Ultimate Software (ULTI) Down To Strong Sell On Tepid View

On Jun 20, The Ultimate Software Group Inc (NASDAQ:ULTI) was downgraded to Zacks Rank #5 (Strong Sell).

The downgrade can be attributed to declining earnings estimates in the last 60 days primarily due to tepid guidance for the current quarter. The Zacks Consensus Estimates for 2017 and 2018 decreased 6.5% and 5.1% to $13.73 and $14.94, respectively.

The company’s first-quarter results were mixed. While adjusted earnings of 27 cents per share beat the Zacks Consensus Estimate by 16 cents, revenues of $228.5 million missed the same.

Notably, Ultimate Software has beaten the Zacks Consensus Estimate in two of the four trailing quarters with an average positive surprise of 20.11%.

Tepid Q2 Guidance Hurt Shares

Ultimate Software has underperformed the Zacks categorized Computer Software-Services industry since it reported the first-quarter results on Apr 25. While the stock returned 2.7%, the industry gained 7%.

The underperformance can be attributed to tepid second-quarter guidance. For second-quarter 2017, management expects recurring revenues to be approximately $196 million and total revenues to be approximately $228 million. Operating margin is anticipated to be approximately 20%.

Management now expects most of the growth to come in second-half 2017. For 2017, recurring revenues are projected to grow by more than 25%. Total revenue is projected to grow by approximately 24% and operating margin to be approximately 21%.

The company’s contracting operating margin remains a concern primarily due to continuing investments on new headcounts. Moreover, declining retention rate primarily due to a client mix-shift to small & medium business (SMB) and mid-market remains a concern.

Key Picks

Verint Systems (NASDAQ:VRNT) , DST Systems (NYSE:DST) , and Intuit (NASDAQ:INTU) sporting a Zacks Rank #1 (Strong Buy) are better-ranked stocks in the same sector. You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Verint, DST and Intuit are pegged at 8.5%, 10% and 14.2%, respectively.

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