Ultimate Software Uses Payroll To Grow Business

June 5th, 2012 by Rahul Leave a reply »

Payroll software could end up paying off in more ways than one for Ultimate Software Group.

The company is leveraging its position as a leading provider of payroll software to expand into the human resource and talent management software markets.

Ultimate Software’s (ULTI) year-over-year per-share profit has jumped at least 30% each of the past four quarters.

Most of its revenue comes from its payroll systems, where Ultimate competes with larger rivals such as Automatic Data Processing (ADP), Ceridian and Oracle (ORCL).

But it’s expanded into talent management and human resource software, facing rivals such as Taleo and SuccessFactors. Those two companies recently were acquired by business software leaders Oracle, in the case of Taleo, and SAP (SAP), in the case of SuccessFactors.

Pairing payroll with human resource and talent management software is paying off for Ultimate, says Richard Davis, an analyst for Canaccord Genuity.

“Their pitch is that ‘we have got all of these cool add-ons — performance management, time and attendance, scheduling and stuff like that — and we’ll sell this to you for $1 per employee per month, and it might not have as many bells and whistles as the stuff from SuccessFactors or Taleo but its 50% cheaper and you don’t have to do any integration,’” he said. “For many companies, 80% of the functionality for half the price is a good deal.”

Ultimate’s payroll software sells for roughly the same price as offerings from ADP and Ceridian. But offering a one-stop shop with the other software services helps it win new customers, says Jeff Houston, an analyst for Barrington Research.

“Most of their market share gains are coming from ADP and Ceridian,” he said. Houston says it’s also getting “a little” share from Oracle.

Ultimate Software’s shares are up 22% for the year .

Ultimate says it has more than 2,300 customers, including the Chicago Cubs baseball team, Google (GOOG), sandwich chain Subway and Adobe Systems (ADBE).

The company employs the software-as-a-service business model. Customers pay on a monthly basis for software as needed, which they access via the Internet, rather than spending more money upfront to license a software package. Many customers prefer the SaaS model, says Raghavan Sarathy, an analyst for Dougherty & Co.

“(Customers) have the control but at the same time they don’t have to maintain the software, buy the servers, load the software and do it all in-house,” he said.

And Ultimate has made an effort to out-do rivals in customer service, says Canaccord’s Davis.

“Some of the customer support people would give their clients their home phone numbers so you could call them at home,” Davis said. “No one (else) does that.”

Solid customer service has helped Ultimate Software notch a customer retention rate of 96%, says analyst Houston, compared with 80% to 90% for ADP and Ceridian.

The company’s challenges include successfully handling ever-larger contracts and battling up-and-coming rival Workday.

Workday offers similar SaaS payroll and talent management software. Its founder is David Duffield, who founded and led Peoplesoft before Oracle bought that company in a bitter takeover in 2004 for more than $10 billion.

Workday reportedly is planning an initial public offering that could be big. In April, the company announced its had hired VMware (VMW) Chief Financial Officer Mark Peek to be its CFO. In October, it announced it had closed $85 million in Series F financing.



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