Is Chasing Gains From HCM Cloud Software Worth the Risk?

Arturo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In every crisis there’s an opportunity, so it’s always been said. Going by this oft-repeated dictum, Ultimate Software Group (NASDAQ: ULTI) is one equity worth some due diligence as it is directly downstream of a crisis in global employability, which the ManpowerGroup posited in its 2012 annual survey. In a nutshell, this poll avers that “one in three employers worldwide cannot find qualified talent.”

Is there a boy crying wolf here? Methinks not. A separate study by Deloitte Research tells of an “impending talent crunch,” specifically a “talent crisis in global manufacturing.” This research predicts that the ratio of the 65-years-and-older population to the active labor force will rise to 36% from 25% among industrialized economies and select emerging economies between 2000 and 2020. To address this concern on an aging and thinning workforce, the study advances some strategies aimed at attracting and engaging Generation Y (defined as those born 1982–1993 entering the labor force for the first time) into careers in the manufacturing sector.

For the headhunters’ tool kit

Ultimate Software, based in Weston, FL, is in a position to be at the cusp of implementing these strategies not only in manufacturing but also in business and industry at large. For headhunters of corporate HRs, the company’s cloud-based human capital management (HCM) tools include an UltiPro Recruitment solution. With this tool, the recruitment process is made easier and quicker as it streamlines and automates all activities associated with searching and acquiring top talents. The company’s UltiPro software package combines all aspects of HR management, such as payroll, talent management, payroll and benefits administration, onboarding, performance and succession management, career development, workforce analytics, and global unified HCM.

Peers in California

Cloud-based HR management applications are also the core competencies of Cornerstone OnDemand (NASDAQ: CSOD), which is based in Los Angeles, CA. The company’s software solutions help its clients not only to recruit, connect, train, and manage their employees but also to empower them and increase their productivity.
Cornerstone’s suite of four clouds encompasses all stages of the employee lifecycle: Recruiting Cloud, Learning Cloud, Performance Cloud, and Extended Enterprise Cloud.

Another California company, Jive Software (NASDAQ: JIVE) based in Palo Alto, can likewise contribute in addressing human resource management issues, though less on head hunting. The cloud-based social business collaboration software it develops and markets engages not only employees but its clients’ customers as well. This platform enables users to pursue initiatives at enhanced revenue generation, reduced operating costs, and increased customer retention.

A catch-up game

<table> <thead> <tr><th> </th><th> <p>Ultimate Software</p> </th><th> <p>Cornerstone</p> </th><th> <p>Jive Software</p> </th></tr> </thead> <tbody> <tr> <td> <p>Market Cap</p> </td> <td> <p>$3.04 billion</p> </td> <td> <p>$2 billion</p> </td> <td> <p>$1.07 billion</p> </td> </tr> <tr> <td> <p>Customer Base*</p> </td> <td> <p>2,500+ companies</p> </td> <td> <p>1,237</p> </td> <td> <p>800</p> </td> </tr> <tr> <td> <p>2013 1<sup>st</sup> Q Revenue</p> </td> <td> <p>$78.1 million</p> </td> <td> <p>$37.7 million</p> </td> <td> <p>$33.9 million</p> </td> </tr> <tr> <td> <p>2013 1<sup>st</sup> Q Net Income (Loss)</p> </td> <td> <p>$4.5 million</p> </td> <td> <p>($9.9 million)</p> </td> <td> <p>($16.6 million)</p> </td> </tr> <tr> <td> <p>2013 1<sup>st</sup> Q EPS (Loss)</p> </td> <td> <p>$0.16</p> </td> <td> <p>($0.20)</p> </td> <td> <p>($0.25)</p> </td> </tr> </tbody> </table>

*as of end-2012

From the above table, it appears that both Jive and Cornerstone have plenty of ground to cover in terms of customer base and bottom line in order to catch up with Ultimate Software, which has the advantage of being ahead in the game. Notably for Ultimate Software, founded in 1990, this June marked its 15th year as a publicly traded company. Jive, on the other hand, was incorporated in 2001 and went public in an IPO in December 2011. Cornerstone, established in 1999, IPO’d in March that same year.

It is also significant to note that Ultimate Software pioneered the shift of HCM software development to cloud computing in 2002. Manifesting this culture at product innovation, the company’s HR and payroll Software-as-a-Service (SaaS) solutions were the first of such offerings in the industry.

Foolish take
With a consensus 2013 earnings growth of 32.45% year over year compared to the computer software industry’s expected 8% clip, Ultimate Software can indeed look attractive. Having said that, initiating a position on this equity may be considered a leap of faith on future earnings as its shares are trading at a P/E around the 177 level, and its one-year forward P/E is hovering at the 161 mark. Hence, as a final take, if every cloud or crisis has a silver lining, pursuit of such a gain may call for some bold risk-taking.

Arturo Cuevas has no position in any stocks mentioned. The Motley Fool recommends The Ultimate Software Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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