Ultimate Reports Q4 and Year-End 2010 Financial Results

Achieves Record Recurring Revenues and Record Total Revenues for Quarter and Year

Ultimate Software, a leading provider of unified human capital management SaaS solutions for global businesses, announced today its financial results for 2010’s fourth quarter and year-end. For the quarter ended December 31, 2010, Ultimate reported recurring revenues of $46.0 million, an increase of 29%, and total revenues of $60.4 million, an increase of 16%, both compared with 2009’s fourth quarter. GAAP net income for the fourth quarter of 2010 was $1.4 million, or $0.05 per diluted share, versus $0.1 million, or $0.00 per diluted share, for the fourth quarter of 2009.

Non-GAAP net income, which excludes non-cash stock-based compensation and amortization of acquired intangible assets, was $4.6 million, or $0.17 per diluted share, for the fourth quarter of 2010 compared with non-GAAP net income of $2.5 million, or $0.10 per diluted share, for the fourth quarter of 2009. See “Use of Non-GAAP Financial Information” below.

For 2010, recurring revenues increased 28% to $170.9 million, and total revenues increased 16% to $227.8 million, both as compared with the prior year. For 2010, GAAP net income was $2.2 million, or $0.08 per diluted share, compared with a GAAP net loss of $1.1 million, or $0.05 per diluted share, for 2009.

“2010 was a milestone year for Ultimate. Our total revenues were an all-time high of nearly $228 million, and our recurring revenues climbed to a record $171 million,” said Scott Scherr, CEO, president, and founder of Ultimate.

“Our track record of strong customer retention continued with our 2010 retention exceeding 96 percent for customers live on our SaaS solutions, and we see continuing demand in both our Enterprise and Workplace markets.”

Ultimate’s financial results teleconference will be held today, February 8, 2011, at 5:00 p.m. Eastern Time, through Vcall at http://www.investorcalendar.com/IC/CEPage.asp?ID=162907. The call will be available for replay at the same address beginning at 9:00 p.m. Eastern Time the same day. Windows Media Player or Real Player software is required to listen to the call and can be downloaded from the site. Forward-looking information about future company performance will be discussed during the teleconference call.

Financial Highlights

• Recurring revenues grew by 29% for the fourth quarter of 2010 and by 28% for the 2010 year —primarily due to revenue growth from our Software-as-a-Service (SaaS) offering — both versus comparable 2009 periods.
• Recurring revenues were 76% of total revenues for 2010’s fourth quarter versus 68% for 2009’s fourth quarter, and recurring revenues were 75% of total revenues for the 2010 year versus 68% for 2009. Ultimate’s total revenues for 2010 increased by 16% compared with those of 2009. Excluding license revenues, the incremental non-GAAP operating margin was 32% for the 2010 year versus 2009.
• Ultimate’s annualized retention rate exceeded 96% for its existing recurring revenue customer base.
• Non-GAAP operating margin for the fourth quarter of 2010 was $7.9 million, or 13%, compared with $4.5 million, or 9%, for the fourth quarter of 2009. Non-GAAP operating margin for 2010 was $21.8 million, or 10%, compared with $13.3 million, or 7%, for 2009.
• Cash, cash equivalents, and marketable securities totaled $50.2 million as of December 31, 2010, compared with $33.2 million as of December 31, 2009. We generated $9.2 million in cash from operations for the quarter ended December 31, 2010. For the year ended December 31, 2010, we generated $25.4 million in cash from operations and repurchased 609,400 shares of our common stock for $19.8 million under our stock repurchase plan. As of December 31, 2010, Ultimate had 405,175 shares available for repurchase in the future under our stock repurchase plan.

Business Highlights for 2010 Year

• Ultimate completed its rollout of UltiPro 10, which enables businesses to streamline management of their global workforces more effectively and provides both businesses and individual users with a more flexible, configurable approach to HR functionality. Ultimate also released an UltiPro application for use on the iPhone and iPad.
• According to research completed by Aberdeen Group and summarized in its paper titled Ultimate Software Users Exceed Best-in-Class Results in Key HR Metrics (December 2010), “Compared to Best-in-Class organizations, companies using Ultimate’s solutions have experienced 13% greater improvement in employee satisfaction, twice the reduction in the cost of HR administration, and 30% greater decrease in the number of manual transactions handled by HR personnel.” Aberdeen defines best-in-class companies as “the top 20 percent of aggregate performers.” (For more detail, see http://www.ultimatesoftware.com/pdf/miscellaneous/aberdeenrbususerexceedbest-in-class12-21-10.pdf)
• Ultimate received an Optimas Award from Workforce Management magazine for innovative human capital management practices. Other 2010 winners included Microsoft, IBM, and Infosys Technologies.
• Ultimate’s SaaS security structure was recertified in December 2010 for ISO/IEC 27001. Ultimate was commended for its “superior technology controls” and its “focus on optimal security processes”. Ultimate was the first HR SaaS vendor to be awarded this certification in 2008 for security management, which lasts 3 years and is audited annually. The ISO/IEC 27001 is a global industry standard created by the International Organization for Standardization and the International Electrotechnical Commission that validates organizations that have implemented a sound and secure information security management system.
• Ultimate’s customer support center was awarded Service Capability & Performance (SCP) certification for best practices for the 12th consecutive year. The SCP Standards represent the global benchmark for service excellence and are recognized by leading technology companies around the world.

Financial Outlook

2011 Financial Guidance:

Ultimate provides the following financial guidance for 2011:

For the first quarter of 2011:

• Recurring revenues of approximately $49 million;
• Total revenues of approximately $64 million; and
• Operating margin, on a non-GAAP basis (discussed below), of approximately 7%.

For the year 2011:

• Recurring revenues to increase by approximately 25% in 2011 over those in 2010;
• Total revenues to increase by approximately 19% over those in 2010; and
• Operating margin, on a non-GAAP basis (discussed below), of approximately 13%.

Operating margin expectations were determined on a non-GAAP basis using the methodologies identified under the caption “Use of Non-GAAP Financial Information” in this press release. Non-cash equity-based compensation expense for 2011 is expected to be approximately $15.0 million.

Forward-Looking Statements

Certain statements in this press release are, and certain statements on the teleconference call may be, forward-looking statements within the meaning provided under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are made only as of the date hereof. These statements involve known and unknown risks and uncertainties that may cause Ultimate’s actual results to differ materially from those stated or implied by such forward-looking statements, including risks and uncertainties associated with fluctuations in Ultimate’s quarterly operating results, concentration of Ultimate’s product offerings, development risks involved with new products and technologies, competition, contract renewals with business partners, compliance by our customers with the terms of their contracts with us, and other factors disclosed in Ultimate’s filings with the Securities and Exchange Commission. Ultimate undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

About Ultimate

A leading provider of unified human capital management SaaS solutions for global businesses, Ultimate markets its award-winning UltiPro solutions as Software-as-a-Service (SaaS). Based in Weston, FL, Ultimate employs approximately 1,100 professionals who are focused on developing the highest quality solutions and services. In 2010, Ultimate was named an Optimas Award winner by Workforce Management magazine. In 2009, Ultimate was awarded first place in the People’s Choice Stevie® competition for Favorite New SaaS Product and was ranked the #1 best medium-sized company to work for in America by the Great Place to Work® Institute for the second consecutive year. In 2010, Ultimate’s security practices were recertified for ISO/IEC 27001, and Ultimate was commended for “superior technology controls”. Ultimate was the first HR SaaS vendor to be ISO/IEC 27001 certified and has been certified since 2008. Ultimate has more than 2,100 customers representing diverse industries, including such organizations as Adobe Systems Incorporated, The Container Store, Culligan International, Elizabeth Arden, Major League Baseball, The New York Yankees Baseball Team, and Ruth’s Chris Steak House. More information on Ultimate’s products and services can be found at www.ultimatesoftware.com.

UltiPro is a registered trademark of The Ultimate Software Group, Inc. All other trademarks referenced are the property of their respective owners.

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
			For the Three Months						For the Twelve Months
			Ended December 31,						Ended December 31,
			2010			2009			2010			2009
Revenues:
Recurring		$	46,038		$	35,700		$	170,905		$	133,158
Services			13,959			15,894			55,368			58,994
License			409			598			1,538			4,125
Total revenues			60,406			52,192			227,811			196,277
Cost of revenues:
Recurring			13,101			10,441			49,144			38,765
Services			12,932			13,312			49,843			48,304
License			105			152			255			750
Total cost of revenues			26,138			23,905			99,242			87,819
Gross profit			34,268			28,287			128,569			108,458
Operating expenses:
Sales and marketing			14,038			13,042			58,374			52,810
Research and development			10,790			9,544			42,222			38,002
General and administrative			4,708			4,596			19,727			17,803
Total operating expenses			29,536			27,182			120,323			108,615
Operating income (loss)			4,732			1,105			8,246			(157)
Other (expense) income:
Interest and other expense			(69)			(6)			(263)			(90)
Other income, net			53			21			188			162
Total other (expense) income, net			(16)			15			(75)			72
Income (loss) from continuing operations, before income taxes			4,716			1,120			8,171			(85)
Provision for income taxes			(3,270)			(974)			(5,161)			(721)
Income (loss) from continuing operations		$	1,446		$	146		$	3,010		$	(806)
Loss from discontinued operations, net of income taxes			–			(76)			(853)			(336)
Net income (loss)		$	1,446		$	70		$	2,157		$	(1,142)
Basic earnings (loss) per share:
Earnings (loss) from continuing operations		$	0.06		$	–		$	0.12		$	(0.04)
Loss from discontinued operations		$	–		$	–		$	(0.03)		$	(0.01)
Total		$	0.06		$	–		$	0.09		$	(0.05)
Diluted earnings (loss) per share:
Earnings (loss) from continuing operations		$	0.05		$	–		$	0.11		$	(0.04)
Loss from discontinued operations		$	–		$	–		$	(0.03)		$	(0.01)
Total		$	0.05		$	–		$	0.08		$	(0.05)
Weighted average shares outstanding:
Basic			25,302			24,604			24,960			24,463
Diluted			27,412			26,590			27,101			24,463

The following table sets forth the stock-based compensation expense (excluding the income tax effect, or “gross”) resulting from stock-based arrangements, the amortization of acquired intangibles and the foreign currency translation adjustment from discontinued operations that are recorded in Ultimate’s unaudited condensed consolidated statements of operations for the periods indicated (in thousands):

		For the Three Months Ended December 31,						For the Twelve Months Ended December 31,
		2010			2009			2010				2009
Stock-based compensation:
Cost of recurring revenues		$	245		$	183		$	914			$	689
Cost of service revenues			291			322			1,238				1,316
Sales and marketing			1,575			1,748			6,678				7,059
Research and development			281			302			1,218				1,228
General and administrative			789			767			3,201				2,942
Total non-cash stock-based compensation expense		$	3,181		$	3,322		$	13,249			$	13,234
Amortization of acquired intangibles:
General and administrative		$	28		$	74		$	281				221
Loss from discontinued operations:
Foreign currency translation
adjustment (1)		$	–		$	–		$	(912	)		$	–

________________________________

(1) Pursuant to applicable accounting rules, the amount attributable to our wholly-owned subsidiary in the United Kingdom (“UK Subsidiary”) and accumulated in the translation adjustment component of equity became realized in the unaudited statement of operations during the twelve months ended December 31, 2010, the period in which discontinued operations for the UK Subsidiary were complete.

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
						As of			As of
						December 31,			December 31,
						2010			2009
ASSETS
Current assets:
	Cash and cash equivalents				$	40,889		$	23,684
	Short-term investments in marketable securities					8,884			8,079
	Accounts receivable, net					47,570			38,450
	Prepaid expenses and other current assets					18,613			15,594
	Deferred tax assets, net					1,434			1,128
		Total current assets before funds held for clients				117,390			86,935
		Funds held for clients				72,875			23,560
		Total current assets				190,265			110,495
Property and equipment, net						18,075			19,496
Capitalized software, net						3,115			4,463
Goodwill						3,025			3,198
Long-term investments in marketable securities						433			1,444
Other assets, net						11,656			12,298
Long-term deferred tax assets, net						22,988			19,736
			Total assets		$	249,557		$	171,130
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable				$	4,683		$	4,476
	Accrued expenses					11,074			9,972
	Current portion of deferred revenue					71,808			60,980
	Current portion of capital lease obligations					2,551			1,897
		Total current liabilities before client fund obligations				90,116			77,325
		Client fund obligations				72,875			23,560
		Total current liabilities				162,991			100,885
Deferred revenue, net of current portion						6,287			7,579
Deferred rent						3,022			3,186
Capital lease obligations, net of current portion						2,406			1,710
Long-term income taxes payable						1,866			–
			Total liabilities			176,572			113,360
Stockholders’ equity:
	Preferred Stock, $.01 par value					–			–
	Series A Junior Participating Preferred Stock, $.01 par value					–			–
	Common Stock, $.01 par value					290			276
	Additional paid-in capital					216,262			184,256
	Accumulated other comprehensive income (loss)					126			(696)
	Accumulated deficit					(52,253)			(54,410)
						164,425			129,426
	Treasury stock, at cost					(91,440)			(71,656)
			Total stockholders’ equity			72,985			57,770
			Total liabilities and stockholders’ equity		$	249,557		$	171,130

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
		For the Twelve Months Ended
		December 31,
		2010				2009
Cash flows from operating activities:
Net income (loss)		$	2,157			$	(1,142	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			11,883				11,806
Provision for doubtful accounts			1,549				972
Non-cash stock-based compensation expense			13,249				13,234
Non-cash realized loss on foreign currency translation adjustment			912				–
Income taxes			4,982				561
Excess tax benefits from employee stock plan			(6,671	)			(549	)
Changes in operating assets and liabilities:
Accounts receivable			(10,669	)			(1,120	)
Prepaid expenses and other current assets			(3,019	)			417
Other assets			362				(851	)
Accounts payable			207				(2,724	)
Accrued expenses and deferred rent			938				(2,372	)
Deferred revenue			9,536				5,065
Net cash provided by operating activities			25,416				23,297
Cash flows from investing activities:
Purchases of marketable securities			(9,223	)			(10,040	)
Maturities of marketable securities			9,429				6,323
Net purchases of client funds securities			(49,315	)			(17,697	)
Capitalized software			–				(630	)
Purchases of property and equipment			(4,980	)			(4,011	)
Net cash used in investing activities			(54,089	)			(26,055	)
Cash flows from financing activities:
Repurchases of Common Stock			(19,784	)			(12,156	)
Net proceeds from issuances of Common Stock			14,896				6,278
Excess tax benefits from employee stock plan			6,671				549
Shares acquired to settle employee tax withholding liability			(2,797	)			(373	)
Principal payments on capital lease obligations			(2,503	)			(2,445	)
Repayments of borrowings of long-term debt			–				(320	)
Net increase in client fund obligations			49,315				17,697
Net cash provided by financing activities			45,798				9,230
Effect of foreign currency exchange rate changes on cash			80				12
Net increase in cash and cash equivalents			17,205				6,484
Cash and cash equivalents, beginning of period			23,684				17,200
Cash and cash equivalents, end of period		$	40,889			$	23,684
Supplemental disclosure of cash flow information:
Cash paid for interest		$	218			$	149
Cash paid for income taxes		$	203			$	175