from $7.0 million for the three months ended June 30, 2008 and 36.6% to $18.5 million for the six months ended June 30, 2009 from $13.5 million for the six months ended June 30, 2008. The $2.6 million and $4.9 million increases in
cost of recurring revenues for the three and six months ended June 30, 2009 was primarily due to increases in both Intersourcing costs and maintenance costs. The increase in Intersourcing costs was principally due to the growth in Intersourcing operations and increased sales, including higher depreciation and amortization of related computer equipment supporting the hosting operations, increased hosting data center costs and, to a lesser extent, increased labor costs, amortization of capitalized software
and increased third-party royalty fees for UltiPro time, attendance and scheduling sales. The increase in maintenance costs was primarily related to increased labor costs commensurate with the growth in the Company’s customer base.
Cost of services revenues increased 5.0% to $11.1 million for the three months ended June 30, 2009 from $10.6 million for the three months ended June 30, 2008, and 7.1% to $23.4 million for the six months ended June 30, 2009 from $21.9 million for the six months ended June 30, 2008. The increases in cost of services revenues for
the three and six months ended June 30, 2009 were primarily due to an increase in costs of implementation, mainly attributable to labor costs associated with building the Workplace implementation infrastructure.
Sales and Marketing
Sales and marketing expenses consist primarily of salaries and benefits, sales commissions, travel and promotional expenses, and facility and communication costs for direct sales offices, as well as advertising and marketing costs. Sales and marketing expenses increased 14.7% to $12.9 million for the three months ended June 30, 2009 from
$11.2 million for the three months ended June 30, 2008, and 15.8% to $26.7 million for the six months ended June 30, 2009 from $23.1 million for the six months ended June 30, 2008. The increase in sales and marketing expenses for the three and six month periods ended June 30, 2009 was primarily due to increased labor and related costs attributable to hiring additional direct sales force personnel (particularly for the Company’s Workplace solution) and higher sales commissions principally related to increased
Intersourcing sales. Commissions on Intersourcing sales are amortized over the initial contract term (typically 24 months) commencing on the Live date, which corresponds to the revenue recognition for Intersourcing sales.
Research and Development
Research and development expenses consist primarily of software development personnel costs. Research and development expenses increased 3.0% to $9.6 million for the three months ended June 30, 2009 from $9.3 million for the three months ended June 30, 2008, and 4.1% to $18.9 million for the six months ended June 30, 2009 from
$18.2 million for the six months ended June 30, 2008 principally due to higher labor costs related to the ongoing development of UltiPro and Optional Features, partially offset by lower third-party consulting costs.
General and Administrative
General and administrative expenses consist primarily of salaries and benefits of executive, administrative and financial personnel, as well as external professional fees and the provision for doubtful accounts. General and administrative expenses for the three months ended June 30, 2009 was comparable to the three months ended
June 30, 2008. General and administrative expenses increased 2.1% to $8.9 million for the six months ended June 30, 2009 from $8.7 million for the six months ended June 30, 2008. The increase for the six months ended June 30, 2009 was primarily due to higher professional fees and labor and related costs (including additional personnel costs to support the Company’s growth), partially offset by lower bad debt expense.
Income Taxes
Income taxes for each of the three and six months ended June 30, 2009 included a benefit of $0.1 million. Income taxes for the three and six months ended June 30, 2008 included a benefit of $0.6 million and $0.4 million, respectively. Net operating loss carryforwards available at December 31, 2008, expiring at various times from
2011 through 2028 and which are available to offset future taxable income, approximated $73.9 million. The timing and levels of future profitability may result in the expiration of net operating loss carryforwards before utilization. Additionally, utilization of such net operating losses may be limited as a result of cumulative ownership changes in the Company’s equity instruments.
Liquidity and Capital Resources
In recent years, the Company has funded operations from cash flows generated from operations and, to a lesser extent, equipment financing and borrowing arrangements.
As of June 30, 2009, the Company had $31.3 million in cash, cash equivalents and total investments in marketable securities, reflecting a net increase of $8.3 million since December 31, 2008. This $8.3 million increase was mainly due to cash provided by operating activities of $10.6 million and, to a lesser extent, proceeds from
the issuance of Common Stock from stock option exercises during the six months ended June 30, 2009 of $1.7 million, partially offset by cash purchases of property and equipment and principal payments on financed equipment totaling $3.3 million.
Net cash provided by operating activities was $10.6 million for the six months ended June 30, 2009 as compared to $13.5 million for the six months ended June 30, 2008. This $2.9 million decrease was primarily due to decreased accounts payable, partially offset by lower prepaid expenses and other current assets and lower other assets.
Net cash used in investing activities was $0.1 million for the six months ended June 30, 2009 as compared to net cash provided by investing activities of $2.5 million for the six months ended June 30, 2008. The decrease of $2.6 million from the comparable period in 2008 was primarily attributable to a decrease in cash provided
from the maturities of marketable securities (net of purchases) of $9.2 million, partially offset by a decrease in cash purchases of property and equipment of $6.0 million (including the impact of increased equipment financing).
Net cash provided by financing activities was $2.1 million for the six months ended June 30, 2009 as compared to net cash used in financing activities of $12.6 million for the six months ended June 30, 2008. The $14.7 million increase in net cash provided by financing activities was primarily related to a $17.7 million decrease in repurchases
of Common Stock pursuant to the Company’s stock repurchase plan, partially offset by a $2.7 million decrease in proceeds from the issuance of Common Stock from stock option exercises.
Days sales outstanding, calculated on a trailing three-month basis, as of June 30, 2009 and June 30, 2008, were 65 days and 70 days, respectively.
Deferred revenues were $62.5 million at June 30, 2009, as compared to $63.5 million at December 31, 2008. The decrease of $1.0 million in deferred revenues for the 2009 period was primarily due to decreased deferred maintenance as revenues recognized exceeded the billings, partially offset by increased deferred Intersourcing revenues
and higher deferred services revenues. Substantially all of the total balance in deferred revenues is related to future recurring revenues, including deferred revenues related to Intersourcing.
The Company believes that cash and cash equivalents, investments in marketable securities, equipment financing and cash generated from operations will be sufficient to fund its operations for at least the next 12 months. This belief is based upon, among other factors, management’s expectations for future revenue growth, controlled expenses
and collections of accounts receivable.
The Company did not have any material commitments for capital expenditures as of June 30, 2009.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements (as that term is defined in applicable SEC rules) that have a current, or are reasonably likely to have a future, material effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources.
Quarterly Fluctuations
The Company’s quarterly revenues and operating results have varied significantly in the past and are likely to vary substantially from quarter to quarter in the future. The Company’s operating results may fluctuate as a result of a number of factors, including, but not limited to, increased expenses (especially as they relate
to product development, sales and marketing and the use of third-party consultants), timing of product releases, increased competition, variations in the mix of revenues, announcements of new products by the Company or its competitors and capital spending patterns of the Company’s customers. The Company establishes its expenditure levels based upon its expectations as to future revenues, and, if revenue levels are below expectations, expenses can be disproportionately high. A drop in near term demand for
the Company’s products could significantly affect both revenues and profits in any quarter. Operating results achieved in previous fiscal quarters are not necessarily indicative of operating results for the full fiscal years or for any future periods. As a result of these factors, there can be no assurance that the Company will be able to achieve and, if achieved in future periods, maintain profitability on a quarterly basis. The Company believes that, due to the underlying factors for quarterly fluctuations,
quarter-to-quarter comparisons of its operations are not necessarily meaningful and that such comparisons should not be relied upon as indications of future performance.
Forward-Looking Statements
The foregoing Management’s Discussion and Analysis of Financial Condition and Results of Operations and the following Quantitative and Qualitative Disclosures about Market Risk contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements represent the Company’s expectations or beliefs, including, but not limited to, statements concerning the Company’s operations and financial performance and condition. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,”
and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict. The Company’s actual results could differ materially from those contained in the forward-looking statements due to risks and uncertainties associated with fluctuations in the Company’s quarterly operating results, concentration of the Company’s product offerings,
development risks involved with new products and technologies, competition, the Company’s relationships with third parties, contract renewals with business partners, compliance by the Company’s customers with the terms of their contracts with the Company, and other factors disclosed in this Form 10-Q and the Form 10-K. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
In the ordinary course of its operations, the Company is exposed to certain market risks, primarily interest rate risk and foreign currency risk. Risks that are either non-financial or non-quantifiable, such as political, economic, tax, or regulatory risks, are not included in the following assessment of the Company’s market
risks.
Interest Rate Risk. The Company is subject to financial market risks, including changes in interest rates and in the valuations of its investment portfolio. Changes in interest rates could impact the Company’s anticipated interest income from interest-bearing cash accounts,
or cash equivalents and investments in marketable securities. The Company manages financial market risks, including interest rate risks, in accordance with its investment guideline objectives, including:
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Maximum safety of principal; |
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Maintenance of appropriate liquidity for regular cash needs; |
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Maximum yields in relationship to guidelines and market conditions; |
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Diversification of risks; and |
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Fiduciary control of all investments. |
The Company targets its fixed income investment portfolio to have maturities of 24 months or less. Investments are held to enhance the preservation of capital and not for trading purposes.
Cash equivalents consist of money market accounts with original maturities of less than three months. Short-term investments include obligations of U.S. government agencies and corporate debt securities. Corporate debt securities include commercial paper which according to the Company’s investment guidelines must carry minimum
short-term ratings of P-1 by Moody’s Investor Service, Inc. (“Moody’s”) and A-1 by Standard & Poor’s Ratings Service, a Division of The McGraw-Hill Companies, Inc. (“S&P”). Other corporate debt obligations must carry a minimum rating of A-2 by Moody’s or A by S&P. Asset-backed securities must carry a minimum AAA rating by Moody’s and S&P with a maximum average life of two years at the time of purchase.
As of June 30, 2009, total investments in available-for-sale marketable securities were $1.6 million.
As of June 30, 2009, virtually all of the investments in the Company’s portfolio were at fixed rates (with a weighted average interest rate of 0.5% per annum).
To illustrate the potential impact of changes in interest rates, the Company has performed an analysis based on its June 30, 2009 unaudited condensed consolidated balance sheet and assuming no changes in its investments. Under this analysis, an immediate and sustained 100 basis point increase in the various base rates would result in
a decrease in the fair value of the Company’s total portfolio of approximately $4 thousand over the next 12 months. An immediate and sustained 100 basis point decrease in the various base rates would result in an increase of the fair value of the Company’s total portfolio of approximately $4 thousand over the next 12 months.
Foreign Currency Risk. The Company has foreign currency risks related to its revenue and operating expenses denominated in currencies other than the U.S. dollar. Management does not believe movements in the foreign currencies in which the Company transacts business
will significantly affect future net income.
(a) Evaluation of disclosure controls and procedures. The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the
“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Form 10-Q pursuant to Exchange Act Rules 13a-15(e) or 15d-15(e). Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that, as of June 30, 2009, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company’s
Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events and thus has inherent limitations. Therefore, even those systems
determined to be effective can only provide reasonable assurance as to the achievement of their objectives.
(b) Changes in internal control over financial reporting. There have been no changes during the quarter ended June 30, 2009 in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
PART II – OTHER INFORMATION
The risk factors associated with the Company’s business, as disclosed in Item 1A. “Risk Factors,” in the Form 10-K, have not significantly changed.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchases of Equity Securities by the Issuer. On October 30, 2000, the Company announced that its Board of Directors authorized a stock repurchase plan providing for the repurchase
of up to 1,000,000 shares of the Company’s outstanding Common Stock (the “Stock Repurchase Plan”).
On February 6, 2007, the Company’s Board of Directors extended the Stock Repurchase Plan by authorizing the repurchase of up to 1,000,000 additional shares of the Company’s issued and outstanding Common Stock.
On February 5, 2008, the Company’s Board of Directors extended the Stock Repurchase Plan further by authorizing the repurchase of up to 1,000,000 additional shares of the Company’s Common Stock. Stock repurchases may be made periodically in the open market, in privately negotiated transactions or in a combination of
both. The extent and timing of repurchase transactions will depend on market conditions and other business considerations.
As of June 30, 2009, the Company had purchased 2,533,575 shares of the Company’s Common Stock under the Stock Repurchase Plan, with 466,425 shares available for repurchase in the future. There was no activity under the Stock Repurchase Plan during the three and six months ended June 30, 2009.
The Company held its 2009 Annual Meeting of Stockholders on May 12, 2009. The principal business of the meeting was (i) to elect three directors to serve until the 2012 Annual Meeting of Stockholders or until their successors are duly elected and qualified, (ii) to approve the Amended and Restated 2005 Equity and Incentive Plan,
as proposed to be amended, and (iii) to ratify KPMG LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2009.
The names of the nominees for directors whose term expired at the 2009 Annual Meeting of Stockholders of the Company and who were elected to serve as directors until the 2012 Annual Meeting of Stockholders are as follows:
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Nominee |
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For |
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Withheld Vote |
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Marc D. Scherr |
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15,170,654 |
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9,524,948 |
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James A. FitzPatrick, Jr. |
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15,778,363 |
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8,917,239 |
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Rick A. Wilber |
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15,653,808 |
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9,041,794 |
The names of each other director whose term of office as a director continues after the 2009 Annual Meeting of Stockholders and their respective term expirations are as follows:
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Term Expires in 2010: |
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Scott Scherr |
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Alois T. Leiter |
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Term Expires in 2011: |
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LeRoy A. Vander Putten |
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Robert A. Yanover |
The results of the vote to approve the amendment of the Amended and Restated 2005 Equity and Incentive Plan, as proposed to be amended, are as follows:
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For |
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Against |
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Abstain |
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Broker Non Votes |
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12,337,836 |
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9,635,593 |
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4,540 |
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2,717,633 |
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The results of the vote to ratify KPMG LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2009 are as follows:
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For |
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Against |
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Abstain |
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Broker Non Votes |
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24,480,745 |
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61,430 |
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153,427 |
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0 |
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Number |
Description |
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31.1 |
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended * |
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31.2 |
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended * |
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32.1 |
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted |
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Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended * |
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32.2 |
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted |
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Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended * |
____________________
* Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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The Ultimate Software Group, Inc. |
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Date: August 10, 2009 |
By: |
/s/ Mitchell K. Dauerman |
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Mitchell K. Dauerman |
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Executive Vice President, Chief Financial Officer and Treasurer (Authorized Signatory and Principal Financial and Accounting Officer) |