Why Ultimate Software Shares Popped

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Ultimate Software were screaming "Ultimate!" today, gaining as much as 17% after topping estimates in its quarterly report.

So what: Adjustedearnings per share for the software-as-a-service firm jumped 146%, to $0.32, $0.06 ahead of estimates. Revenue, meanwhile, was up 25%, to $97.9 million, essentially in line with expectations. CEO Scott Scherr credited the strong quarter in part to "a high percentage of new customers continuing to add talent and time management products to their core purchases."

Now what: Ultimate's adjusted EPS figure is actually twice what it should be, as the company doled the equivalent of $4.7 million, or $0.16, in employee stock compensation, a metric that is eliminated in the Non-GAAP accounting that corporations are generally assessed on. Young highly-valued fast-growing companies often use stock compensation to incentivize employees and save on cash, but the effect on shareholders is real, as it dilutes their holdings. I like Ultimate's growth prospects with a foothold in the nascent cloud computing industry, but investors should be mindful of the stock compensation effects, as well as its sky-high P/E.

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The article Why Ultimate Software Shares Popped originally appeared on Fool.com.

Fool contributor Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends The Ultimate Software Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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