ANNUAL REPORT
2017 MILESTONES
#
#1
National Customer
Service Association’s
Service Organization
of the Year
FORTUNE’S
BEST LARGE
WORKPLACES
IN TECHNOLOGY
And #1 on the 2018 list
as well, making it three
consecutive years at #1
#7
#2
Fortune’s Best
Places To Work and
#3 on its 2018 list
People Magazine’s
Companies That Care
+
CUSTOMERS
Forbes’ 100 Most
Innovative Growth
Companies
#7
Consecutive quarters
with the same top-level
management team
FOR FURTHER SUPPORTING DETAILS, SEE BUSINESS HIGHLIGHTS PAGE
LETTER TO SHAREHOLDERS
FELLOW SHAREHOLDERS,
We executed on our growth strategy in 2017. Total revenues were up 20% to $941 million and recurring revenues were up 23%
to $802 million, both compared with 2016 and both record highs. These results give us confidence that we will achieve what we call
our ‘Fifth Championship’ in 2018—surpassing $1 billion in total revenues—and lay the foundation for us to achieve our
‘Sixth-Championship’ of $2 billion in the year 2022.
Sales finished the year strong, giving us what we need to achieve our 2018 goals, and they set the table for a successful 2019.
Our sales management leaders and infrastructure are today the same as they were entering 2017, and for the first time since
2008, we are not changing the territory parameters. Our Enterprise team remains focused on companies larger than 2,500
employees in size, and our Midmarket and Strategic teams cover companies with 300 to 2,500 employees.1
Our sales teams believe, as I do, that we are on the cusp of a tipping point for Ultimate, and they are
at the forefront of making it happen. Their longevity with Ultimate continues to be a powerful
differentiator for us and translates to product and industry expertise unmatched in the human
capital management (HCM) marketplace.
Our marketing metrics quantify the strength of our positivity about future growth and are
the most impressive we have ever had. For the 2017 year, we had a record number of
campaign responders from companies with 300+ employees tell us they are looking to
buy a new HCM solution within the next 12 months—a 52% increase over 2016 and our
largest annual increase ever. For the fourth quarter of 2017 alone, the number of these
looking-to-buy-in-12-months-or-less responders increased by 91% compared with 2016’s
fourth quarter. In our thought leadership workshops that we held across the United States
in 2017, we had an 84% increase in the number of attendees who said their companies
are looking to buy a new HCM solution within 12 months. Excluding our customers and
employees, unique visitors to our company website in 2017 increased 25% over 2016 while
our search engine-generated traffic increased 90% over 2016 and was our best year ever.
Our 2017 media exposure increased 222% versus 2016’s. Ultimate
was featured as a thought and practice leader in The Wall
Street Journal, The Washington Post, and magazines
such as Forbes, Entrepreneur, CIO, Inc., and Fortune
on topics about workplace communication, culture,
corporate responsibility, employee benefits, diversity,
artificial intelligence, successful corporate growth
strategies, and trends in 401(k) employer matching.
The announcement of Ultimate’s sponsorship of
the Miami HEAT jersey and our associated joint
activities, in particular, was covered in 274 articles in
publications such as USA Today, The Washington Post,
MSN, and ESPN for a combined media reach of 370.3
million in one day.
“My father
taught me about
running a successful
business: Make your
people your No. 1
priority, and the
rest will follow.”
— SCOTT SCHERR
A 2017 Forbes’
Quote of the Day
2017 was a milestone year for our product development team.
In addition to a successful rollout of our UltiPro fall release with 360 new
features, including 55 created from customer ideas, our team continued its track
record of innovation and leadership in HCM with the introduction of Xander™, our
new artificial intelligence platform that instantly analyzes free-form text from
LETTER TO SHAREHOLDERS
employees’ open-ended survey answers and deciphers more than
for 2017. Forbes, in partnership with Just Capital, named
100 emotions, 70 workplace themes, and the overall sentiment
Ultimate to its list of The Just 100: America’s Best Corporate
of an individual employee or group, expanding the predictive
Citizens, after analyzing 1,000 publicly traded companies
and prescriptive capabilities already in UltiPro and giving
to determine the companies with the best and ‘most just’
management teams invaluable insights.
business behavior based on seven metrics. (For more detail
on awards and recognition, see the Business
Our product development team also introduced UltiPro Connect,
Highlights section of this report.)
the new hub for our partner ecosystem where our partners can
publish integrations for customer consumption after testing
Our ‘People First’ culture is rooted in
them in our sandbox environment. The benefit to our customers
trust and drives our business success.
is reduced time and costs to integrate and extend our solutions
We compete for and hire the industry’s
because they can access the UltiPro Connect marketplace to
most talented people. We take care
browse available partner applications and services, build their
of them like family, and we entrust
own integrations without having to start from scratch, leverage
them to create products and services
knowledge from the community, and more.
based on this fundamental principle. At
the close of 2017, we had 4,208 UltiPeeps.
52%
INCREASE
IN PROSPECTS
LOOKING TO BUY
WITHIN THE NEXT
12 MONTHS
We survey our customers twice a year to ask for their feedback.
Our employee retention rate was 94% for the
In our Fall 2017 survey, we had our highest participation rate
year and is unusually high for the technology sector. Our
ever—70% compared with 66% in our Fall 2016 survey. Of the
people-centric culture inspires game-changing thinking. It
live customers surveyed, 92% indicated they are satisfied or
inspires innovation, collaboration, and listening. The proof
extremely satisfied with our core UltiPro products.
is in our UltiPro offering—the industry’s finest set of HCM
In January 2018, Ultimate was honored to be ranked #1 in the
more than 4,100 organizations as customers and 37 million
Large Company category of Fortune magazine’s 2018 list of 40
people records in our Ultimate cloud, we believe we continue
Best Workplaces in Technology, making this our third consecutive
to lead the cloud industry in numbers of customers using a
year to be recognized as #1. Rankings were based on survey
unified human resources, payroll, talent, and time and labor
products and services on the market today, in our view. With
responses from more than 79,000 employees at technology
management solution suite.
companies across the United States. We were also honored to be
ranked #2 on Indeed.com’s 2017 Best Companies to Work at in the
We look forward to topping our total revenues objective
US and #10 on Glassdoor’s Large Company list of Best Places to
of $1 billion in 2018. We are continuing to expand the
Work in 2018. In February 2018, Fortune ranked Ultimate #3 on
infrastructure we have been working on for the last two years
its 2018 100 Best Companies to Work For list, marking our seventh
to position us to achieve $2 billion in total revenues in 2022.
consecutive year in the top 25 on this respected list.
We have long-tenured leaders and team members in place,
Looking back at 2017, a number of additional honors reflect our
of the people using them, and we have many passionately
focus on people and validate our belief that an environment of
supportive customers who are eager to share their customer
trust and collaboration leads to innovation and business success.
experiences. At the same time, we have the energy and vision
People magazine ranked Ultimate #2 on its list of
of positivity typical of a young company committed to forging
we have award-winning solutions bettering the work lives
2018
GOAL,
$1 BILLION
IN TOTAL
REVENUES
Companies That Care. Forbes ranked Ultimate
new pathways in all that we do.
#7 on its 2017 list of the 100 Most Innovative
Growth Companies. All key HCM analyst
We thank you, our shareholders, customers, employees, and
firms ranked Ultimate a leader—Gartner
partners for your continuing support.
in its Magic Quadrant, Forrester in its
Wave, and Nucleus Research in its HR
Value Matrix.2 The National Customer
Service Association named Ultimate’s
services team Service Organization of
the Year in the Large Business category
SCOTT SCHERR
Chairman of the Board,
Chief Executive Officer, and Founder
FINANCIAL HIGHLIGHTS
OPERATING DATA (In Thousands)
2015
2016
2017
Revenues
Recurring
Services
TOTAL REVENUES
Non-GAAP Operating Income3
As a % of Total Revenues3
$516,400
$101,681
$654,199
$127,092
$802,300
$138,429
$618,081
$781,291
$940,729
$126,768
$157,550
$194,102
21%
20%
21%
BALANCE SHEET DATA (In Thousands)
2015
2016
2017
Cash, Cash Equivalents, and Corporate Investments
in Marketable Securities
$129,383
$97,861
$165,119
TOTAL ASSETS4
Deferred Revenue
Long-Term Debt
Including Capital Lease Obligations,
Net of Current Portion
$1,448,689
$1,134,688
$1,377,211
$145,727
$173,976
$198,861
$3,665
$3,985
$4,477
Shareholders Equity
$317,186
$414,215
$518,025
RECURRING
REVENUES
Dollars in Millions
TOTAL
REVENUES
Dollars in Millions
$802.3
$654.2
$516.4
2015
2016
2017
$940.7
$781.3
$618.1
increase
2017 versus 2016
%
%
2015
2016
2017
increase
2017 versus 2016
37+
MILLION
PEOPLE
RECORDS IN
ULTIMATE’S
CLOUD
16-YEAR FINANCIAL PERFORMANCE
RECURRING
REVENUES
Dollars in Millions
$802.3
$654.2
$516.4
%
CAGR
$266.4
$213.8
$419.8
$334.4
$19.3
$29.3
$39.0
$50.3
$63.7
$170.9
$133.2
$86.2
$106.2
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
TOTAL
REVENUES
Dollars in Millions
CAGR on both graphs
represents Ultimate’s
compounded annual
growth rate from 2002
through 2017.
%
CAGR
$940.7
$781.3
$618.1
$505.9
$410.4
$332.3
$178.0
$196.3
$150.1
$114.5
$269.2
$227.8
$55.1
$60.4
$72.0
$88.6
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
BUSINESS HIGHLIGHTS
ALL EVENTS OR AWARDS LISTED BELOW TOOK PLACE IN 2017, UNLESS OTHERWISE INDICATED.
#1 ON FORTUNE’S LIST OF
40 BEST WORKPLACES
IN TECHNOLOGY
In January 2018, Fortune magazine ranked Ultimate #1 on its
list of 40 Best Workplaces in Technology in the Large Company
category, making this Ultimate’s third consecutive year to top
the list.
#3 ON FORTUNE’S 2018 LIST
OF 100 BEST COMPANIES
TO WORK FOR
In February 2018, Fortune ranked Ultimate #3 on its list of 100
Best Companies to Work For, making this Ultimate’s seventh
consecutive year to appear on this respected list.
Ultimate introduced
ULTIPRO CONNECT
UltiPro Connect is the new hub of our partner ecosystem that was
engineered to create seamless, automated integrations between
our UltiPro product and third-party solutions and services. Our
product partners can view Ultimate’s existing APIs and supporting
documentation through our UltiPro Developer Network. They can
build and test integrations in sandbox environments and can then
publish integrations for customer consumption. Our customers
access the UltiPro Connect marketplace to browse partner apps
and services, research and select partners, and build their own
integrations without having to start from scratch, or they can leverage
knowledge from the community. The benefit to our customers is
reduced time and costs to integrate and extend our solutions.
HfS Research rated Ultimate
TOP VENDOR FOR PREDICTIVE
PEOPLE ANALYTICS
HfS Research, an industry research firm that helps enterprises
validate and improve their global operations, rated Ultimate the
top vendor for predictive people analytics in the HCM space in
February 2017.
Fortune Magazine recognized Ultimate as
#1 ON ITS 100 BEST
WORKPLACES FOR
MILLENNIALS
As well as #2 on 100 Best Workplaces for Women, #3 on Best
Workplaces for Diversity, #2 on 50 Best Workplaces for Parents,
and #7 on 50 Best Workplaces for Giving Back.
Ultimate introduced
XANDER
Our Development team continued its track record of leadership
and innovation in HCM with the introduction of Xander, our
“People First” artificial intelligence (AI) platform. Xander uses
a portfolio of advanced AI technologies, including natural
language processing and machine-learning algorithms, to
analyze emotions as well as statistics when reporting on
employee data for employers. Xander can instantly analyze
free-form text from employees’ open-ended survey answers and
decipher more than 100 emotions, 70 workplace themes, and
the overall sentiment of an individual employee or group. This
information gives managers invaluable insights that expand
the predictive and prescriptive capabilities already in UltiPro
to aid company leaders in their employee- and culture-related
decision-making.
The National Customer Service Organization named Ultimate
THE CUSTOMER SERVICE
ORGANIZATION OF THE YEAR
#7ON FORBES’ LIST OF THE
100 MOST INNOVATIVE
GROWTH COMPANIES
Canadian HR Reporter named Ultimate
READERS’ CHOICE WINNER
Canadian HR Reporter, a leading HR news publication in Canada,
named Ultimate a Readers’ Choice Winner in several categories:
HR Management Solutions, Payroll Solutions, Recruitment
Solutions, and Talent Management Solutions.
ON PEOPLE MAGAZINE’S LIST OF
50 COMPANIES THAT CARE
#2
3 STEVIE AWARDS
Ultimate won
including the People’s Choice Award for Favorite Customer Service.
CIO.com ranked Ultimate
#1
ON ITS LIST OF 10 BEST PLACES TO
WORK FOR WOMEN IN TECHNOLOGY
UltiPro is a registered trademark and Xander is a trademark of The Ultimate Software Group, Inc. All other trademarks referenced are the property of their
respective owners.
INVESTOR INFORMATION
SHAREHOLDERS’
MEETING
Monday, May 14, 2018, 10 a.m. EDT
2000 Ultimate Way, Weston, FL 33326
Formal notice will be sent
to shareholders of record
as of March 20, 2018.
ANNUAL REPORT AND FORM 10-K
Ultimate’s 2017 Annual Report, including the 2017 Form 10-K
filed with the U.S. Securities and Exchange Commission for the
fiscal year ended December 31, 2017, is available electronically
as a PDF on our website at www.ultimatesoftware.com.
Printed copies of the 2017 Form 10-K are available without
charge upon request to: Ultimate Software, Investor Relations
Department, 2000 Ultimate Way, Weston, Florida 33326.
SAFE HARBOR STATEMENT
Statements in this Annual Report relating to future plans,
results, performance, expectations, achievements, and the like
are considered “forward-looking statements.” These forward-
looking statements involve known and unknown risks and are
subject to change based on various factors and uncertainties
that may cause actual results to differ materially from those
expressed or implied by these statements. Factors and
uncertainties that may cause actual results to differ include,
but are not limited to, the risks disclosed in Ultimate’s filings
with the U.S. Securities and Exchange Commission, including in
Ultimate’s 2017 Form 10-K. Ultimate undertakes no obligation
to revise or update any forward-looking statements.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
LEGAL COUNSEL
Stroock & Stroock & Lavan LLP
New York, New York
TRANSFER AGENT AND REGISTRAR
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, Rhode Island 02940-3078
877.282.1168
www.computershare.com
INVESTOR RELATIONS
For additional information about Ultimate,
contact Mitchell K. Dauerman, 954.331.7369.
STOCK TRADING
Ultimate’s common stock is traded on the Nasdaq Global
Select Market under the symbol, ULTI.
COMPANY ADDRESS
Ultimate Software
2000 Ultimate Way
Weston, Florida 33326
800.432.1729 or 954.331.7000
www.ultimatesoftware.com
COMPANY PROFILE
Ultimate is a leading provider of cloud-based human capital
management solutions, with more than 37 million people records in the
Ultimate cloud. Ultimate’s award-winning UltiPro delivers HR, payroll,
talent, and time and labor management solutions that connect people
with the information they need to work more effectively. Founded in 1990,
Ultimate is headquartered in Weston, Florida, and employs more than
4,200 professionals. In 2018, Fortune ranked Ultimate #1 in the Large
Company category of its 40 Best Workplaces in Technology list, making it
our third consecutive year to be recognized as #1. Also in 2018, Fortune
ranked Ultimate #3 on its prestigious list of 100 Best Companies to Work
For, making it our seventh year to be ranked in the top 25. In 2017,
Fortune ranked Ultimate #1 on its list of Best Workplaces for Millennials
and #2 on its list of 100 Best Workplaces for Women. Also in 2017, Forbes
ranked Ultimate #7 on its list of 100 Most Innovative Growth Companies,
the National Customer Service Association named our services division
the top Service Organization of the Year in the Large-Business category,
People magazine ranked Ultimate #2 on its list of 50 Companies That
Care, Brandon Hall Group honored Ultimate with a Gold Award in
Technology, HfS Research rated Ultimate the top HCM vendor for
predictive people analytics in its Blueprint Market Guide,
and the Stevie Awards honored Ultimate with its
People’s Choice Award for Favorite Customer Service.
Ultimate has more than 4,100 customers with
employees in 160 countries, including Bloomin’
Brands, Culligan International, Feeding
America, Major Lea gue Baseball, Red Roof
Inn, SUBWAY, Texas Roadhouse, and Yamaha
Corporation of America.
ULTIMATE
#1
ON CIO.COM’S
BEST PLACES TO
WORK FOR WOMEN
IN TECHNOLOGY
UltiPro is a registered trademark of The Ultimate Software Group, Inc. All other trademarks referenced are the property of their respective owners.
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
EXECUTIVE OFFICERS
SCOTT SCHERR
Chairman, President, and
Chief Executive Officer
Ultimate Software
MARC D. SCHERR
SCOTT SCHERR
Chairman, President, and
Chief Executive Officer
MITCHELL K. DAUERMAN
Executive Vice President, Chief Financial
Vice Chairman and Chief Operating Officer
Officer, and Treasurer
Ultimate Software
JAMES A. FITZPATRICK, JR.
Vice Chairman and Chief Operating Officer
MARC D. SCHERR
Partner
Hogan Lovells US LLP
RICK A. WILBER
Former President
Lynn’s Hallmark Cards
AL LEITER
President
Leiter’s Landing
JONATHAN MARINER
Retired EVP & CFO
Major League Baseball
JASON DORSEY
President and Co-Founder
The Center for Generational
Kinetics
NOTES
1 Since 2017, Ultimate’s Enterprise sales team targets companies
with 2,501 employees and larger, including companies with 100,000
employees and more; our Midmarket sales team targets companies with
501- 2,500 employees; and our Strategic sales team targets companies
with 300 to 500 employees.
accepted accounting principles in the United States (GAAP). The principal
limitation of these non-GAAP financial measures is that they exclude
significant expenses that are required by GAAP to be recorded. In addition,
they are subject to inherent limitations as they reflect the exercise of
judgement by management about which expenses are excluded from the
non-GAAP financial measures.
2 Gartner and Forrester have disclaimers noting they “do not endorse
any vendor, product, or service.”
3 The term “Non-GAAP Operating Income” is a non-GAAP financial
measure that is defined by Ultimate as operating income excluding
stock-based compensation expense, amortization of acquired
intangibles, and transaction costs related to business combinations. For
more detail, see Note 5 below.
4 The years ended as of December 31, 2016, and December 31, 2015,
were revised in connection with an immaterial correction of prior-period
financial statements. See Note 17 in our Notes to Consolidated Financial
Statements, included in our Form 10-K for the year ended December 31,
2017, for further details.
5 NON-GAAP MEASURES This Annual Report contains non-GAAP
financial measures. Ultimate believes that non-GAAP measures of
financial results provide useful information to management and investors
regarding certain financial and business trends relating to Ultimate’s
financial condition and results of operations. Ultimate’s management
uses these non-GAAP results to compare Ultimate’s performance to
that of prior periods for trend analyses, for purposes of determining
executive incentive compensation, and for budget and planning purposes.
These measures are used in monthly financial reports prepared for
management and in quarterly financial reports presented to Ultimate’s
Board of Directors. These measures may be different from non-GAAP
financial measures used by other companies.
These non-GAAP measures should not be considered in isolation or as an
alternative to such measures determined in accordance with the generally
To compensate for these limitations, Ultimate presents its non-GAAP
financial measures in connection with its GAAP results. Ultimate strongly
urges investors and potential investors in Ultimate’s securities to review
the reconciliation of its non-GAAP financial measures to the comparable
GAAP financial measures that are included in this Annual Report under
the caption “Unaudited Reconciliation of Non-GAAP Financial Measures”
and not rely on any single financial measure to evaluate its business.
Ultimate presents the following non-GAAP financial measure in this
Annual Report: non-GAAP operating income and non-GAAP operating
income, as a percentage of total revenues (or non-GAAP operating
margin). We exclude the following items from these non-GAAP financial
measures, as appropriate:
Stock-based compensation expense. Ultimate’s non-GAAP financial
measures exclude stock-based compensation expense, which consists
of expenses for stock options and stock and stock unit awards
recorded in accordance with Accounting Standards Codification 718,
“Compensation - Stock Compensation.” For the years ended December
31, 2017, 2016, and 2015, stock-based compensation expense was
$146.4 million, $113.9 million, and $82.4 million on a pre-tax basis,
respectively. Stock-based compensation expense is excluded from the
non-GAAP financial measures because it is a non-cash expense that
Ultimate does not consider part of ongoing operations when assessing its
financial performance. Ultimate believes that such exclusion facilitates
the comparison of results of ongoing operations for current and future
periods with such results from past periods.
Amortization of acquired intangible assets. In accordance with GAAP,
NOTES
operating expenses include amortization of acquired intangible assets
over the estimated useful lives of such assets. For the years ended
December 31, 2017, 2016, and 2015, the amortization of acquired
intangible assets was $3.1 million, $1.1 million, and $1.0 million,
respectively. Amortization of acquired intangible assets is excluded
from Ultimate’s non-GAAP financial measures because it is a non-cash
expense that Ultimate does not consider part of ongoing operations
when assessing its financial performance. Ultimate believes that such
exclusion facilitates comparisons to its historical operating results and
to the results of other companies in the same industry, which have their
own unique acquisition histories.
Transaction costs related to business combinations. In accordance with
GAAP, operating expenses include transaction costs for third-party
professional services received in connection with business combinations.
As we do not acquire or dispose of businesses on a predictable basis, the
terms of each business combination are unique and can vary significantly
from other business combinations. Significant expenses can be incurred
in connection with a business combination that we would not have
otherwise incurred in the periods presented as part of our continuing
operations. There were no transaction costs incurred related to business
combinations for the year ended December 31, 2017. For the year ended
December 31, 2016, the transactions costs incurred related to business
combinations were $0.9 million. There were no transaction costs incurred
related to business combinations for the year ended December 31, 2015.
Transaction costs related to business combinations are excluded from
Ultimate’s non-GAAP financial measures because it is an expense that
Ultimate does not consider part of ongoing operations when assessing its
financial performance. Ultimate believes that such exclusion facilitates
comparisons to its historical operating results and to the results of other
companies in the same industry, which have their own unique business
combination histories.
UNAUDITED RECONCILIATION OF NON-GAAP MEASURES
(Dollars in Thousands)
Operating income
Operating income, as a
% of total revenues
Add back:
Non-cash stock-based
compensation expense
Non-cash amortization of
acquired intangible assets
Transaction costs related to
business combinations
2015
2016
2017
$43,318
$41,684
$44,546
7%
5%
5%
82,416
113,877
146,427
1,034
1,115
3,129
—
874
—
Non-GAAP operating income
$126,768
$157,550 $194,102
Non-GAAP operating income,
as a % of total revenues
20.5%
20.2%
20.6%
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
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)
Delaware
(State or other jurisdiction of
incorporation or organization)
2000 Ultimate Way,
Weston, FL
(Address of principal executive offices)
65-0694077
(I.R.S. Employer
Identification No.)
33326
(Zip Code)
Registrant’s telephone number, including area code:
(954) 331-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class:
Name of Each Exchange on which Registered:
Common Stock, par value $.01 per share
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
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
No
Indicate by check mark whether the 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 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of Common Stock, par value $.01 per share, held by non-affiliates of the Registrant, based upon the
closing sale price of such shares on the NASDAQ Global Select Market on June 30, 2017 was approximately $5.9 billion.
As of February 22, 2018, there were 30,573,486 shares of the Registrant’s Common Stock, par value $.01, outstanding.
Portions of the Registrant’s Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
THE ULTIMATE SOFTWARE GROUP, INC.
Forward-Looking Statements
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
INDEX
PART I
PART II
Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Independent Registered Public Accounting Firm’s Report on Internal Control over Financial Reporting
Item 9B.
Other Information
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
PART III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Signatures
Exhibits
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1
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (this “Form 10-K”) of The Ultimate
Software Group, Inc. and subsidiaries (“Ultimate,” "Ultimate Software," “we,” “us” or “our”) may contain certain forward-
looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements represent our expectations or beliefs,
including, but not limited to, our expectations concerning our 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. Ultimate’s actual results could differ materially from those
contained in the forward-looking statements due to risks and uncertainties associated with fluctuations in our quarterly
operating results, concentration of our product offerings, development risks involved with new products and technologies,
competition, our contractual relationships with third parties, 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. Other factors that may cause such differences include, but are not limited to, those discussed in this
Form 10-K, including the risk factors set forth in Item 1A. Ultimate undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
UltiPro® and its related design are registered trademarks of Ultimate in the United States. This Form 10-K also
includes names, trademarks, service marks and registered trademarks and service marks of companies other than Ultimate.
PART I
Item 1. Business
Overview
Ultimate Software is a leading provider of cloud-based human capital management solutions, often referred to as
human capital management ("HCM"). Ultimate's UltiPro product suite ("UltiPro") is a comprehensive, engaging solution that
has human resources ("HR"), payroll, and benefits management at its core and includes global people management, available in
14 languages with more than 37 country-specific localizations. The solution is delivered via software-as-a-service ("SaaS"),
now more commonly known as the cloud computing model, to organizations based in the United States and Canada, including
those with global workforces. At the close of 2017, we had more than 4,100 organizations as customers and more than 37
million people records in our HCM cloud. We attained our leadership position, we believe, through our focus on unified HCM,
people-centric product design, cloud technology, and strong customer relationships.
UltiPro is designed to deliver the functionality businesses need to manage the complete employee life cycle from
recruitment to retirement and to facilitate high levels of employee engagement with their employers and one another. The
solution includes unified feature sets for talent acquisition and onboarding, HR management and compliance, benefits
management and online enrollment, payroll, performance management, employee engagement surveying, compensation
management with salary planning, budgeting, incentive award planning, succession management, learning management,
reporting and analytical decision-making and predictive tools, and time capture, scheduling, attendance tracking, and absence
accruals. UltiPro has role-based features for HR professionals, executives, managers, administrators, and employees whether
they are in or out of the office, including access to business-critical information on mobile devices such as the iPhone, iPad, and
other smartphones and tablets.
Our customers tell us that UltiPro helps them to streamline talent management, HR and payroll processes to
significantly reduce administrative and operational costs while also empowering them to manage the talent in their workforces
more strategically. UltiPro provides our customers tools to analyze workforce trends for better decision making, identify high-
performing talent within their organizations, predict who future high-performers and retention risks will be with a high degree
of accuracy, find critical information quickly and perform routine business activities efficiently.
Our cloud offering of UltiPro provides web-based access to comprehensive HCM functionality for organizations that
want to simplify delivery and support of their business applications. We have found that UltiPro is attractive to companies that
want to focus on their core competencies to increase sales and profits while we supply and manage the hardware, infrastructure,
ongoing maintenance and backup services for our customers.
We market our UltiPro solutions primarily to enterprise companies, which we define as organizations with 2,501 or
more employees, including those with 10,000 employees and larger; mid-market companies, which we define as those having
501-2,500 employees; and strategic market companies, which we define as those having 100-500 employees. Our mid-market
and strategic customers have access to nearly all the features that our larger enterprise companies have through UltiPro, plus a
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bundled services package. Since many companies in the mid- and strategic markets do not have information technology (“IT”)
staff on their premises to help with system deployment or ongoing management issues, we have created a bundled services
package to give these customers a high degree of convenience by handling system configuration, business rules, and other
situations for them “behind the scenes.” UltiPro is marketed primarily through our enterprise, mid-market, and strategic direct
sales teams.
Cloud Computing Model
Market acceptance of cloud computing for mission critical enterprise applications has become increasingly common in
recent years since software can be delivered cost-effectively, reliably, and securely to businesses over the Internet, eliminating
the need for customers to purchase supporting software and hardware for an on-premise system and the need to hire IT staff to
monitor, maintain, and upgrade such a system.
We introduced our first subscription-based service solution over the Internet in December of 2000, and we began
marketing our first multi-tenant SaaS HCM to enterprise companies in 2002. Since that time, we have significantly expanded
our HCM offerings and the cloud infrastructure that supports them. Today, we develop our solutions using cloud-native
technologies and architectural patterns to provide our customers with solutions that are effective, engaging, flexible, and
resilient. Our cloud model is based on a multi-tenant architecture that is both open and secure with support for user experiences
on both desktop and mobile devices. Our customers that have moved away from traditional on-premise software to our cloud-
based service applications benefit by substantially reducing the cost and complexity typical of on-premise software
implementations, customizations, and upgrades. Through our cloud-based SaaS model, we supply and manage the hardware,
infrastructure, ongoing maintenance, and backup services for our customers. We install the latest version of our software for our
customers, reducing their need to buy and maintain their own technology infrastructure resources. As a part of our cloud model,
we also provide activation and training services to our customers as well as ongoing support services.
Our cloud-based solutions are hosted in four data centers: one located near Atlanta, Georgia, one near Phoenix,
Arizona, one near Toronto, Canada, and the fourth near Vancouver, Canada. Our data center facilities are owned and operated
by independent third parties, who provide redundant power, bandwidth, and physical security. Ultimate employees deploy,
monitor, and manage our hardware and software systems in accordance with our security and data privacy policies, which are
subject to examination by an independent third-party.
Market Share
Based on our customer counts and market data from Hoover's/Dun & Bradstreet as of January 5, 2018, we estimate
our approximate share of the total available market (TAM) at the close of 2017 to be 8 percent for enterprise companies, 8
percent for mid-market companies, and 2 percent for companies in the strategic market.
Company Information
Ultimate is a Delaware corporation formed in April 1996 to assume the business and operations of The Ultimate
Software Group, Ltd. (the “Partnership”), a limited partnership founded in 1990. During August 2006, Ultimate formed a
wholly-owned subsidiary, The Ultimate Software Group of Canada, Inc. (“Ultimate Canada”), to accommodate our operations
in Canada. During February 2015, Ultimate formed a wholly-owned subsidiary, The Ultimate Software Group of Asia, PTE.
LTD. There were no material assets or revenues in Canada or Singapore as of or for the year ended December 31, 2017.
Ultimate's headquarters is located at 2000 Ultimate Way, Weston, Florida 33326 and our telephone number is (954) 331-7000.
Capabilities of UltiPro
UltiPro is a comprehensive cloud-based solution designed to deliver the functionality businesses need to manage the
complete employee life cycle from recruitment to retirement, and to facilitate high levels of employee engagement with their
employers and one another. The solution includes feature sets for talent acquisition and onboarding, HR management and
compliance, benefits management and online enrollment, payroll, performance management, employee engagement surveying,
compensation management, succession management, learning management, reporting and analytical decision-making tools,
time and attendance, and role-based self-service capabilities for executives, managers, administrators, and employees whether
they are in or out of the office. UltiPro offers the following capabilities to our customers:
Role-Based Internet Access to Functionality. UltiPro provides web access to workforce-related business functions,
company communications, and reporting for everyone in our customer's organization, not just the HR department. The access
and specific functionality can be tailored to our customer's process requirements and the individual user's role. We believe that
UltiPro's employee-facing web applications can increase management and administrative efficiencies by providing immediate
access to reporting, staff management processes and business intelligence for business leaders, and can reduce operating costs
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by eliminating the need for organizations to print and distribute paper communications, handbooks, forms, and paychecks.
Ultimate also provides UltiPro functionality for use on mobile devices. Using tablets or smartphones, employees can manage
their goals, provide feedback to managers, search and apply for career opportunities, access their own personal information,
such as pay statements, and view their company's employee directory to look up contact information or employee photos. In
addition, managers can approve or deny daily workflow transactions, such as salary changes and paid time off, access reports
and analytics, and readily review goals, competencies, and accomplishments of their team members.
Rich and Highly Configurable Functionality. UltiPro has rich functionality built into the solution and provides
extensive capabilities for configurability. As a result, we have found that our customers can avoid extensive customizations and
yet are able to achieve a highly tailored solution to meet their specific business needs. Since UltiPro's feature-sets are unified,
our customers are able to streamline their management of the total employment cycle and can generate strategic HR and talent
management reports from UltiPro as their primary, central system of record for their employee data.
Flexible, Rapid System Setup and Configuration. UltiPro has been designed to minimize the time and effort required to
set up and configure the system to address individual company needs. Largely because our UltiPro solutions deliver extensive
functionality that can be configured to align with our customers' various business models with few customizations, our setup of
new customers is faster and simpler than implementations typical of legacy, on-premise software.
Reduced Total Cost of Ownership. We believe that the UltiPro solution provides cost saving opportunities for our
customers and that UltiPro is competitively priced. In addition, we believe that our current practices in activating the UltiPro
solution result in cost savings for customers when compared with implementations of other similar solutions in the industry.
The UltiPro customer may also reduce the administrative and IT support costs associated with the organization's HR, benefits
and payroll functions over time. Administrative costs can be further reduced by providing an organization with greater access to
information, streamlined HR processes and transactions, and control over reporting.
Modern Cloud-Native Technologies. We are consistently focused on evolving our cloud architecture, leveraging the
most appropriate technologies, platforms, and patterns to solve business challenges and deliver value to our customers. The
primary characteristics of our technology and cloud architecture are:
• Multi-Tenant SaaS offering. We take on the responsibility of delivery, maintenance, and upgrades. This allows us
to serve all of our customers from a single code base for each of our offerings, reducing complexity and
improving reliability.
• Cloud-Native Applications and Platforms. Micro-Service oriented applications deployed on robust Infrastructure
as a Service (IaaS) and Platform as a Service (PaaS) backed cloud platforms allow our offerings to scale and
better isolate themselves from failure, leading to more resilient and reliable solutions for our customers.
• A highly configurable platform that enables customers to achieve a tailored UltiPro experience for their businesses
without incurring the high expense of custom software.
• Extensible offerings that leverage web services and event-based integrations to expose functionality to the outside
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world, including an extensive network of partners.
Industry-leading tools, technologies and design patterns including, but not limited to, Microsoft .NET, Java/
Spring, Python, AngularJS, Openstack and Docker Containers to streamline the complexities of our HCM domain
and focus on how our users want to use UltiPro rather than expect them to change their behavior to accommodate
our product.
Rich End-User Experience, Ease of Use and Navigation. We design our products to be user-friendly and to simplify
the complexities of managing employees and complying with government regulations in the HR, payroll, and talent
management areas. UltiPro uses familiar, consumer-style navigation, which we believe makes our solution convenient and easy
to use. While traveling or out of the office, our customer's HR professionals, executives, managers, administrators, and
employees can manage payroll and employee functions and run reports by accessing UltiPro over the Internet or find answers
to key routine questions by using an UltiPro application on their mobile devices.
Comprehensive Customer Services and Industry-Specific Expertise. We provide several types of customer service:
cloud services, professional setup and activation services, customer support services, knowledge (or training) services, and a
group of optional service offerings we call Select Services that includes payment services (such as tax filing, garnishment
management and check printing), ongoing managed services, and other specific-need services such as filing the Patient
Protection and Affordable Care Act ("ACA") compliance documents for customers. The voice of our customers is incorporated
into all of our processes, and all of our services are designed to create a positive, proactive and productive UltiPro experience
for our customers. We have multiple avenues for our customers to give us feedback and recommendations on product
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enhancements, and we provide our customers a portal where they can choose to learn about UltiPro and Ultimate in the style
that best suits them - online webinars, videos, instructional documents, online chats, customer communities, and other vehicles.
We recognize the importance of issuing timely updates that reflect changes in tax and other regulatory laws and employ a
dedicated research team to track jurisdictional tax changes for more than 10,000 active tax codes included in UltiPro as well as
changes in other employee-related regulations.
Managed Services. As part of our mission to simplify the work lives of our customers’ human resources and payroll
people, we introduced UltiPro Managed Services in 2013. These managed services are now part of our Select Services offerings
and are designed for those customers who want to outsource some components of their HR, payroll, benefits, and HCM
technology management functions without sacrificing the control of, or access to, their employee data that they enjoy with our
cloud solution. Unlike other outsourced payroll or Human Resources Information System ("HRIS") services that typically take
a one-size-fits-all approach, our customers can select from a variety of payroll management, HRIS, and/or benefits management
services and combine them into a tailored bundle that best suits their unique needs.
UltiPro Standard Functionality and Optional Capabilities
UltiPro's standard functionality includes, but is not limited to, a set of role-based features that engage employees while
allowing HR generalists as well as benefits, compensation, and payroll managers and other business managers to develop,
coach, evaluate and reward their people and meet organizational objectives. Business intelligence along with system
configuration tools and integration capabilities support our customers' connections with third-party applications and providers.
UltiPro also includes employee relations tools for managing disciplinary actions and grievances, and health and safety
incidents.
In addition to UltiPro's HCM functionality, our customers have the option to purchase a number of additional
capabilities on a per-employee-per-month (“PEPM”) basis, which are available to enhance and complement the core
functionality of UltiPro and which are based on the particular business needs of our customers. These optional UltiPro
capabilities currently include (i) the talent acquisition suite (recruitment and onboarding); (ii) the talent management suite
(performance management, talent predictors, and succession management); (iii) learning management; (iv) employee
engagement surveys; (v) compensation management; (vi) benefits enrollment; (vii) time and scheduling management; (viii)
payment services; (ix) wage attachments; and (x) other optional features (collectively, “Optional Capabilities”), which are
described below.
Differences between capabilities available to our enterprise, mid-market and strategic customers are specified below.
Unless otherwise specified, capabilities are included in both our enterprise and mid-market offerings.
UltiPro's Standard HR/Payroll Functionality
UltiPro can act as the gateway to business activities for a company's executives, management team, HR/payroll staff,
administrators, and employees. Employees of customers can access UltiPro from standard web browsers such as Microsoft
Internet Explorer, Mozilla Firefox and Google Chrome, view information and perform tasks in a language of their individual
choice (most commonly English, Spanish, or French), set their personal preferences for the order and placement of home-page
content, and set up access to any available page in one click. Ultimate believes that UltiPro allows our customers to improve
service to their employees through better communications and to save time because managers and administrators can complete
hundreds of common employee-related tasks, including administering benefits, managing staff and accessing reporting and
business intelligence in real time, from one central solution. UltiPro also enables companies to provide secure, on-demand
access to company and personal information for their employees over the Internet.
UltiPro's Standard HR/payroll functionality includes, but is not limited to, the following:
Human Resources Management. UltiPro manages all aspects of a person and their employment relationship regardless
of where the employee resides. This includes personal details, skills and competencies, international identification documents,
employment history, employment contracts (for those employees in countries that require them), performance, job and salary
information, career development and preferences, and health and wellness programs. This allows single country or
multinational organizations to easily manage and report on worldwide headcounts, and other critical business metrics. In
addition, UltiPro facilitates the recording and tracking of key information for government compliance and reporting in the US,
Canada and many other countries. This includes the Consolidated Omnibus Budget Reconciliation Act (COBRA), the Health
Insurance Portability & Accountability Act (HIPAA), regulations implemented by the Occupational Safety & Health
Administration (OSHA), workers' compensation regulations, the Family Medical Leave Act (FMLA), the ACA, and Equal
Employment Opportunity (EEO) laws for the United States. UltiPro also enables compliance with HIPPAA confidentiality
requirements for protecting sensitive data such as employee social security numbers.
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Benefits Management. UltiPro allows companies to automate the administration of health, welfare, dental, vision, and
other benefits they offer their employees, including configuration and the matching of employee and employer contributions.
UltiPro also enables employees to check benefit options and coverage online. UltiPro eliminates the need for duplicate rules,
duplicate data entry, and reconciliation reporting because it stores details for deductions and benefit plans in one common table.
These features include rules for coverage, premium and employer match computations, and eligibility and participation
determinations. UltiPro also allows companies to maintain and administer paid time off allowances (including vacation, sick,
and holiday accrual computations), track leave-time taken, and facilitate the response to employee leave requests.
Payroll. UltiPro's payroll features a powerful engine that handles hundreds of payroll-related computations intended to
minimize the customer's need for side calculations or additional programming. UltiPro delivers complex wage calculations such
as average pay rates for overtime calculations, shift premiums, garnishments and levy calculations. With UltiPro, a company's
central payroll department, remote offices or multiple divisions can process payroll and can define and report on who completes
each specific processing step based on the exact needs of the organization, thus supporting appropriate segregation of duties.
All of this is managed through an easy-to-use dashboard of payroll tasks and statuses. To help our customers reduce the
complexities and errors associated with administrators manually assigning appropriate payroll taxes to employees in the United
States, Ultimate offers an embedded feature called Smart Tax Search™. Smart Tax Search™ leverages the latest GIS
(geographic information systems) technology to enable UltiPro to automatically assign the correct federal, state, and local
payroll taxation rules based upon the home and work addresses listed in UltiPro’s employee records.
Tablet-Based Time clock. UltiPro TouchBase, which was introduced in connection with our acquisition of
Employtouch (the "Employtouch Acquisition"), provides our customers an interactive mobile time clock device that collects
time punches, as well as highlights the information most critical to employees and managers via an engaging activity stream.
With UltiPro TouchBase, our customers can capture employee time on a touchscreen tablet device, collecting employee-
validated data for cost accounting and payroll; can leverage photos for accurate capture of employee time-entry, avoiding
'buddy punches'; and can validate transactions using PIN (Personal Identification Number) entry, HID (Human Interface
Device), RFID (Radio Frequency Identification), magnetic swipe or barcode.
Role-Based Self-Service. Authorized managers have self-service access to staff information such as salary,
compensation history, key dates and emergency contacts, with reporting and workforce analysis tools to facilitate decision-
making. A customer's managers can view and update staff information, manage department activities, post job openings,
leverage recruiting and hiring tools, and perform queries on workforce data. UltiPro's document management features can be
used to house and categorize employee-related documents such as drivers' licenses, consent forms, and completed I-9 forms
with required identification. Administrators, managers and employees have the ability to attach files in standard formats such as
Microsoft Word, PDF, JPEG, and spreadsheets to employee files. The documents can be grouped and sorted to individual
requirements, as necessary.
Employees also may be given immediate, security-protected access to view their own pay details on a mobile device
or the web, and benefits summaries, frequently used forms, and company information on the web. They can also update
personal information such as address, phone number, emergency contacts, and skills; change their preferences such as direct
deposit accounts and benefits selections; make routine requests such as asking for vacation time; and enroll in training.
UltiPro Business Intelligence. UltiPro Business Intelligence leverages a business intelligence platform from IBM
Cognos Corporation, a third-party provider, for built-in, ad hoc HR, payroll, and talent management reporting and analysis.
Accessed via the web, UltiPro Business Intelligence gives users the ability to access data across the UltiPro solution - from HR
and payroll to benefits administration and enrollment, compensation, talent acquisition and onboarding, talent management,
compliance, year-end data, and more_and enables them to create, modify, and distribute workforce-related reports and
automated notifications. UltiPro also includes a pre-configured data mapping library and pre-authored reports and analytics.
Controlled by role-based security, everyone in a customer's organization—from line managers to executives can have
immediate access to key workforce metrics, and they can personalize their own user experience to show the reports they want
to see and how they want to see them. We believe that UltiPro Business Intelligence gives our customers significant strategic
value for managing their workforce-related functions and saves them labor time and money by eliminating or reducing the need
for internal technology resources to generate hundreds of individual reports for disparate executive and management needs.
UltiPro Business Intelligence is available to manager roles on a mobile device or tablet to provide quick access to mobile
optimized reports and analytics. We also embed key data insights and visualizations in context of the application. These data
visualizations are developed as part of the core application and provide in-context support to decision-makers.
Other Key Capabilities. UltiPro's tracking of hours worked in payroll ties to UltiPro's benefits management, enabling
automatic calculation of employees' hours of service eligibility and providing HR leaders analytical insight into compliance risk
related to the ACA delivered via a Healthcare Eligibility Dashboard and our UltiPro ACA Toolkit. UltiPro includes system
configuration tools such as graphical workflow configuration and platform configuration to allow customers to extend UltiPro
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with secure, personalized and reportable fields. Conditional workflow enables organizations to authorize HR/payroll staff,
managers, or supervisors to manage key HR processes with multiple approvals via UltiPro, expediting business activities such
as hiring an employee or making a salary increase. UltiPro workflow is configurable based on customer need and includes
numerous pre-configured processes based on industry best-practices. In addition, UltiPro offers role-based security, flexible
business rules, and an easy-to-use content management tool. System administration is designed to enable non-technical users to
administer UltiPro's role-based security, built-in conditional workflow, and system business rules, as well as to enable system
administrators to post company communications, link to external web sites and tailor functionality to reflect the customer's own
company user experience requirements. Broadcast communications tools are available and can leverage employee qualifiers in
UltiPro for distribution of mass communication emails to ensure accurate recipients and the trackable follow-up and/or
acknowledgment often required with regulated notifications. Enterprise Integration Tools also are included to provide the
ability to interface with third-party cloud and on-premise applications and providers such as general ledger, payment services,
time clocks, banks, 401(k) and benefits providers, check printing services and unemployment management services. Delivered
integrations are also available to customers through UltiPro Connect and the UltiPro Developer Network of preferred partners
to facilitate extending their UltiPro and third-party data across multiple systems.
UltiPro Predictors. The UltiPro predictive analytics solution is a key part of the core UltiPro suite where predictive
metrics and indicators are available to support manager decisions. The predictors are based on statistical algorithms we
developed over the course of more than two years and validated with numerous customers. UltiPro’s predictive metrics help
managers to determine the best actions to take for further developing or changing the career trajectory of employees reporting
to them, thereby helping organizations to reduce turnover and improve employee engagement. For example, organizations can
set tolerances for certain predictive metrics in our UltiPro Retention Predictor™, giving a manager or HR generalist the
ability to see immediately if an employee exceeds the tolerance level they have defined as "at risk of leaving" and, thereby,
providing them an early warning to take an appropriate action to increase the chances of that employee staying. In addition to
our UltiPro Retention Predictor, the solution includes an UltiPro High Performer Indicator™, which identifies employees who
consistently receive high pay raises, and an UltiPro High Performer Predictor™, which ranks employees predicted to be high
performers based upon a number of variables tracked in UltiPro, and the UltiPro Engagement Indicator which provides insight
into an employee’s level of engagement at their organization. To assist managers in identifying and tracking key actions
designed to increase the engagement and retention of team members, UltiPro Leadership Actions prompt a leader to intervene
in a positive and proven-to-be effective fashion, based on best practices in talent management.
UltiPro's Optional Capabilities
UltiPro Talent Acquisition is a suite of add-on products comprised of Recruitment and Onboarding.
i) Recruiting. The Ultimate team designed our recruiting solution to transform the recruiting process by
increasing candidate engagement and simplifying the work of recruiters. Built to be candidate-centric, UltiPro
Recruiting has a consumer-like interface to attract and keep top talent engaged, with the goal to reduce the typical 40
percent to 80 percent online application drop-off rate typically occurring with traditional applicant tracking solutions.
Rather than being restricted to limited profile information and résumés typical of traditional solutions, candidates can
build an in-depth online presence that gives recruiters and hiring managers a more complete understanding of who
they are and their abilities. UltiPro Recruiting includes an appealing user interface, gamification, and collaboration
tools. It is fully mobile and integrates with popular social networks such as LinkedIn and Twitter. At the same time,
UltiPro Recruiting automates the recruiting process for hiring managers, recruiters, and HR staff by enabling them to
track and manage standard recruitment tasks such as posting open jobs, reviewing résumés, screening candidates, and
scheduling interviews.
ii) Onboarding. UltiPro Onboarding is a comprehensive solution that provides employers the ability to
engage and welcome new employees into an organization before the first day of work and to speed their time to
productivity. UltiPro Onboarding enables dynamic content such as video messages from executives, managers, and co-
workers and gives new hires the ability to connect with fellow team members, request a mentor, engage in self-
directed learning through a feature called ‘Unlock Your Potential,’ and complete required and compliance-related
documents. The solution is easily configurable to meet the specific needs of an organization and includes such
activities as obtaining required government and procedural paperwork, including electronic signatures and document
storage; provisioning necessary equipment and job-specific tools such as office location, computer equipment, and
uniforms; ensuring enrollment in necessary training programs; and familiarizing new hires with the employer's core
values and business objectives.
UltiPro Talent Management is a suite of add-on products comprised of Performance Management, Talent Predictors, and
Succession Management.
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i) Performance Management. UltiPro Performance Management helps companies maximize the development
of their people and improve employee satisfaction by automating and enhancing the performance process, using
competency-based employee development. UltiPro Performance Management streamlines the processes of evaluating
performance and completing performance reviews, validating competencies, identifying top performers for succession
planning, and tracking and executing coaching, training and development plans. The solution also supports a
continuous process of capturing real-time employee feedback from a social network and, through our mobile solution,
makes goal management and access to talent profile information, employee observations, and journaling convenient
for employees and managers alike.
ii) Succession Management. With UltiPro Succession Management, organizations can involve company
leadership, managers, and individuals in an ongoing, collaborative process of succession planning. Employees can
manage their own talent profiles-updating factors that influence succession readiness such as mobility preferences,
languages, education, accomplishments, and competencies-to ensure that leadership has a deeper understanding of the
talent landscape at their organization. Visible to employees and managers, UltiPro's employee “talent card” provides a
consolidated and comparative view of multiple succession-readiness factors, which then can be used in both decision-
making and career development processes.
Other Optional Capabilities include, but are not limited to, the following products, which are supplemental to
UltiPro's standard HR/payroll capabilities:
UltiPro Learning. Through a strategic partnership, Ultimate has the right to market and distribute an independent
third party's learning management product as part of the UltiPro solution. We have branded this product UltiPro Learning.
Ultimate is the single-source contact for customer implementations and ongoing solution support for UltiPro Learning. It is
both web-based and mobile and is integrated with UltiPro's HR and talent management functionality. UltiPro Learning is a
new approach to learning that supports the collaborative and on-demand nature of learning demanded by employees today.
UltiPro Learning allows organizations to create, curate, and deliver learning content to employees and other members of the
extended enterprise to meet their professional and personal learning needs. Customers can also create learning academies to
meet specific organizational needs.
UltiPro Perception. UltiPro Perception was introduced as part of the acquisition, made in the third quarter of 2016,
of Kanjoya, Inc. ("Kanjoya"), a California corporation (the “Kanjoya Acquisition”), located in San Francisco, California.
UltiPro Perception offers a modern way to collect and understand feedback through employee surveys and in-depth analytics
of that data for HR and managers. The solution enables organizations to solicit feedback from employees in both structured
and unstructured forms. Using the power of the ingrained Natural Language Processing (NLP) engine, UltiPro Perception
analyzes feedback in a variety of ways, providing leaders a deeper understanding of employee sentiment while safeguarding
employee privacy and anonymity. The built-in analytics allow everyone from HR and company executives to individual
managers to view and gain a deeper insight into employee sentiments, identify employee feedback trends, and compare team
results. These insights provide the basis for organizations to take appropriate action tailored to the needs of both teams and
leaders, with the objective to improve engagement, satisfaction, and retention.
UltiPro Compensation Management. UltiPro Compensation Management includes Salary Planning, Salary Budgeting
and Incentive Compensation Plans capabilities. This expanded solution is designed to support executives, managers and
compensation analysts working with salary increase allocations and to incentivize employees by giving them visibility into
their individual compensation plans. Highly configurable, including multi-currency and pro-ration capabilities, UltiPro
Compensation Management makes it easy for companies to manage their unique compensation plans and salary award
processes with flat amounts, percentages and unit-based compensation such as restricted stock unit awards. Managers can
review their salary budgets and merit pool guidelines and determine the best way to allocate pay increases to their employees
within their approved budget parameters. Once managers decide on the allocations, the related pay increases and awards are
automatically submitted, approved and updated to UltiPro Payroll.
UltiPro Benefits Enrollment. With UltiPro Benefits Enrollment, employees can enroll in the appropriate benefit plans
for their individual needs online, either at work or from home, during defined open enrollment periods. Employees can also
choose to quickly renew their benefits in a single click and are guided to make the right selections based on prerequisites that
link benefit plans together. UltiPro mobile capabilities enable employees to update their retirement contributions on the go.
Benefits administrators can configure the enrollment process and messaging to make the process easy for employees and can
monitor the enrollment progress. UltiPro Benefits Enrollment also guides employees through the benefit and personal
information changes necessary as a result of life events such as getting married, having a baby or moving. UltiPro also delivers
more than 70 predefined Benefit Carrier templates to facilitate the electronic feeds required for insurance carriers and plan
administrators, reducing the need for manual reporting of employee census information, participant coverage, and billing
reconciliation.
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UltiPro Benefits Prime. Ultimate has the right to market and distribute an independent third party's benefit
administration, decision support, and enrollment product as part of our UltiPro solution. We have branded this product UltiPro
Benefits Prime. Benefits Prime serves as an optional advanced benefit solution that focuses on simplifying the administration of
complex plan rules and improving the employee enrollment experience. Through in-depth education and personalized
recommendations, UltiPro Benefits Prime helps employees better understand the benefits options available to them. With an
easy-to-navigate solution, robust tools for administrators, and connections with hundreds of carriers, UltiPro Benefits Prime
delivers consumer-grade benefits shopping and decision-support capabilities for an organization’s employees, along with
advanced benefits billing, compliance, reporting and ongoing support for the benefits administrator. Organizations can
configure the solution to support diverse programs, automate processes, ensure compliance, and engage employees. Ultimate is
the single-source contact for customer implementations and ongoing solution support for UltiPro Benefits Prime, and it is
integrated with core UltiPro HR and Payroll capabilities.
UltiPro Time, Attendance, and Scheduling (designed for enterprise companies). Through a strategic partnership, we
have the right to market and distribute an independent third party's time and labor management product as part of the UltiPro
solution. We have branded this product as UltiPro Time and Attendance, marketing the components as UltiPro Time and
Attendance, UltiPro Leave Management, and UltiPro Workforce Scheduling (collectively, “UTA”). Ultimate is the single-
source contact for customer implementations and ongoing solution support for UTA. UTA is web-based and integrated with
UltiPro's payroll, HR, and benefits functionality. UltiPro Time and Attendance tracks time and attendance labor metrics and
supports a variety of time-capture mechanisms. UltiPro Leave Management includes all of the functionality required to
effectively track and manage employee leave. UltiPro Workforce Scheduling features industry-specific employee scheduling
options to ensure that organizations in different environments deploy employees in an efficient and legislatively compliant
manner.
UltiPro Time Management (designed for mid-market and strategic companies). UltiPro Time Management delivers the
functionality and flexibility needed to manage employee time and attendance efficiently and provides web access to real-time
employee time and labor information. UltiPro Time Management provides companies with the tools to proactively prevent
issues that negatively impact business performance, such as employee coverage gaps, labor law violations, and excess labor
spending. Fully integrated scheduling, time and attendance, and leave management capabilities reduce payroll expenditures and
streamline payroll and workforce management processes.
UltiPro Workforce Management. The UltiPro Workforce Management suite is a limited release of UltiPro Time and
UltiPro Scheduling applications, which was new in 2017. It is fully integrated with UltiPro Payroll and is designed to deliver a
relatively effortless experience for time tracking and scheduling for employees at every level. The solution reduces the need for
supportive resources; increases visibility into time off, allowances, and work schedules; and elevates the convenience of time
tracking through features such as mobile access and in-app messaging between managers and employees. UltiPro Workforce
Management removes the demands and roadblocks of traditional labor management systems by requiring minimal human
interactions and proactively presenting relevant information to enable employees to quickly manage their own time and
schedules.
UltiPro Payment Services. We have the right to market and distribute an independent third party's tax filing solution
that we have branded UltiPro Payment Services (“UltiPro Payment Services”). With this solution, companies are able to meet
all Federal, state, and local payroll tax filing obligations quickly and easily. The UltiPro solution saves payroll staff time by
eliminating the administrative burdens associated with tax filing. UltiPro Payment Services enables businesses to deposit
federal, state, and local tax payments for more than 10,000 active tax codes via electronic funds transfer or check and automates
filing for monthly, quarterly, and annual tax returns.
UltiPro Wage Attachments. For organizations required to process third-party payments on behalf of their employees
for items such as child support, tax levies, and creditor garnishments, UltiPro Wage Attachments provides the means to
effectively streamline and manage the payment process. UltiPro Wage Attachments eliminates the burden associated with
payments to third parties by using information entered and calculated in UltiPro, so there is no need to manage payment
processing or analyze varying disbursement schedules for multiple jurisdictions. We ensure that each third-party payment is
made according to the designated payment method and reaches its required destination within the assigned timeframe.
Patient Protection and Affordable Care Act (ACA) Compliance. In the fall of 2015, Ultimate began deploying an ACA
Toolkit that enables our customers to comply with ACA regulations by the 2016 deadline. The toolkit is embedded in UltiPro
and automatically populates the Forms 1094-C and 1095-C with the appropriate employee, benefits, and organization
information. In addition, Ultimate offers our customers additional optional ACA-related services branded UltiPro ACA
Employer Services. These include such services as printing and electronic filing of 1094-C and 1095-C forms with the IRS on
our customer’s behalf and ongoing proactive monitoring and managing of employee eligibility alerts, notices, and penalty
responses.
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Other Optional Capabilities. We offer a number of additional HR and payroll-related services to extend the value of
UltiPro, including test environment services, W-2 print services, pre-employment screening, paycheck modeling, pay cards,
unemployment tax management, employment verification services, employee assistance, health and wellness, and work/life
balance programs. In addition, we offer UltiPro Federated Single Sign-On for standards-based identity management by
leveraging Microsoft's Active Directory Federated Services infrastructure as well as single-sign-on capabilities through our
partner Ping Identity. These solutions help improve and simplify data security by enabling individuals to use a single login
credential (such as a network login) to seamlessly access UltiPro over the Internet.
Technology
We strive to use the most modern and capable technologies available for delivering solutions that are flexible, easy to
use, fast, and secure. Major characteristics of our cloud application platform include, but are not limited to, the following:
Multi-tenancy. As a SaaS provider, we use a multi-tenant cloud model that allows us to support multiple customers on
a single set of systems while maintaining performance, security, and reliability. We manage and maintain our solutions for our
customers, including all hardware and software upgrades. Our customers benefit by reducing their need to keep their own IT
resources on staff for UltiPro solutions. Our cloud customers also benefit from having the most current version of UltiPro
installed as soon as it is available.
Configurability. We have invested in our own technology and approaches for enabling application and system
configurability, giving our customers the ability to achieve a highly tailored solution while minimizing or eliminating the need
to create custom code.
Openness and Connectivity. We leverage widely adopted technology and industry standards for exposing data and
functionality via application programming interfaces (APIs). Customers can access their HCM data based on these standard,
open, and secured connections in order to link to their in-house systems, third-party cloud applications, and other systems that
require data feeds such as benefits providers. Our UltiPro Carrier Network (UCN) leverages industry-leading solutions from
Informatica, allowing Ultimate to create standard, reusable connectors that support the unique data transfer requirements of
individual benefits providers, simplifying both the development and maintenance of these connections. Ultimate also supports a
number of pre-packaged connectors for solutions that expand or extend the functionality included in UltiPro. These packaged
integrations include, but are not limited to: Yammer, a provider of enterprise social networking solutions; CERTPOINT, a
provider of learning management solutions; and Ping Identity, which offers single-sign-on capabilities for business applications.
Domain-Driven, User-Centered Design. Our solution design approach includes domain-driven design, which provides
a streamlined process for developing software with the complexities of an HCM domain in alignment with the principles of a
service-oriented architecture (SOA). A key focus of our user-centered design is to optimize the overall user experience of our
customers and to maximize user engagement. We have invested significant resources in usability design and testing to create a
consumer-grade experience that is flexible, responsive, and personalized. In the design of the user-experience, our emphasis is
on how users want to use the product rather than the expectation that users will change their behavior to accommodate the
product.
Mobile-Centric User Experience. In addition to the user experience capabilities available through Microsoft.NET,
Ultimate uses Hypertext Markup Language version 5 (HTML5) and responsive web design approaches to deliver flexible user
experiences for smartphones and tablets. This mobile framework supports applications delivered through multiple browsers and
automatically adapts to screen size and orientation and takes advantage of gesture-based capabilities. Other features of our
mobile-centric user experience include search for both people data and functionality, configurability for individual users that
allows them to drag and drop individual content 'gadgets' and menu controls, and favorite-specific functionality for quick
access.
Workflow. Ultimate supports numerous transactions and operational processes for our customers. These processes are
frequently unique to an individual customer and typically require multiple steps, approvals, data input, and confirmations. To
support our customers' unique requirements, UltiPro includes configurable business process automation, or workflow, which
enables customers to automate processes based on their own needs and change these processes over time without custom
software code.
Business Intelligence. Ultimate provides sophisticated data query and report authoring via IBM Cognos, a leading
suite of business intelligence tools. Our customers can access reports and conduct data queries from a web browser and are able
to apply on-line analytical processing to multidimensional data cubes for exploring data on employees graphically and
statistically from diverse angles. We maintain a link between Cognos' report catalog and UltiPro's data dictionary, eliminating
the necessity for customers to create and maintain ad hoc reporting catalogs on their own. We also maintain a BI Exchange, an
online community where Ultimate professionals and customers can post, download, and share standard reports. We have unified
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security for the data elements across UltiPro and Cognos instances so that role-based security controls data access across both
solutions. We also provide single sign-on to simplify and secure user access.
Data Centers for Cloud Offering
Our cloud offering provides web-based access to comprehensive HCM functionality for organizations that want to
simplify delivery and support of their business applications. As a part of our cloud offering services, Ultimate provides the
hardware, infrastructure, ongoing maintenance and backup services for our customers at four data centers. The data center
located near Atlanta, Georgia, is owned and operated by Quality Technology Services (“QTS”). The data centers located near
Toronto and Vancouver, Canada, are owned and operated by Cyxtera Technologies ("Cyxtera") (formerly CenturyLink
Technology Services ("CenturyLink") ), and the data center located in Phoenix, Arizona, is owned and operated by IO Phoenix
One, LLC.
Ultimate's use of the data center located near Atlanta, Georgia, is governed by a Master Space Agreement dated
February 2, 2012 with Quality Technology Services Metro, LLC (“QTS Metro”). Pursuant to the terms of the QTS Agreement,
Ultimate may from time to time submit orders for the use of certain physical space within the data centers for hosting Ultimate's
hardware equipment, as well as Internet connectivity services, security, power and generator back-up, environmental controls
and access controls. The QTS Agreement provides that any service order will automatically renew for successive renewal
terms, unless either party notifies the other party in writing at least sixty days prior to the end of the then current term that there
will be no such renewal. Furthermore, the QTS Agreement may be terminated at any time by either party thereto, if: (i) the non-
terminating party breaches any material term of such QTS Agreement and fails to cure such breach within 10 days after receipt
of written notice; (ii) the non-terminating party becomes the subject of a voluntary or involuntary proceeding relating to
insolvency, bankruptcy, receivership, liquidation, or reorganization; or (iii) a court or other government authority having
jurisdiction over the services prohibits the furnishing of services governed by such QTS Agreement.
Ultimate's use of the data centers located near Toronto and Vancouver, Canada, are governed by a Master Services
Agreement dated April 30, 2013 (the “CenturyLink Agreement,” now known as Cyxtera) between Ultimate's wholly owned
subsidiary Ultimate Canada and CenturyLink. Pursuant to the terms of the CenturyLink Agreement, Ultimate Canada has use of
certain physical space within the data center for hosting Ultimate Canada's hardware equipment, as well as Internet connectivity
services. The CenturyLink Agreement contains provisions relating to data security and access to the data center. Upon placing a
service order, Ultimate Canada is guaranteed certain pricing terms and is committed to minimum usage levels for a period of at
least 36 months from the effective date of April 1, 2016, per an addendum entered into by both parties to extend the term of the
original agreement. The CenturyLink Agreement will renew on a month-to-month basis unless either party gives at least sixty
days written notice prior to the completion of the applicable term that there will be no such renewal. The CenturyLink
Agreement provides that its term will end upon the expiration of the term of the last-executed service order. Ultimate has
guaranteed the payment of all amounts due from Ultimate Canada to CenturyLink under the CenturyLink Agreement.
Ultimate's use of the data center located near Phoenix, Arizona is governed by a License and Master Services
Agreement dated February 27, 2012 (the "IO Phoenix Agreement") with IO Phoenix One, LLC. Pursuant to the terms of the IO
Phoenix Agreement, Ultimate has use of certain physical space within the data center for hosting Ultimate's hardware
equipment, as well as Internet connectivity services. The IO Phoenix Agreement contains provisions relating to data security
and access to the data center. Ultimate is guaranteed certain pricing terms through the initial term of the agreement, and is
committed to minimum usage levels for a period of at least 42 months from November 1, 2014, the effective date of an
addendum entered into by both parties to extend the term of the original agreement. The IO Phoenix Agreement will
automatically renew thereafter for additional terms of one year unless either party gives written notice prior to the completion
of the applicable term that there will be no such renewal. Ultimate must give written notice within 60 days while IO Phoenix
must give written notice within 120 days.
Pricing
Our cloud offering is designed to provide an appealing pricing structure to organizations that prefer to minimize the
initial cash outlay associated with typical capital expenditures for traditional on-premise products. Our cloud customers
purchase the right to use UltiPro on an ongoing basis for a specific term in a shared or dedicated hosted environment, and the
arrangement can typically be renewed after its initial term has expired. In the shared environment, Ultimate provides an
infrastructure with servers shared among many customers who use a web browser to access the application software through
the related data center. In the dedicated environment, the customer does not share servers with other customers but rather has its
own set of servers. The pricing for our cloud offering, including both the hosting element as well as the right to use UltiPro, is
on a per employee per month ("PEPM") basis.
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Research and Development Activities
Ultimate incurs research and development expenses, consisting primarily of software development personnel costs, in
the normal course of our business. Such research and development expenses are for enhancements to our existing products and
for the development of new products. During 2017, 2016 and 2015, we spent $203.2 million, $158.5 million and $120.0
million, respectively, on research and development activities, gross of capitalized software. During 2017, 2016 and 2015, $52.6
million, $37.9 million and $26.3 million, respectively, of research and development expenses were capitalized for computer
software development costs related to an internal-use development project (the "Development Project") that is expected to be
offered in the future. Components of the overall capitalized Development Project, become ready for their intended use
throughout the life cycle of the Development Project. The first component became ready for its intended use during May 2014
and other components have become ready for their intended use since 2014. Amortization for the components of the
Development Project that are completed will begin when they are ready for their intended use and will be included with cost of
recurring revenues in our consolidated statements of income once amortization commences.
Customer Services
The National Customer Service Association named Ultimate’s services team Service Organization of the Year in the
large business category in 2017, and the Stevie Awards recognized our services team with a 2017 People’s Choice Award for
Favorite Customer Service in the Computer Services category. Stevie Awards also recognized Ultimate with Silver Awards for
Customer Service Department of the Year, Innovation in Customer Service, and the 2017 Innovation Award. Network Products
Guide named Ultimate’s services team the “Best Customer Service Department of the Year” in its 2016 IT World Awards, and
the Technology Services Industry Association recognized our services team for “Innovation in Transformation of Support
Services” in its 2016 TSIA Star Awards.
We believe that our focus on delivering our customers a positive and productive UltiPro experience has differentiated
Ultimate in the marketplace and is critical to the quality of Ultimate's comprehensive service solution. We provide our customer
services in two broad categories: (i) professional services and (ii) customer support services and product maintenance.
Additionally, we provide services associated with the delivery of our cloud-based solutions. These services include, but are not
limited to, purchasing and supporting hardware and system software; installing new versions of UltiPro; and backing up
customer data.
Professional Services. Ultimate's professional services include system setup and activation (i.e., implementation),
executive relationship management (“ERM”), and knowledge management (or training) services. We believe that our setup and
activation consulting services are differentiated from those of other vendors by speed, predictability and completeness. Our
successful record with rapid system activation and implementations is due, we believe, to our standardized methodology,
consultants, highly configurable product functionality, and comprehensive conversion and integration tools.
Ultimate has a primarily long-tenured team of functional and technical consultants who are dedicated to assisting
customers with rapid deployments. In addition, we provide our customers with the opportunity to participate in formal training
programs conducted by our learning team (on-site and virtual), including online self-paced courses, "Quick Tours," and on-
demand training. Training programs are designed to increase our customers' ability to use the full functionality of our products,
thereby maximizing the value of our customers' investments. Courses are designed to align with the stages of product launch
and to give attendees hands-on experience with UltiPro. Trainees learn such basics as how to enter new employee information,
set up benefit plans and generate standard reports, as well as more complex processes such as defining company rules,
configuring the system and creating custom reports. Ultimate maintains training facilities in Atlanta, Georgia; Schaumburg,
Illinois; Santa Ana, California; and at our headquarters in Weston, Florida. Ultimate rents training facilities in other locations,
such as Dallas, Texas; Toronto, Canada; and other cities on an as-needed basis. After our customers have processed their first
live payroll using UltiPro (referred to as going “Live”) and have been turned over to our customer support and maintenance
program, we assign a customer relationship manager to the account to assist customers obtaining maximum value of the UltiPro
solution, connect with other Ultimate users and advanced business analytics. The ERM team also focuses a large portion of its
time on customer retention, which is an important aspect of Ultimate's long-term business model.
Customer Support. We offer comprehensive and on-going support services to all of our UltiPro customers. Ultimate
had a recurring revenue cloud customer retention rate which was approximately 96% in 2017. Ultimate's customer support
services include: software updates that reflect tax and other legislative changes; a named customer service representative;
telephone support 24 hours a day, 7 days a week; unlimited access to Ultimate's employee tax center on the web; seminars on
year-end closing procedures; a customer blog; and periodic newswire emails. In addition, our customer support services team
maintains a Customer Success Portal for our customers where customers can submit inquiries and service requests as well as
search a knowledge base of information for instant answers to questions, holds an annual national user conference and arranges
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for Ultimate professionals to attend smaller, user-organized user group meetings on a routine basis throughout the United
States.
Customers
As of December 31, 2017, Ultimate provides our UltiPro solutions to more than 4,100 customers with more than 37
million people records in our cloud. Ultimate's customers represent a wide variety of industries, including manufacturing, food
services, sports, technology, finance, insurance, retail, real estate, transportation, communications, healthcare and other
services. For each of the three years ended December 31, 2017, no customer accounted for more than 10% of total revenues.
Sales and Marketing
We market and sell our products and services primarily through our direct sales force.
Our direct sales force includes business development vice presidents, directors and managers who have defined
territories, typically geographic. The sales cycle begins with a sales lead generated through a national, corporate marketing
campaign or a territory-based activity. In one or more on-site visits, phone-based sales calls, or web demonstrations, sales
managers work with application and technical sales consultants to analyze prospective client needs, demonstrate Ultimate's
UltiPro solutions and, when required, respond to requests for proposals. The sale is finalized after customers complete their
internal sign-off procedures and the terms of the contract are negotiated and signed.
With a sale of the cloud offering, the agreement generally requires PEPM fees based on company size, and bundled
fees for implementation and training. Typical payment terms include a deposit at the time the contract is signed and ongoing
PEPM payments on specific payment dates designated in the contract, usually tied to the Live date.
We support our sales force with a comprehensive marketing program that includes public relations, advertising, direct
mail, trade shows, seminars and workshops, email marketing, social media marketing, and web marketing. Working closely
with the direct sales force, customers and strategic partners, our marketing team defines positioning strategies and develops a
well-defined plan for implementing these strategies. Our marketing services include market surveys and research, overall
campaign management, creative development, demand generation, results analysis, and communications with field offices,
customers, and marketing partners.
Intellectual Property Rights
Ultimate's success is dependent, in part, on our ability to protect our proprietary technology. We rely on a combination
of copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish
and protect our proprietary rights. We do not have any patents or patent applications pending.
Competition
The market for our products is highly competitive. Our products compete primarily on the basis of technology,
delivered functionality, price/performance and service.
Ultimate's competitors in our enterprise market include (i) large service bureaus, primarily Automatic Data Processing
Inc. (“ADP”) and, to a lesser extent, Ceridian; and (ii) companies, such as Oracle, Lawson, and Workday that offer human
resource management and payroll software products for use on mainframes, client/server environments and/or in the cloud. In
our mid-market and strategic market, Ultimate's competitors include primarily payroll service providers, such as ADP, Paychex,
Ceridian, Paycom and Paylocity.
Backlog
Backlog consists of our UltiPro cloud-based solutions under signed contracts for which the services have not yet been
delivered. Our backlog amounts include the full contract value of sales to our customers that have not yet processed their first
payroll using UltiPro and are not indicative of the annual recurring revenue value of such sales. Backlog can vary from one
year to the next when the average contract period fluctuates significantly. At December 31, 2017, Ultimate had backlog of
$456.2 million compared with $399.9 million as of December 31, 2016. Ultimate expects to fill approximately $392.2 million
of the backlog during 2018. Ultimate does not believe that backlog is a meaningful indicator of sales that can be expected for
any future period. There can be no assurance that backlog at any point in time will translate into revenue in any subsequent
period.
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Employees
As of December 31, 2017, Ultimate employed 4,208 people. Ultimate believes that our leadership's relationships with
employees are good. This belief is validated by Ultimate’s #1 ranking in the large company category of Fortune magazine’s
2018 list of 40 Best Workplaces in Technology, our third consecutive year to be recognized as #1, and Ultimate's # 3 ranking on
Fortune's 2018 list of 100 Best Companies to Work For, our seventh year to be ranked in the top 15. Ultimate was also ranked
#2 on Indeed’s 2017 list of Best Companies to Work for in the U.S. and #10 on Glassdoor’s large-company list of Best Places to
Work in 2018. In 2017, Ultimate was ranked #1 on Fortune's 100 Best Workplaces for Millenials list. Other high rankings on
2017 Fortune lists, based primarily on employee survey feedback, were: #2 on 100 Best Workplaces for Women, #3 on Best
Workplaces for Diversity, #2 on 50 Best Workplaces for Parents, and #7 on 50 Best Workplaces for Giving Back. Ultimate has a
history of good employee relationships as confirmed by consistently high ratings of our workplace culture by third parties over
the years. As far back as 2008 and 2009, when Ultimate was a smaller company, the Great Place to Work Institute ranked
Ultimate the #1 Best Place to Work in America among medium-sized companies for both years. When Ultimate exceeded 1,000
employees in size and became eligible for Fortune’s large company lists, Fortune ranked Ultimate #25 on its 2012 100 Best
Companies to Work For list, #9 on its 2013 list, #20 on its 2014 list, #21 on its 2015 list, and #15 on its 2016 list. However, we
know competition for qualified employees in the technology sector and Ultimate's HCM industry, in particular, is intense.
Ultimate’s management team recognizes that our future success will depend, in part, on our continued ability to attract, hire and
retain qualified people.
Available Information
Ultimate's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy
statements and amendments to those reports and any registration statements, including but not limited to registration statements
on Form S-3, are available free of charge on Ultimate's website at www.ultimatesoftware.com as soon as reasonably practicable
after such reports are electronically filed with the Securities and Exchange Commission (“SEC”). Information contained on or
accessible through Ultimate's website is not part of this Form 10-K. You may record and copy any materials we file with the
SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains the reports, proxy and information statements and other information regarding us that we file with the SEC. You can
access the SEC's website at www.sec.gov.
Item 1A. Risk Factors
Ultimate operates in a rapidly changing and dynamic business environment that involves risk and uncertainty. The
following discussion is a description of risks and uncertainties associated with our business that could cause, or contribute to
causing, actual results to differ materially from expectations. These are not all of the risks we face. We may be adversely
affected by risks not currently known or that we currently consider immaterial.
Our failure to maintain and increase acceptance of UltiPro, which accounts for substantially all of our revenues, could
cause a significant decline in our revenues.
Currently, the UltiPro solutions, including the UltiPro standard/HR payroll product and Optional Capabilities and
related services, account for substantially all of our revenues. Our future success depends on maintaining and increasing
acceptance of UltiPro. Any decrease in the demand for UltiPro would have a material adverse effect on our business, operating
results and financial condition.
If we are unable to enhance our products and develop new services, our revenue growth may be harmed.
Our ability to attract new customers and increase revenue from existing customers will depend in large part on our
ability to enhance and improve our existing UltiPro product suite and Optional Capabilities and to introduce new features and
Optional Capabilities to our product offering. The success of any enhancement or new feature depends on several factors,
including the timely completion, introduction and market acceptance of the enhancement or service. If we are unable to develop
enhancements and introduce new features and Optional Capabilities to our existing products in a cost-effective manner that
keeps pace with rapid technological developments, our business could be adversely affected. If we are unable to successfully
develop, acquire new services or enhance our existing products to meet customer requirements, our revenues may not grow as
expected.
Due to the method of accounting for sales from our cloud offering, a change in the period of the time from contract date to
the Live date (“Time-to-Live”) could negatively impact the amount of recurring revenues recognized in a reporting period.
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Sales production, as it pertains to sales of cloud units, is not reflected in recurring revenues and related variable costs
in our consolidated statements of income typically until the related customer goes Live. In our internal business model, we
make certain assumptions, among other things, with respect to future sales production, revenue growth, variable costs,
personnel costs and other operating expenses.
Our expectations for recurring revenue growth are typically established based on combinations of actual sales
production (for those units that have been previously sold but have not yet gone Live) and expected future sales production,
together with expectations as to the Time-to-Live periods. Estimates for Time-to-Live periods are usually based on (i) specific
estimates (for certain backlog sales) provided by our field personnel, which estimates include factors and assumptions that are
not within the control of our field personnel; and (ii) estimates for Time-to-Live periods for other cloud sales (including backlog
sales without specific estimates at that point in time), as well as expected sales, which are typically based on assumptions
derived from our historical Time-to-Live periods. These estimates are adjusted periodically, and prospectively, based on
management’s assessment of Time=to-Live for backlog sales at that point in time. Factors that could impact the estimates for
Time-to-Live periods include, but are not limited to, customer size (as larger customers may have longer implementations, tend
to go Live on more UltiPro features and have more interface and integration requirements), and the number of complementary
products sold in addition to UltiPro to a single customer, which in some cases involve customers’ desire to go Live on all
products at once, as compared with UltiPro first followed by complementary products.
To the extent there are changes in the underlying assumptions which drive Ultimate’s expected revenue growth from
cloud sales, which include, but are not limited to, actual sales production achieved and changes in Time-to-Live periods, our
recurring revenues and services revenues, as reported in our consolidated statements of income, could differ materially from
levels we expected to achieve.
A systems failure or other service interruption at the data center owned and managed by QTS, the data centers owned and
managed by Cyxtera (formerly known as CenturyLink), and the data center owned and managed by IO Phoenix One, LLC
and used for our hosting services could result in substantial expense to us, loss of customers and claims by our customers
for damages caused by any losses they incur.
We offer hosting services, which include hardware, infrastructure, ongoing maintenance and back-up services, to our
customers in the United States at a data center owned and operated by QTS, at a location near Atlanta, Georgia and at a data
center owned and operated by IO Phoenix One, LLC near Phoenix, Arizona. We also offer hosting services, which include
hardware, infrastructure, ongoing maintenance and back-up services, to our customers with employees exclusively in Canada at
two data centers owned and operated by Cyxtera (formerly known as CenturyLink), one near Toronto, Canada and one near
Vancouver, Canada.
These hosting services, which are provided as part of our cloud offering, must be able to be reliably operated on a 24
hours per day, seven days per week basis without interruption or data loss. The success of the cloud offering depends on our
ability to protect the infrastructure, equipment and customer data files against damage from:
• Human error;
• Natural disasters;
•
•
• Unforeseen interruption or damages experienced in moving hardware to a new location.
Power loss or telecommunication failures;
Sabotage or other intentional acts of vandalism; and
We perform a daily backup of our customer data which is stored offsite of the data centers. In addition, QTS has
implemented various activities comprising QualityTech’s Business Continuity Planning & Disaster Recovery Program which
includes risk assessment and business impact analysis, redundancy and crisis and emergency response procedures. Cyxtera also
has a Business Continuity Program which handles business continuity planning, incident management and site emergency
action planning. However, the occurrence of one of the above listed events or other unanticipated problems at any of the data
centers could:
• Result in interruptions in the services we provide to our customers, during which time our customers may be
unable to retrieve their data;
• Require us to spend substantial amounts of money replacing existing equipment and/or purchasing services from
an alternative data center;
• Cause existing customers to cancel their contracts;
• Cause our customers to seek damages for losses incurred; or
• Make it more difficult for us to attract new customers.
15
We face risks associated with security breaches or cyber-attacks.
We face risks associated with security breaches or cyber-attacks of our computer systems and those of our third-party
representatives, vendors and service providers. Although we have implemented security procedures and controls to address
these threats, our systems and our software products may still be vulnerable to breaches, data theft, computer viruses,
programming errors, attacks by third parties, or similar disruptive problems.
If our systems, or the hosting systems at our third party owned data centers, were breached or attacked, the proprietary
and confidential information of our company and our customers could be disclosed, and we may be required to incur substantial
costs and liabilities, including the following:
• Expenses to rectify the consequences of the security breach or cyber-attack;
• Liability for stolen assets or information;
• Costs of repairing damage to our systems;
• Lost revenue and income resulting from any system downtime caused by such breach or attack;
• Loss of competitive advantage if our proprietary information is obtained by competitors as a result of such breach
or attack;
Increased costs of cyber security protection;
•
• Costs of incentives we may be required to offer to our customers or business partners to retain their business; and
• Damage to our reputation.
As a result, any compromise of security of our systems or cyber-attack could have a material adverse effect on our
business, reputation, financial condition, and operating results.
Rapid technological changes and the introduction of new products and enhancements by new or existing competitors could
undermine our current market position.
The market for our products is characterized by rapid technological advancements, changes in customer requirements,
frequent new product introductions and enhancements and changing industry standards. The life cycles of our products are
difficult to estimate. Rapid technological changes and the introduction of new products and enhancements by new or existing
competitors could undermine our current market position. Our growth and future success will depend, in part, upon our ability
to:
• Enhance our current products and introduce new products in order to keep pace with products offered by our
competitors;
• Adapt to technological advancements and changing industry standards; and
• Expand the functionality of our products to address the increasingly sophisticated requirements of our customers.
We may not have sufficient resources to make the necessary investments and we may experience difficulties that could delay or
prevent the successful development, introduction or marketing of new products or enhancements. In addition, our products or
enhancements may not meet the increasingly sophisticated customer requirements of the marketplace or achieve market
acceptance at the rate we expect, or at all. Any failure by us to anticipate or respond adequately to technological advancements,
customer requirements and changing industry standards, or any significant delays in the development, introduction or
availability of new products or enhancements, could undermine our current market position.
Our business may be adversely impacted if the ACA is repealed in its entirety or certain aspects of the ACA are repealed or
changed as a result of recent political changes.
The ACA remains subject to legislative efforts to repeal, modify or delay the implementation of the law. The recent
Presidential and Congressional elections may result in additional or successful efforts to repeal, modify or delay
implementation of all or certain aspects of the ACA. Generally, if the ACA is repealed or modified in whole or in part, or if
implementation of certain aspects of the ACA is delayed, such repeal, modification or delay could adversely impact our existing
and future business and operating results. For example, any such repeal, modification or delay could negatively impact the
revenue we currently generate from our UltiPro ACA Toolkit or our UltiPro ACA Employer Services. While we expect
continued challenges to the ACA, at this time we are unable to more precisely predict the full impact of any repeal,
modification or delay in the implementation of the ACA.
Our acquisitions of other companies, products, or technologies may result in operating difficulties, dilution, and other
harmful consequences that may adversely impact our business and results of operations.
16
As part of our overall business strategy, from time to time, we acquire complementary businesses, products and
technologies. These transactions could be material to our financial condition and results of operations. We expect to continue
to evaluate, and potentially enter into, acquisitions and a wide array of strategic transactions in the future.
We may not realize the anticipated benefits of our acquisitions to the extent that we anticipate, or at all, because
acquisitions involve many risks, including:
•
•
•
•
•
•
•
•
•
•
•
•
•
difficulties integrating the acquired operations, personnel, technologies, products or infrastructure;
diversion of management's attention or other resources from other critical business operations and strategic
priorities;
unexpected difficulties encountered when we enter new markets in which we have little or no experience, or
where competitors may have stronger market positions;
inability to maintain relationships with customers and partners of the acquired business;
the difficulty of incorporating acquired technology and rights into our products and services;
potential unknown liabilities associated with an acquired business;
unanticipated expenses related to integrating acquired technology with our existing technology;
the impact on our results of operations due to depreciation and amortization related to acquired intangible assets,
fixed assets and deferred compensation;
the tax effects of any such acquisitions;
potential litigation, such as claims by third parties related to intellectual property of the businesses we acquire;
potential write-offs of our investments in acquired businesses;
the need to implement controls, procedures and policies appropriate for a public company at companies that prior
to the acquisition lacked such controls, procedures and policies; and
challenges caused by distance, language and cultural differences.
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and
strategic transactions could cause us to fail to realize the anticipated benefits of such acquisitions or transactions, incur
unanticipated liabilities, and harm our business generally.
We may issue additional equity securities to pay for future acquisitions or other strategic transactions, the issuance of
which could be dilutive to our existing stockholders and affect the trading price of our securities. If any acquisition or other
strategic transactions is not perceived as ultimately improving our financial condition and operating results, our stock price may
decline. Further, if we fail to properly evaluate and execute acquisitions or other strategic transactions, our business and
financial condition may be seriously harmed.
Adverse changes in general economic or political conditions could adversely affect our operating results.
As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic
and global economic and political conditions. If the state of the economy and the rate of employment deteriorate in the
future, many customers may delay or reduce technology purchases. This could result in reductions in sales of our products,
longer sales cycles, slower adoption of new technologies, increased price competition, customers purchasing fewer services or
Optional Capabilities than they have in the past, customers requesting longer payment terms, customers failing to pay amounts
due and slower collections of accounts receivable. In addition, increased unemployment could result in significant decreases in
our recurring revenues from our existing customer base as we price our ongoing recurring revenues on a PEPM basis, subject,
in many cases, to minimum employee sizes per customer. Any of these events would likely harm our business, results of
operations, financial condition and cash flows from operations.
Defects and errors in our software could affect market acceptance of our products.
Software products such as those offered by us may contain undetected errors or failures when first introduced or as
new versions are released. Testing of our products is particularly challenging because it is difficult to simulate the wide variety
of computing environments in which our customers may use these products. Despite extensive testing, from time to time we
have discovered defects or errors in our products. Defects and errors may:
• Cause delays in product introductions and shipments;
• Result in increased costs and diversion of development resources;
• Require design modifications; or
• Decrease market acceptance of, or customer satisfaction with, our products.
17
Despite testing by us and by current and potential customers, errors may be found after commencement of commercial
shipments, which may result in loss of or delay in market acceptance which could have a material adverse impact upon our
business, operating results and financial condition.
If our direct sales force is not successful, we may be unable to achieve significant revenue growth in the future.
We sell our products and services primarily through our direct sales force. Our ability to achieve significant revenue
growth in the future will depend upon the success of our direct sales force and our ability to adapt our sales efforts to address
the evolving markets for our products. If our direct sales force does not perform as expected, our revenues could suffer.
Our current and future competitors include companies with greater financial, technical and marketing resources than we
have and if we are unable to compete successfully with other businesses in our industry or with in-house systems developed
by potential customers, our profitability will be adversely affected.
Our future success will depend significantly upon our ability to increase our share of our target market, to maintain and
increase our recurring revenues from new and existing customers and to sell additional products, product enhancements,
maintenance and support services and training and consulting services to existing and new customers. The HCM market is
intensely competitive. Our competitors include:
• Large service bureaus, primarily ADP and, to a lesser extent, Ceridian;
• A number of companies, such as Oracle, Lawson, and Workday that offer HCM software products for use on
mainframes, client/server environments and/or Web servers; and, in the UltiPro mid-market and strategic markets,
payroll service providers such as ADP, Paychex, Ceridian, Paycom and Paylocity that service companies on the
smaller end of the mid-market; and
• The internal HR/payroll departments of potential customers which use custom-written software.
Our competitors may develop products that are superior to our products or achieve greater market acceptance. Many of
our competitors or potential competitors have significantly greater financial, technical and marketing resources than we do. As a
result, they may be able to respond more quickly to new or emerging technologies and to changes in customer requirements, or
to devote greater resources to the development, promotion and sale of their products than we can. We believe that existing
competitors and new market entrants will attempt to develop in-house systems that will compete with our products. We may be
unable to compete successfully against current or future competitors. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with third parties to increase the ability of their
products to address the needs of our prospective customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share.
The loss of the services of one or more of our key employees could negatively affect our ability to implement our business
strategy.
Our success depends to a significant extent upon a limited number of members of senior executive management and
other key employees, including Scott Scherr, our Chairman of the Board of Directors, President and Chief Executive Officer.
We do not have employment contracts with any of our key personnel. The loss of the services of one or more of our key
employees could have a material adverse effect upon us. In addition, uncertainty created by turnover of our key employees
could cause further turnover of our employees.
If we are not able to successfully recruit personnel, our revenues could be negatively affected.
Our ability to achieve significant revenue growth in the future will also depend on our success in recruiting, training
and retaining sufficient sales, marketing, professional services, product development and other personnel.
The potential growth of our business and expansion of our customer base may place a significant strain on our
management and operations, and we may be unable to manage that growth and expansion successfully.
We expect to increase research and development, professional services, sales and marketing and administrative
operations as and when appropriate to accommodate our growth plans. Accordingly, our future operating results will depend on
the ability of our management and other key employees to continue to implement and improve our systems for operations,
financial control and information management and to recruit, train, manage and retain our employee base. We cannot be certain
that we will be able to manage any future growth successfully.
Our business relies heavily on the products of Microsoft, which may not always be compatible with our products, and we
may be required to spend significant capital if businesses adopt alternative technologies that are incompatible with our
products.
18
Our software products are designed primarily to operate with Microsoft technologies and our strategy requires that our
products and technology be compatible with new developments in Microsoft technology. Although we believe that Microsoft
technologies are currently widely utilized by businesses of all sizes, we cannot be certain that businesses will continue to adopt
such technologies as anticipated, will migrate from older Microsoft technologies to newer Microsoft technologies or will not
adopt alternative technologies that are incompatible with our products. As a result, we may be required to develop new products
or improve our existing products to be compatible with different technologies that may be used by our customers. We cannot be
certain we will be able to adapt our product to any technologies other than Microsoft’s.
If our third-party software is not adequately maintained or updated or independent third party's products that we market
and distribute as part of the UltiPro solution are no longer available to us, our sales could be materially adversely affected.
Certain products utilize software of third-party software developers or products from third parties from whom we have
either purchased a license or the underlying source code of such software, entered into a service agreement with the vendor or
have entered into a strategic alliance that gives us the right to market and distribute such product. Although we believe that
there are alternatives for these products, any significant interruption in the availability of such third-party software or products
could have a material adverse impact on our sales unless and until we can replace the functionality provided by these products.
Additionally, we are, to a certain extent, dependent upon such third parties’ abilities to enhance their current products, to
develop new products on a timely and cost-effective basis and to respond to emerging industry standards and other
technological changes. We may be unable to replace the functionality provided by the third-party software or products currently
offered in conjunction with our products in the event that such software or products become obsolete or incompatible with
future versions of our products or are otherwise not adequately maintained, updated or available.
If we are unable to release annual or periodic updates on a timely basis to reflect changes in tax laws and regulations or
other regulatory provisions applicable to our products, the market acceptance of our products may be adversely affected and
our revenues could decline.
Our products are affected by changes in tax laws and regulations and generally must be updated annually or
periodically to maintain their accuracy and competitiveness. We cannot be certain that we will be able to release these annual or
periodic updates on a timely basis in the future. Failure to do so could have a material adverse effect on market acceptance of
our products. In addition, significant changes in tax laws and regulations or other regulatory provisions applicable to our
products could require us to make a significant investment in product modifications, which could result in significant
unexpected costs to us.
If we are unable to protect our proprietary rights against unauthorized third-party copying or use, our revenues or our
methods of doing business could be negatively impacted.
Our success is dependent, in part, on our ability to protect our proprietary rights. We rely on a combination of
copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and
protect our proprietary rights. We do not have any patents or patent applications pending, and existing copyright, trademark and
trade secret laws afford only limited protection. As a result, we cannot be certain that we will be able to protect our proprietary
rights against unauthorized third-party copying or use. Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy or reverse engineer aspects of our products or to obtain and use information that we regard as proprietary.
In addition, others may develop products that perform comparably to our proprietary products. Policing the unauthorized use of
our products is difficult.
Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trademarks, copyrights or
trade secrets or to determine the validity and scope of the proprietary rights of others; such litigation may be expensive and
divert the attention of management.
Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trademarks,
copyrights or trade secrets or to determine the validity and scope of the proprietary rights of others. Any litigation could result
in substantial costs and diversion of resources and management attention.
As is common in the software industry, from time to time we may become aware of third-party claims of infringement
by our operations or products of third-party proprietary rights. While we are not currently aware of any such material claim, our
software products may increasingly be subject to such claims as the number of products and competitors in our industry grows,
as the functionality of products overlaps and as the issuance of software patents becomes increasingly common. Any such
claims, with or without merit, can be time consuming and expensive to defend, cause product shipment delays or require us to
enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms
acceptable to us, or at all.
19
Privacy concerns could result in regulatory changes that may harm our business.
Personal privacy is a significant issue in the United States and in many other countries where our customers
operate. The United States and many other countries have imposed restrictions and requirements on the use of personal
information by those collecting such information. Changes to law or regulations affecting privacy, if applicable to our business
or product, could impose additional costs and potential liability on us and could limit our use and disclosure of such
information. If we were required to change our business activities or revise or eliminate services, our business could be
harmed.
The sale and support of software products and the performance of related services by us entail the risk of product or service
liability claims, which could significantly affect our financial results.
Customers use our products in connection with the preparation and filing of tax returns and other regulatory reports. If
any of our products contain errors that produce inaccurate results upon which users rely, or cause users to misfile or fail to file
required information, we could be subject to liability claims from users. Our cloud and maintenance renewal agreements with
our customers typically contain provisions intended to limit our exposure to such claims, but such provisions may not be
effective in limiting our exposure. Contractual limitations we use may not be enforceable and may not provide us with adequate
protection against product liability claims in certain jurisdictions. A successful claim for product or service liability brought
against us could result in substantial cost to us and divert management’s attention from our operations.
We may be adversely affected by substantial quarterly fluctuations in our revenues and operating results.
Our quarterly revenues and operating results have varied significantly in the past and are likely to vary substantially
from quarter to quarter in the future. Our quarterly operating results may fluctuate as a result of a number of factors, including:
•
Increased expenses from one quarter to another (especially as they relate to product development and sales and
marketing);
Spending patterns of our customers;
•
• Timing of our product releases;
•
• A drop in the near-term demand for our products, particularly in relation to professional services; and
• Announcements of new products by Ultimate or by our competitors.
Increased competition;
We establish our expenditure levels based upon our expectations as to future revenues, which are comprised primarily
of recurring revenues and services revenues. If revenue levels are below expectations, particularly services revenues which are
more subject to variations between periods than recurring revenues, expenses can be disproportionately high in a particular
period. For example, while sales production could be at our level of expectations, depending on the spending patterns of our
customers including the timing in which they begin the implementation of UltiPro and the extent to which they use Ultimate’s
resources, the immediate reported total revenues could be lower than expected.
Our operating results for previous fiscal quarters are not necessarily indicative of our operating results for the full
fiscal years or for any future periods. We believe that, due to the underlying factors for quarterly fluctuations, quarter-to-quarter
comparisons of our operations are not necessarily meaningful and that such comparisons should not be relied upon as
indications of future performance.
Our stock price has experienced high volatility, may continue to be volatile and may decline.
The trading price of our Common Stock has fluctuated widely in the past and may do so in the future, as a result of a
number of factors, many of which are outside our control, such as:
• The volatility inherent in stock prices within the sector in which we conduct business;
• The volume of trading in our Common Stock, including sales upon exercise of outstanding stock options and upon
the vesting of restricted stock and restricted stock units;
•
Failure to achieve earnings expectations;
• Changes in our earnings estimates by analysts;
• Variations in our actual and anticipated operating results, including, but not limited to, prospective financial
guidance provided by Ultimate to our investors and research analysts; and
• The announcement of a merger or acquisition.
Stock markets have experienced extreme price and volume fluctuations that have affected the market prices of many
technology and computer software companies, particularly Internet-related companies. Such fluctuations have often been
20
unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could adversely
affect the market price of our Common Stock.
Further, securities class action litigation has often been brought against companies that experience periods of volatility
in the market prices of their securities. Securities class action litigation could result in substantial costs and a diversion of our
management’s attention and resources.
Anti-takeover provisions in our certificate of incorporation and by-laws and under our Amended and Restated Rights
Agreement and Delaware law could substantially increase the cost to acquire us or prevent or delay a change in control and,
as a result, negatively impact our stockholders and the price of our Common Stock.
We have taken a number of actions that could have the effect of discouraging a takeover attempt. For example, we
have adopted an Amended and Restated Rights Agreement that would cause substantial dilution to a stockholder, and
substantially increase the cost paid by a stockholder, who attempts to acquire us on terms not approved by our Board of
Directors. This rights plan could prevent us from being acquired.
Our Board of Directors is divided into three classes, each of whose members serve for a staggered three-year term.
This board structure may prevent stockholders from changing the composition of our Board of Directors quickly.
In addition, our certificate of incorporation grants our Board of Directors the authority to fix the rights, preferences
and privileges of and issue up to 2,500,000 shares of preferred stock without stockholder approval. Although we have no
present intention to issue shares of preferred stock, such an issuance could have the effect of making it more difficult and less
attractive for a third-party to acquire a majority of our outstanding voting stock. Preferred stock may also have other rights,
including economic rights senior to our Common Stock, which could have a material adverse effect on our stock price.
We are also subject to the anti-takeover provisions of Section 203 of Delaware General Corporation Law. This section
provides that a corporation may not engage in any business combination with any interested stockholder (as defined in that
section) during the three-year period following the time that a stockholder became an interested stockholder. This provision
could have the effect of delaying or preventing a change in control of our company.
The growth of the international operations of our business subjects us to additional risks associated with foreign operations.
International operations are subject to risks associated with operating outside of the United States. During the fourth
fiscal quarter of 2006, we began operating in Canada (through the formation of a wholly-owned Canadian subsidiary). During
2017, we continued to grow our operations in Canada and Singapore. The financial impact of our international operations to
our overall business has been insignificant to date. However, over time, our international operations may grow and increase
their significance to our business. Sales to international customers subject us to a number of risks, including foreign currency
fluctuations, unexpected changes in regulatory requirements for software, international economic and political instability,
compliance with multiple, conflicting, and changing governmental laws and regulations, difficulty in staffing and managing
foreign operations, international tax laws, potentially weaker protection for our intellectual property than in the United States,
and difficulties in enforcing such rights abroad. If sales to any of our customers outside of the United States are delayed or
canceled because of any of the above factors, our revenue may be negatively impacted.
Our international operations also increase our exposure to international laws and regulations. If we are unable to
comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could
incur unexpected costs and potential litigation.
If our goodwill or acquired intangible assets become impaired, we may be required to record a significant charge to
earnings.
Under U.S. generally accepted accounting principles, we review our acquired intangible assets for impairment when
events or changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is required to be tested
for impairment at least annually. Factors that may be considered in circumstances indicating that the carrying value of our
goodwill or acquired intangible assets may not be recoverable include a reduction in our market capitalization (as a result of a
decline in our stock price) to a level below our consolidated stockholders’ equity as of the applicable balance sheet date,
declining future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to
earnings in our consolidated financial statements during the period in which any impairment of our goodwill or acquired
intangible assets is determined, resulting in a negative impact on our results of operations.
Changes in, or interpretations of, accounting principles could result in unfavorable accounting changes.
21
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles and
accompanying accounting pronouncements, implementation guidelines, and interpretations. Changes in these rules or their
interpretation could significantly change our reported results and may even retroactively affect previously reported
transactions. Our accounting principles that recently have been or may be affected by changes in accounting principles include,
but are not limited to: recurring revenue recognition and accounting for income taxes.
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could
be unfavorably affected by changes in tax laws or the interpretation of tax laws, or by changes in the valuation of our deferred
tax assets and liabilities. In addition, we are subject to the examination of our income tax returns by the Internal Revenue
Service and other domestic and foreign tax authorities. We regularly assess the likelihood of outcomes resulting from these
examinations to determine the adequacy of our provision for income taxes. There can be no assurance that these potential
examinations will not have an adverse effect on our operating results and financial position.
22
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters in Weston, Florida are at different locations in the city, which, in the aggregate, consist of
approximately 337,000 square feet of leased space. We also have leased facilities in Atlanta, Georgia; Alpharetta, Georgia;
Memphis, Tennessee; Scottsdale, Arizona; Santa Ana, California; Toronto, Canada; San Francisco, California; and Singapore.
Currently, we also lease satellite offices for certain field personnel in various locations throughout the United States
and, to a much lesser extent, internationally. We believe that our existing facilities are suitable and adequate for our current
operations for the next 12 months. We further believe that suitable space will be available as needed to accommodate any
expansion of our operations on commercially reasonable terms.
Item 3. Legal Proceedings
From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of
business. We are not currently a party to any legal proceedings the adverse outcome of which, individually or in the aggregate,
could reasonably be expected to have a material adverse effect on our operating results or financial condition.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information. The following table sets forth, for the periods indicated, the high and low sales prices of Ultimate’s
common stock, $0.01 par value (the "Common Stock"), as quoted on the NASDAQ Global Select Market (“NASDAQ”) under
the symbol “ULTI."
First Quarter ..............................................
Second Quarter..........................................
Third Quarter.............................................
Fourth Quarter...........................................
2017
2016
High
$201.65
225.63
233.42
224.57
Low
$182.35
192.83
181.59
188.96
High
$194.70
213.35
224.07
218.25
Low
$148.26
183.30
200.19
180.29
As of February 20, 2018, we had approximately 44 holders of record, representing approximately 5,020 stockholder
accounts.
We have never declared or paid any cash dividends on our capital stock and do not anticipate paying any cash
dividends in the foreseeable future. We currently intend to retain future earnings to fund the development and growth of our
business. The payment of dividends in the future, if any, will be at the discretion of our Board of Directors.
23
Performance Graph. The following graph compares the cumulative total stockholder returns on Ultimate’s Common Stock for
the five year period covering December 31, 2012-December 31, 2017, on an annual basis, with the cumulative total return of
the NASDAQ Composite Index and the RDG Software Composite Index for the same period.
Purchases of Equity Securities by the Issuer. On October 30, 2000, Ultimate announced that our Board of Directors authorized
the repurchase of up to 1,000,000 shares of our outstanding Common Stock (the “Stock Repurchase Plan”).
On February 6, 2007, Ultimate’s Board of Directors extended the Stock Repurchase Plan by authorizing the
repurchase of up to 1,000,000 additional shares of our issued and outstanding Common Stock.
On February 5, 2008, Ultimate’s Board of Directors extended the Stock Repurchase Plan further by authorizing the
repurchase of up to 1,000,000 additional shares of our Common Stock.
On October 26, 2009, Ultimate’s Board of Directors extended the Stock Repurchase Plan further by authorizing the
repurchase of up to 1,000,000 additional shares of our Common Stock.
On October 24, 2011, Ultimate’s Board of Directors extended the Stock Repurchase Plan further by authorizing the
repurchase of up to 1,000,000 additional shares of our Common Stock.
On April 25, 2016, Ultimate's Board of Directors extended our Stock Repurchase Plan further by authorizing the
repurchase of up to 1,000,000 additional shares of our Common Stock.
As of December 31, 2017, Ultimate had purchased 4,657,995 shares of our Common Stock under the Stock
Repurchase Plan, with 1,342,005 shares available for repurchase in the future.
24
The number of shares of Common Stock repurchased by us during the three months ended December 31, 2017 is as
indicated below:
Period
October 1 – 31, 2017 ........................................................
November 1 – 30, 2017 ....................................................
December 1 – 31, 2017 ....................................................
Total Number of
Shares
Purchased (1)
Average Price
Paid per Share
Total Cumulative
Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
Maximum
Number of
Shares That May
Yet Be Purchased
Under the Plans
or Programs
12 (1)
151,571 (1)
92 (1)
$
$
$
194.22
203.04
218.23
4,657,995
4,657,995
4,657,995
1,342,005
1,342,005
1,342,005
(1) Represents shares of Common Stock that were acquired by us at the fair market value of the Common Stock as of the
period stated, in connection with the satisfaction of our employees' tax withholding liability resulting from the vesting of
restricted stock holdings.
25
Item 6. Selected Financial Data
The following selected consolidated financial data is qualified by reference to and should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Ultimate’s Consolidated
Financial Statements and Notes thereto included elsewhere in this Form 10-K. The consolidated statements of income data
presented below for each of the years in the three-year period ended December 31, 2017 and the consolidated balance sheet
data as of December 31, 2017 and 2016 have been derived from our Consolidated Financial Statements included elsewhere in
this Form 10-K. The years ended December 31, 2016, 2015, 2014 and 2013 were revised in connection with an immaterial
correction of prior period financial statements. See Note 17 in our Notes to Consolidated Financial Statements for further
discussion.
26
Consolidated Statements of Income: (in thousands, except per share data)
Revenues:
Years Ended December 31,
2017
2016
2015
2014
2013
587,029
143,140
353,700
940,729
210,560
Recurring ............................................................................. $ 802,300
138,429
Services................................................................................
Total revenues.................................................................
Cost of revenues:....................................................................
Recurring .............................................................................
Services................................................................................
Total cost of revenues .....................................................
Gross profit ............................................................................
Operating expenses: ...............................................................
Sales and marketing.............................................................
Research and development ..................................................
General and administrative..................................................
Total operating expenses.................................................
Operating income............................................................
Other (expense) income: ........................................................
Interest expense and other, net.............................................
Other income, net ................................................................
Total other expense, net .........................................................
Income before income taxes ..................................................
Provision for income taxes ..................................................
Net income .............................................................................
(813)
397
(416)
44,130
(30,075)
14,055
122,119
542,483
269,781
150,583
44,546
$ 654,199
$ 516,400
$ 419,771
$ 335,287
127,092
781,291
101,681
618,081
86,165
505,936
75,110
410,397
172,676
127,433
300,109
481,182
224,416
120,650
94,432
439,498
41,684
(717)
451
(266)
41,418
(12,178)
29,240
138,587
99,948
238,535
379,546
169,664
93,671
72,893
336,228
43,318
(491)
256
(235)
43,083
(28,825)
14,258
117,700
85,939
203,639
302,297
117,033
83,542
47,379
247,954
54,343
(353)
339
(14)
54,329
(13,640)
40,689
92,101
76,577
168,678
241,719
93,879
67,757
36,869
198,505
43,214
(229)
104
(125)
43,089
(20,082)
23,007
Net income per share: (1).......................................................
Basic .................................................................................... $
Diluted ................................................................................. $
0.47
0.46
$
$
1.01
0.96
$
$
0.50
0.48
$
$
1.44
1.39
$
$
0.83
0.79
Weighted average shares outstanding: (1)
Basic ....................................................................................
Diluted .................................................................................
29,791
30,799
28,976
30,414
28,634
29,721
28,293
29,343
27,773
29,013
Balance Sheet Data: (in thousands)
As of December 31,
2017
2016
2015
2014
2013
Cash and cash equivalents ..................................................... $ 155,685
Corporate investments in marketable securities ....................
9,434
Total assets............................................................................. 1,377,211
198,861
Deferred revenue....................................................................
Long-term borrowings, including capital lease obligations...
8,727
Stockholders’ equity............................................................... $ 518,025
$
73,773
$ 109,325
$ 108,298
$
79,794
24,088
20,058
10,156
1,134,688
1,448,689
1,181,859
173,976
145,727
109,705
3,985
3,665
3,759
10,453
593,804
103,184
2,833
$ 414,215
$ 317,186
$ 263,310
$ 183,827
________________________________
(1) See Note 11 of the Notes to the Consolidated Financial Statements for information regarding the computation of net
earnings per share.
27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations provides information
we believe is relevant to an assessment and understanding of our results of operations and financial condition. This discussion
should be read in conjunction with our Consolidated Financial Statements and Notes that are included in this Form 10-K. Also,
the discussion of Critical Accounting Policies and Estimates in this section is an integral part of the analysis of our results of
operations and financial condition.
Business Overview
Ultimate Software is a leading provider of cloud-based human capital management solutions, often referred to as
human capital management (“HCM”). Ultimate's UltiPro product suite (“UltiPro”) is a comprehensive, engaging solution that
has human resources ("HR"), payroll, and benefits management at its core and includes global people management, available in
14 languages with more than 37 country-specific localizations. The solution is delivered via software-as-a-service ("SaaS"),
now more commonly known as the cloud computing model, to organizations based in the United States and Canada, including
those with global workforces. At the close of 2017, we had more than 4,100 organizations as customers and more than 37
million people records in our HCM cloud. We attained our leadership position, we believe, through our focus on unified HCM,
people-centric product design, cloud technology, and strong customer relationships.
UltiPro is designed to deliver the functionality businesses need to manage the complete employee life cycle from
recruitment to retirement and to facilitate high levels of employee engagement with their employers and one another. The
solution includes unified feature sets for recruiting and onboarding, HR management and compliance, benefits management
and online enrollment, payroll, performance management, employee engagement surveying, compensation management with
salary planning, budgeting, incentive award planning, succession management, learning management, reporting and analytical
decision-making and predictive tools, and time capture, scheduling, attendance tracking, and absence accruals. UltiPro has role-
based features for HR professionals, executives, managers, administrators, and employees whether they are in or out of the
office, including access to business-critical information on mobile devices such as the iPhone, iPad, and other smartphones and
tablets.
Our customers tell us that UltiPro helps them to streamline talent management, HR and payroll processes to
significantly reduce administrative and operational costs while also empowering them to manage the talent in their workforces
more strategically. UltiPro provides our customers tools to analyze workforce trends for better decision making, identify high-
performing talent within their organizations, predict who future high-performers and retention risks will be with a high degree
of accuracy, find critical information quickly, and perform routine business activities efficiently.
Our cloud offering of UltiPro provides web-based access to comprehensive HCM functionality for organizations that
want to simplify delivery and support of their business applications. We have found that UltiPro is attractive to companies that
want to focus on their core competencies to increase sales and profits while we supply and manage the hardware, infrastructure,
ongoing maintenance, and backup services for our customers.
We market our UltiPro solutions primarily to enterprise companies, which we define as organizations with 2,501 or
more employees, including those with 10,000 employees and larger; mid-market companies, which we define as those having
501-2,500 employees; and strategic market companies, which we define as those having 100-500 employees. Our mid-market
and strategic customers have access to nearly all the features that our larger enterprise companies have through UltiPro, plus a
bundled services package. Since many companies in the mid- and strategic markets do not have information technology (“IT”)
staff on their premises to help with system deployment or ongoing management issues, we have created a bundled services
package to give these customers a high degree of convenience by handling system configuration, business rules, and other
situations for them “behind the scenes.” UltiPro is marketed primarily through our enterprise, mid-market, and strategic direct
sales teams.
In addition to UltiPro's HCM functionality, our customers have the option to purchase a number of additional
capabilities on a per-employee-per-month (“PEPM”) basis, which are available to enhance and complement the core
functionality of UltiPro and which are based on the particular business needs of our customers. These optional UltiPro
capabilities currently include (i) the talent acquisition suite (recruitment and onboarding); (ii) the talent management suite
(performance management, talent predictors, and succession management); (iii) learning management; (iv) employee
engagement surveys; (v) compensation management; (vi) benefits enrollment; (vii) time management; (viii) payment services;
(ix) wage attachments; (x) UltiPro ACA toolkit and (xi) other optional features (collectively, “Optional Capabilities”), which
are described above.
All Optional Capabilities are priced solely on a subscription basis. Some of the Optional Capabilities are available to
enterprise, mid-market and strategic market customers while others are available exclusively to either enterprise, mid-market or
28
strategic market customers, and availability is based on the needs of the respective customers, the number of their employees
and the complexity of their HCM environment.
The key drivers of our business are (i) growth in recurring revenues; (ii) operating income, excluding non-cash stock-
based compensation and amortization of acquired intangibles ("Non-GAAP Operating Income"); and (iii) revenue retention of
our customers once our solutions are sold (“Customer Retention”). For the year ended December 31, 2017, our (i) recurring
revenues grew by 22.6%, compared with the same period in 2016, and (ii) Non-GAAP Operating Income was $194.1 million,
or 20.6% of total revenues, as compared with $157.6 million, or 20.2% of total revenues, for the same period in 2016. For the
year ended December 31, 2016, our (i) recurring revenues grew by 26.7%, compared with the same period in 2015 and (ii)
Non-GAAP Operating Income was $157.6 million, or 20.2% of total revenues, as compared with $126.8 million, or 20.5% of
total revenues, for the same period in 2015. As of December 31, 2017, our Customer Retention, on a trailing twelve-month
basis, was approximately 96% for our recurring revenue cloud customer base, compared with approximately 97% for the prior
year. See “Non-GAAP Financial Measures” below.
Our ability to achieve significant revenue growth in the future will depend upon the success of our direct sales force
and our ability to adapt our sales efforts to address the evolving markets for our products and services. We provide our sales
personnel with comprehensive and continuing training with respect to technology and market place developments. Aside from
sales commissions, we also provide various incentives to encourage our sales representatives, including stock-based
compensation awards based upon performance.
The HCM market is intensely competitive. We address competitive pressures through improvements and
enhancements to our products and services, the development of additional features of UltiPro and a comprehensive marketing
team and process that distinguishes Ultimate and its products from the competition. Our focus on customer service, which
enables us to maintain a high Customer Retention rate, also helps us address competitive pressures.
As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic
and global economic conditions. If general economic conditions were to deteriorate, we may experience delays in our sales
cycles, increased pressure from prospective customers to offer discounts and increased pressure from existing customers to
renew expiring recurring revenue agreements for lower amounts. We address continuing economic pressures by, among other
things, efforts to control growth of our operating expenses through the monitoring of controllable costs and vendor
negotiations.
Ultimate has two primary revenue sources: recurring revenues and services revenues. The primary component of
recurring revenues is subscription revenues from our cloud offering of UltiPro. The majority of services revenues are derived
from implementation consulting services.
As cloud units are sold, the recurring revenue backlog associated with UltiPro grows, enhancing the predictability of
future revenue streams. Cloud revenues include ongoing monthly subscription fees, priced on a PEPM basis. Revenue
recognition for our recurring revenue stream is typically triggered when the customer processes its first payroll using UltiPro
(or goes “Live”).
Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“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, costs and
expenses, and related disclosures during the reporting period. Actual results could differ from those estimates.
We believe that of our significant accounting policies, which are described in Note 3, "Summary of Significant
Accounting Policies and Recent Accounting Pronouncements," to our consolidated financial statements, the following
accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the
most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
We recognize revenues in accordance with Accounting Standards Update ("ASU") No. 2009-13, “Multiple-
Deliverable Revenue Arrangements” (“ASU 2009-13”). We use the relative selling price method to allocate the total
consideration to units of accounting in a multiple element arrangement. We allocate revenue in an arrangement using the
estimated selling price (“ESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) or third-party
evidence (“TPE”) of selling price.
29
VSOE is the price charged when the same or similar product or service is sold separately. We define VSOE as a
median price of recent stand-alone transactions that are priced within a narrow range.
TPE is determined based on the prices charged by our competitors for a similar deliverable when sold
separately. However, due to the difficulty in obtaining sufficient information on competitor pricing and differences in our
product offerings when compared with those of our peers, we generally are unable to reliably determine TPE.
ESP is our best estimate of the selling price of an element in a transaction. If we are unable to establish selling price
using either VSOE or TPE, we will use ESP in our allocation of arrangement consideration. The objective of ESP is to
determine the price at which we would transact business if the product or service were sold by us on a stand-alone basis. Our
determination of ESP involves the use of a customary discount from the list (or book) price for each element, with the
discounted price applied within a narrow range. The customary discount is derived from historical data that has been analyzed
to determine trends and patterns. We analyze the customary discount used for determining ESP on no less than an annual basis.
We evaluate each deliverable in our arrangements to determine whether it represents a separate unit of accounting. A
deliverable constitutes a separate unit of accounting when it has stand-alone value to our customers. Our products and services
continue to qualify as separate units of accounting under ASU 2009-13.
There are two major elements in our multiple element arrangements for the delivery of our UltiPro offering, which are
recurring revenues (i.e., cloud subscription revenues) and services revenues (mostly implementation consulting services).
For multiple element arrangements, the consideration allocated to cloud subscription revenues is recognized as
recurring revenues over the initial contract period, as those subscription-based services are delivered, typically commencing
with the Live date of the related product. The consideration allocated to fixed fee implementation consulting services in
multiple element arrangements is recognized as services revenues on a percentage of completion basis (in relation to
progression through implementation phases), by product.
Single element arrangements typically consist of renewals for cloud subscriptions and implementation consulting
services sold on a time and materials basis. Under these single element arrangements, cloud subscription revenues are
recognized over the related renewal period, as the services are delivered, and implementation consulting services are
recognized as the related time and materials services are performed.
We recognize revenues when all of the following criteria are met:
•
•
•
•
persuasive evidence of an arrangement exists;
delivery has occurred;
the fees are fixed and determinable; and
collection is considered probable.
If collection is not considered probable, we recognize revenues when the fees are collected. If the fees are not fixed
and determinable, we recognize revenues when the fees become due from the customer. If non-standard acceptance periods or
non-standard performance criteria are required, we recognize revenue when the acceptance period expires or upon the
satisfaction of the acceptance/performance criteria, as applicable.
The majority of services revenues are recognized over the implementation period, which is from the contract
execution date until the Live date. Cloud revenues are recognized over the initial contract term, typically beginning in the
month the customer goes Live.
Recurring Revenues
Recurring revenues primarily consist of subscription revenues recognized from our customers' use of UltiPro after
they have gone Live.
i) Cloud subscription revenues are principally derived from PEPM fees earned from UltiPro units that are Live.
Ongoing PEPM fees are recognized as subscription revenues as the services are delivered, typically commencing when the
customer goes Live.
ii) Effective January 1, 2015, we no longer have maintenance revenues associated with our Legacy customers and we
stopped supporting our Legacy customers after December 31, 2014. Since the time we announced that we would stop
supporting our Legacy product in 2012, we successfully converted the majority of our Legacy customers to the cloud. Those
customers that did not convert terminated.
30
With UltiPro, our customers do not have the right to take possession of our software and these arrangements are
considered service contracts. The selling price of multiple deliverables in cloud arrangements is derived for each element based
on the guidance provided by ASU 2009-13. The multiple elements that typically exist in cloud arrangements include (1)
recurring revenues from the combination of hosting services, the right to use UltiPro, and maintenance of UltiPro (i.e., product
enhancements, updates and customer support) and (2) professional services (i.e., primarily implementation consulting services).
The pricing for the three elements that pertain to recurring revenues (i.e., hosting services, the right to use UltiPro and
maintenance of UltiPro (as described above)) is bundled. Since these three bundled elements are components of recurring
revenues in the consolidated statements of income, allocation of selling price to each of the three elements is not necessary and
they are not reported separately. Selling price, which is established through VSOE, for the bundled elements, as a whole, is
determined on the basis of renewal pricing, without taking into consideration potential price increases or potential changes in
the number of employees of the customer in the future due to the uncertainties surrounding these potential occurrences. These
bundled elements are provided on an ongoing basis, represent undelivered elements and are recognized on a monthly basis as
the related services are performed, typically commencing once the customer goes Live.
Services Revenues
Services revenues primarily include revenues from fees charged for implementation consulting services in connection
with the implementation of our product solutions and, to a much lesser extent, fees for other services, including the provision of
payroll-related forms, sales of time clocks and printing services for certain customers, as well as certain client reimbursable
out-of-pocket expenses.
Our multiple element contracts contain recurring cloud revenues and implementation consulting services priced on a
fixed fee basis. Time and materials implementation consulting services are sold as stand-alone sales not directly related to the
basic implementation of the cloud product. The total arrangement consideration is allocated to services elements in the
arrangement based on relative selling prices, using the prices established when the services are sold on a stand-alone
basis. Selling price is established through ESP for fixed fee implementation consulting services that are included in our
multiple element contracts.
Revenues from implementation consulting services sold on a fixed-fee basis are recognized using the percentage of
completion accounting method, which involves the use of estimates. Percentage of completion is measured at each reporting
date based on progress made to date.
Revenues from implementation consulting services, billed on a time and materials basis (at an hourly rate), are
recognized as these services are performed. Other services are recognized as the product is shipped or as the services are
rendered, depending on the specific terms of the related arrangement.
Capitalized Internal-Use Software Costs
We follow the guidance of Accounting Standards Codification ("ASC") Topic 350-40, "Intangibles Goodwill and
Other-Internal Use Software" (“ASC 350”), in accounting for costs related to software developed for internal use. ASC 350
requires companies to capitalize qualifying computer software costs, which are incurred during the application development
stage. Costs capitalized during the application development stage include external direct costs of materials and services
consumed in developing or obtaining internal-use software and payroll and payroll-related costs for employees who are directly
associated with, and who devote time to, the internal-use computer software. In addition to capitalizing costs for software
(which are used by us in our general operations, for internal purposes), we also capitalize costs under ASC Topic 350-40 for
certain software development projects related to our suite of products sold to our customers exclusively on a subscription basis
under our software-as-a-service ("SaaS") offering of UltiPro.
Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use
software is amortized on a straight-line basis over its estimated useful life. We evaluate the useful lives of these assets on an
annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of
these assets. To the extent there is amortization of capitalized costs associated with development projects for UltiPro sold to our
customers on a SaaS basis, the related amortization is included with cost of recurring revenues upon the commencement of that
amortization period.
31
Results of Operations
The following table sets forth the consolidated statements of income data of Ultimate, as a percentage of total revenues,
for the periods indicated. The years ended December 31, 2016 and 2015 were revised in connection with an immaterial correction
of prior period financial statements. See Note 17 in our Notes to Consolidated Financial Statements for further discussion.
Revenues:
Recurring ......................................................................................................
Services.........................................................................................................
Total revenues ..........................................................................................
85.3%
14.7
100.0
83.7%
16.3
100.0
83.5%
16.5
100.0
For the Years Ended December 31,
2017
2016
2015
Cost of revenues:
Recurring ......................................................................................................
Services.........................................................................................................
Total cost of revenues ..............................................................................
Gross profit .....................................................................................................
Operating expenses:
Sales and marketing......................................................................................
Research and development ...........................................................................
General and administrative ...........................................................................
Total operating expenses..........................................................................
Operating income.....................................................................................
Other income (expense):
Interest expense and other, net......................................................................
Total other expense, net ................................................................................
Total other income (expense), net ...................................................................
Income before income taxes ...........................................................................
Provision for income taxes ...........................................................................
Net income ......................................................................................................
22.4
15.2
37.6
62.4
28.7
16.0
13.0
57.7
4.7
—
—
—
4.7
(3.2)
1.5%
22.1
16.3
38.4
61.6
28.7
15.5
12.1
56.3
5.3
(0.1)
0.1
—
5.3
(1.6)
3.7%
22.4
16.2
38.6
61.4
27.4
15.2
11.8
54.4
7.0
(0.1)
—
(0.1)
6.9
(4.7)
2.2%
The following table sets forth the non-cash stock-based compensation expense resulting from stock-based
arrangements that is recorded in our consolidated statements of income for the periods indicated (in thousands):
For the Years Ended
December 31,
2017
2016
Cost of recurring revenues .............................................................................. $
Cost of services revenues ................................................................................
Sales and marketing ........................................................................................
Research and development..............................................................................
General and administrative .............................................................................
Total stock-based compensation expense........................................................ $
11,931
7,909
75,428
12,026
39,133
146,427
$
$
8,613
6,198
59,187
8,238
31,641
113,877
Overview of Financial Results
In comparison with 2016, our total revenues for 2017 increased by $159.4 million and our total cost of revenues and
operating expenses, combined, increased by $156.6 million, resulting in an increase in our operating income of $2.9 million.
32
During the years ended December 31, 2017 and 2016, our non-cash stock-based compensation expense increased
$32.6 million and $31.5 million, respectively, from the prior year primarily as the result of certain restricted stock awards
granted in connection with changes we made with respect to, and the final termination of, our change in control plans ("CIC
Plans") for certain senior officers. These restricted stock awards granted in March 2015, February 2016, and February 2017,
accounted for $22.2 million of the $32.6 million increase in our non-cash stock-based compensation expense for the year ended
December 31, 2017 and $19.7 million of the $31.5 million increase in our non-cash stock-based compensation expense for the
year ended December 31, 2016. The remaining increases were due to the effects of new grants in each year and the impact of
changes in our stock price ("General Operations"). See Note 15 in our Notes to Consolidated Financial Statements for further
discussion.
The following table sets forth the stock-based compensation expense associated with modifications made to the
Company's change in control plans as discussed above (in thousands):
For the Years Ended
December 31,
2017
2016
Stock-based compensation expense:
Stock-based compensation expense related to General Operations ............ $
Stock-based compensation expense related to CIC modifications..............
81,468
64,959
Total non-cash stock-based compensation expense................................ $
146,427
$
$
71,119
42,758
113,877
Net income decreased $15.2 million for 2017, compared with 2016. This decrease was due to a $17.9 million increase
in our provision for income taxes, partially offset by our pre-tax income from operations. On December 22, 2017, the federal
government passed the federal Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act reduced our federal statutory tax rate from
35% to 21%, effective January 1, 2018. Accounting Standards Codification ("ASC") 740, "Income Taxes" ("ASC 740"),
requires companies to recognize the effect of tax law changes in the period of enactment. During the quarter ended December
31, 2017, we adjusted the statutory federal and state income tax rates to our deferred tax assets and liabilities. As a result of the
statutory rate decrease, we had a reduction in our net deferred tax asset balance of $8.8 million. We recorded $8.7 million of the
$8.8 million reduction in our net deferred tax asset balance to our provision for income taxes in our consolidated statement of
income and $0.1 million to our consolidated statements of comprehensive income.
Comparison of Fiscal Years Ended December 31, 2017 and 2016
Revenues
Our revenues are derived from recurring revenues and services revenues. See “Revenue Recognition” above for
further discussion of Ultimate’s revenue sources and its method of accounting for each of them.
Total revenues increased 20.4% to $940.7 million for 2017 from $781.3 million for 2016.
Recurring revenues, primarily consisting of subscription revenues from cloud-based UltiPro, increased 22.6% to
$802.3 million for 2017 from $654.2 million for 2016. The increase in recurring revenues for 2017 was primarily based on the
revenue impact of incremental units sold to customers that have processed their first payroll using UltiPro (or gone "Live")
since December 31, 2016, including the UltiPro core product and, to a lesser extent, Optional Capabilities of UltiPro. Cloud
subscription revenues are recognized as recurring revenues over the initial contract period, as those services are delivered,
typically commencing with the Live date.
Our annual revenue customer retention rate for our recurring revenue cloud customers was approximately 96% at the
end of 2017 (calculated on a 12-month rolling basis) which compares to approximately 97% at the end of 2016. The impact on
recurring revenues of UltiPro units sold has been a gradual increase from one reporting period to the next, based on the
incremental effect of revenue recognition of the subscription fees over the terms of the related contracts as sales in backlog go
Live.
Services revenues increased 8.9% to $138.4 million for 2017 from $127.1 million for 2016. The increase in services
revenues for the year was primarily due to additional implementation revenues to support increased sales and, to a lesser extent,
as a result of increased fixed fee implementations primarily in association with interfaces with UltiPro.
As previously discussed in our second quarter 2017 Form 10-Q, during 2017, we experienced an elongation in our
Time-to-Live periods for our sales in our backlog (i.e., those which had not gone Live yet) for our enterprise sales, as well as
our mid-market sales, which caused our expected 2017 revenues (both recurring and services) to be less than our original
33
projections. The extension of the Time-to-Live periods does not change the overall value of recurring revenues or our fixed fee
implementations (included with services revenues) from these customers and is essentially a timing issue. We do not believe
that our Time-to-Live periods will elongate beyond our 2017 experience and have factored the revised Time-to-Live periods
into our 2018 revenue expectations.
Cost of Revenues
Cost of revenues consists of the costs of recurring and services revenues. Cost of recurring revenues primarily consists
of costs to provide customer support services ("Customer Support") to cloud customers, the cost of providing periodic updates
and the cost of recurring subscription revenues, including hosting data center costs and, to a lesser extent, amortization of
capitalized software. Cost of services revenues primarily consists of costs to provide implementation services and training to
Ultimate’s customers and, to a lesser extent, costs related to sales of payroll-related forms, time clocks and print services, as
well as costs associated with certain client reimbursable out-of-pocket expenses.
Total cost of revenues increased 17.9% to $353.7 million for 2017, from $300.1 million for 2016.
Cost of recurring revenues increased 21.9% to $210.6 million for 2017 from $172.7 million for 2016. The $37.9
million increase in the cost of recurring revenues for the year was primarily due to increases in both cloud costs and Customer
Support costs, as described below, and, to a lesser extent, increased amortization of capitalized software costs from the
development project to be sold in the future as a cloud product only (the "Development Project") which resulted from other
product modules becoming available for their intended use during the last half of 2017.
•
For the year ended December 31, 2017, the increases in cloud costs were principally as a result of the growth in
cloud operations from increased sales, including increased labor costs and, to a lesser extent, increased variable
costs associated with our cloud operations.
• The increase in Customer Support costs for the year ended December 31, 2017 was primarily due to higher labor
costs commensurate with the growth in the number of cloud customers serviced.
Cost of services revenues increased 12.3% to $143.1 million for 2017 from $127.4 million for 2016. The $15.7
million increase in cost of services revenues was primarily due to an increase in the cost of implementation, including higher
labor and related costs and the increased use of third-party implementation partners.
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 20.2% to $269.8 million for 2017 from $224.4 million for 2016. The $45.4 million increase in
sales and marketing during 2017 was primarily due to increased labor and related costs (including the impact of an increase in
sales personnel, primarily in our mid-market and strategic sales channels, and higher sales commissions) and higher advertising
and marketing expenses, which included media advertising. Included in the increased labor and related costs for 2017 was a
portion of certain non-cash, stock-based compensation expenses relating to the revisions and terminations of our CIC Plans.
Commissions on subscription-based cloud sales are amortized over the initial contract term (typically 24 to 36 months)
typically commencing on the Live date, which corresponds with the related cloud revenue recognition.
Research and Development
Research and development expenses consist primarily of software development personnel costs. Research and
development expenses increased 24.8% to $150.6 million in 2017 from $120.7 million in 2016. The $29.9 million increase in
research and development expenses during 2017 was principally due to higher labor and related costs associated with the
ongoing development of UltiPro and Optional Capabilities, including the impact of increased personnel costs (predominantly
from additional headcount), net of capitalized labor costs. For the years ended December 31, 2017 and 2016, we capitalized
$52.6 million (including $4.0 million in non-cash stock-based compensation) and $37.9 million (including $3.9 million in non-
cash stock-based compensation), respectively, of computer software development costs related to the Development Project. The
capitalized costs for the Development Project were primarily from direct labor costs and, to a lesser extent, third party
consulting fees for the years ended December 31, 2017 and 2016. For the years ended December 31, 2017 and 2016, there was
$4.4 million and $1.2 million, respectively, of amortization associated with certain product modules of the Development
Project which were ready for their intended use. The amortization of capitalized software is included in cost of recurring
revenues.
34
General and Administrative
General and administrative expenses consist primarily of salaries and benefits of executive, administrative and
financial personnel, as well as facility costs, external professional fees and the provision for doubtful accounts. General and
administrative expenses increased by 29.3% to $122.1 million for 2017 from $94.4 million for 2016. The $27.7 million
increase in general and administrative expenses during 2017 was primarily due to higher labor and related costs, including
increased personnel to support Ultimate's growth in operations, an increase in professional fees, an increase in facility costs to
support the growth in headcount, and a portion of certain non-cash, stock-based compensation expenses for the revisions and
terminations of our CIC Plans.
Provision for Income Taxes
In 2017, based on pre-tax income, we had income tax expense of $30.1 million as compared with $12.2 million in
2016. The increase in income tax expense of $17.9 million was attributable to the revaluation of the net deferred tax asset
balance from the reduction in federal statutory tax rates per the enactment of the federal Tax Act, passed in December 2017.
The remaining increase to income tax expense was due to an increase in non-deductible expenses, primarily stock-based
compensation, and a resulting higher ratio of non-deductible expenses to pre-tax income. Ultimate recorded $4.5 million and
$4.0 million of research and development tax credit carryforwards during the years ended December 31, 2017 and December
31, 2016, respectively.
Comparison of Fiscal Years Ended December 31, 2016 and 2015
Revenues
Total revenues, primarily consisting of recurring and services revenues, increased 26.4% to $781.3 million for 2016
from $618.1 million for 2015.
Recurring revenues increased 26.7% to $654.2 million for 2016 from $516.4 million for 2015. The increase in
recurring revenues for 2016 was primarily based on the revenue impact of incremental units sold to customers that have
gone Live since December 31, 2015, including the UltiPro core product and, to a lesser extent, Optional Capabilities of
UltiPro. Cloud subscription revenues are recognized as recurring revenues over the initial contract period, as those services
are delivered, typically commencing with the Live date.
Our Customer Retention rate for our recurring revenue cloud customers was approximately 97% at the end
of 2016 which compared with in excess of 97% for the prior year comparable period. The impact on recurring revenues of
UltiPro units sold has been a gradual increase from one reporting period to the next, based on the incremental effect of revenue
recognition of the subscription fees over the terms of the related contracts as sales in backlog go Live.
Services revenues increased 25.0% to $127.1 million for 2016 from $101.7 million for 2015. The increase in services
revenues for the year was primarily due to additional implementation revenues from incremental billable consultants to
support increased sales, particularly from our mid-market and strategic market sales channels and, to a lesser extent, as a
result of increased fixed fee implementations primarily in association with interfaces with UltiPro. In addition, other services
revenues increased primarily from additional print services provided to our customers (which occurred in the first quarter of
2016).
Cost of Revenues
Cost of revenues consists of the costs of recurring and services revenues. Cost of recurring revenues primarily
consists of costs to provide Customer Support services to cloud customers, the cost of providing periodic updates and the cost
of recurring subscription revenues, including hosting data center costs and, to a lesser extent, amortization of capitalized
software. Cost of services revenues primarily consists of costs to provide implementation services and training to Ultimate’s
customers and, to a lesser extent, costs related to sales of payroll-related forms, time clocks and print services, as well as costs
associated with certain client reimbursable out-of-pocket expenses.
Total cost of revenues increased 25.8% to $300.1 million for 2016, from $238.5 million for 2015.
Cost of recurring revenues increased 24.6% to $172.7 million for 2016 from $138.6 million for 2015. The $34.1
million increase in the cost of recurring revenues for the year was primarily due to increases in both cloud costs and Customer
Support costs, as described below:
•
For the year ended December 31, 2016, the increases in cloud costs were principally as a result of the growth
in cloud operations from increased sales, including increased labor costs and, to a lesser extent, increased
35
variable costs associated with our cloud operations.
• The increase in Customer Support costs for the year ended December 31, 2016 was primarily due to higher labor
costs commensurate with the growth in the number of cloud customers serviced.
Cost of services revenues increased 27.5% to $127.4 million for 2016 from $99.9 million for 2015. The $27.5
million increase in cost of services revenues was primarily due to an increase in the cost of implementation, including higher
labor and related costs, particularly in association with the increased number of implementation consultants and the
increased use of third-party implementation partners.
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 32.3% to $224.4 million for 2016 from $169.7 million for 2015. The $54.8 million
increase in sales and marketing during 2016 was primarily due to increased labor and related costs (including the impact of
an increase in sales personnel, primarily in our mid-market and strategic sales channels, and higher sales commissions) and
higher advertising and marketing expenses, which included media advertising. Included in the increased labor and related
costs for the 2016 year was a portion of certain non-cash, stock-based compensation expenses relating to the revisions and
terminations of our CIC Plans. Commissions on subscription-based cloud sales are amortized over the initial contract term
(typically 24 to 36 months) typically commencing on the Live date, which corresponds with the related cloud revenue
recognition.
Research and Development
Research and development expenses consist primarily of software development personnel costs. Research and
development expenses increased 28.8% to $120.7 million in 2016 from $93.7 million in 2015. The $27.0 million increase in
research and development expenses during 2016 was principally due to higher labor and related costs associated with the
ongoing development of UltiPro and Optional Capabilities, including the impact of increased personnel costs (predominantly
from additional headcount), net of capitalized labor costs. For the years ended December 31, 2016 and 2015, we capitalized
$37.9 million (including $3.9 million in non-cash stock-based compensation) and $26.3 million (including $3.0 million in
non- cash stock-based compensation), respectively, of computer software development costs related to the Development
Project. The capitalized costs for the Development Project were primarily from direct labor costs and, to a lesser extent, third
party consulting fees for the years ended December 31, 2016 and 2015. For each of 2016 and 2015, we recognized $1.1
million of amortization costs which were associated with a particular product module, of the Development Project, UltiPro
Recruiting, which was ready for its intended use during the second quarter of 2014. In addition, another product module of the
Development Project, UltiPro Onboarding, became ready for its intended use in mid-December 2016; the amortization related
to the commencement of the amortization for UltiPro Onboarding was insignificant for the 2016 year. The amortization of
capitalized software is included in cost of recurring revenues.
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 increased by 29.5% to $94.4 million for 2016 from $72.9 million for 2015. The $21.5 million increase in general
and administrative expenses during 2016 was primarily due to higher labor and related costs, including increased personnel
to support Ultimate's growth in operations, an increase in facility costs to support growth in headcount, including our Weston,
Florida headquarter locations, increased professional fees and a portion of certain non-cash, stock-based compensation
expenses for the revisions and terminations of our CIC Plans.
Provision for Income Taxes
In 2016, based on pre-tax income, we had income tax expense of $12.2 million as compared to $28.8 million in 2015.
The decrease in income tax expense of $16.6 million was primarily due to the early adoption of ASU 2016-09 (see Note 3 in
Notes to Consolidated Financial Statements), partially offset by an increase in non-deductible expenses, primarily stock based
compensation, and a resulting higher ratio of non-deductible expenses to pre-tax income. Ultimate recorded $4.0 million and
$3.2 million of research and development tax credit carryforwards during the years ended December 31, 2016 and December
31, 2015, respectively.
36
Quarterly Results of Operations
The following table sets forth certain unaudited quarterly results of operations for each of the quarters in the years
ended December 31, 2017 and 2016. In management’s opinion, this unaudited information has been prepared on the same basis
as the audited consolidated financial statements and includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the information for the quarters presented. The unaudited quarterly results of operations for
the first three quarters of 2017 and each of the quarters in the year ended December 31, 2016, were revised in connection with
an immaterial correction of prior period financial statements. See Note 17 in our Notes to Consolidated Financial Statements
for further discussion.
This information should be read in conjunction with Ultimate’s Consolidated Financial Statements and Notes thereto
included elsewhere in this Form 10-K.
Our quarterly revenues and operating results have varied significantly in the past and are likely to vary substantially
from quarter to quarter in the future. Our 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 us or our competitors and capital spending patterns of our customers. We establish our expenditure levels based
upon our expectations as to future revenues, and, if revenue levels are below expectations, expenses can be disproportionately
high. A drop in near term demand for our 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 we will be able to achieve or maintain profitability on
a quarterly basis. We believe that, due to the underlying factors for quarterly fluctuations, quarter-to-quarter comparisons of
Ultimate’s operations are not necessarily meaningful and that such comparisons should not be relied upon as indications of
future performance.
37
Quarters Ended
(In thousands, except per share data)
Revenues:
Dec 31,
2017
Sep 30,
2017
Jun 30,
2017
Mar 31,
2017
Dec 31,
2016
Sep 30,
2016
Jun 30,
2016
Mar 31,
2016
(Unaudited)
Recurring..............................................
$ 214,112
$ 203,059
$ 195,147
$ 189,981
175,944
167,025
158,479
152,751
Services ................................................
37,319
33,054
29,545
38,510
34,605
29,966
28,058
34,463
Total revenues .................................
251,431
236,113
224,692
228,491
210,549
196,991
186,537
187,214
Cost of revenues: ....................................
Recurring..............................................
Services ................................................
Total cost of revenues .....................
55,394
35,659
91,053
52,558
36,136
88,694
52,539
31,715
84,254
50,069
39,631
89,700
46,173
33,218
79,391
44,095
32,069
76,164
42,951
29,342
72,293
39,457
32,804
72,261
Gross profit .............................................
160,378
147,419
140,438
138,791
131,158
120,827
114,244
114,953
Operating expenses:................................
Sales and marketing .............................
Research and development...................
General and administrative ..................
68,339
41,013
30,983
65,066
38,415
29,459
67,015
34,997
31,472
69,360
36,158
30,204
58,074
32,383
25,439
55,212
31,699
25,284
54,548
29,053
22,180
56,582
27,515
21,529
Total operating expenses.................
140,335
132,940
133,484
135,722
115,896
112,195
105,781
105,626
Operating income............................
20,043
14,479
6,954
3,069
15,262
8,632
8,463
9,327
Other (expense) income:.........................
Interest expense and other, net ..........
Other income, net ..............................
Total other expense, net.....................
(129)
34
(95)
(239)
57
(182)
(165)
81
(84)
Income before income taxes ...................
19,948
14,297
6,870
Provision for income taxes...................
(22,005)
(9,954)
(2,341)
(280)
226
(54)
3,015
4,225
(174)
135
(39)
(179)
111
(68)
(180)
102
(78)
(184)
103
(81)
15,223
8,564
8,385
9,246
(2,873)
(4,000)
(2,463)
(2,839)
Net income (loss) ....................................
$ (2,057) $
4,343
$
4,529
$
7,240
$ 12,350
$
4,564
$
5,922
$
6,407
Earnings (loss) per share:........................
Basic ................................................
Diluted .............................................
$
$
(0.07) $
(0.07) $
0.15
0.14
$
$
0.15
0.15
$
$
0.25
0.24
$
$
0.42
0.41
$
$
0.16
0.15
$
$
0.20
0.20
$
$
0.22
0.21
Weighted average shares outstanding: ....
Basic.....................................................
Diluted..................................................
30,021
30,021
29,848
30,770
29,751
30,623
29,538
30,497
29,200
30,469
28,977
30,475
28,895
30,240
28,825
30,108
Seasonality
We have experienced, and may experience in the future, seasonality in our business, and our business, operating
results and financial condition may be affected by such trends in the future. Ultimate'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. Revenues have
historically increased at higher rates in the fourth quarter of the year and at lower rates in the next succeeding quarter. We
believe such seasonality is due to a number of factors, including our quota-based compensation arrangements, typical of those
used in software companies, and year-end budgetary pressures on our customers. We believe that the seasonal trend that
Ultimate has experienced in the past may continue in the foreseeable future.
38
Liquidity and Capital Resources
In recent years, we have funded operations primarily from cash flows generated from operations.
As of December 31, 2017, we had $165.1 million in cash, cash equivalents and short-term corporate investments in
marketable securities, reflecting a net increase of $75.8 million since December 31, 2016. The increase was primarily
attributable to cash provided by operations of $214.0 million and proceeds from the issuances of our common stock from
employee and non-employee director stock option exercises of $6.6 million, partially offset by cash purchases of property and
equipment (including principal payments on financed equipment) of $83.9 million (which includes $48.6 million of capitalized
labor and third party consulting costs, paid in cash, associated with the Development Project) and cash used to settle the
employee tax withholding liability for vesting of restricted stock awards and restricted stock units of $68.0 million.
Our operating cash inflows primarily consist of payments received from our UltiPro customers. Our operating cash
outflows primarily consist of cash we invest in personnel and infrastructure to support the anticipated growth of our business,
payments to vendors related to our operations, payments under arrangements with third party vendors who provide hosting
infrastructure services in connection with UltiPro, related sales and marketing costs, other costs of operations, as well as
systems development and programming costs. Net cash provided by operating activities increased $54.5 million during 2017 as
compared with 2016. This increase was primarily due to an increase in operating income (after adjusting for the impact of non-
cash expenses) of $43.8 million, partially offset by cash paid for working capital, including prepaid commissions (short- and
long-term) in association with increased sales.
Net cash used in investing activities was $162.7 million for 2017 as compared with net cash provided by investing
activities of $358.2 million for 2016. The $520.9 million decrease from 2016 was primarily attributable to a decrease of $575.0
million in client funds received from our customers using the UltiPro payment services offering (“UltiPro Payment Services”),
a decrease in maturities of marketable securities of $2.0 million and an increase in cash purchases of property and equipment of
$8.2 million (including an increase of $14.7 million of capitalized labor costs and, to a lesser extent, third party consulting
costs, paid in cash, associated with the Development Project), partially offset by a decrease in the purchases of marketable
securities of $39.7 million (which includes $208.8 million of funds held for customers being invested in marketable securities
in addition to our corporate funds). We invest our customer funds in available for sale securities in addition to our corporate
funds in accordance with our internal investment strategies. The portfolio predominantly consists of investment grade securities
with long-term ratings of AAA and AA+ and short-term ratings A-1/P-1. Customer funds not invested in available for sale
securities, temporarily held by us as a result of our UltiPro Payment Services, are invested in U.S. Government money market
funds that invest in short-term, high quality money market instruments which consist of U.S. Treasury and U.S. Government
Agency obligations and repurchase agreements collateralized by such obligations. The money market funds are rated AAA by
Standard & Poor's and Aaa by Moody's. Any residual customer funds are held primarily in our bank accounts.
Net cash provided by financing activities was $29.8 million for 2017 as compared with net cash used in financing
activities of $553.7 million for 2016. The $583.5 million increase in net cash provided by financing activities was primarily
related to an increase of $554.6 million in UltiPro Payment Services client fund obligations, a decrease of $29.7 million in cash
used for the repurchases of shares of Common Stock under our Stock Repurchase Plan, partially offset by, a $2.5 million
increase in cash used to settle employee tax withholding liabilities for the vesting of restricted stock.
Days sales outstanding (“DSO”), calculated on a trailing three-month basis, as of December 31, 2017 were 70 days as
compared with 71 days as of December 31, 2016. The decrease of one day was associated with stronger collections.
Deferred revenues were $198.9 million at December 31, 2017, as compared with $174.0 million at December 31,
2016. The increase of $24.9 million in deferred revenues for 2017 was primarily due to higher deferred cloud revenues mainly
attributable to increased sales.
We believe that cash and cash equivalents, investments in marketable securities, equipment financing, other
borrowings and cash generated from operations will be sufficient to fund our 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.
As of December 31, 2017, we did not have any material commitments for capital expenditures, except for anticipated
capitalized costs associated with the Development Project.
39
Off-Balance Sheet Arrangements
We do not, and, as of December 31, 2017, we did not, have any off-balance sheet arrangements (as that term is defined
in applicable SEC rules) that are reasonably likely to have a current or future material effect on our financial condition, results
of operations, liquidity, capital expenditures or capital resources.
Non-GAAP Financial Measures
Item 10 (e) of Regulation S-K, "Use of Non-GAAP Financial Measures in Commission Filings," defines and
prescribes the use of non-GAAP financial information. Our measure of Non-GAAP Operating Income, which excludes non-
cash stock-based compensation, amortization of acquired intangibles, and transaction costs related to business combinations
meets the definition of a non-GAAP financial measure.
Ultimate believes that this non-GAAP measure of financial results provides useful information to management and
investors regarding certain financial and business trends relating to Ultimate's financial condition and results of operations.
Ultimate's management uses this non-GAAP result to compare Ultimate's performance to that of prior periods for trend
analyses, for purposes of determining executive incentive compensation, and for budget and planning purposes. This measure is
used in monthly financial reports prepared for management and in quarterly financial reports presented to Ultimate's Board of
Directors. This measure may be different from non-GAAP financial measures used by other companies.
This non-GAAP measure should not be considered in isolation or as an alternative to such measures determined in
accordance with generally accepted accounting principles in the United States (GAAP). The principal limitation of this non-
GAAP financial measure is that it excludes significant expenses that are required by GAAP to be recorded. In addition, it is
subject to inherent limitations as it reflects the exercise of judgment by management about which expenses are excluded from
the non-GAAP financial measure.
To compensate for these limitations, Ultimate presents its non-GAAP financial measure in connection with its GAAP
result. Ultimate strongly urges investors and potential investors in Ultimate's securities to review the reconciliation of its non-
GAAP financial measure to the comparable GAAP financial measure that is included in the table below and not to rely on any
single financial measure to evaluate its business.
We exclude the following items from the non-GAAP financial measure, Non-GAAP Operating Income, as
appropriate:
Stock-based compensation expense. Ultimate's non-GAAP financial measure of Non-GAAP Operating Income
excludes non-cash stock-based compensation expense, which consists of expenses for restricted stock and stock unit awards
recorded in accordance with Accounting Standards Codification 718, “Compensation - Stock Compensation.” For the years
ended December 31, 2017, 2016 and 2015, stock-based compensation expense was $146.4 million, $113.9 million and $82.4
million, respectively, on a pre-tax basis. Stock-based compensation expense is excluded from the non-GAAP financial
measures because it is a non-cash expense that Ultimate does not consider part of ongoing operations when assessing its
financial performance. Ultimate believes that such exclusion facilitates the comparison of results of ongoing operations for
current and future periods with such results from past periods. For GAAP net income periods, non-GAAP reconciliations are
calculated on a diluted weighted average share basis.
Amortization of acquired intangible assets. In accordance with GAAP, operating expenses include amortization of
acquired intangible assets over the estimated useful lives of such assets. For the years ended December 31, 2017, 2016 and
2015, the amortization of acquired intangible assets was $3.1 million, $1.1 million and $1.0 million, respectively. Amortization
of acquired intangible assets is excluded from Ultimate's non-GAAP financial measures because it is a non-cash expense that
Ultimate does not consider part of ongoing operations when assessing its financial performance. Ultimate believes that such
exclusion facilitates comparisons to its historical operating results and to the results of other companies in the same industry,
which have their own unique acquisition histories.
Transaction costs related to business combinations. In accordance with GAAP, operating expenses include transaction
costs for third-party professional services incurred in connection with business combinations. As we do not acquire or dispose
of businesses on a predictable basis, the terms of each business combination are unique and can vary significantly from other
business combinations. Significant expenses can be incurred in connection with a business combination that we would not have
otherwise incurred in the periods presented as part of our continuing operations. For the year ended December 31, 2017 there
were no transactions costs incurred related to business combinations. For the year ended December 31, 2016, there were $0.9
million of transaction costs incurred related to business combinations. For the year ended December 31, 2015 there were no
40
transaction costs incurred related to business combinations. Transaction costs related to business combinations are excluded
from Ultimate's non-GAAP financial measures because it is an expense that Ultimate does not consider part of ongoing
operations when assessing its financial performance. Ultimate believes that such exclusion facilitates comparisons to its
historical operating results and to the results of other companies in the same industry, which have their own unique business
combination histories.
For the Year Ended
2016
2015
2017
Non-GAAP operating income reconciliation:
Operating income ...............................................................
Operating income, as a % of total revenues.......................
Add back:
Non-cash stock-based compensation expense....................
Non-cash amortization of acquired intangible assets .........
Transaction costs related to business combinations ...........
Non-GAAP operating income ............................................
Non-GAAP operating income, as a % of total revenues ....
$
44,546
$
41,684
$
43,318
4.7%
5.3%
7.0%
146,427
3,129
—
194,102
$
113,877
1,115
874
157,550
$
82,416
1,034
—
126,768
$
20.6%
20.2%
20.5%
Contractual Obligations
As of December 31, 2017, Ultimate’s outstanding contractual cash obligations were as follows (in thousands):
Payments Due by Period
Total
Less Than 1
Year
1-3 Years
4-5 Years
More than 5
Years
Capital lease obligations (1)............................... $
Other long-term obligations (2) .........................
Other long-term liabilities (3) ............................
Total contractual cash obligations...................... $
9,951
$
5,474
$
4,477
$
— $
63,643
8,902
16,151
8,902
28,783
—
17,867
—
82,496
$
30,527
$
33,260
$
17,867
$
—
842
—
842
_________________________
(1) We lease certain computer equipment under non-cancelable agreements, which are accounted for as capital leases and
expire at various dates through 2020. See Note 13 of the Notes to Consolidated Financial Statements included
elsewhere in this Form 10-K for information regarding capital lease obligations.
(2) Included in other long-term obligations were Ultimate’s leases for corporate office space and certain equipment under
non-cancelable operating lease agreements expiring at various dates.
(3) Ultimate has an income tax payable related to the unrecognizable benefit of an uncertain tax position. As of the date
of this report, it is not reasonable to estimate the timing of this payment. Ultimate does not have any other long-term
liabilities as of December 31, 2017.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
In the ordinary course of Ultimate’s operations, we are 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 our market risks.
Interest Rate Risk. Ultimate is subject to financial market risks, including changes in interest rates which influence the
valuations of our fixed income investment portfolio. Changes in interest rates could also impact Ultimate’s anticipated interest
income from interest-bearing cash accounts, or cash equivalents and investments in marketable securities. We manage financial
market risks, including interest rate risks, in accordance with our investment guideline objectives, including:
• Maximum safety of principal;
• Maintenance of appropriate liquidity for regular cash needs;
• Maximum yields in relationship to guidelines and market conditions;
• Diversification of risks; and
•
Fiduciary control of all investments.
41
Ultimate 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, asset-backed securities and corporate debt securities. Corporate
debt securities include commercial paper which, according to Ultimate’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 December 31, 2017, total corporate investments in available-for-sale marketable securities were $9.4 million. As
of December 31, 2017, total investments with customer funds in available-for-sale marketable securities were $208.8 million.
As of December 31, 2017, virtually all of the investments in Ultimate’s corporate portfolio and portfolio of
investments with customer funds were at fixed rates (with a weighted average interest rate of 1.4% and 1.6% per annum,
respectively).
To illustrate the potential impact of changes in interest rates, Ultimate has performed an analysis based on its
December 31, 2017 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 Ultimate’s
corporate portfolio of approximately $23 thousand over the next 12 months and a decrease in the fair value of Ultimate’s
portfolio of investments with customer funds of approximately of $1.3 million over the next 12 months. An immediate and
sustained 100 basis point decrease in the various base rates would result in an increase in the fair value of Ultimate’s corporate
portfolio of approximately $23 thousand over the next 12 months and an increase in the fair value of Ultimate’s portfolio of
investments with customer funds of approximately $1.3 million over the next 12 months.
Foreign Currency Risk. Ultimate 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 Ultimate transacts business will materially affect future net income.
42
Item 8. Financial Statements and Supplementary Data
INDEX
Report of Independent Registered Public Accounting Firm ..................................................................................
Consolidated Balance Sheets as of December 31, 2017 and 2016 ........................................................................
Consolidated Statements of Income for the Years Ended December 31, 2017, 2016 and 2015............................
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015..
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015 ......
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015 .....................
Notes to Consolidated Financial Statements..........................................................................................................
Page(s)
44
45
46
47
48
50
52
43
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
The Ultimate Software Group, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of The Ultimate Software Group, Inc. and subsidiaries (the
Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2017, and the related
notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations
and its cash flows for each of the years in the three year period ended December 31, 2017, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 26, 2018 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Fort Lauderdale, FL
February 26, 2018
Certified Public Accountants
44
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
2017
2016
(In thousands, except share data)
Current assets:
ASSETS
Cash and cash equivalents........................................................................................................................... $
155,685
$
Investments in marketable securities .....................................................................................................
Accounts receivable, net of allowance for doubtful accounts of $900 for 2017 and 2016....................
Prepaid expenses and other current assets .............................................................................................
Deferred tax assets, net ..........................................................................................................................
Total current assets before funds held for customers .......................................................................
Funds held for customers .......................................................................................................................
Total current assets ...........................................................................................................................
Property and equipment, net........................................................................................................................
Goodwill......................................................................................................................................................
Investments in marketable securities...........................................................................................................
Intangible assets, net ...................................................................................................................................
Other assets, net...........................................................................................................................................
Deferred tax assets, net................................................................................................................................
9,434
190,989
71,602
—
427,710
563,062
990,772
243,664
35,808
—
20,862
53,409
32,696
73,773
15,541
162,240
61,901
1,125
314,580
465,167
779,747
179,558
35,322
8,547
23,860
47,432
60,222
Total assets ............................................................................................................................................. $
1,377,211
$
1,134,688
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable ................................................................................................................................... $
16,099
$
Accrued expenses and other liabilities...................................................................................................
Deferred revenue....................................................................................................................................
Capital lease obligations ........................................................................................................................
Total current liabilities before customer funds obligations ..............................................................
Customer funds obligations ...................................................................................................................
Total current liabilities......................................................................................................................
Deferred revenue .........................................................................................................................................
Deferred rent ...............................................................................................................................................
Capital lease obligations..............................................................................................................................
Other long-term liabilities ...........................................................................................................................
Deferred income tax liability.......................................................................................................................
60,394
197,088
5,474
279,055
564,031
843,086
1,773
5,349
4,477
4,250
251
13,519
50,973
171,669
5,056
241,217
466,423
707,640
2,307
6,022
3,985
—
519
Total liabilities .......................................................................................................................................
859,186
720,473
Commitments and contingencies (Note 16) ................................................................................................
Stockholders’ equity:
Series A Junior Participating Preferred Stock, $.01 par value, 500,000 shares authorized, no shares
issued...................................................................................................................................................
Preferred Stock, $.01 par value, 2,000,000 shares authorized, no shares issued ....................................
Common Stock, $.01 par value, 50,000,000 shares authorized, 34,787,986 and 34,003,036 shares issued
in 2017 and 2016, respectively............................................................................................................
Additional paid-in capital ......................................................................................................................
Accumulated other comprehensive loss.................................................................................................
Accumulated earnings............................................................................................................................
Treasury stock, 4,657,995 shares, at cost, for 2017 and 2016.....................................................................
Total stockholders’ equity ......................................................................................................................
—
—
348
609,160
(5,912)
125,788
729,384
(211,359)
518,025
—
—
340
520,524
(7,023)
111,733
625,574
(211,359)
414,215
Total liabilities and stockholders’ equity ............................................................................................... $
1,377,211
$
1,134,688
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
45
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
2017
2016
2015
(in thousands, except per share data)
Revenues:
Recurring......................................................................................................... $
Services ...........................................................................................................
Total revenues ...............................................................................................
Cost of revenues:
Recurring.........................................................................................................
Services ...........................................................................................................
Total cost of revenues ...................................................................................
Gross profit .....................................................................................................
Operating expenses:
Sales and marketing ........................................................................................
Research and development..............................................................................
General and administrative .............................................................................
Total operating expenses...............................................................................
Operating income ............................................................................................
Other (expense) income:
Interest expense and other, net ........................................................................
Other income, net ............................................................................................
Total other expense, net ................................................................................
Income before income taxes ...........................................................................
Provision for income taxes..............................................................................
Net income ...................................................................................................... $
802,300
$
654,199
$
138,429
940,729
210,560
143,140
353,700
587,029
269,781
150,583
122,119
542,483
44,546
(813)
397
(416)
44,130
(30,075)
14,055
127,092
781,291
172,676
127,433
300,109
481,182
224,416
120,650
94,432
439,498
41,684
(717)
451
(266)
41,418
(12,178)
29,240
1.01
0.96
$
$
$
$
$
$
516,400
101,681
618,081
138,587
99,948
238,535
379,546
169,664
93,671
72,893
336,228
43,318
(491)
256
(235)
43,083
(28,825)
14,258
0.50
0.48
Net income per share:
Basic ............................................................................................................. $
Diluted .......................................................................................................... $
0.47
0.46
Weighted average shares outstanding:
Basic .............................................................................................................
Diluted ..........................................................................................................
29,791
30,799
28,976
30,414
28,634
29,721
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
46
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income ...................................................................................................... $
Other comprehensive (loss) income:
Unrealized loss on investments in marketable available for sale securities .
Unrealized gain (loss) on foreign currency translation adjustments ............
Other comprehensive income (loss), before tax ..............................................
Income tax benefit related to items of other comprehensive income ...........
Other comprehensive income (loss), net of tax............................................... $
Comprehensive income................................................................................... $
For the Years Ended December 31,
2017
2016
2015
14,055
$
29,240
$
14,258
(558)
1,529
971
140
1,111
15,166
$
$
(61)
843
782
24
806
30,046
$
$
(56)
(4,195)
(4,251)
12
(4,239)
10,019
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
47
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Common Stock
Shares
Amount
Additional
Paid -in
Capital
Accumulated
Other
Comprehensive
(Loss) Income
Treasury Stock
Accumulated
Earnings
Shares
Amount
Total
Stockholders’
Equity
32,723
$
327
$
376,609
$
(3,590) $
—
—
—
—
—
—
13
189
336
—
—
—
—
—
—
—
1
2
3
—
—
—
(34,989)
31,859
—
—
4,701
—
—
85,429
—
(44)
(4,195)
—
—
—
—
—
—
—
28,489
14,258
—
—
—
—
—
—
—
—
—
4,217
$ (138,525) $
263,310
—
—
—
—
—
—
14,258
—
—
—
—
(44)
(4,195)
(34,989)
31,859
251
(43,149)
(43,149)
—
—
—
—
—
—
—
—
1
4,703
3
85,429
33,261
$
333
$
463,609
$
(7,829) $
42,747
4,468
$ (181,674) $
317,186
—
—
—
—
—
—
7
183
552
—
—
—
—
—
—
—
—
2
5
—
—
—
—
(65,522)
—
—
4,657
—
—
117,780
—
—
39,746
29,240
(37)
843
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
39,746
29,240
(37)
843
(65,522)
190
(29,685)
(29,685)
—
—
—
—
—
—
—
—
—
4,659
5
117,780
34,003
$
340
$
520,524
$
(7,023) $
111,733
4,658
$ (211,359) $
414,215
48
Balance, December 31,
2014 ...............................
Net income.....................
Unrealized loss on
investments in
marketable securities
available-for-sale, net of
tax ..................................
Unrealized loss on
foreign exchange ...........
Shares acquired to settle
employee tax
withholding liability ......
Excess tax benefits from
employee stock plan ......
Repurchases of
Common Stock ..............
Stock consideration for
acquisitions ....................
Issuances of Common
Stock from exercises of
stock options..................
Issuances of Common
Stock from restricted
stock releases .................
Non-cash stock-based
compensation expense ...
Balance, December 31,
2015 ...............................
Cumulative impact of
adoption of ASU
2016-09..........................
Net income.....................
Unrealized loss on
investments in
marketable securities
available-for-sale, net of
tax ..................................
Unrealized gain on
foreign exchange ...........
Shares acquired to settle
employee tax
withholding liability ......
Repurchases of
Common Stock ..............
Stock consideration for
acquisitions ....................
Issuances of Common
Stock from exercises of
stock options..................
Issuances of Common
Stock from restricted
stock releases .................
Non-cash stock-based
compensation expense ...
Balance, December 31,
2016 ...............................
Common Stock
Shares
Amount
Additional
Paid -in
Capital
Accumulated
Other
Comprehensive
(Loss) Income
Treasury Stock
Accumulated
Earnings
Shares
Amount
Total
Stockholders’
Equity
—
—
—
—
230
555
—
—
—
—
—
2
6
—
—
—
(68,034)
6,563
—
—
150,107
—
14,055
(418)
1,529
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
14,055
—
—
—
—
—
—
(418)
1,529
(68,034)
6,565
6
150,107
34,788
$
348
$
609,160
$
(5,912) $
125,788
4,658
$ (211,359) $
518,025
Net loss ..........................
Unrealized loss on
investments in
marketable securities
available-for-sale, net of
tax ..................................
Unrealized gain on
foreign exchange ...........
Shares acquired to settle
employee tax
withholding liability ......
Issuances of Common
Stock from exercises of
stock options..................
Issuances of Common
Stock from restricted
stock releases .................
Non-cash stock-based
compensation expense ...
Balance, December 31,
2017 ...............................
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
49
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income ...................................................................................................... $
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................................................
Provision for doubtful accounts....................................................................
Non-cash stock-based compensation expense ..............................................
Income taxes .................................................................................................
Net amortization of premiums and accretion of discounts on available-for-
sale securities ................................................................................................
Changes in operating assets and liabilities:
Accounts receivable .................................................................................
Prepaid expenses and other current assets ...............................................
Other assets ..............................................................................................
Accounts payable .....................................................................................
Accrued expenses and deferred rent ........................................................
Deferred revenue......................................................................................
Net cash provided by operating activities .............................................
Cash flows from investing activities:
Purchases of marketable securities .................................................................
Maturities of marketable securities .................................................................
Payments for acquisitions ...............................................................................
Net change in money market securities and other cash equivalents held to
satisfy customer funds obligations ..................................................................
Purchases of property and equipment, including capitalized software
development ....................................................................................................
Net cash (used in) provided by investing activities...............................
Cash flows from financing activities:
Repurchases of Common Stock ......................................................................
Net proceeds from issuances of Common Stock ............................................
Shares acquired to settle employee tax withholding liabilities .......................
Principal payments on capital lease obligations .............................................
Repayments of other borrowings ....................................................................
Net increase (decrease) in customer fund obligations.....................................
Net cash provided by (used in) financing activities ..............................
Effect of exchange rate changes on cash.........................................................
Net increase (decrease) in cash and cash equivalents .....................................
Cash and cash equivalents, beginning of year ................................................
Cash and cash equivalents, end of year........................................................... $
50
For the Years Ended December 31,
2017
2016
2015
(in thousands)
14,055
$
29,240
$
14,258
34,055
5,727
146,427
28,607
27,098
3,213
113,877
11,208
308
755
(34,476)
(9,704)
(5,977)
2,580
7,498
24,885
213,985
(35,004)
(14,973)
(16,325)
5,850
7,403
27,179
159,521
(168,006)
121,857
(1,000)
(207,676)
123,895
(25,636)
21,738
4,687
82,416
28,180
—
(34,575)
(12,016)
(10,496)
(23)
12,507
36,022
142,698
(91,528)
11,711
—
(37,959)
537,077
(94,306)
(77,594)
(162,702)
(69,415)
358,245
(50,634)
(224,757)
—
6,565
(68,034)
(6,340)
—
97,608
29,799
830
81,912
73,773
(29,685)
4,659
(65,522)
(5,831)
(400)
(456,943)
(553,722)
404
(35,552)
109,325
155,685
$
73,773
$
(43,149)
4,703
(34,989)
(4,810)
(567)
164,279
85,467
(2,381)
1,027
108,298
109,325
Supplemental disclosure of cash flow information:
Cash paid for interest .................................................................................... $
Cash paid for taxes........................................................................................ $
498
2,192
$
$
426
1,758
Non-cash investing and financing activities:
Capital lease obligations to acquire new equipment..................................... $
Cash held in escrow for business combinations ........................................... $
Software agreement ...................................................................................... $
Stock based compensation for capitalized software ..................................... $
7,250
$
— $
6,500
4,003
$
$
$
$
$
$
6,719
3,600
— $
371
815
5,949
—
—
3,903
$
3,013
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
51
THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Nature of Operations
The Ultimate Software Group, Inc. and subsidiaries (“Ultimate,” “we,” “us” or “our”) is a leading provider of cloud-
based human capital management solutions, often referred to as human capital management (“HCM”). Ultimate's UltiPro
product suite (“UltiPro”) is a comprehensive, engaging solution that has human resources ("HR"), payroll, and benefits
management at its core and includes global people management, available in 14 languages with more than 37 country-specific
localizations. The solution is delivered via software-as-a-service ("SaaS"), now more commonly known as the cloud computing
model, to organizations based in the United States and Canada, including those with global workforces. UltiPro is designed to
deliver the functionality businesses need to manage the complete employment life cycle from recruitment to retirement. We
market our UltiPro solutions primarily to enterprise companies, which we define as organizations with 2,501 or more
employees, including those with 10,000 or more employees; mid-market companies, which we define as those having
501-2,500 employees; and strategic market companies, which we define as those having 100-500 employees. UltiPro is
marketed primarily through our enterprise, mid-market and strategic direct sales teams.
2.
Basis of Presentation, Consolidation and the Use of Estimates
The accompanying consolidated financial statements of Ultimate have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”).
The consolidated financial statements included herein reflect all adjustments, which are, in the opinion of Ultimate’s
management, necessary for a fair presentation of the information for the periods presented. The preparation of financial
statements in conformity with U.S. generally accepted accounting principles (“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.
Such estimates include, but are not limited to, revenue recognition, income taxes, the allowance for doubtful accounts, the
valuation of deferred tax assets and long-lived assets, among others discussed below. Actual results could differ from those
estimates.
The consolidated financial statements reflect the financial position and operating results of Ultimate and include its
wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.
3.
Summary of Significant Accounting Policies and Recent Accounting Pronouncements
Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or less when acquired are considered cash
equivalents and are comprised of interest-bearing accounts.
Accounts Receivable
Accounts receivable are principally from end-users of Ultimate’s products. We maintain an allowance for doubtful
accounts at an amount estimated to be sufficient to provide adequate protection against losses resulting from collecting less
than full payment on accounts receivable. A considerable amount of judgment is required when the realization of receivables is
assessed, including assessing the probability of collection and current credit-worthiness of each customer. If the financial
condition of our customers were to deteriorate, resulting in a further impairment of their ability to make payments, an
additional provision for doubtful accounts may be required. We charge off uncollectible amounts against the allowance for
doubtful accounts in the period in which we determine they are uncollectible.
Funds Held for Customers and Customers’ Funds Obligations
Ultimate has the right to market and distribute an independent third party’s tax filing solution that Ultimate has
branded UltiPro Payment Services. Ultimate’s UltiPro Payment Services offering provides payment services to our
customers. These payment services are being sold directly by us to our customers only on a per-employee-per-month
(“PEPM”) basis in conjunction with UltiPro, our core product. In connection with our UltiPro Payment Services product, we
receive funds from our customers and hold such funds for purposes of paying the appropriate taxing authorities on behalf of
such customers. We invest a portion of our customer funds in available for sale securities in addition to our corporate funds in
accordance with our internal investment strategies. The portfolio predominantly consists of investment grade securities with
long-term ratings of AAA and AA+ and short-term ratings A-1/P-1. These funds held for customers and the corresponding
customer funds obligations are included in current assets and current liabilities, respectively, in our consolidated balance sheets
52
as of December 31, 2017 and 2016. We have reported the cash flows for purchases of securities with funds received from
UltiPro Payment Services customers in the investing activities section of the consolidated statements of cash flows for the years
ended December 31, 2017, 2016 and 2015. We have reported the cash flows related to the funds received and paid on behalf of
such customers to the applicable taxing authorities in the financing activities section of the consolidated statements of cash
flows for the years ended December 31, 2017, 2016 and 2015. The associated PEPM fees for UltiPro Payment Services are
included in recurring revenues in the consolidated statements of income for the years ended December 31, 2017, 2016 and
2015. The associated interest earned was not material for the years ended December 31, 2017, 2016 and 2015.
Fair Value of Financial Instruments
Ultimate’s financial instruments, consisting of cash and cash equivalents, investments in marketable securities, funds
held for customers and the related obligations, accounts receivable, accounts payable, and capital lease obligations,
approximated fair value (due to their relatively short maturity) as of December 31, 2017 and 2016.
Funds Held for Customers and Corporate Investments
We classify our investments in marketable securities with readily determinable fair values as available-for-
sale. Available-for-sale securities consist of debt and equity securities not classified as trading securities or as securities to be
held to maturity. Unrealized gains and losses, net of tax, on available-for-sale securities are reported as a net amount in
accumulated other comprehensive income in stockholders’ equity until realized. Gains and losses on the sale of available-for-
sale securities are determined using the specific identification method. Interest earned on investments from funds held for
customers is included in recurring revenue and was not material in the years presented. If the fair value of an available-for-sale
debt security is below its amortized cost, Ultimate assesses whether we intend to sell the security or if it is more likely than not
we will be required to sell the security before recovery. If either of those two conditions are met, Ultimate would recognize a
charge in earnings equal to the entire difference between the security's amortized cost basis and its fair value. If we do not
intend to sell a security or it is not more likely than not that it will be required to sell the security before recovery, the
unrealized loss is separated into an amount representing the credit loss, which is recognized in earnings, and the amount related
to all other factors, which is recognized in accumulated other comprehensive income.
Prepaid Expenses and Other Current Assets
Ultimate’s consolidated financial statements include prepaid expenses and other current assets which include prepaid
commissions on cloud sales. Prepaid expenses are amortized over the life of the asset (typically within one year) and prepaid
commissions on cloud sales are amortized over the initial contract term (typically 24-36 months) typically commencing on the
day the customer processes its first live payroll using UltiPro (also referred to as going “Live”), which corresponds with the
related cloud revenue recognition. The portion of prepaid commissions that extends beyond one year is classified in other
assets, net, in the consolidated balance sheets as of December 31, 2017 and 2016.
Long-Lived Assets
We evaluate the carrying value of long-lived assets when indicators of impairment exist. For the year ended
December 31, 2017, no such events or circumstances were identified. The carrying value of a long-lived asset is considered
impaired when the undiscounted expected future cash flows from such asset (or asset group) are separately identifiable and less
than the asset’s (or asset group’s) carrying value. In that event, a loss is recognized to the extent that the carrying value exceeds
the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. For the years ended December 31, 2017, 2016 and 2015, we recorded no impairment of
our long-lived assets.
Property and Equipment
Property and equipment is stated at cost, net of accumulated depreciation and amortization. Property and equipment is
depreciated using the straight-line method over the estimated useful lives of the assets, which range from 2 to 15 years.
Leasehold improvements and assets under capital leases are amortized over the shorter of the life of the asset or the term of the
lease over periods ranging from approximately 3 to 15 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.
Computer Software Development Costs
Computer software development costs related to software developed for internal use falls under the accounting
guidance of ASC Topic 350-40, Intangibles Goodwill and Other–Internal Use Software, in which computer software costs are
expensed as incurred during the preliminary project stage and capitalization begins in the application development stage once
53
the capitalization criteria are met. Costs associated with post implementation activities are expensed as incurred. Costs
capitalized during the application development stage include external direct costs of materials and services consumed in
developing or obtaining internal-use software and payroll and payroll-related costs for employees who are directly associated
with, and who devote time to, the internal-use computer software. In addition to capitalizing costs for software (which are used
by us in our general operations, for internal purposes), we also capitalize costs under ASC Topic 350-40 for certain software
development projects related to our suite of products sold to our customers exclusively on a subscription basis under our SaaS
offering of UltiPro.
Deferred Revenue
Deferred revenue is primarily comprised of deferrals of recurring revenues for cloud services which are recognized
over the initial term of the related contract as the services are performed, typically 24-36 months, commencing with the related
Live date; and implementation consulting services for which the services have not yet been rendered which are primarily
recognized prior to the respective Live date.
Guarantees
The standard commercial terms in our sales contracts for UltiPro include an indemnification clause that indemnifies
the customer against certain liabilities and damages arising from any claims of patent, copyright, or other proprietary rights of
any third party. Due to the nature of the intellectual property indemnification provided to our customers, we cannot estimate the
fair value, or determine the total nominal amount, of the indemnification until such time as a claim for such indemnification is
made. In the event of a claim made against us under such provision, we evaluate estimated losses for such indemnification
considering such factors as the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate
of the amount of loss. To date, Ultimate has not had any claims made against it under such provision and, accordingly, has not
accrued any liabilities related to such indemnifications in its consolidated financial statements.
Segment Information
Public companies are required to report selected information about operating segments in annual and interim financial
reports to shareholders, as well as related disclosures about an enterprise’s business segments, products, services, geographic
areas and major customers. Ultimate operates its business as a single segment and is comprised as a single reporting unit.
Revenue Recognition
We recognize revenues in accordance with Accounting Standards Update No. 2009-13, “Multiple-Deliverable
Revenue Arrangements” (“ASU 2009-13”). We use the relative selling price method to allocate the total consideration to units
of accounting in a multiple element arrangement. We allocate revenue in an arrangement using the estimated selling price
(“ESP”) of deliverables if it does not have vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) of
selling price.
VSOE is the price charged when the same or similar product or service is sold separately. We define VSOE as a
median price of recent stand-alone transactions that are priced within a narrow range.
TPE is determined based on the prices charged by our competitors for a similar deliverable when sold
separately. However, due to the difficulty in obtaining sufficient information on competitor pricing and differences in our
product offerings when compared with those of our peers, we generally are unable to reliably determine TPE.
ESP is our best estimate of the selling price of an element in a transaction. If we are unable to establish selling price
using either VSOE or TPE, we will use ESP in our allocation of arrangement consideration. The objective of ESP is to
determine the price at which we would transact business if the product or service were sold by us on a stand-alone basis. Our
determination of ESP involves the use of a customary discount from the list (or book) price for each element, with the
discounted price applied within a narrow range. The customary discount is derived from historical data that has been analyzed
to determine trends and patterns. We analyze the customary discount used for determining ESP on no less than an annual basis.
We evaluate each deliverable in our arrangements to determine whether it represents a separate unit of accounting. A
deliverable constitutes a separate unit of accounting when it has stand-alone value to our customers. Our products and services
continue to qualify as separate units of accounting under ASU 2009-13.
There are two major elements in our multiple element arrangements for the delivery of our UltiPro offering, which are
recurring revenues (i.e., cloud subscription revenues) and services revenues (mostly implementation consulting services).
54
For multiple element arrangements, the consideration allocated to cloud subscription revenues is recognized as
recurring revenues over the initial contract period, as those subscription-based services are delivered, typically commencing
with the Live date of the related product. The consideration allocated to fixed fee implementation consulting services in
multiple element arrangements is recognized as services revenues on a percentage of completion basis, using reasonably
dependable estimates with respect to milestones achieved (in relation to progression through implementation phases), by
product.
Single element arrangements typically consist of renewals for cloud subscriptions and implementation consulting
services sold on a time and materials basis. Under these single element arrangements, cloud subscription revenues are
recognized over the related renewal period, as the services are delivered, and implementation consulting services are
recognized as the related time and materials services are performed.
We recognize revenues when all of the following criteria are met:
•
•
•
•
persuasive evidence of an arrangement exists;
delivery has occurred;
the fees are fixed and determinable; and
collection is considered probable.
If collection is not considered probable, we recognize revenues when the fees are collected. If the fees are not fixed
and determinable, we recognize revenues when the fees become due from the customer. If non-standard acceptance periods or
non-standard performance criteria are required, we recognize revenue when the acceptance period expires or upon the
satisfaction of the acceptance/performance criteria, as applicable.
The majority of services revenues are recognized over the implementation period, which is from the contract
execution date until the Live date. Cloud revenues are recognized over the initial contract term, typically beginning in the
month the customer goes Live.
Recurring Revenues
Recurring revenues primarily consist of subscription revenues recognized from our customers' use of UltiPro after
they have gone Live.
i) Cloud subscription revenues are principally derived from PEPM fees earned from UltiPro units that are Live.
Ongoing PEPM fees are recognized as subscription revenues as the services are delivered, typically commencing when the
customer goes Live.
ii) Effective January 1, 2015, we no longer have maintenance revenues associated with our Legacy customers. Since
the time we announced that we would stop supporting our Legacy product in 2012, we successfully converted the majority of
our Legacy customers to the cloud. Those customers that did not convert terminated.
With UltiPro, our customers do not have the right to take possession of our software and these arrangements are
considered service contracts. The selling price of multiple deliverables in cloud arrangements is derived for each element based
on the guidance provided by ASU 2009-13. The multiple elements that typically exist in cloud arrangements include (1)
recurring revenues from the combination of hosting services, the right to use UltiPro, and maintenance of UltiPro (i.e., product
enhancements, updates and customer support) and (2) professional services (i.e., primarily implementation consulting services).
The pricing for the three elements that pertain to recurring revenues (i.e., hosting services, the right to use UltiPro and
maintenance of UltiPro (as described above) is bundled. Since these three bundled elements are components of recurring
revenues in the consolidated statements of income, allocation of selling price to each of the three elements is not necessary and
they are not reported separately. Selling price, which is established through VSOE, for the bundled elements, as a whole, is
determined on the basis of renewal pricing, without taking into consideration potential price increases or potential changes in
the number of employees of the customer in the future due to the uncertainties surrounding these potential occurrences. These
bundled elements are provided on an ongoing basis, represent undelivered elements and are recognized on a monthly basis as
the related services are performed, commencing once the customer goes Live.
Services Revenues
Services revenues primarily include revenues from fees charged for implementation consulting services in connection
with the implementation of our product solutions and, to a much lesser extent, fees for other services, including the provision of
payroll-related forms, sales of time clocks and the printing of W-2 forms for certain customers, as well as certain client
reimbursable out-of-pocket expenses.
55
Our multiple element contracts contain recurring cloud revenues and implementation consulting services priced on a
fixed fee basis. Time and materials implementation consulting services are sold as stand-alone sales not directly related to the
basic implementation of the cloud product. The total arrangement consideration is allocated to services elements in the
arrangement based on relative selling prices, using the prices established when the services are sold on a stand-alone
basis. Selling price is established through ESP for fixed fee implementation consulting services that are included in our
multiple element contracts.
Revenues from implementation consulting services sold on a fixed-fee basis are recognized using the percentage of
completion accounting method. Percentage of completion is measured at each reporting date based on progress made to date.
Revenues from implementation consulting services, billed on a time and materials basis (at an hourly rate), are
recognized as these services are performed. Other services are recognized as the product is shipped or as the services are
rendered, depending on the specific terms of the related arrangement.
Goodwill and Intangible Assets
The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the
acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of the intangible
assets acquired involves certain judgments and estimates. These judgments and estimates can include, but are not limited to, the
cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital.
At December 31, 2017, our goodwill totaled $35.8 million and our identifiable net intangible assets totaled $20.9
million. We assess the impairment of goodwill of our reporting unit annually, or more often if events or changes in
circumstances indicate that the carrying value may not be recoverable. Goodwill is tested for impairment at the reporting unit
level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the
reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting
unit's carrying value is compared to its fair value. We consider both market and discounted cash flow approaches to determine
the fair value of the reporting unit. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair
value. The discounted cash flow approach uses expected future operating results. Failure to achieve these expected results
may cause a future impairment of goodwill at the reporting unit. We conducted our annual impairment test of goodwill as of
December 31, 2017, and 2016. As a result of this test, we determined that no adjustment to the carrying value of goodwill for
our reporting unit was required.
We evaluate our amortizable intangible assets for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset
or group of assets. The amount of any impairment is measured as the difference between the carrying value and the fair value
of the impaired asset. We also evaluate the estimated remaining useful lives of intangible assets and whether events or changes
in circumstances warrant a revision to the remaining periods of amortization. Assumptions and estimates about future values
and remaining useful lives of our intangible assets are complex and subjective. They can be affected by a variety of factors,
including external factors such as industry and economic trends and internal factors such as changes in our business strategy
and our internal forecasts.
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 our 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 consulting services and, to a lesser degree, training to our
customers, costs related to sales of payroll-related forms, time clocks and costs associated with certain client reimbursable out-
of-pocket expenses.
Stock-Based Compensation
Our Amended and Restated 2005 Equity and Incentive Plan (the “Plan”) authorizes the grant of options to non-
employee directors, officers and employees of Ultimate to purchase shares of Ultimate’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 our Nonqualified Stock Option Plan (the “Prior
Plan”). Beginning in 2009, we began making grants to employees of restricted stock units in lieu of stock options.
56
As of December 31, 2017, the aggregate number of shares of Common Stock that were available to be issued under all
Awards granted under the Plan was 819,893 shares.
The Plan provides broad discretion to the Compensation Committee of the Board of Directors to create appropriate
equity incentives for directors, officers and employees of Ultimate. The Plan is intended to attract and retain talented
employees and align employee and stockholder interests.
For purposes of calculating and accounting for stock-based compensation expense (“SBC”) in accordance with ASC
718, “Compensation – Stock Compensation” (“ASC 718”) for restricted stock awards and restricted stock units, we measure
compensation based on the closing market price of our Common Stock at the date of grant and it is recognized on a straight-
line basis over the vesting period. We estimate forfeitures at the time of grant and revise those estimates in subsequent periods
if actual forfeitures differ from those estimates. The weighted-average forfeiture rate is based on historical data.
In accordance with ASC 718, Ultimate capitalizes the portion of SBC expense attributed to personnel whose labor
costs are being capitalized pursuant to ASC Topic 350-40, Intangibles Goodwill and Other-Internal Use Software, related to
software development. The following table summarizes SBC recognized by the Company (in thousands):
For the Years Ended December 31,
2015
2016
2017
SBC - Statements of income ......................................................................... $
SBC - Capitalized software ...........................................................................
SBC - Statements of stockholders' equity ..................................................... $
146,427
4,003
150,430
$
$
113,877
3,903
117,780
$
$
82,416
3,013
85,429
Rental Costs Incurred in Relation to a Construction Period
We have incurred rental costs associated with operating leases during construction periods. Rental costs incurred
during a construction period are costs incurred for the right to control the use of a leased asset during and after construction of a
leased asset. Since there is no distinction between the right to use a leased asset during the construction period and the right to
use that asset after the construction period, rental costs associated with ground or building operating leases that are incurred
during a construction period are recognized as rental expense on a straight-line basis.
Income Taxes
We are subject to federal, foreign and state corporate income taxes. We account for income taxes using an asset and
liability approach under which deferred income taxes are provided based upon enacted tax laws and rates applicable to the
periods in which the taxes become payable. The federal Tax Cuts and Jobs Act (the "Tax Act”) was enacted on December 22,
2017. The impact of implementing the Tax Act to our deferred income tax expense was reflected during the fourth quarter of
2017.
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These
estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing
of recognition of revenue and expense for tax and financial statement purposes.
We assess the likelihood that Ultimate will be able to recover its deferred tax assets. Management considers all
available evidence, both positive and negative, including historical levels of pre-tax book income, expiration of net operating
losses, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning
strategies, as well as current tax laws and interpretation of current tax laws, in assessing the need for a valuation allowance. If
recovery is not likely, we record a valuation allowance against the deferred tax assets that we estimate will not ultimately be
recoverable. The available positive evidence at December 31, 2017 included, among other factors, three years of cumulative
historical pre-tax book income and a projection of future pre-tax book income and taxable income sufficient to realize all of our
remaining deferred tax assets. As a result of our analysis of all available evidence, both positive and negative, we believe that it
is more likely than not that the results of future operations will generate sufficient taxable income to realize all of the deferred
tax assets as of December 31, 2017. See Note 14 for further discussion.
ASC 740, "Income Taxes" ("ASC 740") provides guidance on the related de-recognition, classification, interest and
penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. Our accounting policy is to
record the tax effects of a change in the opening balance of the unrecognized tax benefits (including unrecognized tax benefits
related to prior-period discontinued operations) in current-period income (loss) from continuing operations. We recognize
interest and penalties accrued related to unrecognized tax benefits as components of our income tax provision. We did not have
57
any interest and penalties accrued upon the adoption of ASC 740, and, as of December 31, 2017 and 2016, we did not have any
interest and penalties accrued related to unrecognized tax benefits.
Reimbursable Out-Of-Pocket Expenses
Reimbursable out-of-pocket expenses, which are included in services revenues and cost of services revenues in our
accompanying consolidated statements of income, were $2.2 million, $2.4 million and $1.9 million for 2017, 2016 and 2015,
respectively.
Recently Issued Accounting Standards
ASC 606
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("Topic 606)”. Topic 606
supersedes the revenue requirements in ASU Topic 605, Revenue Recognition ("Topic 605") and requires the recognition of
revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is
expected to be received for those goods or services and includes Subtopic 340-40, Other Assets and Deferred Costs - Contracts
with Customers, which discusses the deferral of incremental costs of obtaining a contract with a customer, including the period
of amortization of such costs. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of
revenue and cash flows arising from contracts with customers. Collectively, we refer to Topic 606 and Subtopic 340-40 as the
"new standard". Topic 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more
judgment and estimates may be required within the revenue recognition process than are required under existing GAAP,
including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the
transaction price and allocating the transaction price to each separate performance obligation, among others.
Topic 606 is effective for Ultimate on January 1, 2018 using either of two transition methods including several
practical expedients: (1) full retrospective method, in which the new standard would be applied to each prior reporting period
presented or (2) the modified retrospective method, in which the cumulative effect of initially applying the new standard would
be recognized at the date of initial application and providing certain additional disclosures as defined per the new
standard. Ultimate has selected the modified retrospective method with the new standard applied to all contracts that were not
completed on the effective date of January 1, 2018.
We began assessing the new standard in 2016 and continued our assessment in 2017 to address the potential impact
that Topic 606 could have on our consolidated financial statements. Our assessment of the impact included an evaluation of the
five step process including, but not limited to, identifying the customer contract population, identifying the performance
obligations in those customer contracts, determining the contract transaction price and allocating this amount to each
performance obligation, and selecting the measurement methods to recognize revenue in a manner that depicts the transfer of
control to the customer of each identified performance obligation. We have identified changes to our accounting policies and
practices and controls to support the new revenue recognition standard. Implementation of the policy and control changes are
in progress along with continuing our assessment of potential changes to our disclosures under the new guidance.
We anticipate this standard will not have a material impact on the way we recognize revenues, however, the standard
will have a material impact on our consolidated balance sheet, upon adoption, as a result of the period of benefit in which
deferred incremental commission costs to obtain related subscription is recognized. Under current GAAP, we defer incremental
commission costs to obtain a contract and amortize those costs over the initial term of the related subscription contract, which
is generally 2-3 years. Based on our assessment, the period of benefit and, therefore, amortization period has changed to 7 years
under the new standard, representing the period of benefit and the estimated useful life of the underlying software used to
provide our subscription-based recurring services. The change in amortization period of deferred incremental commission costs
will result in an adjustment ranging from $23 million to $27 million in the opening balance sheet amounts as of January 1,
2018.
ASU 2016-02
In February 2016, the FASB issued ASU 2016-02, "Leases" ("ASU 2016-02"), to increase transparency and
comparability among organizations by recognizing lease assets and lease liabilities on the consolidated balance sheet and
disclosing key information about leasing arrangements. The new standard is effective for Ultimate on January 1, 2019 and early
adoption is permitted. The standard requires lessees and lessors to recognize and measure leases at the beginning of the earliest
period presented using a modified retrospective approach. We are still in the process of evaluating the effect that ASU 2016-02
will have on our consolidated financial statements and related disclosures.
58
Recently Adopted Accounting Standards
ASU 2015-17
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): "Balance Sheet Classification of
Deferred Taxes" ("ASU 2015-17”). ASU 2015-17 requires entities to offset all deferred tax assets and liabilities (and valuation
allowances) for each tax-paying jurisdiction within each tax-paying component and present the net deferred tax as a single
noncurrent amount in a classified balance sheet. Effective January 1, 2017 the Company adopted ASU 2015-17. Subsequent to
adoption, all deferred tax assets and deferred tax liabilities are presented as noncurrent on the consolidated balance sheet. The
changes have been applied prospectively as permitted by the ASU and prior years have not been restated. The adoption of this
ASU does not have a material effect on the Company's results of operations, financial condition or liquidity.
4.
Business Combinations
2016 Business Combinations
During the third quarter of 2016, we completed the acquisition of Kanjoya, Inc. ("Kanjoya"), a California corporation
(the “Kanjoya Acquisition”), located in San Francisco, California. During the second quarter of 2016, we completed the
acquisition of substantially all of the assets of Capital Analytics, Inc. (d/b/a Vestrics) (hereinafter referred to as "Vestrics") (the
“Vestrics Acquisition”), a Delaware limited liability company located in North Carolina. The Kanjoya Acquisition and the
Vestrics Acquisition (the “2016 Acquisitions”) were deemed insignificant to the audited consolidated financial statements on an
individual basis and in the aggregate.
Acquisition of Kanjoya, Inc.
On September 29, 2016, pursuant to a merger agreement with Kanjoya, we acquired Kanjoya in exchange for $19.6
million, of which $16.9 million was paid in cash during the twelve months ended December 31, 2016 while the remaining $2.6
million is being held in escrow, and is included in accrued liabilities on our consolidated balance sheet. We recorded the
Kanjoya Acquisition using the acquisition method of accounting and recognized assets and liabilities assumed at their fair value
as of the date of acquisition. Based on the valuation, the significant classes of assets and liabilities to which we allocated the
purchase price of Kanjoya were acquired intangibles for a total of $13.6 million, consisting of $12.1 million for developed
technology, $1.5 million for customer relationships, and goodwill for the balance of $6.4 million. Pursuant to the Kanjoya
Acquisition we assumed working capital, net, totaling $0.4 million. The fair value of the acquired developed technology was
estimated using the cost approach. In accordance with GAAP, direct costs related to the acquisition were expensed as incurred.
Kanjoya is a leading cloud workforce intelligence provider for enterprises. Based upon the technology acquired, we launched
UltiPro Perception, a feature-set that enables businesses to identify and analyze attitudes and performance traits of their
employees, managers, and teams from surveys and other sources of employee feedback. Kanjoya's workforce has joined
Ultimate and will serve to establish an additional research and development hub for us in San Francisco.
The results of operations from this acquisition have been included in our consolidated financial statements since the
closing of the Kanjoya Acquisition. Pro forma results of operations have not been presented because the effects of this business
combination were not deemed significant to our audited consolidated results of operations.
Acquisition of Capital Analytics, Inc., d/b/a Vestrics
On May 11, 2016 (the "Vestrics Closing Date"), pursuant to an asset purchase agreement with Vestrics, we acquired
certain assets and liabilities in exchange for $10.1 million, of which $1.0 million and $9.1 million was paid in cash during the
years ended December 31, 2017 and 2016, respectively. We recorded the Vestrics Acquisition using the acquisition method of
accounting and recognized assets and liabilities assumed at their fair value as of the date of acquisition. The valuation of
Vestrics has been completed and the significant classes of assets and liabilities to which we allocated the purchase price were
goodwill of $4.3 million (which includes working capital, net, totaling $0.2 million, which was assumed pursuant to the
Vestrics Acquisition) and identifiable intangible assets of $6.0 million related to developed technology. In accordance with
GAAP, direct costs related to the acquisition were expensed as incurred. Vestrics’ predictive technology enables a company to
identify and analyze the connections between its investments in human capital and the performance-related business results of
those investments. We will leverage Vestrics’ technology as we continue to expand our analytics capabilities across UltiPro.
The fair value of the acquired developed technology was estimated using the cost approach. Identifiable intangible assets were
assigned a total weighted-average amortization period of 7.0 years. Since the developed predictive technology acquired
pursuant to the Vestrics Acquisition will be included in the Development Project currently being capitalized as internal-use
59
software to be offered as a cloud product in the future, amortization of the Vestrics developed technology will begin when it is
ready for its intended use.
The results of operations from this acquisition have been included in our audited consolidated financial statements
since the Vestrics Closing Date. Pro forma results of operations have not been presented because the effects of this business
combination were not deemed significant to our audited consolidated results of operations.
5.
Instruments
Funds Held for Customers, Corporate Investments in Marketable Securities and Fair Value of Financial
We classify our investments in marketable securities with readily determinable fair values as available-for-
sale. Available-for-sale securities consist of debt and equity securities not classified as trading securities or as securities to be
held to maturity. Unrealized gains and losses, net of tax, on available-for-sale securities are reported as a net amount in
accumulated other comprehensive loss in stockholders’ equity until realized. Gains and losses on the sale of available-for-sale
securities are determined using the specific identification method. Included in accumulated other comprehensive loss was a
$704 thousand net unrealized loss and $145 thousand net unrealized loss on available-for-sale securities at December 31, 2017
and December 31, 2016, respectively. Realized gains and losses resulting on available-for-sale securities are included in other
(expense) income, net, in the consolidated statements of income. There were no significant reclassifications of realized gains
and losses on available-for-sale securities to the consolidated statements of income for the years ended December 31, 2017,
2016 and 2015.
The amortized cost, net unrealized (loss) gain and fair value of our investments in marketable available-for-sale
securities as of December 31, 2017 and December 31, 2016 are shown below (in thousands):
Funds held for customers and corporate investments as of December 31, 2017 and December 31, 2016 are shown
below (in thousands):
As of December 31, 2017
As of December 31, 2016
Amortized
Cost
Net
Unrealized
(Loss)
Fair Value (1)
Amortized
Cost
Net
Unrealized
(Loss)
Fair Value (1)
Type of issue:
Funds held for customers – money
market securities and other cash
equivalents............................................ $
Available-for-sale securities:
Corporate debentures – bonds ..........
Commercial paper.............................
U.S. Agency bonds ...........................
U.S. Treasury bills ............................
Asset-Backed Securities ...................
Total corporate investments and funds
held for customers ................................ $
354,312
$
— $
354,312
$
316,353
$
— $
316,353
2,848
—
209,443
5,876
721
(4)
—
(693)
(6)
(1)
2,844
—
208,750
5,870
720
10,175
1,446
148,939
9,586
2,901
(3)
—
(125)
(18)
1
10,172
1,446
148,814
9,568
2,902
573,200
$
(704) $
572,496
$
489,400
$
(145) $
489,255
_________________
(1) Included within available-for-sale securities as of December 31, 2017 and 2016 are corporate investments with fair values
of $9.4 million and $24.1 million, respectively. Included within available-for-sale securities as of December 31, 2017 and 2016
are funds held for customers with fair values of $208.8 million and $148.8 million, respectively. All available-for-sale securities
were included in Level 2 of the fair value hierarchy.
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a
period of less than and greater than 12 months as of December 31, 2017 are as follows (in thousands):
60
Securities in unrealized loss
position less than 12 months
Securities in unrealized loss
position greater than 12 months
Total
Gross
unrealized
losses
Fair market
value
Gross
unrealized
losses
Fair market
value
Gross
unrealized
losses
Fair market
value
Corporate debentures – bonds...
Commercial paper .....................
U.S. Agency bonds....................
U.S. Treasury bills.....................
Asset-Backed Securities............
Total...........................................
$
(1) $
699
$
—
(408)
—
—
—
74,940
—
—
$
(409) $
75,639
$
— $
—
(285)
(6)
—
(291) $
— $
—
133,811
5,869
—
139,680
$
(1) $
—
(693)
(6)
—
(700) $
699
—
208,751
5,869
—
215,319
The unrealized losses and fair values of available-for-sale securities that have been in an unrealized loss position for a
period of less than and greater than 12 months as of December 31, 2016 are as follows (in thousands):
Securities in unrealized loss
position less than 12 months
Securities in unrealized loss
position greater than 12 months
Total
Gross
unrealized
losses
Fair market
value
Gross
unrealized
losses
Fair market
value
Gross
unrealized
losses
Fair market
value
Corporate debentures – bonds...
Commercial paper .....................
U.S. Agency bonds....................
U.S. Treasury bills.....................
Asset-Backed Securities............
Total...........................................
$
(4) $
6,125
$
— $
— $
—
(131)
(18)
(1)
—
118,810
9,568
751
—
—
—
—
—
—
—
—
$
(154) $
135,254
$
— $
— $
(4) $
—
(131)
(18)
(1)
(154) $
6,125
—
118,810
9,568
751
135,254
The amortized cost and fair value of the marketable available-for-sale securities by contractual maturity at December 31,
2017 are shown below (in thousands):
Due in one year or less .................................................................... $
Due after one year ...........................................................................
Total................................................................................................. $
Amortized Cost
173,517
45,371
218,888
Fair Value
$
$
173,075
45,109
218,184
As of December 31, 2017
We classify and disclose fair value measurements in one of the following three categories of fair value hierarchy:
Level 1:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical,
unrestricted assets and liabilities.
Quoted prices in markets that are not active or financial instruments for which all significant inputs
are observable, either directly or indirectly.
Prices or valuations that require inputs that are both significant to the fair value measurement and
unobservable.
Level 2:
Level 3:
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.
Our 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. Such instruments are generally classified within Level 1 of the fair value hierarchy. We did not
have any transfers into and out of Level 1 and Level 2 during the years ended December 31, 2017, 2016 and 2015.
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 corporate debentures and bonds,
commercial paper, U.S. agency bonds, and U.S. Treasury bills. Such instruments are generally classified within Level 2 of the
61
fair value hierarchy. We use consensus pricing, which is based on multiple pricing sources, to value our fixed income
investments.
The following table sets forth, by level within the fair value hierarchy, financial assets accounted for at fair value as of
December 31, 2017 and December 31, 2016 (in thousands):
As of December 31, 2017
As of December 31, 2016
Quoted
Prices in
Active
Markets
(Level 1)
Other
Observable
Inputs
(Level 2)
Un-
Observable
Inputs
(Level 3)
Total
Quoted
Prices in
Active
Markets
(Level 1)
Other
Observable
Inputs
(Level 2)
Un-
Observable
Inputs
(Level 3)
Total
Corporate debentures
and bonds ........................ $
Commercial paper...........
U.S. Agency bonds .........
U.S. Treasury bills ..........
Asset-Backed Securities .
2,844
$
— $
2,844
$
— $ 10,172
$
— $ 10,172
$
—
208,750
5,870
720
—
—
— 208,750
—
—
5,870
720
—
1,446
— 148,814
—
—
9,568
2,902
—
1,446
— 148,814
—
—
9,568
2,902
Total ................................ $ 218,184
$
— $ 218,184
$
— $ 172,902
$
— $ 172,902
$
—
—
—
—
—
—
Assets and liabilities measured at fair value on a recurring basis were presented in the consolidated balance sheets as
of December 31, 2017 and as of December 31, 2016 as short-term and long-term investments in marketable securities. There
were no financial liabilities accounted for at fair value as of December 31, 2017 and December 31, 2016.
6.
Allowance for Doubtful Accounts
We have established an allowance for doubtful accounts based on a review of the current status of existing accounts
receivable by customer and historical experience.
The activity within the allowance for doubtful accounts was as follows (in thousands):
Balance at beginning of year........................................................................... $
Charged to expense .........................................................................................
Write-offs ........................................................................................................
Balance at end of year ..................................................................................... $
900
$
900
$
5,727
(5,727)
900
$
3,213
(3,213)
900
$
675
4,687
(4,462)
900
For the Years Ended December 31,
2017
2016
2015
7.
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
Prepaid commissions on cloud sales........................................................................................... $
Other prepaid expenses...............................................................................................................
Other current assets.....................................................................................................................
Total prepaid expenses and other current assets ......................................................................... $
38,519
$
20,088
12,995
71,602
$
29,842
16,753
15,306
61,901
As of December 31,
2017
2016
62
8.
Property and Equipment, net
Property and equipment, net consists of the following (in thousands):
As of December 31,
2017
2016
Computer equipment .................................................................................................................. $
Internal-use software ..................................................................................................................
Leasehold improvements ............................................................................................................
Furniture and fixtures .................................................................................................................
Building ......................................................................................................................................
Land ............................................................................................................................................
Property and equipment..............................................................................................................
Less: accumulated depreciation and amortization.....................................................................
Property and equipment, net ....................................................................................................... $
185,034
178,093
43,556
19,817
2,100
655
429,255
185,591
243,664
$
$
166,420
113,407
36,095
16,932
1,074
655
334,583
155,025
179,558
Depreciation and amortization expense on property and equipment, including depreciation and amortization expense
on property and equipment under capital leases, totaled $31.2 million, $25.5 million and $20.7 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
Included in property and equipment, net, is computer equipment acquired under capital leases as follows (in
thousands):
As of December 31,
2017
2016
Computer equipment .................................................................................................................. $
Less: accumulated amortization ................................................................................................
Computer equipment, net............................................................................................................ $
58,831
48,963
9,868
$
$
51,581
43,732
7,849
Capital leases entered into and included in property and equipment totaled $7.3 million, $6.7 million and $5.9 million
for the years ended December 31, 2017, 2016 and 2015, respectively.
See Note 10 in the Notes to Consolidated Financial Statements for further discussion of computer software
development costs related to internal-use software which is included in property and equipment, net.
9.
Foreign Currency
The financial statements of Ultimate’s foreign subsidiaries have been translated into U.S. dollars. The functional
currency of our wholly-owned subsidiary, The Ultimate Software Group of Canada, Inc., is the Canadian dollar. Assets and
liabilities 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 non-cash foreign currency translation adjustments, representing
unrealized gains or losses, are included in consolidated stockholders’ equity as a component of accumulated other
comprehensive income (loss). We did not have any realized gains and losses resulting from foreign exchange transactions
during the years ended December 31, 2017, 2016 and 2015. Included in accumulated other comprehensive income (loss), as
presented in the accompanying consolidated balance sheets, are $5.4 million of unrealized translation losses at December 31,
2017 and $6.9 million of unrealized translation losses at December 31, 2016. There were no significant reclassifications of
realized gains and losses resulting from foreign exchange transactions to the consolidated statements of income for the years
ended December 31, 2017, 2016 and 2015.
63
10.
Computer Software Development Costs
We previously capitalized software costs in accordance with Accounting Standards Codification ("ASC") Topic
985-20, Costs of Software to Be Sold, Leased, or Marketed. Those capitalized software costs were fully amortized as of
December 31, 2013.
Computer software development costs related to software developed for internal use falls under the accounting
guidance of ASC Topic 350-40, Intangibles Goodwill and Other-Internal Use Software. These capitalized costs are included
with property and equipment in the consolidated balance sheets and purchases of property and equipment in the consolidated
statements of cash flows. Internal-use software is amortized on a straight-line basis over its estimated useful life, generally
three to seven years, commencing after the software development is substantially complete and the software is ready for its
intended use.
For the years ended December 31, 2017 and 2016, we capitalized $52.6 million (including $4.0 million in non-cash
stock-based compensation) and $37.9 million (including $3.9 million in non-cash stock-based compensation), respectively, of
computer software development costs related to an internal-use development project for our UltiPro product offering (the
"Development Project"). The capitalized costs for the Development Project were primarily from direct labor costs and, to a
lesser extent, third party consulting fees. For 2017, 2016 and 2015, we recognized $4.4 million, $1.2 million and $1.1 million,
respectively, of amortization costs which were associated with certain product modules of the Development Project which were
ready for their intended use. The amortization of capitalized software is included in cost of recurring revenues. At each balance
sheet date, we evaluate the useful lives of these assets and test for impairment whenever events or changes in circumstances
occur that could impact the recoverability of these assets.
Capitalized computer software development costs and accumulated amortization of capitalized software, developed
for internal use, were as follows (in thousands):
As of December 31,
2017
2016
2015
Computer software development costs ........................................................... $
Less: accumulated amortization......................................................................
Computer software development costs, net ....................................................
178,093
(7,283)
170,810
113,407
(2,925)
110,482
75,529
(1,742)
73,787
11.
Earnings Per Share
Earnings per share calculations require a dual presentation — “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 (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 per share (in
thousands):
For the Years Ended December 31,
2017
2016
2015
Basic weighted average shares outstanding ....................................................
Effect of dilutive equity instruments (1) .........................................................
Dilutive shares outstanding .............................................................................
29,791
1,008
30,799
28,976
1,438
30,414
28,634
1,087
29,721
Anti-dilutive equity instruments (1)................................................................
—
24
19
_________________
(1) Includes options to purchase shares of Common Stock and other stock-based awards outstanding.
64
12.
Goodwill and Intangible Assets
Goodwill represents the excess of cost over the net tangible and identifiable intangible assets of acquired
businesses. Goodwill amounts are not amortized, but rather tested for impairment at least annually. Identifiable intangible
assets acquired in business combinations are recorded based upon fair value at the date of acquisition and amortized over their
estimated useful lives.
The changes in the carrying value of goodwill were as follows (in thousands):
Goodwill, beginning of year ....................................................................................................... $
Goodwill from Vestrics Acquisition (1) ..................................................................................
Goodwill from Kanjoya Acquisition (2) .................................................................................
Translation adjustment (3) ......................................................................................................
Goodwill, end of year ................................................................................................................. $
As of December 31,
2017
2016
35,322
$
24,410
—
—
486
4,305
6,394
213
35,808
$
35,322
_________________
(1) Represents the goodwill recognized for the Vestrics Acquisition on May 11, 2016. See Note 4 of the Notes to Consolidated
Financial Statements.
(2) Represents the goodwill recognized for the Kanjoya Acquisition on September 29, 2016. See Note 4 of the Notes to
Consolidated Financial Statements.
(3) Represents the impact of the foreign currency translation of the portion of goodwill that is recorded by our Canadian
subsidiary whose functional currency is also its local currency. Such goodwill is translated into U.S. dollars using exchange
rates in effect at period end. Adjustments related to foreign currency translation are included in other comprehensive income
(loss).
Our amortizable intangible assets net carrying amount and estimated useful lives are as follows (in thousands):
As of December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Cumulative
Translation
Adjustment
(1)
Net Carrying
Amount
Weighted
Average
Remaining
Useful Life
Developed technology.................... $
Customer relationships...................
Non-compete agreements ...............
23,300
$
4,700
300
$
28,300
$
(4,355) $
(2,004)
(300)
(6,659) $
(895) $
—
—
(895) $
18,050
2,696
—
20,746
6.0
4.5
0.0
5.9
As of December 31, 2016
Gross
Carrying
Amount
Accumulated
Amortization
Cumulative
Translation
Adjustment
(1)
Net Carrying
Amount
Weighted
Average
Remaining
Useful Life
Developed technology.................... $
Customer relationships...................
Non-compete agreements ...............
23,300
$
4,700
300
$
28,300
$
(2,036) $
(1,194)
(300)
(3,530) $
(1,026) $
—
—
(1,026) $
20,238
3,506
—
23,744
6.7
5.3
0.0
6.5
_________________
(1) Represents the impact of the foreign currency translation of the portion of acquired intangible assets that is recorded by our
Canadian subsidiary whose functional currency is also its local currency. Such intangible assets are translated into U.S. dollars
using exchange rates in effect at period end. Adjustments related to foreign currency translation are included in other
comprehensive income (loss).
Acquired intangible assets are amortized over their estimated useful life, generally three to ten years, in a manner that
reflects the pattern in which the economic benefits are consumed. Included in acquired intangible assets as of December 31,
65
2017, were $0.1 million of assets with indefinite lives. There were no assets, with indefinite lives, as of December 31, 2015.
Amortization expense for acquired intangible assets was $3.1 million, $1.1 million and $1.0 million for the years ended
December 31, 2017, 2016 and 2015. Future amortization expense for acquired intangible assets is as follows, as of
December 31, 2017 (in thousands):
Year
2018 ............................................................................................................
2019 ............................................................................................................
2020 ............................................................................................................
2021 ............................................................................................................
2022 ............................................................................................................
Thereafter....................................................................................................
Total ............................................................................................................
$
Amount
3,149
3,452
3,353
2,896
2,896
5,000
$
20,746
13.
Capital Lease Obligations
We lease certain equipment under non-cancelable agreements, which are accounted for as capital leases and expire at
various dates through 2020. Interest rates on these leases are 4.25% to 5.25%. The scheduled lease payments of the capital lease
obligations are as follows as of December 31, 2017 (in thousands):
Year
2018 ............................................................................................................
2019 ............................................................................................................
2020 ............................................................................................................
Less amount representing interest ..............................................................
Lease obligations reflected as current ($5,474) and non-current ($4,477).
Amount
5,832
3,494
1,143
10,469
(518)
9,951
$
$
14.
Income Taxes
For the year ended December 31, 2017, the income tax provision of $30.1 million was based on book income from
operations before income taxes of $44.1 million. For the year ended December 31, 2016, the income tax provision of $12.2
million was based on book income from operations before income taxes of $41.4 million. For the year ended December 31,
2015, the income tax provision of $28.8 million was based on a book income from operations before income taxes of $43.1
million. Deferred tax assets and liabilities are determined based on the difference between financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
On December 22, 2017, the federal government passed the federal Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act
made broad and complex changes to the U.S. tax code including but not limited to reducing the federal statutory tax
rate from 35% to 21%, effective January 1, 2018. Accounting Standards Codification ("ASC") 740, "Income Taxes" ("ASC
740"), requires companies to recognize the effect of tax law changes in the period of enactment. During the quarter ended
December 31, 2017, we adjusted the statutory federal and state income tax rates to our deferred tax assets and liabilities. As a
result of the statutory rate decrease, we had a reduction in our net deferred tax asset balance of $8.8 million. We recorded $8.7
million of the $8.8 million reduction in our net deferred tax asset balance to our provision for income taxes in our consolidated
statement of income and $0.1 million to our consolidated statements of comprehensive income.
The income tax provision consists of the following (in thousands):
66
For the Year Ended December 31,
2017
2016
2015
Current taxes:
Federal ........................................................................................................ $
State and local ............................................................................................
Foreign .......................................................................................................
Deferred taxes, net ..........................................................................................
Federal ........................................................................................................
State and local ............................................................................................
Foreign .......................................................................................................
Income tax provision....................................................................................... $
(209) $
(230)
(1,070)
(26,693)
(2,099)
226
(30,075) $
$
34
(170)
(856)
(8,858)
(2,478)
150
(12,178) $
(26,111)
(6,021)
(200)
2,673
627
207
(28,825)
The income tax provision is different from that which would be obtained by applying the statutory federal income tax
rate of 35% to income from continuing operations before income taxes as a result of the following (in thousands):
Income tax provision at statutory federal tax rate........................................... $
State and local income taxes, net of the federal benefit..................................
Non-deductible expenses ................................................................................
Change in tax rates ..........................................................................................
Recognition of excess tax benefit ...................................................................
Research credit, federal benefit.......................................................................
Enactment of Tax Cuts and Jobs Act...............................................................
Other, net.........................................................................................................
Income tax provision....................................................................................... $
For the Year Ended December 31,
2017
2016
2015
(15,446) $
(1,514)
(26,196)
374
18,415
4,688
(9,750)
(646)
(30,075) $
(14,490) $
(1,720)
(20,715)
216
20,966
3,727
—
(162)
(12,178) $
(15,079)
(3,506)
(13,673)
117
—
3,239
—
77
(28,825)
67
Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. One of the significant provisions
of the Tax Act, passed December 22, 2017, is the reduction of the federal corporate tax rate to 21% effective January 1, 2018.
In accordance with ASC 740, a company must remeasure its deferred tax assets and liabilities to reflect the enacted rates as of
that date. The balances of the deferred tax assets and liabilities were remeasured and an $8.8 million reduction to deferred tax
assets was recorded in this period. Significant components of our deferred tax assets and liabilities at December 31, 2017 and
2016 were as follows (in thousands):
As of December 31,
2017
2016
Deferred tax assets:
Net operating losses ................................................................................................................. $
Tax credit carryforwards ..........................................................................................................
Research credit .........................................................................................................................
Deferred revenue ......................................................................................................................
Accruals not currently deductible ............................................................................................
Allowance for doubtful accounts .............................................................................................
Charitable contributions ...........................................................................................................
Stock-based compensation .......................................................................................................
Deferred rent adjustment ..........................................................................................................
Deferred tax assets .................................................................................................................... $
Deferred tax liabilities:.............................................................................................................
34,771
1,807
27,559
497
1,137
238
1,729
9,851
2,128
79,717
$
$
Property and equipment ........................................................................................................... $
Foreign, primarily acquired intangible assets ..........................................................................
Gross deferred tax liabilities....................................................................................................
Net deferred tax assets.............................................................................................................. $
(47,022) $
(250)
(47,272)
32,445
$
60,026
911
22,768
918
1,012
338
1,777
20,261
3,081
111,092
(49,745)
(519)
(50,264)
60,828
Ultimate considers all available evidence, both positive and negative, including historical levels of pre-tax book
income, expiration of net operating loss carryforwards, expectations and risks associated with estimates of future taxable
income, ongoing prudent and feasible tax planning strategies and reversal of deferred tax liabilities in assessing the need for the
valuation allowance. If it is not more likely than not that we will recover our deferred tax assets, we will increase our provision
for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable.
The available positive evidence at December 31, 2017 included, among other factors, three years of cumulative
historical pre-tax book income and a projection of future pre-tax book income and taxable income. As a result of our analysis
of all available evidence, both positive and negative, we believe that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize all of the deferred tax assets as of December 31, 2017. As such,
there was no valuation allowance for the years ended December 31, 2017 and 2016.
During the fourth quarter of 2017, as part of the evaluation of net deferred tax assets for implementing the Tax Act,
immaterial errors were discovered in the reporting of the GAAP deferred income tax expense and related deferred tax assets,
associated with the stock-based compensation expense for certain of our named executive officers for prior periods through
September 30, 2017. Since the amount of the error in any prior period was not material, we have retrospectively revised our
financial statements to reflect this immaterial correction for these prior periods. See Note 17 in our Notes to Consolidated
Financial Statements for further discussion.
One of the provisions of the Tax Act was to transition to a territorial tax system, and to enable this, required a one-
time deemed repatriation of post-1986 earnings and profits of certain foreign corporations, and would subject those amounts
to reduced federal tax rates depending on whether the earnings and profits relate to cash and cash equivalents or other assets.
The effective preferential rates on repatriated earnings are 15.5% for cash and cash equivalents and 8% for other amounts.
The bill would require this income inclusion in our tax year ending December 31, 2017 but would allow offset of the deemed
repatriated earnings and profits with net operating losses and foreign tax credits. We have more than sufficient foreign tax
credits to offset our estimate of the deemed earnings and any transition tax liability. The foreign tax credits rather than the net
operating losses would be used, as we are invoking Internal Revenue Code 965(n), which is an election to not use the net
operating losses.
68
For the current and subsequent tax years, we will continue to assert the position of indefinite re-investment of
earnings in Canada and Singapore. We will apply the exception to the comprehensive recognition of deferred income taxes to
the undistributed earnings of our foreign subsidiaries, the Ultimate Software Group of Canada, Inc. and the Ultimate
Software Group of Asia, PTE. LTD. The indefinite reinvestment criteria applicable includes state taxes and withholding
taxes that arise from repatriation under IRC Section 965(n).
We recorded deferred tax assets as a result of research and development credit studies of $4.4 million and $4.0 million
during the years ended December 31, 2017 and 2016, respectively.
At December 31, 2017, we had approximately $135.0 million of net operating loss carryforwards for federal income
tax reporting purposes available to offset future taxable income. Prior to January 1, 2016, the tax benefit of net operating loss
carryforwards attributable to deductions from the exercise of non-qualified employee, and non-employee director, stock options
and the vesting of restricted stock units and restricted stock awards, were credited to paid-in-capital and deferred tax asset only
to the extent realized through a reduction of income taxes payable. As a result, prior to January 1, 2016, the excess tax benefits
associated with stock-based compensation were included in net operating loss carryforwards but not reflected in deferred tax
assets. Upon adoption of ASU 2016-09, the excess tax benefits associated with stock based compensation were reflected in
deferred tax assets. These excess tax benefits combined with the associated financial statement expense (previously included in
the stock-based compensation line of this footnote) are currently reflected in the net operating loss line. During 2015, we
realized a tax benefit of $42.0 million comprised of a $31.9 million and a $10.1 million credit to paid-in-capital and deferred
tax asset, respectively. The carryforwards expire from 2018 through 2034 and from 2017 through 2034, for Federal and state
income tax reporting purposes, respectively.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-09, "Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). The standard amended the
accounting for share-based payments to employees effective for annual periods beginning after December 15, 2016, with early
adoption permitted. The standard required transition for specific objectives of the standard. Amendments related to the timing
of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value
should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of
the beginning of the period in which the guidance is adopted. We elected to early adopt ASU 2016-09 in the third quarter of
fiscal year 2016 which required us to reflect any adjustments as of January 1, 2016. The primary impact of adoption was the
recognition of excess tax benefits in our provision for income taxes rather than paid-in capital for all periods in fiscal year
2016. ASU 2016-09 requires entities to recognize all income tax effects of stock-based compensation in the income statement
when the restricted stock units and awards vest and when the stock options are exercised. Prior to the adoption of ASU
2016-09, companies could not recognize excess tax benefits (the amount by which the tax deduction exceeds the financial
statement expense previously recorded) when a restricted stock unit or award vested or an option was exercised if the related
tax deduction increased a net operating loss carryforward rather than a reduction in income taxes payable. Consequently, the
excess tax benefits were credited to paid-in-capital and a deferred tax asset only to the extent realized through a reduction of
income taxes payable when realized, which resulted in the excess tax benefits being included in Ultimate’s net operating loss
carryforwards, while being excluded from deferred tax assets on the consolidated balance sheet. If an entity early adopts the
amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that
interim period. Adoption of the new standard resulted in a $39.7 million cumulative-effect adjustment as of January 1, 2016 to
record a deferred tax asset with the offset to retained earnings in the consolidated balance sheet representing the amount of our
net operating loss carryforward attributable to excess tax benefits. We recognized $23.7 million of excess tax benefits in our
provision for income taxes for the twelve months ended December 31, 2016.
Utilization of such net operating loss carryforwards, as well as tax credit carryforwards, may be limited as a result of
cumulative ownership changes in Ultimate’s equity instruments due to ownership change provisions of Internal Revenue Code
Section 382 and similar state provisions. The Internal Revenue Service examination of our U.S. federal income tax return for
the year ended December 31, 2010 was completed in 2013 with no change to the taxable income or income tax liability as
reported.
ASC 740, “Income Taxes,” ("ASC 740") requires that a position taken or expected to be taken in a tax return be
recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the
position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest
amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. During 2013, the Internal
Revenue Service completed their examination of our U.S. Federal income tax return for the year ended December 31, 2010,
which resulted in the recognition of previously unrecognized tax benefits of approximately $1.9 million, which decreased our
provision for income taxes and our effective tax rate. As of December 31, 2017, we had $5.0 million of gross unrecognized tax
benefits resulting from a research and development credit attributable to the 1998-2014 years as a result of the completion of
the research and development activities study that if recognized would affect the annual effective tax rate. During 2015 we
69
increased the unrecognized tax benefits by $0.1 million related to the completion of the research credit study for 2014 and
increased the unrecognized tax benefits by $0.9 million related to the research credit study estimate for 2015, totaling $6.0
million at December 31, 2015. During 2016, we increased the unrecognized tax benefits by $0.2 million related to the
completion of the research credit study for 2015 and increased the unrecognized tax benefits by $1.1 million related to the
research credit study estimate for 2016, totaling $7.2 million at December 31, 2016. During 2017, we increased the
unrecognized tax benefits by $0.2 million related to the completion of the research credit study for 2016 and increased the
unrecognized tax benefits by $1.5 million related to the research credit study estimate for 2017, totaling $8.9 million at
December 31, 2017. While it is often difficult to predict the final outcome of any particular uncertain tax position, management
does not believe that it is reasonably possible that the estimates of unrecognized tax benefits will change significantly in the
next twelve months.
Tax years 1998 to 2017 remain subject to future examination by the tax jurisdictions in which we are subject to tax.
We recognize interest and penalties accrued related to unrecognized tax benefits as components of our income tax
provision. Due to our net operating loss carryover position, we did not have any interest and penalties accrued upon the
adoption of ASC 740, and, as of December 31, 2017 and 2016, we did not have any interest and penalties accrued related to
unrecognized tax benefits.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31,
2017, 2016 and 2015 is as follows (in thousands):
Balance at January 1, ...................................................................................... $
Tax positions taken in prior period..................................................................
Gross increases .............................................................................................
Gross decreases.............................................................................................
Tax positions taken in current period ..............................................................
Gross increases .............................................................................................
Settlements ......................................................................................................
Statute expiration ............................................................................................
Balance at December 31, ................................................................................ $
15.
Stock-Based Compensation and Equity
Summary of Plans
As of December 31,
2017
2016
2015
7,241
$
5,957
$
4,950
187
—
1,474
—
—
205
—
1,079
—
—
133
—
874
—
—
8,902
$
7,241
$
5,957
Our Amended and Restated 2005 Equity and Incentive Plan (the “Plan”) authorizes the grant of options (“Options”) to
non-employee directors, officers and employees of Ultimate to purchase shares of Ultimate's Common Stock ("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 the Options, the “Awards”).
As of December 31, 2017, the aggregate number of shares of Common Stock that were available to be issued under all
Awards granted under the Plan was 819,893 shares.
Stock-Based Compensation
The following table sets forth the non-cash stock-based compensation expense resulting from stock-based
arrangements that is recorded in our consolidated statements of income for the periods indicated (in thousands):
70
For the Years Ended December 31,
2017
2016
2015
Cost of recurring revenues .............................................................................. $
Cost of services revenues ................................................................................
Sales and marketing ........................................................................................
Research and development..............................................................................
General and administrative .............................................................................
11,931
$
8,613
$
7,909
75,428
12,026
39,133
6,198
59,187
8,238
31,641
Total stock-based compensation expense ......................................... $
146,427
$
113,877
$
6,303
5,017
41,059
6,180
23,857
82,416
Stock-based compensation for the twelve months ended December 31, 2017 was $146.4 million, as compared with
stock-based compensation of $113.9 million and $82.4 million for the twelve months ended December 31, 2016 and 2015,
respectively. The increases of $32.6 million and $67.7 million in stock-based compensation over 2016 and 2015, respectively,
included increases of $21.4 million and $19.7 million, respectively, associated with modifications made to our change in
control plans ("CIC Plans") for certain senior officers in March 2015 and February 2016 which significantly reduced the
potential payments that could be made under such plans. As previously disclosed, these changes were made to better align
management's incentives with long-term value creation for our shareholders. As part of the modifications in connection with
unwinding the change in control plans, time-based restricted stock awards (vesting over three years) were granted to certain
senior officers in March 2015, February 2016 and February 2017.
During the years ended December 31, 2017 and 2016, our non-cash stock-based compensation expense increased
$32.6 million and $31.5 million, respectively, primarily as the result of certain restricted stock awards granted in connection
with changes we made with respect to our CIC Plans for certain senior officers. As part of an on-going comprehensive review
of our senior officers’ compensation arrangements, our Board of Directors and our Compensation Committee took actions to
modify, and eventually terminate, the CIC Plans primarily to better align management's incentives with long-term value
creation for our shareholders, by significantly amending the CIC Plan I (in March 2015 and February 2016), and terminating
the CIC Plan I (in February 2017), which covered Mr. Scott Scherr, our Chairman of the Board, President and Chief Executive
Officer, Mr. Marc D. Scherr, our Vice Chairman of the Board and Chief Operating Officer, and Mr. Mitchell K. Dauerman, our
Executive Vice President, Chief Financial Officer and Treasurer, and terminating our CIC Plan II (in March 2015), which
covered eight other senior officers of the Company (collectively, the "CIC Plan Revisions"). The CIC Plans were designed to
provide cash payments to senior officers covered by the respective plans upon a “change in control” of Ultimate Software. The
CIC Plans were originally established in 2004 in lieu of granting time-based equity awards, and they were amended in 2007 to
increase the size of the control awards, again in lieu of granting time-based equity awards. Under the terms of each of the CIC
Plans, we were required to provide each covered senior officer with “comparable value” with respect to the reduction or
termination of his or her change in control award. The comparable value given to each such senior officer was in the form of
time-based restricted stock awards (vesting over three years). These restricted stock awards granted in March 2015, February
2016, and February 2017 in connection with the CIC Plan Revisions, accounted for $22.2 million of the $32.6 million increase
in our non-cash stock-based compensation expense for the year ended December 31, 2017 and $19.7 million of the $31.5
million increase in our non-cash stock-based compensation expense for the year ended December 31, 2016. The remaining
increases were due to the effects of new grants in each year and the impact of changes in our stock price ("General
Operations").
The following table sets forth the stock-based compensation expense associated with modifications made to the
Company's change in control plans as discussed above (in thousands):
For the Years Ended December 31,
2017
2016
2015
Stock-based compensation expense:
Stock-based compensation expense related to General Operations ............ $
Stock-based compensation expense related to CIC modifications..............
81,468
64,959
Total non-cash stock-based compensation expense................................ $
146,427
$
$
71,119
42,758
113,877
$
$
59,390
23,026
82,416
Included in computer equipment in property and equipment, net in our consolidated balance sheet and excluded from
purchases of property and equipment in the consolidated statements of cash flow at December 31, 2017, 2016 and 2015 was
$4.0 million, $3.9 million and $3.0 million, respectively, in non-cash stock-based compensation expense related to capitalized
71
software which was developed for internal use during the fiscal years then ended. These amounts would have otherwise been
charged to research and development expense for the years ended December 31, 2017, 2016 and 2015.
Net cash proceeds from the exercise of Options were $6.6 million, $4.7 million and $4.7 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
Fair Value
The fair value of restricted stock awards and restricted stock units is equal to the closing price of our Common Stock
on NASDAQ on the date of grant.
We estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ
from those estimates. The weighted-average forfeiture rates for the years ended December 31, 2017, 2016 and 2015 were
based on historical data.
Options
There were no Options granted during the years ended December 31, 2017, 2016 and 2015. Options granted to officers
and employees under the Plan generally have a 10-year term, vesting 25% immediately and 25% on each of the first three
anniversaries of the grant date. Options granted to non-employee directors under the Plan generally have a 10-year term and
vest and become exercisable immediately on the grant date.
Restricted Stock Awards
Under the provisions of the Plan, Ultimate may, at the discretion of the Compensation Committee or the Board, grant
restricted stock awards (“Restricted Stock Awards”) to officers, employees and non-employee directors. The shares of
Common Stock issued under Restricted Stock Awards are subject to certain vesting requirements and restrictions on
transfer. During the years ended December 31, 2017, 2016 and 2015, we granted Restricted Stock Awards for 353,857,
453,023 and 579,320 shares, respectively, of Common Stock to officers and employees and we granted Restricted Stock
Awards for 11,730, 9,815 and 9,910 shares, respectively, of Common Stock to non-employee directors. Compensation expense
for Restricted Stock Awards is measured based on the closing market price of our Common Stock at the date of grant and is
recognized on a straight-line basis over the vesting period. Holders of Restricted Stock Awards have all rights of a stockholder
including the right to vote the shares and receive all dividends and other distributions paid or made with respect thereto during
the vesting period. Each Restricted Stock Award granted to officers and employees vest in three equal annual installments of
33-1/3% of the number of Restricted Stock Unit Awards on the anniversary of the date of grant thereof, subject to the grantee’s
continued employment with Ultimate or any of its subsidiaries on each such vesting date and subject further to accelerated
vesting in the event of a change in control of Ultimate, death or disability, the termination of employment by Ultimate without
cause. Each Restricted Stock Award granted to non-employee directors becomes vested on the fourth anniversary of the
respective date of grant, subject to the grantee’s continued board services on each such vesting date and subject further to
accelerated vesting in the event of a change in control of Ultimate, death or disability, the termination of employment by
Ultimate without cause or, in the case of a non-employee director, at cessation of his board services at the end of his
term. Included in our consolidated statements of income for the years ended December 31, 2017, 2016 and 2015 was $98.1
million, $79.0 million and $56.3 million, respectively, of non-cash stock-based compensation expense (which includes amounts
capitalized associated with an internal-use development project) for Restricted Stock Awards.
Restricted Stock Unit Awards
Ultimate may, at the discretion of the Compensation Committee, make Awards of stock units or restricted stock units
under the Plan (“Restricted Stock Unit Awards”) to certain officers and employees. A Restricted Stock Unit Award is a grant of
a number of hypothetical share units with respect to shares of Common Stock that are subject to vesting and transfer
restrictions and conditions under a restricted stock unit award agreement. The value of each unit is equal to the fair value of
one share of Common Stock on any applicable date of determination. The payment with respect to each unit under a Restricted
Stock Unit Award may be made, at the discretion of the Compensation Committee, (i) in a number of shares of our Common
Stock equal to the number of Restricted Stock Units becoming vested, (ii) in cash, in an amount equal to the fair market value
of a share of our Common Stock on the vesting date multiplied by the number of restricted stock units becoming vested on such
date or (iii) in a combination of both. The grantee of a Restricted Stock Unit Award does not have any rights as a stockholder
with respect to the shares subject to a Restricted Stock Unit Award until such time as shares of Common Stock are delivered to
the grantee pursuant to the terms of the related stock unit award agreement.
Restricted Stock Unit Awards vest in three equal annual installments of 33-1/3% of the number of Restricted Stock
Unit Awards on each of the first three anniversaries of the date of grant thereof, subject to the participant’s continued
72
employment with Ultimate or any of its subsidiaries on each such vesting date and subject further to accelerated vesting in the
event of a change in control of Ultimate, death or disability, the termination of employment by Ultimate without cause and shall
be payable as described above, provided, however, that if any such anniversary is not a date on which our Common Stock is
traded on NASDAQ, then the vesting date shall be the last such trading day immediately preceding such anniversary; and
provided further, however, that if the Chief Financial Officer (“CFO”) of Ultimate should determine that any such anniversary
falls within a period during which the participant is prohibited from trading Ultimate’s Common Stock under our stock trading
policy, the CFO shall so advise the participant in writing and the vesting date shall be the date as of which the CFO has
determined that such period has ended.
There were 348,979, 363,458 and 241,235 Restricted Stock Unit Awards granted to employees during the years ended
December 31, 2017, 2016 and 2015, respectively. Non-cash stock-based compensation expense for Restricted Stock Unit
Awards is measured based on the fair market value of our Common Stock on the date of grant and recognized on a straight-line
basis over the vesting period. Included in Ultimate’s consolidated statements of income for the years ended December 31,
2017, 2016 and 2015 was $52.1 million, $38.8 million and $29.2 million, respectively, of non-cash stock-based compensation
expense (which includes amounts capitalized associated with an internal-use development project) for Restricted Stock Unit
Awards.
Option, Restricted Stock and Restricted Stock Unit Activity
The following table summarizes Option activity for the years ended December 31, 2015, 2016 and 2017, as follows (in
thousands, except per share amounts and years):
Options
Outstanding at December 31, 2014....................................
Granted ............................................................................
Exercised .........................................................................
Forfeited or expired .........................................................
Outstanding and exercisable at December 31, 2015..........
Outstanding at December 31, 2015....................................
Granted ............................................................................
Exercised .........................................................................
Forfeited or expired .........................................................
Outstanding and exercisable at December 31, 2016..........
Outstanding at December 31, 2016....................................
Granted ............................................................................
Exercised .........................................................................
Forfeited or expired .........................................................
Outstanding and exercisable at December 31, 2017..........
Shares
Weighted
Average Exercise
Price
Weighted
Average
Remaining
Contractual
Term (in Years)
Aggregate
Intrinsic Value
722
$
26.68
2.6
$
86,758
—
(189)
(1)
532
532
—
(188)
—
344
344
—
(230)
—
$
$
$
$
114
$
—
24.85
14.36
27.36
27.36
—
24.79
—
28.76
28.76
—
28.53
—
29.24
1.8
$
89,373
1.1
$
52,797
0.4
$
21,476
The aggregate intrinsic value of Options in the table above represents total pretax intrinsic value (i.e., the difference
between the closing price of our 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
December 31, 2017. The amount of the aggregate intrinsic value changes, based on the fair value of our Common Stock. Total
intrinsic value of Options exercised during the years ended December 31, 2017, 2016 and 2015 was $40.6 million, $32.0
million and $28.7 million, respectively. There were no Options vested during the years ended December 31, 2017, 2016 and
2015. All options granted under the Plan and the Prior Plan are fully vested as of December 31, 2017.
73
The following table summarizes Restricted Stock and Restricted Stock Unit Award activity for the years ended
December 31, 2015, 2016 and 2017, as follows (in thousands, except per share amounts):
Restricted Stock Awards
Restricted Stock Unit Awards
Shares
Weighted
Average Grant
Date Fair Value
Shares
Weighted
Average Grant
Date Fair Value
Outstanding at December 31, 2014 .....................................
Granted..............................................................................
Vested................................................................................
Released ............................................................................
Forfeited or expired...........................................................
Outstanding at December 31, 2015 .....................................
Granted..............................................................................
Vested................................................................................
Released ............................................................................
Forfeited or expired...........................................................
Outstanding at December 31, 2016 .....................................
Granted..............................................................................
Vested................................................................................
Released ............................................................................
Forfeited or expired...........................................................
Outstanding at December 31, 2017 .....................................
1,060
$
589
—
(283)
—
1,366
$
463
—
(668)
—
$
1,161
366
—
(645)
—
112.77
169.52
—
86.91
—
142.61
168.94
—
122.37
—
164.77
195.85
—
161.64
—
882
$
179.95
444
241
—
(233)
(17)
435
363
—
(214)
(22)
562
349
—
(252)
(29)
630
$
$
$
$
124.07
169.89
—
109.79
147.24
156.18
173.28
—
145.47
170.36
170.73
196.54
—
197.05
180.27
170.73
As of December 31, 2017, $93.6 million of total unrecognized compensation cost related to non-vested Restricted
Stock Awards is expected to be recognized over a weighted average period of 1.40 years. As of December 31, 2017, $75.9
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 1.67 years.
The following table summarizes information with respect to Options outstanding and Options exercisable under the
Plan at December 31, 2017:
Range of Exercise Prices
$14.72—$14.72......................................
$28.41—$28.41......................................
$32.39—$32.39
$32.54—$32.54......................................
$14.72—$32.54......................................
Number
11,601
38,888
50,995
12,150
113,634
Board Compensation
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Term
(Years)
Weighted-
Average Exercise
Price
0.82
0.10
0.57
0.32
0.41
$
$
14.72
28.41
32.39
32.54
29.24
Number
11,601
$
38,888
50,995
12,150
113,634
$
Weighted
Average
Exercise Price
14.72
28.41
32.39
32.54
29.24
Each non-employee director of Ultimate receives compensation for serving on the Board, payable exclusively in the
form of Restricted Stock Awards granted under the Plan.
Under the Plan, (i) each non-employee director was granted a restricted stock award of 400 shares of Common Stock
for each regular meeting of the Board attended during each quarter of 2015, 2016 and 2017 and (ii) each of the Chairmen of the
Audit Committee, Compensation Committee and Nominating Committee was granted a restricted stock award of 50 shares of
Common Stock for attendance at each regular meeting of the Committee during each quarter of 2015, 2016 and 2017 that he
chaired.
74
In addition, in 2017, 2016 and 2015 each non-employee director was granted, for each fiscal quarter during which he
served, a restricted stock award of that number of shares of Common Stock equal to the quotient of $12,500 divided by the
closing price of the Common Stock on NASDAQ on the date of grant, which is the effective date of the grant determined by the
Board for each such quarter, rounded down to the closest full number of shares. Under the arrangement as amended, the date of
grant shall not be a date prior to the date of the Board’s determination of the same and such restricted stock awards shall vest on
the fourth anniversary of the date of grant, subject to accelerated vesting in the event of a director’s death, disability, cessation
of service or the end of his term or the occurrence of a change of control of Ultimate.
The following table summarizes information about Restricted Stock Awards granted by us to non-employee directors
in exchange for director related services rendered for 2017, 2016 and 2015:
Year
2015 ........................................................
$
Market Value of
Restricted Stock
Awards Granted
Number of Restricted Stock Awards Granted
2016 ........................................................
$
2017 ........................................................
$
160.92
163.99
183.19
203.94
156.12
191.67
210.29
210.59
195.61
196.24
201.88
209.79
214.78
2,535
2,480
2,440
2,455
2,550
2,425
2,445
2,395
2,465
2,415
2,455
2,395
2,000
The non-cash compensation expense, recognized in the consolidated statements of income related to the Restricted
Stock Awards granted to non-employee directors, including the chairmen of the Audit, Compensation and Nominating
Committees, determined pursuant to the application of ASC 718 for the years ended December 31, 2017, 2016 and 2015, was
$3,039,000, $1,839,000 and $1,757,000, respectively, and is included in general and administrative expenses in the
consolidated statements of income.
Common Stock
The holders of Common Stock are entitled to one vote per share for each share held of record on all matters submitted
to a vote of the stockholders.
75
16.
Commitments and Contingencies
Operating Leases
We lease corporate office space and certain equipment under non-cancelable operating lease agreements expiring at
various dates. Total rent expense under these agreements was $19.0 million, $16.7 million and $13.1 million for the years
ended December 31, 2017, 2016 and 2015, respectively. Future minimum annual rental commitments related to these leases are
as follows as of December 31, 2017 (in thousands):
Year
2018 ............................................................................................................
2019 ............................................................................................................
2020 ............................................................................................................
2021 ............................................................................................................
2022 ............................................................................................................
Thereafter....................................................................................................
$
Amount
16,151
14,980
13,803
11,734
6,133
842
$
63,643
Litigation
From time-to-time, Ultimate is involved in litigation relating to claims arising out of its operations in the normal
course of business. We are not currently a party to any legal proceedings the adverse outcome of which, individually or in the
aggregate, could reasonably be expected to have a material adverse effect on our operating results or financial condition.
17. Immaterial Correction of Prior Period Financial Statements
In connection with the preparation of the consolidated statements of income, consolidated statements of
comprehensive income and consolidated balance sheets for the year ended December 31, 2017, we revalued our net deferred
tax assets to implement the Tax Act. During the revaluation, immaterial errors were discovered in prior periods in the reporting
of the GAAP income tax expense associated with the stock-based compensation for certain of our executive officers. While we
have concluded that the impact of these errors on our previously-issued consolidated statements of income, consolidated
statements of comprehensive income and consolidated balance sheets was not material, we have revised our previously-
reported consolidated statements of income, consolidated statements of comprehensive income for the years end December 31,
2016 and 2015 and consolidated balance sheets as of December 31, 2016. The impact of the revision for the period January 1,
2017 through September 30, 2017, was a $0.9 million increase in GAAP income tax expense and corresponding decrease in net
income and is reflected in our consolidated statements of income for the year ended December 31, 2017. The revisions to our
consolidated statements of income, consolidated statements of comprehensive income for the years ended December 31, 2016
and 2015 are as follows (in thousands, except per share amounts):
76
Income before income taxes
Provision for income taxes
Net income
Net income per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Net income
Other comprehensive income :
Unrealized loss on investments in marketable available
for sale securities
Unrealized gain (loss) on foreign currency translation
adjustments
Other comprehensive income (loss), before tax
Income tax benefit related to items of other comprehensive
income
Other comprehensive income (loss), net of tax
For the Year Ended
December 31, 2016
For the Year Ended
December 31, 2015
As Reported
As Revised
As Reported
As Revised
$
$
$
$
41,418
(11,165)
30,253
1.04
0.99
$
$
$
$
41,418
(12,178)
29,240
1.01
0.96
$
$
$
$
43,083
(20,384)
22,699
0.79
0.76
$
$
$
$
43,083
(28,825)
14,258
0.50
0.48
28,976
30,414
28,976
30,414
28,634
29,721
28,634
29,721
$
30,253
$
29,240
$
22,699
$
14,258
(61)
(61)
(56)
(56)
843
782
24
806
843
782
24
806
(4,195)
(4,251)
12
(4,239)
18,460
$
(4,195)
(4,251)
12
(4,239)
10,019
Comprehensive income
$
31,059
$
30,046
$
The revisions to our consolidated balance sheets as of December 31, 2016 was as follows (in thousands):
As of December 31, 2016
As Reported
As Revised
Deferred tax assets, net
$
78,115
$
Total assets
Accumulated earnings
Total stockholders equity
1,152,581
129,626
432,108
60,222
1,134,688
111,733
414,215
Total liabilities and stockholders equity
$
1,152,581
$
1,134,688
The revisions had no impact on cash flows from operating, investing, or financing activities on the consolidated
statements of cash flows for the years ended December 31, 2017, 2016 and 2015. The revisions to the consolidated statements
of shareholders' equity include the changes to net income and comprehensive income, as noted above, and a $17.9 million
decrease to retained earnings at the beginning of fiscal 2016.
18.
Related Party Transactions
On May 15, 2017, Ultimate’s shareholders elected Jason Dorsey as a non-employee member of Ultimate’s Board of
Directors. During February 2016, The Center for Generational Kinetics, LLC ("TCGK"), entered into an agreement with
Ultimate. TCGK is a leading Millennials and Generation Z research, speaking, and strategy firm in the U.S. Mr. Dorsey is Co-
founder of TCGK. The agreement was to create a diagnostic tool and to create revenue opportunities for Ultimate through lead
generation, marketing differentiation, media appearances, executive speaking opportunities and innovation based on research.
77
For the years ending December 31, 2017 and 2016, Ultimate paid approximately $71,500 and $135,500, respectively, to TCGK
for these services.
19.
Employee Benefit Plan
Ultimate provides retirement benefits for eligible employees, as defined, through a defined contribution plan that is
qualified under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”). Contributions to the 401(k) Plan, which are
made at the sole discretion of Ultimate, were $13.1 million, $10.5 million and $7.2 million for the years ended December 31,
2017, 2016 and 2015, respectively.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Ultimate carried out an evaluation, under the supervision and with the participation of Ultimate’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 Ultimate’s disclosure controls and procedures as of the end of the period covered by this Form 10-K
pursuant to Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based
on that evaluation, Ultimate’s management, including the CEO and CFO, concluded that, as of December 31, 2017. Ultimate’s
disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in
Ultimate’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. Ultimate’s disclosure controls and procedures were designed to provide
reasonable assurance as to the achievement of these objectives. 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.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act). Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external reporting purposes in accordance with GAAP. Our management assessed the effectiveness of our
internal control over financial reporting as of December 31, 2017. In making this assessment, our management used the criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on the results of this assessment, our management has concluded that, as of
December 31, 2017, our internal control over financial reporting was effective. However, because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective,
can only provide reasonable assurance with respect to financial statement preparation and presentation.
KPMG LLP, the independent registered public accounting firm that audited our consolidated financial statements
included in this Form 10-K, has issued an attestation report on Ultimate’s internal control over financial reporting as of
December 31, 2017, which is included below on this Form 10-K.
Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2017, our management identified a deficiency in the design and operation of a
control over the reassessment of accounting policies on an annual basis for recording deferred tax assets associated with the
stock-based compensation expense for our named executive officers and related deferred income tax expense. The control
deficiency resulted in an immaterial correction of our previously issued interim and annual financial statements. Therefore, we
retrospectively revised our financial statements to reflect this immaterial correction for these applicable prior periods during the
quarter ended December 31, 2017 as disclosed in Note 17 of our Notes to Consolidated Financial Statements. Management has
concluded the deficiency constituted a material weakness in internal control over financial reporting during the applicable prior
periods. We evaluated the controls over the valuation of deferred tax assets associated with the stock-based compensation
expense for our named executive officers and designed a remediation plan to implement controls over the reassessment of the
underlying accounting policy and review the resulting computations. During the quarter ended December 31, 2017,
management implemented the remediation plan, tested the review controls and concluded the deficiency has been remediated.
78
Except for the changes due to the remediation of the control deficiency discussed above, our management, including
the CEO and CFO, concluded that no significant changes in Ultimate's internal controls over financial reporting (as such term
is defined in Exchange Act Rules 13a-15(f) and 15-d-15(f) occurred during the quarter ended December 31, 2017 that has
materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
79
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
The Ultimate Software Group, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited The Ultimate Software Group, Inc. and subsidiaries’ (the Company) internal control over financial reporting
as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, the related consolidated
statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements), and our report
dated February 26, 2018 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Fort Lauderdale, FL
February 26, 2018
Certified Public Accountants
/s/ KPMG LLP
80
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The executive officers (Messrs. Scott Scherr, Marc D. Scherr, Mitchell K. Dauerman, Adam Rogers, Greg Swick,
Robert Manne and Chris Phenicie), directors and other key employees of Ultimate, and their ages as of February 18, 2018, are
as follows:
Name
Scott Scherr...............................................
Marc D. Scherr..........................................
Mitchell K. Dauerman ..............................
Adam Rogers ............................................
Greg Swick ...............................................
Robert Manne ...........................................
Chris Phenicie...........................................
James A. FitzPatrick, Jr.............................
Jonathan D. Mariner .................................
Rick A. Wilber ..........................................
Alois T. Leiter ...........................................
Jason Dorsey.............................................
Julie Dodd.................................................
Bill Hicks ..................................................
Jody Kaminsky .........................................
Vivian Maza..............................................
Age
Position(s)
65 Chairman of the Board, President and Chief Executive Officer
60 Vice Chairman of the Board and Chief Operating Officer
60 Executive Vice President, Chief Financial Officer and Treasurer
43 Senior Vice President, Chief Technology Officer
54 Senior Vice President, Chief Enterprise Sales Officer
64 Senior Vice President, General Counsel
46 Senior Vice President, Chief Mid-Market Sales Officer
68 Director
62 Director
71 Director
52 Director
39 Director
48 Senior Vice President, Chief Services Officer
52 Senior Vice President, Chief Relationship Officer
43 Senior Vice President, Marketing
56 Senior Vice President, Chief People Officer and Secretary
Scott Scherr has served as President and a director of Ultimate since its inception in April 1996 and has been
Chairman of the Board and Chief Executive Officer of Ultimate since September 1996. Mr. Scherr is also a member of the
Executive Committee of the Board of Directors (the “Board”). In 1990, Mr. Scherr founded The Ultimate Software Group, Ltd.
(the “Partnership”), the business and operations of which were assumed by Ultimate in 1998. Mr. Scherr served as President of
the Partnership’s general partner from the inception of the Partnership until its dissolution in March 1998. From 1979 until
1990, he held various positions at ADP, a payroll services company, where his titles included Vice President of Operations and
Sales Executive. Prior to joining ADP, Mr. Scherr operated Management Statistics, Inc., a data processing service bureau
founded by his father, Reuben Scherr, in 1959. He is the brother of Marc Scherr, the Vice Chairman of the Board of Ultimate
and the father-in-law of Adam Rogers, Senior Vice President, Chief Technology Officer.
Marc D. Scherr has been a director of Ultimate since its inception in April 1996 and has served as Vice Chairman
since July 1998 and as Chief Operating Officer since October 2003. Mr. Scherr is also a member of the Executive Committee
of the Board. Mr. Scherr became an executive officer of Ultimate effective March 1, 2000. Mr. Scherr served as a director of
Gerschel & Co., Inc., a private investment firm from January 1992 until March 2000. In December 1995, Mr. Scherr co-
founded Residential Company of America, Ltd. (“RCA”), a real estate firm, and served as President of its general partner until
March 2000. Mr. Scherr also served as Vice President of RCA’s general partner from its inception in August 1993 until
December 1995. From 1990 to 1992, Mr. Scherr was a real estate pension fund advisor at Aldrich, Eastman & Waltch.
Previously, he was a partner in the Boston law firm of Fine & Ambrogne. Mr. Scherr is the brother of Scott Scherr, Chairman of
the Board, President and Chief Executive Officer of Ultimate.
Mitchell K. Dauerman has served as Executive Vice President of Ultimate since April 1998 and as Chief Financial
Officer and Treasurer of Ultimate since September 1996. From 1979 to 1996, Mr. Dauerman held various positions with
KPMG LLP, an accounting firm, serving as a Partner in the firm from 1988 to 1996. Mr. Dauerman is a Certified Public
Accountant.
Adam Rogers has served as Senior Vice President, Chief Technology Officer since February 6, 2007. Mr. Rogers
served as Senior Vice President, Development from December 2002 to February 6, 2007. From July 2001 to December 2002,
81
Mr. Rogers served as Vice President of Engineering. From May 1997 to July 2001, Mr. Rogers held various positions in
Ultimate’s research and development organization, including Director of Technical Support from October 1998 to November
1999 and Director of Web Development from November 1999 to July 2001. Mr. Rogers is the son-in-law of Scott Scherr,
Chairman of the Board, President and Chief Executive Officer of Ultimate.
Greg Swick has served as Senior Vice President since January 2001 and as Chief Enterprise Sales Officer since
February 6, 2007. Mr. Swick served as Vice President and General Manager of the PEO Division of Ultimate’s sales
organization from November 1999 to January 2001. From February 1998 to November 1999, Mr. Swick was Director of Sales,
Northeast Division. Prior to joining Ultimate, Mr. Swick was President of The Ultimate Software Group of New York and New
England, G.P., a reseller of Ultimate Software which was acquired by Ultimate in March 1998. From 1987 to 1994, Mr. Swick
held various positions with ADP, where the most recent position was Area Vice President — ADP Dealer Services Division.
Robert Manne has served as Senior Vice President, General Counsel since February 2004 and served as Vice
President, General Counsel from May 1999 through January 2004. Prior to joining Ultimate, Mr. Manne was an attorney and
partner of Becker & Poliakoff, P.A., an international law firm, since 1978. In addition to administering the Litigation
Department of the law firm, Mr. Manne was a permanent member of the firm’s executive committee which was responsible for
law firm operations. Mr. Manne has performed legal services for Ultimate since its inception.
Chris Phenicie has served as Senior Vice President and Chief Mid-Market Sales Officer since January 2009 and served
as Vice President of Workplace Sales from April 2007 until January 2009. From January 2000 to April 2007, Mr. Phenicie
served as Strategic Account Manager for Ultimate. From July 1997 to January 2000, Mr. Phenicie held various sales positions
with ADP, the most recent of which position was Sales Manager.
James A. FitzPatrick, Jr. has served as a director of Ultimate since July 2000 and as Chairman of the Compensation
Committee of the Board since May 2017. Mr. FitzPatrick is a member of the Audit Committee of the Board since May 2017
and a member of the Nominating Committee. Mr. FitzPatrick was the Chairman of the Nominating Committee of the Board
from 2013 until May 2017. Mr. FitzPatrick is, and since January 2018, has been, senior counsel in the law firm Hogan Lovells
US LLP. From June 2012 until January 2018, Mr. FitzPatrick was a partner in Hogan Lovells US LLP. Mr. FitzPatrick was a
partner in the law firm Dewey & LeBoeuf LLP and its predecessor firms from January 1983 until May 2012 and was an
associate from September 1974 until January 1983.
Jonathan D. Mariner began serving as a director of Ultimate in May 2017 and is Chairman of the Audit Committee
and a member of the Compensation and Nominating Committees. Mr. Mariner is a private investor and entrepreneur, having
recently retired from 23 years working in professional sports, including retiring in May 2016 after serving as Chief Investment
Officer for 18 months, and having served over 12.5 years as Executive Vice President and Chief Financial Officer, of Major
League Baseball. He previously served as Executive Vice President and Chief Financial Officer for the Florida Marlins
Baseball Club; and as Vice President and Chief Financial Officer for the Florida Panthers Hockey Club during their initial start-
up and 1993-94 inaugural seasons. He brings both knowledge and experience from serving on a number of corporate boards
and audit committees of boards. His leadership skills and principles as demonstrated over his career is an asset to our Board.
Mr. Mariner currently serves on several corporate boards: McGraw Hill Education; The Investor’s Exchange (IEX), the new,
SEC-approved public stock exchange; and FM Global Insurance Company. He also currently serves on the University of
Virginia’s Darden Graduate Business School’s Board of Trustees; Little League Baseball’s board of directors; and the Knight
Commission on Intercollegiate Sports. Mr. Mariner has a B.S. degree in Accounting from the University of Virginia; an MBA
degree from Harvard Business School; and is a former Certified Public Accountant (CPA). Mr. Mariner served as a director of
PHH Corporation, a mortgage services solution company, from February 2005 to December 2010, BankAtlantic Corporation, a
banking services provider, from April 2000 to April 2006 and Steiner Leisure Limited, an innovative spa company, from
February 1997 to April 2006 where he also served on their compensation committee.
Rick A. Wilber has served as a director of Ultimate since October 2002 and is Chairman of the Nominating Committee
since May 2017. Mr. Wilber is a member of the Audit Committee and a member of the Compensation Committee of the Board.
Mr. Wilber formerly served on Ultimate’s Board of Directors from October 1997 through May 2000. Mr. Wilber served as the
President of Lynn’s Hallmark Cards, which owned and operated a number of Hallmark Card stores, from 1995 until 2013, at
which time Mr. Wilber retired. Mr. Wilber has served as a director of Synergy Resource Corporation, an oil and gas
exploration company, since October 2008. Mr. Wilber was a co-founder of Champs Sports Shops and served as its President
from 1974 to 1984. He served on the Board of Royce Laboratories, a pharmaceutical concern, from 1990 until April 1997,
when Royce Laboratories was sold to Watson Pharmaceuticals, Inc., a pharmaceutical concern.
Al Leiter has served as director of Ultimate since October 2006 and is a member of the Compensation Committee, the
Audit Committee and the Nominating Committee of the Board. Mr. Leiter was a three-time Major League Baseball World
Champion and two-time All-Star pitcher formerly with the New York Yankees, New York Mets, Toronto Blue Jays, and Florida
82
Marlins, and has been an official spokesperson for Ultimate since 2002. Mr. Leiter has served as a television commentator for
the Yankees Entertainment and Sports Network since 2006 and as an analyst with MLB Network since January 2009. Mr.
Leiter is president and founder of Leiter’s Landing, a charitable organization formed in 1996. Mr. Leiter has served on the
Executive Committee of New York City’s official tourism marketing organization, NYC & Company, since 2000 and is on the
Board of Directors of America’s Camp, a legacy organization of the Twin Towers Fund, on which he also served as a board
member.
Jason Dorsey began serving as a director of Ultimate in May 2017. Mr. Dorsey is President and Co-founder of The
Center for Generational Kinetics ("TCGK"). Mr. Dorsey has been the co-owner of TCGK for seven years where he oversees
research, strategy, and consulting. TCGK is a leading Millennials and Generation Z research, speaking, and strategy firm in the
U.S. TCGK clients span numerous industries including automotive, financial services, retail, restaurants, technology, and
manufacturing. TCGK's expert team works with over 150 clients each year including numerous Fortune 500 companies. Mr.
Dorsey is considered a leading expert and strategist on Millennials and Generation Z in the workforce and as customers. Mr.
Dorsey brings experience working with over 50 clients each year including numerous Fortune 500 companies in various
industries. As the leading expert and strategist on Millennials and Generation Z in the workforce, he will bring expert
knowledge to our Board to assist management with our continued growth strategy in today's workforce environment.
Each officer serves at the discretion of the Board and holds office until his or her successor is elected and qualified or
until his or her earliest resignation or removal. Messrs. Marc D. Scherr, James A. FitzPatrick, Jr. and Rick A. Wilber serve on
the Board in the class whose term expires at the Annual Meeting of Stockholders in 2018. Messrs. Scott Scherr and Al Leiter
serve on the Board in the class whose term expires at the Annual Meeting of Stockholders in 2019. Messrs. Jonathan D.
Mariner and Jason Dorsey serve on the Board in the class whose term expires at the Annual Meeting of Stockholders in 2020.
Julie Dodd has served as Senior Vice President and Chief Services Officer since October 2013, responsible for all
support and implementation services provided by the Company to its customers. Ms. Dodd served as Senior Vice President and
General Manager, Mid-Market Services, from April 2010 until January 2014 and served as Vice President and General
Manager of Mid-Market Operations from January 2009 until April 2010. From October 2007 to December 2008, Ms. Dodd
served as the Director of Product Strategy, with primary focus on the UltiPro Mid-Market product offering. Prior to joining
Ultimate, Ms. Dodd provided consulting services for large scale implementations, operations efficiencies projects and new
cloud product launches for various service providers. From 2002 to 2005, Ms. Dodd held various executive positions with
Ceridian Corporation, an information technology company, supporting their small and mid-market solutions.
Bill Hicks has served as Senior Vice President and Chief Relationship Officer since October 2013. Mr. Hicks served
as Senior Vice President of Shared Services and Chief Information Officer since April 2005. Mr. Hicks served as Vice
President and Chief Information Officer from February 2004 through March 2005. From 1993 until February 2004, Mr. Hicks
held various positions in the management of technologies for Precision Response Corporation, a wholly-owned subsidiary of
Interactive Corporation and a provider of call centers and on-line commerce customer care services, including Chief
Information Officer and Senior Vice President of Technology from August 2000 until February 2004.
Jody Kaminsky has served as Senior Vice President of Marketing since April 2010. Ms. Kaminsky served as Vice
President of Marketing from July 2008 until April 2010. Ms. Kaminsky served as Vice President of Marketing Operations from
July 2005 to June 2008, as Director of Strategic Marketing from December 2002 through June 2005, and in various other
Marketing and Communications positions from November 1999 through November 2002. Prior to that, Ms. Kaminsky held
various positions with General Electric's GE Information Services division from April 1997 through August 1999, including
Manager of Communications and Community Relations.
Vivian Maza has served as Senior Vice President, Chief People Officer and Secretary of Ultimate since February 2004
and served as Vice President, People from January 1998 through January 2004. Ms. Maza has served as Secretary of Ultimate
since September 1996. Prior to that, Ms. Maza served as the Office Manager of Ultimate from its organization in April 1996
and of the Partnership from its inception in 1990 until April 1996. Ms. Maza is an HR Generalist and holds a Professional in
Human Resources (PHR) certification from the Society for Human Resource Management (SHRM) association. From 1985 to
1990, Ms. Maza was a systems analyst for the Wholesale Division of ADP.
Code of Ethics
Ultimate has adopted a Code of Ethics within the meaning of Item 406 of Regulation S-K of the Exchange
Act. Ultimate’s Code of Ethics applies to its principal executive officer, principal financial officer and principal accounting
officer. A copy of Ultimate’s Code of Ethics is posted on Ultimate’s website at www.ultimatesoftware.com. In the event that
Ultimate makes any amendments to, or grants any waiver from, a provision of the Code of Ethics that requires disclosure under
Item 5.05 of Current Report on Form 8-K, Ultimate will post such information on its website.
83
Corporate Governance
In 2013 the Board formed a Nominating Committee. The primary function of the Nominating Committee is to
recommend director-nominees to be considered for election or appointment by the Board. Ultimate has established a
Nominating Committee Charter that sets forth the Nominating Committee’s principal duties and responsibilities. This charter is
available on our website.
When considering potential director candidates, the Board considers, and the Nominating Committee will consider, the
candidate’s independence (as mandated by the NASDAQ rules), character, judgment, age, skills, financial literacy, and
experience in the context of the needs of Ultimate and the Board. Other information required by this item is incorporated
herein by reference to the information set forth in Ultimate’s Proxy Statement for the Annual Meeting of Stockholders in 2018
under the heading “Corporate Governance, Board Meetings and Committees of the Board.” In 2017, Ultimate did not pay any
fees to a third party to assist in identifying or evaluating potential nominees.
The Nominating Committee and the Board will consider director candidates recommended by Ultimate’s stockholders
in a similar manner as those recommended by members of management or other directors.
Other Information
The information required by this item is incorporated herein by reference to the information set forth in Ultimate’s
Proxy Statement for the Annual Meeting of Stockholders in 2018 under the headings “Section 16(a) Beneficial Ownership
Reporting Compliance” and “Corporate Governance, Board Meetings and Committees of the Board-Audit Committee.”
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to the information in Ultimate’s Proxy
Statement for the 2018 Annual Meeting of Stockholders under the headings “Executive Compensation Policy,” “Director
Compensation” and “Compensation Committee Report.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information set forth in this item is incorporated herein by reference to the information in Ultimate’s Proxy
Statement for the 2018 Annual Meeting of Stockholders under the heading “Security Ownership of Certain Beneficial Owners
and Management.”
Equity Compensation Plan Information.
The following table summarizes information related to Ultimate’s equity compensation plans as of December 31, 2017:
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by security holders ........
Equity compensation plans not approved by security holders ..
Total ...........................................................................................
(a) Number of
Securities to be Issued
upon Exercise of
Outstanding Options,
Warrants and Rights
(b) Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
113,634
—
113,634
$
$
29.22
—
29.22
(c) Number of
Securities Remaining
Available for Future
Issuance under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column ( a ))
819,893
—
819,893
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated herein by reference to the information in Ultimate’s Proxy
Statement for the 2018 Annual Meeting of Stockholders under the headings “Certain Relationships and Related Transactions,”
“Compensation Committee Interlocks and Insider Participation” and “Corporate Governance, Board Meetings and Committees
of the Board.”
Item 14. Principal Accountant Fees and Services
84
The information required by this item is incorporated herein by reference to the information in Ultimate’s Proxy
Statement for the 2018 Annual Meeting of Stockholders under the heading “KPMG LLP Fees.”
PART IV
Item 15. Exhibits
(a) Documents filed as part of this Form 10-K:
1. The following consolidated financial statements of Ultimate, together with the report thereon, of KPMG LLP, our
Independent Registered Public Accounting Firm, are included in Part II, Item 8, of this Form 10-K:
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Income for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
3. Exhibits
Number
Description
3.1
3.2
3.3
4.1
4.2
4.3
10.1
10.2
10.3
10.4
Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.4 to the Registration
Statement on Form S-1/A (File 333-47881), filed May 29, 1998 (the "Registration Statement"))
Certificate of Designations of Series A Junior Preferred Stock (incorporated by reference to Exhibit 2 to Ultimate’s
Current Report on Form 8-K dated October 23, 1998)
Amended and Restated Bylaws (incorporated herein by reference to Exhibit 3.2 to Ultimate's Current Report on Form
8-K dated April 3, 2017)
Form of Certificate for the Common Stock, par value $0.01 per share (incorporated by reference to Exhibit 4.1 to
the Registration Statement)
Form of Warrant for Common Stock (incorporated by reference to Exhibit 4.4 to Ultimate's Registration Statement
on Form S-3 (File No. 333-107527), initially filed July 31, 2003)
Amended and Restated Rights Agreement, dated as of August 26, 2008, between Ultimate and Computershare Trust
Company, N.A., as Rights Agent. The Rights Agreement includes the Form of Certificate of Designations of Series
A Junior Preferred Stock as Exhibit A, the Form of Rights Certificate as Exhibit B and the Summary of Rights as
Exhibit C (incorporated by reference to Exhibit 4.1 to Ultimate’s Current Report on Form 8-K dated September 2,
2008).
Shareholders Rights Agreement, dated June 6, 1997 among Ultimate and certain stockholders named therein
(incorporated by reference to Exhibit 10.1 to the Registration Statement)
Commercial Office Lease by and between ROHO Ultimate, LTD. II, a Florida limited partnership (“Landlord”) and
Ultimate dated May 23, 2001 (incorporated by reference to Exhibit 10.32 to Ultimate's Annual Report on Form 10-
K dated March 15, 2006)
Weston Town Center South Office Building Lease between South Office Building-DLB, LLC, a Florida Limited
Liability Company, South Office Building Bagtrust, LLC, a Florida Limited Liability Company, and South Office
Building-BJB, LLC, a Florida Limited Liability Company, and Ultimate and Weston Common Area LTD., dated
August 18, 2005 (incorporated by reference to Exhibit 10.35 to Ultimate’s Annual Report on Form 10-K, dated March
15, 2006)
Galleria Atlanta office lease agreement between Galleria 600, LLC, a Delaware limited liability company, and
Ultimate, dated April 27, 2006 (incorporated by reference to Exhibit 10.36 to Ultimate’s Quarterly Report on Form
10-Q, dated August 8, 2006)
85
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
Lease of Office Space by and between OMERS Realty Corporation CPP Investment Board Real Estate Holdings
Inc., and The Ultimate Group of Canada, Inc., dated August 22, 2006 (incorporated by reference to Exhibit 10.37 to
Ultimate’s Quarterly Report on Form 10-Q, dated November 8, 2006)
Indemnity Agreement between OMERS Realty Corporation, CPP Investment Board Real Estate Holdings, Inc., and
Ultimate dated August 22, 2006 (incorporated by reference to Exhibit 10.38 to Ultimate’s Quarterly Report on Form
10-Q, dated November 8, 2006)
Amendment to Lease by and between ROHO Ultimate, Ltd. I (“Landlord”) and Ultimate Group. Inc. (“Tenant”) for
Demised premises at 2000 Ultimate Way, Weston, FL 33326 (the “Premises”) dated February 15, 2000 (incorporated
by reference to Exhibit 10.39 to Ultimate’s Annual Report on Form 10-K, dated March 16, 2007)
First Amendment to Lease between Galleria 600, LLC (“Landlord”) and Ultimate, dated August 18, 2006 (incorporated
by reference to Exhibit 10.42 to Ultimate’s Annual Report on Form 10-K, dated March 16, 2007)
Amended and Restated 2005 Equity and Incentive Plan (incorporated by reference to Exhibit 10.1 to Ultimate’s
Current Report on Form 8-K, dated May 17, 2016) †
Commercial lease between Weston Office, LLC (“Landlord”) and Ultimate, dated January 18, 2008 (incorporated
by reference to Exhibit 10.45 to Ultimate’s Annual Report on Form 10-K, dated March 13, 2008)
Commercial lease between AGF Woodfield Owner, L.L.C., (“Landlord”) and Ultimate, dated October 31, 2008
(incorporated by reference to Exhibit 10.47 to Ultimate’s Annual Report on Form 10-K, dated March 2, 2009)
Commercial lease between 300 Galleria Parkway Associates, L.P., (“Landlord”) and Ultimate, dated September 8,
2009 (incorporated by reference to Exhibit 10.33 to Ultimate’s Quarterly Report on Form 10-Q, dated November 9,
2009)
Commercial lease between RT Twenty-Sixth Pension Properties Limited (“Landlord”) and Ultimate, dated September
4, 2009 (incorporated by reference to Exhibit 10.34 to Ultimate’s Quarterly Report on Form 10-Q, dated November
9, 2009)
Master Space Agreement between Quality Technology Services Miami LLC and Ultimate, dated June 1, 2009
(incorporated by reference to Exhibit 10.1 to Ultimate’s Quarterly Report on Form 10-Q, dated August 9, 2010)
Master Space Agreement between Quality Technology Services Metro LLC and Ultimate, dated June 1, 2009
(incorporated by reference to Exhibit 10.2 to Ultimate’s Quarterly Report on Form 10-Q, dated August 9, 2010)
Service Order Form between Verizon Canada Ltd. and Ultimate, dated September 23, 2009 (incorporated by reference
to Exhibit 10.3 to Ultimate’s Quarterly Report on Form 10-Q, dated August 9, 2010)
Amended and Restated Change in Control Bonus Plan for Executive Officers dated April 26, 2010 (incorporated by
reference to Exhibit 10.1 to Ultimate’s Current Report on Form 8-K, dated February 2, 2016) †
Commercial lease between 2000 Main Street Associates, LLC (“Landlord”) and Ultimate, dated November 3, 2010
(incorporated by reference to Exhibit 10.54 to Ultimate’s Annual Report on Form 10-K, dated March 1, 2011)
Commercial lease between Micari Holdings, LLC (“Landlord”) and Ultimate, dated November 5, 2010 (incorporated
by reference to Exhibit 10.55 to Ultimate’s Annual Report on Form 10-K, dated March 1, 2011)
Commercial lease between Galleria 400, LLC (“Landlord”) and Ultimate, dated December 29, 2010 (incorporated
by reference to Exhibit 10.56 to Ultimate’s Annual Report on Form 10-K, dated March 1, 2011)
Commercial lease between AG/LPC Griffin Towers, L.P., (“Landlord”) and Ultimate, dated February 23, 2011
(incorporated by reference to Exhibit 10.1 to Ultimate's Quarterly Report on Form 10-Q, dated May 10, 2011)
Commercial lease between TCS-CB LLC, ("Landlord") and Ultimate, dated July 25, 2012 (incorporated by reference
to Exhibit 10.1 to Ultimate's Quarterly Report on Form 10-Q, dated November 9, 2012)
License and Master Services Agreement between IO Phoenix One, LLC and Ultimate, dated February 27, 2012, as
amended (incorporated by reference to Exhibit 10.2 to Ultimate's Quarterly Report on Form 10-Q, dated November
9, 2012)
Master Services Agreement between Savvis Communications Canada, Inc. and Ultimate, dated April 30, 2013
(incorporated by reference to Exhibit 10.1 to Ultimate's Quarterly Report on Form 10-Q, dated August 8, 2013)
Service Schedule between Savvis Communications Canada, Inc. and Ultimate, dated April 30, 2013 (incorporated
by reference to Exhibit 10.2 to Ultimate's Quarterly Report on Form 10-Q, dated August 8, 2013)
Colocation Services Service Level Attachment between Savvis Communications Canada, Inc. and Ultimate, dated
April 30, 2013 (incorporated by reference to Exhibit 10.3 to Ultimate's Quarterly Report on Form 10-Q, dated
August 8, 2013)
Commercial lease between DP Weston Pointe III, LLC, ("Landlord") and Ultimate, dated December 8, 2014
(incorporated by reference to Exhibit 10.27 to Ultimate's Annual Report on Form 10-K, dated February 27, 2015)
Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.1 to Ultimate's Quarterly
Report on Form 10-Q, dated August 5, 2016) †
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to Ultimate's Quarterly Report
on Form 10-Q, dated August 5, 2016) †
86
21.1
23.1
31.1
31.2
32.1
32.2
101.1
Subsidiaries of the Registrant
Consent of Independent Registered Public Accounting Firm *
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended *
Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended *
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, as amended *
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, as amended *
Interactive Data Files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31,
2017 and 2016, (ii) Consolidated Statements of Income for the Years Ended December 31, 2017, 2016 and 2015,
(iii) Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015;
(iv) Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015; (v)
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015; and (vi) Notes to
Consolidated Financial Statements.
_________________
* Filed herewith.
†
Indicates management contract or compensatory plan, contract or arrangement.
Confidential treatment has been granted with respect to certain portions of this exhibit pursuant to Rule 24b-2 of the
Securities and Exchange Act of 1934, as amended, and such portions have been omitted and filed separately with the SEC.
87
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
THE ULTIMATE SOFTWARE GROUP, INC.
By:/s/ Mitchell K. Dauerman
Mitchell K. Dauerman
Executive Vice President, Chief Financial Officer and Treasurer
Date: February 26, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Scott Scherr
Scott Scherr
/s/ Mitchell K. Dauerman
Mitchell K. Dauerman
/s/ Marc D. Scherr
Marc D. Scherr
President, Chief Executive Officer and Chairman of the Board
February 26, 2018
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
February 26, 2018
Vice Chairman of the Board and Chief Operating Officer
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
February 26, 2018
/s/ James A. FitzPatrick, Jr.
Director
James A. FitzPatrick, Jr.
/s/ Jonathan D.Mariner
Jonathan D. Mariner
/s/ Rick Wilber
Rick Wilber
/s/ Alois T. Leiter
Alois T. Leiter
/s/ Jason Dorsey
Jason Dorsey
Director
Director
Director
Director
88
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Ultimate Software Group, Inc.:
We consent to the incorporation by reference (i) in the registration statements (No. 333 107527 and No. 333-115894) on Forms
S-3 of The Ultimate Software Group, Inc. (the Company) and (ii) the registration statements (No. 333-91332, No. 333-125076,
No. 333-142972, No. 333-161201, and No. 333-183984) on Forms S-8 of the Company, of our reports dated February 26,
2018, with respect to the consolidated balance sheets of The Ultimate Software Group, Inc. and subsidiaries as of December 31,
2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows
for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively, the consolidated
financial statements), and the effectiveness of internal control over financial reporting as of December 31, 2017, which reports
appear in the December 31, 2017 annual report on Form 10 K of the Company.
/s/ KPMG LLP
Fort Lauderdale, FL
February 26, 2018
Certified Public Accountants
I, Scott Scherr, certify that:
CERTIFICATION
1.
I have reviewed this Form 10-K of The Ultimate Software Group, Inc.;
Exhibit 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the Registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 26, 2018
/s/ Scott Scherr
Chief Executive Officer
I, Mitchell K. Dauerman, certify that:
CERTIFICATION
1.
I have reviewed this Form 10-K of The Ultimate Software Group, Inc.;
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: February 26, 2018
/s/ Mitchell K. Dauerman
Chief Financial Officer
(Principal Financial and Accounting Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Scott Scherr, Chief Executive Officer of The Ultimate Software Group, Inc., hereby certify to the best of my
knowledge and belief that this Annual Report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and that the information contained in this Annual Report on
Form 10-K fairly represents, in all material respects, the financial condition and results of operations of The Ultimate Software
Group, Inc.
/s/ Scott Scherr
Chief Executive Officer
February 26, 2018
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
I, Mitchell K. Dauerman, Chief Financial Officer of The Ultimate Software Group, Inc., hereby certify to the best of
my knowledge and belief that this Annual Report on Form 10-K fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and that the information contained in this Annual Report
on Form 10-K fairly represents, in all material respects, the financial condition and results of operations of The Ultimate
Software Group, Inc.
/s/ Mitchell K. Dauerman
Chief Financial Officer
February 26, 2018