UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2018~~2019



☐	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		65-0694077
(State or other jurisdiction of incorporation		(I.R.S. Employer Identification No.)
or organization)



2000 Ultimate Way, Weston, FL		33326
(Address of principal executive offices)		(Zip Code)

(954) 331 - 7000

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the ~~Registrant~~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~~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~~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 ~~twelve~~12 months (or for such shorter period that the ~~Registrant~~registrant was required to submit ~~and post~~ such files). Yes ☑ No ☐

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 reviews financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the ~~Registrant~~registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of ~~May 7, 2018,~~April 30, 2019, there were ~~30,614,017~~31,680,399 shares of the ~~Registrant’s~~registrant’s common stock, par value $0.01, outstanding.

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



	Page
Part I – Financial Information:
Item 1 – Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of March 31, ~~2018~~2019 and December 31, ~~2017~~2018	1
Unaudited Condensed Consolidated Statements of Income for the Three Months Ended March 31, ~~2018~~2019 and March 31, ~~2017~~2018	2
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, ~~2018~~2019 and March 31, ~~2017~~2018	3
Unaudited Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Three Months Ended March 31, 2019 and March 31, 2018	4
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, ~~2018~~2019 and March 31, ~~2017~~2018	45
Notes to Unaudited Condensed Consolidated Financial Statements	56
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	1714
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	2622
Item 4 – Controls and Procedures	2723
Part II – Other Information:
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	2824
Item 6 – Exhibits	2925
Signatures	3026
Certifications

~~Table of Contents~~

PART 1 – FINANCIAL INFORMATION


ITEM 1.	Financial Statements

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


							As of			As of
	As of March 31, 2018			As of December 31, 2017			March 31, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	143,639		$	155,685		$	100,424		$	151,247
Investments in marketable securities	4,257			9,434			3,448			10,741
Accounts receivable, net of allowance for doubtful accounts of $1,100 for 2018 and $900 for 2017	192,477			190,989
Accounts receivable, net of allowance for doubtful accounts of $1,750 for 2019 and $1,650 for 2018							247,651			238,768
Deferred contract costs, prepaid expenses and other current assets	64,290			71,602			110,155			90,761
Total current assets before funds held for customers	404,663			427,710			461,678			491,517
Funds held for customers	1,210,419			563,062			1,378,121			618,206
Total current assets	1,615,082			990,772			1,839,799			1,109,723
Property and equipment, net	259,782			243,664			321,962			302,939
Goodwill	35,613			35,808			216,395			219,904
Intangible assets, net	20,034			20,862			137,059			144,411
Deferred contract costs and other assets, net	104,582			53,409			201,056			129,108
Deferred tax assets, net	22,429			32,696
Deferred income tax assets, net							—			14,632
Total assets	$	2,057,522		$	1,377,211		$	2,716,271		$	1,920,717
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	16,003		$	16,099		$	16,825		$	16,058
Accrued expenses and other liabilities	65,280			60,394			143,982			154,383
Deferred revenue	200,576			197,088			249,219			238,940
Capital lease obligations	5,307			5,474
Finance lease obligations							8,142			6,303
Total current liabilities before customer funds obligations	287,166			279,055			418,168			415,684
Customer funds obligations	1,212,055			564,031			1,378,736			619,230
Total current liabilities	1,499,221			843,086			1,796,904			1,034,914
Deferred revenue	1,650			1,773			844			1,009
Deferred rent	9,162			5,349			—			8,472
Capital lease obligations	3,981			4,477
Finance lease obligations							7,136			5,739
Other long-term liabilities	2,500			4,250			60,872			500
Deferred income tax liability	361			251			24,165			25,105
Total liabilities	1,516,875			859,186			1,889,921			1,075,739
Stockholders’ equity:
Series A Junior Participating Preferred Stock, $.01 par value, 500,000 shares authorized, no shares issued or outstanding	—			—			—			—
Preferred Stock, $.01 par value, 2,000,000 shares authorized, no shares issued or outstanding	—			—			—			—
Common Stock, $.01 par value, 50,000,000 shares authorized, 35,259,958 and 34,787,986 shares issued as of March 31, 2018 and December 31, 2017, respectively	353			348
Common Stock, $.01 par value, 50,000,000 shares authorized, 36,338,258 and 35,985,995 shares issued as of March 31, 2019 and December 31, 2018, respectively							363			360
Additional paid-in capital	595,426			609,160			836,185			863,030
Accumulated other comprehensive loss	(6,613		)	(5,912		)	(19,537		)	(14,574		)
Accumulated earnings	162,840			125,788			220,697			207,521
	752,006			729,384			1,037,708			1,056,337
Treasury stock, 4,657,995 shares, at cost, for 2018 and 2017	(211,359		)	(211,359		)
Treasury stock, 4,657,995 shares, at cost, for 2019 and 2018							(211,359		)	(211,359		)
Total stockholders’ equity	540,647			518,025			826,349			844,978
Total liabilities and stockholders’ equity	$	2,057,522		$	1,377,211		$	2,716,270		$	1,920,717

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)


	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2018			2017			2019			2018
Revenues:
Recurring	$	236,587		$	189,981		$	287,925		$	236,587
Services	40,168			38,510			47,080			40,168
Total revenues	276,755			228,491			335,005			276,755
Cost of revenues:
Recurring	62,865			50,069			82,598			62,865
Services	41,908			39,631			46,847			41,908
Total cost of revenues	104,773			89,700			129,445			104,773
Gross profit	171,982			138,791			205,560			171,982
Operating expenses:
Sales and marketing	71,197			69,360			85,622			71,197
Research and development	46,974			36,158			64,505			46,974
General and administrative	31,722			30,204			45,723			31,722
Total operating expenses	149,893			135,722			195,850			149,893
Operating income	22,089			3,069			9,710			22,089
Other income (expense):
Interest and other expense	(197		)	(280		)
Other (expense) income:
Interest expense and other, net							(808		)	(197		)
Other income, net	385			226			490			385
Total other income (expense), net	188			(54		)
Total other (expense) income, net							(318		)	188
Income before income taxes	22,277			3,015			9,392			22,277
(Provision) benefit for income taxes	(1,283		)	4,225
Benefit (provision) for income taxes							3,784			(1,283		)
Net income	$	20,994		$	7,240		$	13,176		$	20,994
Net income per share:
Basic	$	0.69		$	0.25		$	0.42		$	0.69
Diluted	$	0.67		$	0.24		$	0.41		$	0.67
Weighted average shares outstanding:
Basic	30,404			29,538			31,526			30,404
Diluted	31,105			30,497			32,140			31,105

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

For the Three Months Ended March 31,
2018 2017
Net income $ 20,994
$ 7,240
Other comprehensive (loss) income:
Unrealized loss on investments in marketable available-for-sale securities (322 ) (230 )
Unrealized (loss) gain on foreign currency translation adjustments (461 ) 162
Other comprehensive loss, before tax (783 ) (68 )
Income tax benefit related to items of other comprehensive income 90
92
Other comprehensive (loss) income, net of tax $ (693 ) $ 24
Comprehensive income $ 20,301
$ 7,264



	For the Three Months Ended March 31,
	2019			2018
Net income	$	13,176		$	20,994
Other comprehensive loss:
Unrealized gain (loss) on investments in marketable available-for-sale securities	625			(322		)
Unrealized loss on foreign currency translation adjustments	(5,413		)	(469		)
Other comprehensive loss, before tax	(4,788		)	(791		)
Income tax (provision) benefit related to items of other comprehensive income	(175		)	90
Other comprehensive loss, net of tax	$	(4,963	)	$	(701	)
Comprehensive income	$	8,213		$	20,293

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)



	Common Stock			Additional Paid -in Capital			Accumulated Other Comprehensive Loss			Accumulated Earnings		Treasury Stock				Total Stockholders’ Equity
	Shares	Amount		Additional Paid -in Capital			Accumulated Other Comprehensive Loss			Accumulated Earnings		Shares	Amount			Total Stockholders’ Equity
Balance, December 31, 2017	34,788	$	348	$	609,160		$	(5,912	)	$	125,788	4,658	$	(211,359	)	$	518,025
ASC 606 cumulative adjustment	—	—		—			—			16,058		—	—			16,058
Net income	—	—		—			—			20,994		—	—			20,994
Unrealized loss on investments in marketable securities available-for-sale, net of tax	—	—		—			(232		)	—		—	—			(232		)
Unrealized loss on foreign exchange	—	—		—			(469		)	—		—	—			(469		)
Shares acquired to settle employee tax withholding liability	—	—		(50,338		)	—			—		—	—			(50,338		)
Issuances of Common Stock from exercises of stock options	83	1		2,505			—			—		—	—			2,506
Issuances of Common Stock from restricted stock releases	389	4		—			—			—		—	—			4
Non-cash stock-based compensation expense	—	—		34,099			—			—		—	—			34,099
Balance, March 31, 2018	35,260	$	353	$	595,426		$	(6,613	)	$	162,840	4,658	$	(211,359	)	$	540,647



	Common Stock			Additional Paid -in Capital			Accumulated Other Comprehensive Loss			Accumulated Earnings		Treasury Stock				Total Stockholders’ Equity
	Shares	Amount		Additional Paid -in Capital			Accumulated Other Comprehensive Loss			Accumulated Earnings		Shares	Amount			Total Stockholders’ Equity
Balance, December 31, 2018	35,986	$	360	$	863,030		$	(14,574	)	$	207,521	4,658	$	(211,359	)	$	844,978
Net income	—	—		—			—			13,176		—	—			13,176
Unrealized gain on investments in marketable securities available-for-sale, net of tax	—	—		—			450			—		—	—			450
Unrealized loss on foreign exchange	—	—		—			(5,413		)	—		—	—			(5,413		)
Shares acquired to settle employee tax withholding liability	—	—		(66,131		)	—			—		—	—			(66,131		)
Issuances of Common Stock from restricted stock releases	352	3		—			—			—		—	—			3
Non-cash stock-based compensation expense	—	—		39,286			—			—		—	—			39,286
Balance, March 31, 2019	36,338	$	363	$	836,185		$	(19,537	)	$	220,697	4,658	$	(211,359	)	$	826,349

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2018			2017			2019			2018
Cash flows from operating activities:
Net income	$	20,994		$	7,240		$	13,176		$	20,994
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,358			8,171			17,327			9,358
Provision for doubtful accounts	2,815			2,293			3,475			2,815
Non-cash stock-based compensation expense	33,197			33,866			38,158			33,197
Income taxes	821			(4,536		)	13,936			821
Net amortization of premiums and accretion of discounts on available-for-sale securities	(114		)	118			12			(114		)
Changes in operating assets and liabilities:
Changes in operating assets and liabilities, net of business combinations:
Accounts receivable	(4,302		)	(1,460		)	(12,338		)	(4,302		)
Deferred contract costs, prepaid expenses and other current assets	(15,006		)	(4,875		)	(16,701		)	(15,006		)
Deferred contract costs and other assets	(3,914		)	(1,766		)	(5,935		)	(3,914		)
Accounts payable	(96		)	5,427			825			(96		)
Accrued expenses, other liabilities and deferred rent	11,369			(46		)	(26,814		)	11,369
Deferred revenue	1,455			1,893			10,114			1,455
Net cash provided by operating activities	56,577			46,325			35,235			56,577
Cash flows from investing activities:
Purchases of property and equipment	(22,871		)	(22,759		)	(25,018		)	(22,871		)
Purchases of marketable securities	(114,732		)	(92,646		)	(79,922		)	(114,732		)
Proceeds from sales and maturities of marketable securities	44,985			42,554			87,521			44,985
Net change in money market securities and other cash equivalents held to satisfy customer funds obligations	(572,640		)	(399,403		)	(757,792		)	(572,640		)
Net cash used in investing activities	(665,258		)	(472,254		)	(775,211		)	(665,258		)
Cash flows from financing activities:
Net proceeds from issuances of Common Stock	2,506			1,572			—			2,506
Shares acquired to settle employee tax withholding liabilities	(50,338		)	(33,595		)	(66,131		)	(50,338		)
Principal payments on capital lease obligations	(1,576		)	(1,535		)	(2,247		)	(1,576		)
Payments of other long-term liabilities	(1,750		)	—			(125		)	(1,750		)
Net change in customer funds obligations	648,025			459,392			757,689			648,025
Net cash provided by financing activities	596,867			425,834			689,186			596,867
Effect of exchange rate changes on cash	(232		)	87			(33		)	(232		)
Net decrease in cash and cash equivalents	(12,046		)	(8		)	(50,823		)	(12,046		)
Cash and cash equivalents, beginning of period	155,685			73,773			151,247			155,685
Cash and cash equivalents, end of period	$	143,639		$	73,765		$	100,424		$	143,639

Supplemental disclosure of cash flow information:
Cash paid for interest	$	126		$	105		$	119		$	126
Cash paid for taxes	$	1,718		$	383		$	1,261		$	1,718

Non-cash investing and financing activities:
Capital lease obligations to acquire new equipment	$	913		$	1,078		$	5,299		$	913
Stock based compensation for capitalized software	$	1,034		$	1,021		$	1,130		$	1,034
Software agreement	$	—		$	6,500

The accompanying Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.

THE ULTIMATE SOFTWARE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.	Nature of Operations

With offices in the United States, Canada, France, Germany, England, and Singapore, 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”~~("HCM"). and employee experience solutions. Ultimate's UltiPro product suite (“UltiPro”) is a comprehensive, engaging solution that has human resources ("HR"), and payroll ~~and benefits management~~ at its core and includes benefits management, talent acquisition, talent management, time management, and global people management functionality available in 14 languages with ~~more than 37~~61 country-specific localizations. ~~The solution is~~Ultimate also offers a-la-carte employee experience solutions, such as HR Service Delivery and "Perception," an employee-sentiment analysis solution. Ultimate's solutions are delivered via software-as-a-service ("SaaS"), now more commonly known as ~~the~~ cloud computing, ~~model,~~ to organizations ~~based~~with employees in the United States, Canada, Europe, Asia Pacific, and ~~Canada, including those with~~other global ~~workforces. UltiPro is designed to deliver the functionality businesses need to manage the complete employment life cycle from recruitment to retirement.~~ locations. 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;~~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. ~~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 unaudited condensed consolidated financial statements of Ultimate have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The information in this quarterly report should be read in conjunction with Ultimate’s audited consolidated financial statements and notes thereto included in Ultimate’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017~~2018 filed with the SEC on ~~February 26, 2018~~March 1, 2019 (the “Form 10-K”).

The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting only of normal, recurring 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 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. Actual results could differ from those estimates. Interim results of operations for the three months ended March 31, ~~2018~~2019 are not necessarily indicative of operating results for the full fiscal year or for any future periods.

The unaudited condensed 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.	Accounting Standards and Significant Accounting Policies

Recently Adopted Accounting Standards

In ~~May 2014,~~February 2016, the ~~FASB~~Financial Accounting Standards Board issued Accounting Standards Update No. ~~2014-09,~~ ~~“Revenue from Contracts with Customers (Topic 606)”~~ ~~(“Topic 606”).Topic 606 supersedes the revenue requirements in ASU Topic 605, Revenue Recognition~~2016-02, "Leases" ("Topic ~~605"~~842"). This guidance, as amended by subsequent ASU's on the topic, improves transparency and ~~requires~~comparability among companies by recognizing right-of-use (ROU) assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. Effective January 1, 2019, we adopted Topic 842 and elected the "package of practical expedients" in transition where the prior conclusions of lease identification, lease classification and initial direct costs under Topic 840, “Leases” (the "old standard"), do not need to be reassessed for adoption. No other practical expedients available under the new standard were elected.

The transition to Topic 842 did not materially impact 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~~our finance leases 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 revenues and cash flows arising from contracts with customers. Collectively, we refer to Topic 606 and Subtopic 340-40 as the "new standard."

~~Effective January 1, 2018, we adopted the requirements of the new standard, utilizing the modified retrospective method of transition with the new standard applied to all customer contracts that were~~did not ~~completed on the effective date of the new standard. Adoption of the new standard resulted in changes to our accounting policies for revenue recognition, as detailed below.~~

~~The impact of adopting the new standard on our revenues resulted in an immaterial increase to deferred revenue and had~~have a material ~~impact on our~~effect to operating or finance lease transactions recorded in the unaudited condensed consolidated statements of income and unaudited condensed consolidated statements of cash flows. Topic 842 did result in a material effect to the unaudited condensed consolidated balance sheet ~~as a result~~due to the recognition of ROU assets and lease liabilities related to real estate and office equipment operating leases. For the ~~amortization~~transition, we elected not to restate prior period over which deferred contract costs to obtain related subscription contracts are recognized. Under Topic 605, we deferred incremental commission costs to obtain a contract and amortized those costs overcomparatives presented in the ~~initial term of the related subscription contract, which~~

is generally 2-3 years. During our assessment of the new standard, we did not identify any incremental contract costs from what was capitalized under Topic 605. We analyzed our customer contract term periods and our customer life, taking into consideration technological changes for our UltiPro product offering, and based on our assessment of the new standard, we amortize the deferred contract costs over 7 years on a systematic basis, consistentunaudited condensed consolidated financial statements with the ~~pattern of transfer of the goods or services to which the asset relates.~~

~~The~~ cumulative effect ofto the ~~changes made to our January 1, 2018~~unaudited condensed consolidated balance ~~sheet for the adoption of the new standard were as follows (in thousands):~~

Balance as of December 31, 2017 Adjustments Due to Adoption of Topic 606 Balance as of January 1, 2018
Assets
Deferred contract costs, prepaid expenses and other current assets $ 71,602
$ (22,318 ) $ 49,284
Total current assets 990,772
(22,318 ) 968,454
Deferred contract costs and other assets, net 53,409
47,259
100,668
Deferred tax assets, net 32,696
(6,803 ) 25,893
Total assets $ 1,377,211
$ 18,138
$ 1,395,349
Liabilities
Deferred revenue $ 197,088
$ 1,909
$ 198,997
Total current liabilities 843,086
1,909
844,995
Deferred income tax liability 251
170
422
Total liabilities 859,186
2,079
861,265
Stockholders' Equity
Accumulated earnings 125,788
16,059
141,847
Total stockholders' equity 518,025
16,059
534,084
Total liabilities and stockholders' equity $ 1,377,211
$ 18,138
$ 1,395,349

In accordance with the requirements of the new standard, the disclosure for the quantitative effect and the significant changes between the reported results under the new standard and those that would have been reported under legacy GAAP (i.e., Topic 605) on our unaudited consolidated condensed income statement and balance sheet wassheets as follows (in thousands):

For the Three Months Ended March 31, 2018
As Reported - Topic 606 Balances Without Adoption of Topic 606 Effect of Change Higher/(Lower)
Income Statement
Revenues
Recurring revenues $ 236,587
$ 237,030
$ (443 )

Operating Expenses
Sales and marketing 71,197
77,154
(5,957 )

Net income $ 20,994
$ 15,480
$ (5,514 )

As of March 31, 2018
As Reported - Topic 606 Balances Without Adoption of Topic 606 Effect of Change Higher/(Lower)
Balance Sheet
Assets
Deferred contract costs, prepaid expenses and other current assets $ 64,290
$ 76,219
$ (11,929 )
Deferred contract costs and other assets, net 104,582
51,692
52,890
Liabilities
Deferred revenue 200,576
198,107
2,469
Stockholders' Equity
Accumulated earnings $ 162,840
$ 124,348
$ (38,492 )



	Balance as of December 31, 2018		Adjustments Due to Adoption of Topic 842			Balance as of January 1, 2019
Assets
Deferred contract costs, prepaid expenses and other current assets	$	90,761	$	2,760		$	93,521
Total current assets	1,109,723		2,760			1,112,483
Deferred contract costs and other assets, net	129,108		54,826			183,934
Total assets	$	1,920,717	$	57,586		$	1,978,303
Liabilities
Accrued expenses and other liabilities	$	154,383	$	15,911		$	170,294
Total current liabilities	415,684		15,911			431,595
Deferred rent	8,472		(8,472		)	—
Other long-term liabilities	5,739		50,147			55,886
Total liabilities	1,075,739		57,586			1,133,325
Stockholders' Equity
Total stockholders' equity	$	844,978	$	—		844,978
Total liabilities and stockholders' equity	$	1,920,717	$	57,586		$	1,978,303

Summary of Significant Accounting Policies

Except for the accounting policy for ~~revenue recognition~~leases that was updated as a result of adopting Topic ~~606~~, 842, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed with the SEC on ~~February 26, 2018,~~March 1, 2019, that have had a material impact on our unaudited condensed consolidated financial statements and related notes.

~~Revenue Recognition~~

Leases

Effective January 1, ~~2018,~~2019, we recognize ~~revenues~~leases in accordance with Topic ~~606.~~842. We identify a contract as a lease or containing a lease if the terms convey the right to control use of identified tangible property or equipment for a period of time in exchange for consideration. We enter into lease contracts primarily for the right to control use of office space (“property leases”), computer equipment and other assets. Property leases are classified as operating leases and include locations throughout North America and to a lesser extent, in Europe and one office location in Singapore. Computer equipment leases includes equipment such as laptops and servers which are classified as finance leases because they are typically purchased at the end of the lease period. Other equipment leases include printer and copier equipment which are classified as operating leases.

Lease contracts are recognized on their commencement date which is when the leased asset is made available for use to the Company. A lease contract is assessed for classification, and its liability is initially measured by the total number of lease payments over the lease term, discounted by an incremental borrowing rate defined as an estimated collateralized borrowing rate that the Company would pay for a similar amount and term. The ~~core principle of Topic 606 is~~lease term excludes any renewal options because exercising the renewals are not reasonably certain at lease commencement. The lease payments include the fixed lease payments per the contract and we typically do not enter into contracts with variable lease payments that ~~revenue~~require estimation at lease commencement. Once a lease liability is recognized, ~~upon transfer of control of promised products or services to customers~~lease accretion adjustments and lease payments are recorded against the liability over the lease term.

For each lease contract, a ROU asset is recognized at lease commencement and is initially measured in an amount ~~that reflects the consideration we expect to receive in exchange for those products or services. To achieve the core principle of Topic 606, we perform the following steps:~~

~~1) Identify the contract(s) with a customer;~~

~~2) Identify the performance obligations in the contract;~~

~~3) Determine the transaction price;~~

~~4) Allocate the transaction price~~equal to the ~~performance obligations in~~lease liability, less any lease payments made prior to lease commencement and lease incentives the ~~contract; and~~

~~5) Recognize revenue when (or as) we satisfy~~Company reasonably expects to receive. Initial direct costs that would otherwise not be incurred if a ~~performance obligation.~~

~~The significant majority of our two major revenue sources - recurring and services is derived from contracts with customers. Recurring revenues~~lease had not been obtained are primarily related to our subscription-based SaaS performance obligations. Services revenues are primarily related to implementation services for our SaaS customers (including activation services as well as post-live work typically billed on a time and materials basis) 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 and Affordable Care Act ("ACA") forms for certain customers, as well as certain client reimbursable out-of-pocket expenses. Fees charged to subscription-based SaaS performance obligations are each priced on a per-employee-per-month (“PEPM”) basis for a given calendar month based on usage and fees

~~charged for implementation services~~not material and are typically priced on a fixed fee basis for activating the product offering. A majority of our SaaS subscription revenues are satisfied over time, because they are simultaneously received and consumed by the customer, with certain SaaS performance obligations satisfied at a point in time. Our activation services revenues are satisfied over time because they are simultaneously received and consumed by the customer.

~~Our SaaS performance obligations are each priced based on the number of active customer employees,~~expensed as ~~of the signing of the contract, at the contract PEPM rate~~incurred. The recorded ROU asset is subsequently amortized over the initial contract term. Our activation services are based on a fixed fee charged to our customers. There is typically no variable consideration related to our SaaS performance obligations or our activation services, nor do they include a significant financing component, non-cash consideration, or consideration payable to a customer. Our SaaS performance obligations are typically billed quarterly in advance while our activation services are billed over the implementation period.

~~Our SaaS arrangements include multiple performance obligations and transaction price allocations are based on the stand-alone selling price ("SSP")~~lease term for each performance obligation. There is an observable input for SSP for each of the SaaS performance obligations. Since activation services do not have directly observable pricing, the SSP is estimated using market conditions and observable inputs, which is calculated based on historical average discounts off our standard price list.

For our performance obligations, the consideration allocated to cloud subscription revenues is recognized as recurring revenues, typically using the output method, over the initial contract period, as those subscription-based services are consumed, typically commencing with the date the customer processes their first live payroll using UltiPro (referred to as going "Live"). The consideration allocated to activation services is recognized as services revenues based on the proportion performed, using reasonably dependable estimates (in relation to progression through activation phases), by product.

~~Recently Issued Accounting Standards~~

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~"Leases"~~ ~~("ASU 2016-02"), to increase transparency and comparability among organizations by recognizing~~all operating lease assets and over the estimated useful life for finance lease ~~liabilities on~~assets which range from 3 to 5 years. If an indicator of impairment exists for an ROU asset, it is tested for recoverability and an impairment charge is recorded to the 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 lessorsextent that the assets carrying amount exceeds its fair value.

Lease modifications that result in rights to ~~recognize and measure leases at~~use additional tangible property or equipment are treated as separate contracts from the ~~beginning~~original lease because the incremental lease charges are typically commensurate of the ~~earliest period presented using~~relative standalone

selling price for each additional leased asset. When a ~~modified retrospective approach. We are evaluating~~lease modification fully or partially terminates an existing lease, the ~~effect that ASU 2016-02 will have~~lease liability and ROU asset on ~~our consolidated financial statements and related disclosures. We have not yet determined~~modification date is remeasured for the ~~effect the standard will have on our ongoing financial reporting.~~reduction in lease payments.

4. Funds held for Customers, Corporate Investments in Marketable Securities and Fair Value of Financial Instruments

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~~loss in stockholders’ equity until realized. Realized gains and losses resulting from available-for-sale securities are included in other income, net, in the unaudited condensed consolidated statements of income. There were no significant reclassifications of realized gains and losses on available-for-sale securities to the unaudited condensed consolidated statements of income for the three months ended March 31, ~~2018~~2019 and March 31, ~~2017.~~2018.

Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. There was ~~$982~~$883 thousand and ~~$704~~$162 thousand of net unrealized ~~loss~~gain on available-for-sale securities as of March 31, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

The amortized cost, net unrealized loss and fair value of our funds held for customers and corporate investments in marketable available-for-sale securities as of March 31, ~~2018~~2019 and December 31, ~~2017~~2018 are shown below (in thousands):


	As of March 31, 2018							As of December 31, 2017							As of March 31, 2019						As of December 31, 2018
	Amortized Cost		Net Unrealized Gain/(Loss)			Fair Value (1)		Amortized Cost		Net Unrealized (Loss)/Gain			Fair Value (1)		Amortized Cost		Net Unrealized Gain		Fair Value (1)		Amortized Cost		Net Unrealized (Loss)/Gain			Fair Value (1)
Type of issue:
Funds held for customers – money market securities and other cash equivalents	$	926,952	$	—		$	926,952	$	354,312	$	—		$	354,312	$	1,093,277	$	—	$	1,093,277	$	333,942	$	—		$	333,942
Available-for-sale securities:
Corporate debentures – bonds	2,837		(4		)	2,833		2,848		(4		)	2,844		1,399		1		1,400		4,469		(2		)	4,467
Commercial paper	—		—			—		—		—			—		850		—		850		2,687		—			2,687
U.S. Agency bonds	284,444		(977		)	283,467		209,443		(693		)	208,750		283,962		882		284,844		284,099		165			284,264
U.S. Treasury bills	1,425		(1		)	1,424		5,876		(6		)	5,870		749		—		749		2,240		—			2,240
Asset-Backed securities	—		—			—		721		(1		)	720		449		—		449		1,348		(1		)	1,347
Total corporate investments and funds held for customers	$	1,215,658	$	(982	)	$	1,214,676	$	573,200	$	(704	)	$	572,496	$	1,380,686	$	883	$	1,381,569	$	628,785	$	162		$	628,947

_________________

(1) Included within available-for-sale securities as of March 31, ~~2018~~2019 and December 31, ~~2017~~2018 are corporate investments with fair values of ~~$4.3~~$3.4 million and ~~$9.4~~$10.7 million, respectively. Included within available-for-sale securities as of March 31, ~~2018~~2019 and December 31, ~~2017~~2018 are funds held for customers with fair values of ~~$283.5~~$284.8 million and ~~$208.8~~$284.3 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 March 31, ~~2018~~2019 are as follows (in thousands):


	Securities in unrealized loss position less than 12 months					Securities in unrealized loss position greater than 12 months					Total					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		Gross unrealized losses			Fair market value		Gross unrealized losses			Fair market value		Gross unrealized losses			Fair market value
Corporate debentures – bonds	$	(2	)	$	1,401	$	(2	)	$	1,432	$	(4	)	$	2,833	$	—		$	—	$	—		$	—	$	—		$	—
Commercial paper	—			—		—			—		—			—
U.S. Agency bonds	—			—		(977		)	283,467		(977		)	283,467		(1		)	17,240		(12		)	15,953		(13		)	33,193
U.S. Treasury bills	—			—		(1		)	1,424		(1		)	1,424		—			—		—			—		—			—
Asset-Backed securities	—			—		—			—		—			—		—			—		—			—		—			—
Total	$	(2	)	$	1,401	$	(980	)	$	286,323	$	(982	)	$	287,724	$	(1	)	$	17,240	$	(12	)	$	15,953	$	(13	)	$	33,193

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~~2018 are as follows (in thousands):


	Securities in unrealized loss position less than 12 months					Securities in unrealized loss position greater than 12 months					Total					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		Gross unrealized losses			Fair market value		Gross unrealized losses			Fair market value		Gross unrealized losses			Fair market value
Corporate debentures – bonds	$	(1	)	$	699	$	—		$	—	$	(1	)	$	699	$	(2	)	$	3,521	$	—		$	—	$	(2	)	$	3,521
Commercial paper	—			—		—			—		—			—
U.S. Agency bonds	(408		)	74,940		(285		)	133,811		(693		)	208,751		(39		)	14,957		(133		)	45,246		(172		)	60,203
U.S. Treasury bills	—			—		(6		)	5,869		(6		)	5,869		—			2,239		—			—		—			2,239
Asset-Backed securities	—			—		—			—		—			—		(1		)	1,347		—			—		(1		)	1,347
Total	$	(409	)	$	75,639	$	(291	)	$	139,680	$	(700	)	$	215,319	$	(42	)	$	22,064	$	(133	)	$	45,246	$	(175	)	$	67,310

The amortized cost and fair value of the marketable available-for-sale securities, by contractual maturity, as of March 31, ~~2018,~~2019, are shown below (in thousands):


	Corporate Investments				Investments with Funds Held for Customers				Total				Corporate Investments				Investments with Funds Held for Customers				Total
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	4,261	$	4,257	$	223,941	$	223,241	$	228,202	$	227,498	$	3,447	$	3,448	$	230,198	$	230,891	$	233,645	$	234,339
Due after one year	—		—		60,503		60,226		60,503		60,226		—		—		53,764		53,953		53,764		53,953
Total	$	4,261	$	4,257	$	284,444	$	283,467	$	288,705	$	287,724	$	3,447	$	3,448	$	283,962	$	284,844	$	287,409	$	288,292

The amortized cost and fair value of the marketable available-for-sale securities, by contractual maturity, as of December 31, ~~2017,~~2018, are shown below (in thousands):


	Corporate Investments				Investments with Funds Held for Customers				Total				Corporate Investments				Investments with Funds Held for Customers				Total
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	9,445	$	9,434	$	164,072	$	163,641	$	173,517	$	173,075	$	10,743	$	10,741	$	185,385	$	185,361	$	196,128	$	196,102
Due after one year	—				45,371		45,109		45,371		45,109		—				98,714		98,903		98,714		98,903
Total	$	9,445	$	9,434	$	209,443	$	208,750	$	218,888	$	218,184	$	10,743	$	10,741	$	284,099	$	284,264	$	294,842	$	295,005

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.


Level 2 -	Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.


Level 3 -	Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

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. We have had assets in the past, and may have assets in the future, classified within Level 1 of the fair value hierarchy. No assets or investments were classified within Level 1 of the fair value hierarchy as of March 31, ~~2018~~2019 or as of December 31, ~~2017.~~2018. We did not have any transfers into and out of Level 1 or Level 2 during the three months ended March 31, ~~2018~~2019 or the twelve months ended December 31, ~~2017.~~2018. No assets or investments were classified as Level 3 as of March 31, ~~2018~~2019 or as of December 31, ~~2017.~~2018.

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 and asset-backed securities owned by Ultimate. Such instruments are generally classified within Level 2 of the fair value hierarchy. Ultimate uses consensus pricing, which is based on multiple pricing sources, to value its fixed income investments. The following table sets forth, by level within the fair value hierarchy, financial assets accounted for at fair value as of March 31, ~~2018~~2019 and December 31, ~~2017~~2018 (in thousands):


	As of March 31, 2018								As of December 31, 2017								As of March 31, 2019								As of December 31, 2018
	Total		(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)		Total		(Level 1)		(Level 2)		(Level 3)
Corporate debentures – bonds	$	2,833	$	—	$	2,833	$	—	$	2,844	$	—	$	2,844	$	—	$	1,400	$	—	$	1,400	$	—	$	4,467	$	—	$	4,467	$	—
Commercial paper	—		—		—		—		—		—		—		—		850		—		850		—		2,687		—		2,687		—
U.S. Agency bonds	283,467		—		283,467		—		208,750		—		208,750		—		284,844		—		284,844		—		284,264		—		284,264		—
U.S. Treasury bills	1,424		—		1,424		—		5,870		—		5,870		—		749		—		749		—		2,240		—		2,240		—
Asset-Backed securities	—		—		—		—		720		—		720		—		449		—		449		—		1,347		—		1,347		—
Total	$	287,724	$	—	$	287,724	$	—	$	218,184	$	—	$	218,184	$	—	$	288,292	$	—	$	288,292	$	—	$	295,005	$	—	$	295,005	$	—

Assets measured at fair value on a recurring basis were presented in the unaudited condensed consolidated balance sheet as of March 31, ~~2018~~2019 and the audited consolidated balance sheet as of December 31, ~~2017~~2018 as short-term and long-term investments in marketable securities. There were no financial liabilities accounted for at fair value as of March 31, ~~2018~~2019 and December 31, ~~2017.~~2018.


5.	~~Property and Equipment~~

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are 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 estimated useful life of the asset or the term of the lease, which range from 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.

~~Property and equipment as of March 31, 2018 and December 31, 2017 consist of the following (in thousands):~~

As of March 31, 2018 As of December 31, 2017
Computer equipment $ 188,575
$ 185,034
Internal-use software 193,694
178,093
Leasehold improvements 47,292
43,556
Other property and equipment 24,021
22,572
Property and equipment 453,582
429,255
Less: accumulated depreciation and amortization 193,800
185,591
Property and equipment, net $ 259,782
$ 243,664

~~We capitalize computer software development costs related to software developed for internal use in accordance with Accounting Standards Codification ("ASC") Topic 350-40,~~ ~~Intangibles Goodwill and Other-Internal Use Software.~~ During the three months ended March 31, 2018, we capitalized $14.6 million of computer software development costs related to a development project to be sold in the future as a cloud product only (the "Development Project"). There was $12.6 million of software development costs related to the Development Project which were capitalized in the three months ended March 31, 2017. For the three months ended March 31, 2018 and March 31, 2017, these capitalized costs were primarily direct labor costs. As a component of these direct labor costs we capitalized $1.0 million of stock-based compensation costs during the three months ended March 31, 2018. During the three months ended March 31, 2017, we capitalized $1.0 million of stock-based compensation costs. These capitalized costs are included with internal-use software in property and equipment in the unaudited condensed consolidated balance sheets and purchases of property and equipment in the unaudited condensed consolidated statements of cash flows. Internal-use software is amortized on a straight-line basis over its estimated useful life, commencing after the software development is substantially complete and the software is ready for its intended use. 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. During the three months ended March 31, 2018 there was $1.8 million of amortization associated with certain product modules of the Development Project which were ready for their intended use. During the three months ended March 31, 2017 there was $1.0 million 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.


6.	~~Deferred Contract Costs, Prepaid Expenses and Other Current Assets~~

~~Deferred contract costs, prepaid expenses and other current assets as of March 31, 2018 and December 31, 2017 consist of the following (in thousands):~~

As of March 31, 2018 As of December 31, 2017
Deferred contract costs $ 28,899
$ 38,519
Prepaid expenses 25,367
20,088
Other current assets 10,024
12,995
Total deferred contract costs, prepaid expenses and other current assets $ 64,290
$ 71,602

Deferred contract costs, which are primarily deferred sales commissions earned by our sales force and are considered incremental and recoverable costs of obtaining a contract with a customer, were $28.9 million as of March 31, 2018 and $38.5 million as of December 31, 2017. Amortization expense for the deferred contract costs was $5.4 million and $8.5 million for the three months ended March 31, 2018 and 2017, respectively. There was no impairment loss in relation to the costs capitalized for the periods presented.

Included in deferred contract costs and other assets, net are deferred contract costs of $96.3 million as of March 31, 2018 and $45.5 million as of December 31, 2017. Deferred contract costs are primarily deferred sales commissions earned by our sales force and are considered incremental and recoverable costs of obtaining a contract with a customer. The amortization of these deferred contract costs are expected to start after one year.


7.	~~Goodwill and Intangible Assets~~

~~Goodwill~~

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 since December 31, 2017 were as follows (in thousands):~~

Goodwill, December 31, 2017 $ 35,808
Translation adjustment for the three months ended March 31, 2018 (1) (195 )
Goodwill, March 31, 2018 $ 35,613

~~__________________________~~

(1) 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).

~~Intangible Assets~~

~~The following tables present our acquired intangible assets as of the dates specified below (in thousands):~~

March 31, 2018
Gross Carrying Amount Accumulated Amortization Cumulative Translation Adjustment (1) Net Carrying Amount Weighted Average Remaining Useful Life
Developed technology $ 23,300
$ (4,943 ) $ (932 ) $ 17,425
5.9
Customer relationships 4,700
(2,206 ) —
2,494
4.4
Non-compete agreements 300
(300 ) —
—
0.0
$ 28,300
$ (7,449 ) $ (932 ) $ 19,919
5.7

December 31, 2017
Gross Carrying Amount Accumulated Amortization Cumulative Translation Adjustment (1) Net Carrying Amount Weighted Average Remaining Useful Life
Developed technology $ 23,300
$ (4,355 ) $ (895 ) $ 18,050
6.0
Customer relationships 4,700
(2,004 ) —
2,696
4.5
Non-compete agreements 300
(300 ) —
—
0.0
$ 28,300
$ (6,659 ) $ (895 ) $ 20,746
5.9

~~____________________________~~

(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 March 31, 2018 and December 31, 2017 were $0.1 million of assets with indefinite lives. Amortization expense for acquired intangible assets was $0.8 million for the three months ended March 31, 2018 and March 31, 2017.


8.	Earnings Per Share

Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted average number of common shares outstanding (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 table is a reconciliation of the shares of Ultimate's issued and outstanding $0.01 par value common stock ("Common Stock") used in the computation of basic and diluted net income per share for the three months ended March 31, ~~2018~~2019 and ~~2017~~2018 (in thousands):


	For the Three Months Ended March 31,		For the Three Months Ended March 31,
	2018	2017	2019	2018
Basic weighted average shares outstanding	30,404	29,538	31,526	30,404
Effect of dilutive equity instruments	701	959	614	701
Diluted weighted average shares outstanding	31,105	30,497	32,140	31,105

Options to purchase shares of Common Stock and other stock-based awards outstanding which are not included in the calculation of diluted income per share because their impact is anti-dilutive	—	3	303	—


9.6.	Foreign Currency

The financial statements of Ultimate’s foreign subsidiaries have been translated into U.S. dollars. The functional currency of our wholly-owned subsidiaries, The Ultimate Software Group of Canada, Inc. (“Ultimate Canada”) ~~and~~, The Ultimate Software Group of Asia, PTE. LTD. ("Ultimate Asia") and PeopleDoc SAS ("PeopleDoc"), have been translated into U.S. dollars. ~~The functional currency of Ultimate Canada 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 stockholder's equity as a component of accumulated other comprehensive ~~income (loss), a component of stockholders’ equity. Realized~~loss. We did not have any realized gains and losses resulting from foreign exchange transactions ~~are included~~for the three months ended March 31, 2019 and March 31, 2018.

Accumulated other comprehensive loss was $19.5 million at March 31, 2019 and $14.6 million at December 31, 2018. Included in ~~total operating expenses in the unaudited condensed consolidated statements~~accumulated other comprehensive loss was unrealized translation losses of ~~income.~~$19.7 million at March 31, 2019 and

$14.3 million at December 31, 2018. There were no significant reclassifications of realized gains and losses resulting from foreign exchange transactions to the unaudited condensed consolidated statements of income for the three months ended March 31, ~~2018~~2019 and March 31, ~~2017.~~2018.

For the three months ended March 31, 2018, Ultimate had an unrealized translation loss of $0.5 million. For the three months ended March 31, 2017, Ultimate had an unrealized translation gain of $0.2 million. Included in accumulated other comprehensive income (loss), as presented in the accompanying unaudited condensed consolidated balance sheets, are cumulative unrealized translation losses of $5.9 million as of March 31, 2018 and $5.4 million as of December 31, 2017.


~~10.~~	~~Stock-Based Compensation~~

~~Summary of Plans~~

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 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 March 31, 2018, the aggregate number of shares of Common Stock that were available to be issued under all Awards granted under the Plan was 555,544 shares.~~

The following table sets forth the non-cash stock-based compensation expense resulting from stock-based arrangements that were recorded in our unaudited condensed consolidated statements of income for the periods indicated (in thousands):

For the Three Months Ended March 31,
2018 2017
Non-cash stock-based compensation expense:
Cost of recurring revenues $ 3,432
$ 2,816
Cost of services revenues 2,373
1,989
Sales and marketing 16,338
17,411
Research and development 3,309
2,777
General and administrative 7,745
8,873
Total non-cash stock-based compensation expense $ 33,197
$ 33,866

Stock-based compensation for the three months ended March 31, 2018 was $33.2 million as compared with stock-based compensation of $33.9 million for the three months ended March 31, 2017. The decrease of $0.7 million in stock-based compensation for the three month period included a decrease of $0.8 million associated with modifications and terminations made to the Company’s change in control plans in March 2015, February 2016, and February 2017. 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 the terminations of 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.

Stock-based compensation expense associated with modifications and terminations made to the Company’s change-in-control plans in March 2015, February 2016 and February 2017, is shown in the table below (in thousands):

For the Three Months Ended March 31,
2018 2017
Stock-based compensation expense:

Stock-based compensation expense 19,989
19,812
Stock-based compensation expense related to change in control plans 13,208
14,054
Total non-cash stock-based compensation expense $ 33,197
$ 33,866

~~Net cash proceeds from the exercise of Options were $2.5 million for the three months ended March 31, 2018 and $1.6 million for the three months ended March 31, 2017.~~

~~Stock Option, Restricted Stock and Restricted Stock Unit Activity~~

There were no Options granted during the three months ended March 31, 2018. The following table summarizes stock option activity (for previously granted Options) for the three months ended March 31, 2018 (in thousands, except per share amounts):

Stock Options Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in Years) Aggregate Intrinsic Value
Outstanding at December 31, 2017 114
$ 29.24
0.4 $ 21,476
Granted —
—
0 —
Exercised (84 ) 29.96
0 —
Forfeited or expired —
—
0 —
Outstanding at March 31, 2018 30
$ 27.23
0.3 $ 6,497
Exercisable at March 31, 2018 30
$ 27.23
0.3 $ 6,497

The aggregate intrinsic value of Options in the table above represents total pretax intrinsic value (i.e., the difference between the closing price of 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 March 31, 2018. The amount of the aggregate intrinsic value changes, based on the fair value of Common Stock. Total intrinsic value of Options exercised was $16.8 million for the three months ended March 31, 2018 and $10.0 million for the three months ended March 31, 2017. All previously granted Options were fully vested as of December 31, 2011 and, therefore, no Options vested during the three months ended March 31, 2018 and March 31, 2017, respectively.

As of March 31, 2018, there were no unrecognized compensation costs related to non-vested Options expected to be recognized as all previously granted Options were fully vested as of December 31, 2011.

~~The following table summarizes restricted stock awards and restricted stock unit awards granted during the three months ended March 31, 2018 and March 31, 2017 (in thousands):~~

For the Three Months Ended March 31,
2018 2017
Restricted Stock Awards:
Non-Employee Directors 2
2
Senior Officers 200
354
Total Restricted Stock Awards Granted 202
356

Restricted Stock Unit Awards:
Non-Senior Officers and Other Employees 296
275
Total Restricted Stock Unit Awards Granted 296
275

The following table summarizes the activity pertaining to Common Stock previously issued under restricted stock awards and restricted stock unit awards which vested during the three months ended March 31, 2018 and March 31, 2017 (in thousands):

For the Three Months Ended March 31,
2018 2017
Shares Vested Shares Retained (1) Amount Retained (in millions) (1) Shares Issued Shares Vested Shares Retained (1) Amount Retained (in millions) (1) Shares Issued
Restricted Stock Awards:
Non-Employee Directors 2
—
$0.0 2
5
—
$0.0 5
Senior Officers 396
150
34.0
246
278
109
21.2
169
Non-Senior Officers and Other Employees 5
2
0.0
3
2
1
0.1
1
Total Restricted Stock Awards 403
152
$34.0 251
285
110
$21.3 175

Restricted Stock Unit Awards:
Non-Senior Officers and Other Employees 208
70
$16.0 137
172
63
$12.2 109
Total Restricted Stock Unit Awards 208
70
$16.0 137
172
63
$12.2 109

(1) During the three months ended March 31, 2018 and March 31, 2017, of the shares released, 221,891 and 172,836 shares, respectively, were retained by Ultimate and not issued, in satisfaction of withholding payroll tax requirements applicable to the payment of such awards.

~~The following table summarizes restricted stock award and restricted stock unit activity for the three months ended March 31, 2018 (in thousands, except per share values):~~

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, 2017 882
$ 179.95
630
$ 170.73
Granted 202
228.87
296
228.87
Vested and released (403 ) 170.42
(208 ) 173.79
Forfeited or expired —
—
(12 ) 199.71
Outstanding at March 31, 2018 681
$ 200.13
706
$ 206.59

As of March 31, 2018, $120.9 million of total unrecognized compensation costs related to non-vested restricted stock awards were expected to be recognized over a weighted average period of 1.91 years. As of March 31, 2018, $123.7 million of total unrecognized compensation costs related to non-vested restricted stock unit awards were expected to be recognized over a weighted average period of 2.13 years.

~~11.~~7. Deferred Revenue and Performance Obligations

During the three months ended March 31, 2019 and 2018, ~~and 2017, $144.1~~$175.2 million and ~~$119.9~~$144.1 million, respectively, of recurring revenues recognized, were included in the deferred revenue balances at the beginning of the respective periods. Services revenues recognized in the same periods from deferred revenue balances at the beginning of the respective periods were not material.

Transaction Price Allocated to the Remaining Performance Obligations

As of March 31, ~~2018,~~2019, approximately ~~$1.6~~$2.0 billion of revenue is expected to be recognized from remaining SaaS performance obligations which includes the remaining period of their initial contract term as well as the remaining renewal periods under contract as of March 31, ~~2018.~~2019. We expect to recognize revenue on approximately 4846 percent of these remaining performance obligations over the next 12 months, with the balance recognized thereafter. Revenue from remaining performance obligations for services as of March 31, ~~2018~~2019 was not material.


8.	Stock-Based Compensation

~~12. Immaterial Correction~~Summary of ~~Prior Period Financial Statements~~Plans

Our Amended and Restated 2005 Equity and Incentive Plan (the “Plan”) authorizes the grant of restricted and non-restricted shares of Common Stock, stock appreciation rights, stock units and cash performance awards (collectively, the “Awards”) to non-employee directors, officers and employees of Ultimate.

As ~~described in Note 17 in our Notes~~of March 31, 2019, the aggregate number of shares of Common Stock that were available to ~~Consolidated Financial Statements in~~be issued under all Awards granted under the ~~Annual Report on Form 10-K for~~Plan was 1,386,928 shares.

The following table sets forth the year ended December 31, 2017, filed with the SEC on February 26, 2018, we revalued our net deferred tax assets to implement the federal Tax Cuts and Jobs Act (the "Tax Act") which the federal government passed on December 22, 2017. During the year ended December 31, 2017, immaterial errors were discovered in prior periods in the reporting of the GAAP income tax expense associated with thenon-cash stock-based compensation ~~for certain of~~("SBC") expense resulting from stock-based arrangements that were recorded in our ~~executive officers. While we have concluded that the impact of these errors on our previously-issued~~ unaudited condensed consolidated statements of income for the periods indicated (in thousands):



	For the Three Months Ended March 31,
	2019		2018
Non-cash stock-based compensation expense:
Cost of recurring revenues	$	5,475	$	3,432
Cost of services revenues	2,887		2,373
Sales and marketing	19,024		16,338
Research and development	4,701		3,309
General and administrative	6,071		7,745
Total non-cash stock-based compensation expense	$	38,158	$	33,197

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 ~~unaudited condensed consolidated statements of comprehensive income~~Other-Internal Use Software, related to software development. For the three months ended March 31, 2019 and March 31, 2018, SBC related to capitalized software was ~~not material, we have revised our previously-reported unaudited condensed consolidated statements of income~~$1.1 million and ~~unaudited condensed consolidated statements of comprehensive income~~$1.0 million, respectively. Total non-cash stock-based compensation expense, including SBC related to capitalized software, was $39.3 million and $34.2 million for the three months ended March 31, ~~2017.~~ 2019 and March 31, 2018, respectively.

Restricted Stock and Restricted Stock Unit Activity

The ~~revisions include a decrease~~following table summarizes restricted stock awards and restricted stock unit awards granted during the three months ended March 31, 2019 and March 31, 2018 (in thousands):



	For the Three Months Ended March 31,
	2019	2018
Restricted Stock Awards:
Non-Employee Directors	2	2
Senior Officers	195	200
Total Restricted Stock Awards Granted	197	202

Restricted Stock Unit Awards:
Non-Senior Officers and Other Employees	327	296
Total Restricted Stock Unit Awards Granted	327	296

The following table summarizes the activity pertaining to ~~GAAP net income for~~Common Stock previously issued under restricted stock awards and restricted stock unit awards which vested during the ~~first quarter of 2017 of $0.1 million, as a result~~three months ended March 31, 2019 and March 31, 2018 (in thousands):



	For the Three Months Ended March 31,
	2019					2018
	Shares Vested	Shares Retained (1)	Amount Retained (in millions) (1)		Shares Issued	Shares Vested	Shares Retained (1)	Amount Retained (in millions) (1)		Shares Issued
Restricted Stock Awards:
Non-Employee Directors	1	—	$	—	1	2	—	$	—	2
Senior Officers	302	114	38.1		188	396	150	34.0		246
Non-Senior Officers and Other Employees	—	—	0.0		—	5	2	0.0		3
Total Restricted Stock Awards	303	114	$	38.1	189	403	152	$	34.0	251

Restricted Stock Unit Awards:
Non-Senior Officers and Other Employees	248	85	$	28.0	163	208	70	$	16.0	137
Total Restricted Stock Unit Awards	248	85	$	28.0	163	208	70	$	16.0	137

(1) During the three months ended March 31, 2019 and March 31, 2018, of the ~~increase~~shares released, 198,943 and 221,891 shares, respectively, were retained by Ultimate and not issued, in satisfaction of withholding payroll tax requirements applicable to ~~our GAAP income tax expense for~~ the ~~first quarter~~payment of ~~2017. For the first quarter of 2017, there was no impact on previously reported cash flows, pre-tax income~~such awards.

The following table summarizes restricted stock award and ~~non-GAAP results. The revisions to our unaudited condensed consolidated statements of income and unaudited condensed consolidated statements of comprehensive income~~restricted stock unit activity for the three months ended March 31, ~~2017 are as follows~~2019 (in thousands, except per share ~~amounts)~~values):



	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, 2018	686		$	207.25	751		$	220.52
Granted	197		332.41		327		332.41
Vested and released	(303	)	187.53		(248	)	197.00
Forfeited or expired	—		—		(6	)	261.30
Outstanding at March 31, 2019	580		$	260.09	824		$	271.75

As of March 31, 2019, total unrecognized compensation costs included $187.9 million related to non-vested restricted stock unit awards and $132.5 million related to non-vested restricted stock.


9.	Leases

Effective January 1, 2019, we recognize leases in accordance with Topic 842. In the unaudited condensed consolidated balance sheet as of March 31, 2019, the ROU assets for operating leases are presented with long-term other assets, net and the ROU assets for finance leases are presented with property and equipment, net. The short-term portions of operating lease liabilities are presented with accrued expenses and other liabilities and the long-term portions are presented with other long-term liabilities. The short-term and long term-portions of finance lease liabilities are separate lines items presented in the unaudited condensed consolidated balance sheet. Below are the ROU asset and lease liability balances as of March 31, 2019 (in thousands):

Unaudited Condensed Consolidated Statements of Income For the Three Months Ended
March 31, 2017
As Reported As Revised
Income before income taxes $ 3,015
$ 3,015
Provision for income taxes 4,319
4,225
Net income $ 7,334
$ 7,240

Net income per share:
Basic $ 0.25
$ 0.25
Diluted $ 0.24
$ 0.24

Unaudited Condensed Consolidated Statement of Comprehensive Income
Net income $ 7,334
$ 7,240
Other comprehensive income, net of tax 24
24
Comprehensive income $ 7,358
$ 7,264



	As of March 31, 2019
	Finance Leases		Operating Leases
Right-of-use assets	$	19,255	$	65,945

Short-term portion of lease liabilities	$	8,142	$	19,668
Long-term portion of lease liabilities	7,136		60,497
Total lease liabilities	$	15,278	$	80,165

Below is disaggregated quantitative information (in thousands) of our total lease cost including the amounts recognized in profit and loss and the cash flows arising from lease transactions.



	For the Three Months Ended March 31, 2019
Finance lease cost:
Amortization of right-of-use assets	$	1,632
Interest on lease liabilities	119
Operating lease cost	4,464
Total lease cost	$	6,215

Other Information
Cash paid in the period for amounts included in the measurement of lease liabilities:
Operating cash outflows from operating leases	$	5,136
Operating cash outflows from finance leases	1,817
Financing cash flows from finance leases	2,247

Right-of-use assets obtained in the period in exchange for lease liabilities:
Right-of-use assets for finance leases	$	5,300
Right-of-use assets for operating leases	14,793

The weighted average lease term, future leases costs and effects of discounting on operating and finance leases are as follows:



	Finance Leases			Operating Leases
Weighted-average remaining lease term in years	2.18			5.63

Future lease costs (in thousands)
Twelve months ending March 31,
2020	$	8,552		$	20,022
2021	6,312			19,048
2022	3,355			17,300
2023	160			12,417
2024	—			8,246
Thereafter	—			20,261
Total future lease costs	18,379			97,294
Less: effects of discounting future lease costs	3,101			17,129
Recognized lease liability as of March 31, 2019	$	15,278		$	80,165

Weighted-average discount rate	5.22		%	4.92		%

10. Subsequent Events

On February 4, 2019, the Company announced that it entered into a definitive merger agreement to be acquired by an investor group led by Hellman & Friedman in an all-cash transaction that values the Company at an aggregate value of approximately $11 billion. Under the terms of the merger agreement, the Company’s stockholders receive $331.50 per share in cash upon the closing of the transaction. The obligation of the parties to complete the merger is subject to customary closing conditions, including, among others, approval by the Company’s stockholders and regulatory approvals. A special meeting of the stockholders of The Ultimate Software Group, Inc. was held on April 30, 2019 at 10:00 a.m., New York City time where the Company’s stockholders voted and approved the proposal to adopt the Agreement and Plan of Merger, dated as of February 3, 2019, by and among the Company, Parent and Merger Sub.


ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the financial condition and results of operations of The Ultimate Software Group, Inc. and its subsidiaries (“Ultimate,” “we,” “us,” or “our”) should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q (this “Form 10-Q”) and in conjunction with Ultimate’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2017,~~2018, filed with the Securities and Exchange Commission (the “SEC”) on ~~February 26, 2018~~March 1, 2019 (the “Form 10-K”).

Merger Agreement

On February 3, 2019, Ultimate entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Unite Parent Corp., a Delaware corporation (“Parent”), and Unite Merger Sub, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Parent (“Merger Sub”). Pursuant to the Merger Agreement, Ultimate would be acquired by an investor group led by Hellman & Friedman (“H&F”), a leading private equity investment firm, in an all-cash transaction for $331.50 per share in cash (representing an aggregate value of approximately $11 billion), after which Ultimate would operate as a privately held company. Parent is a newly-formed entity that will be owned by the investor group.

The Merger Agreement provides, among other things and subject to the terms and conditions set forth therein, that Merger Sub will be merged with and into Ultimate (the “Merger”), with Ultimate continuing as the surviving corporation and as an indirect wholly owned subsidiary of Parent. The Merger Agreement provides that each share of common stock, par value $0.01 per share, of Ultimate (“Common Stock”) outstanding immediately prior to the effective time of the Merger (the “Effective Time”) (other than shares of Common Stock owned by Ultimate in treasury, Parent, Merger Sub or any wholly owned subsidiary of Ultimate or Parent and shares of Common Stock owned by stockholders of Ultimate who properly demand and do not withdraw a demand for, or lose their right to, appraisal rights pursuant to Section 262 of the General Corporation Law of the State of Delaware) will, at the Effective Time, automatically be cancelled and converted into the right to receive $331.50 in cash (the “Merger Consideration”), without interest and subject to applicable withholding taxes.

Pursuant to the Merger Agreement, as of the Effective Time, (i) each Ultimate stock option will become fully vested and be converted into the right to receive an amount in cash equal to the product of (A) the excess, if any, of the Merger Consideration over the applicable exercise price of such option, multiplied by (B) the number of shares subject to such option, subject to applicable withholding taxes, and (ii) each restricted stock award and restricted stock unit award that is outstanding immediately prior to the Effective Time will, whether granted prior to the date of the Merger Agreement or granted on or after the date of the Merger Agreement, become fully vested and be converted into the right to receive the Merger Consideration in respect of each underlying share of Common Stock, subject to applicable withholding taxes.

Ultimate’s board of directors (the “Board of Directors” or the “Board”) has unanimously approved and declared advisable the Merger Agreement and the transactions contemplated thereby, including the Merger. The obligation of the parties to complete the Merger is subject to customary closing conditions, including, among others, (i) the adoption of the Merger Agreement by a majority of outstanding shares of Common Stock entitled to vote thereon (the “Company Stockholder Approval”), (ii) the expiration or earlier termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the decisions, orders, consents or expiration of any waiting periods required to consummate the Merger under the anti-competition laws of certain foreign jurisdictions have occurred or been granted, (iii) the absence of any law, order or injunction of a court or governmental entity of competent jurisdiction prohibiting the consummation of the Merger, (iv) the accuracy of the representations and warranties contained in the Merger Agreement (subject to certain qualifications), (v) the performance in all material respects by the parties of their respective obligations under the Merger Agreement that are required to be performed at or prior to the Effective Time and (vi) the absence of a Company Material Adverse Effect (as defined in the Merger Agreement) occurring after the date of the Merger Agreement.

Ultimate has made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants (i) to conduct its business in all material respects in the ordinary course during the period between the execution of the Merger Agreement and the closing of the Merger, and not to engage in specified types of transactions during this period, subject to certain exceptions and (ii) to convene a meeting of its stockholders for the purpose of obtaining the Company Stockholder Approval. The Merger Agreement provides for a 50 day “go-shop” period beginning on February 3, 2019, and continuing until 11:59 p.m., New York City time, on March 25, 2019, during which period the Board of Directors and Ultimate’s financial advisor are permitted to actively initiate, solicit and encourage alternative acquisition proposals from third parties and to provide information to, and participate in discussions and engage in negotiations with, third parties regarding any alternative acquisition proposals.

At the direction of Ultimate’s board of directors, during the go shop period, Ultimate and its financial advisor solicited and responded to inquiries relating to the proposed merger and alternative acquisition proposals from 22 parties. During such time, three parties executed non-disclosure agreements with Ultimate and were offered access to certain members of Ultimate’s senior management and were provided access to certain non-public information regarding Ultimate. During the go shop period, no alternative acquisition proposals were received by Ultimate. Following the expiration of the go shop period, Ultimate became subject to customary no-shop restrictions that limit its and its representatives’ ability to solicit alternative acquisition proposals from third parties, subject to customary “fiduciary out” provisions.

A special meeting of the stockholders of The Ultimate Software Group, Inc. was held on April 30, 2019 at 10:00 a.m., New York City time where Ultimate stockholders voted and approved the proposal to adopt the Agreement and Plan of Merger, dated as of February 3, 2019, by and among the Company, Parent and Merger Sub.

Business Overview

With offices in the United States, Canada, France, Germany, England, and Singapore, Ultimate Software is a leading provider of cloud-based human capital management ~~solutions,~~ solutions—often referred to as human capital management ~~(“HCM”~~("HCM").—and employee experience solutions. Ultimate's UltiPro product suite ~~(“UltiPro”)~~ is a comprehensive, engaging solution that has human resources ("HR"), and payroll ~~and benefits management~~ at its core and includes benefits management, talent acquisition, talent management, time management, and global people management functionality available in 14 languages with ~~more than 37~~61 country-specific localizations. ~~The solution is~~Ultimate also offers a-la-carte employee experience solutions, such as HR Service Delivery and "Perception," an employee-sentiment analysis solution.

Ultimate's solutions are delivered via software-as-a-service ("SaaS"), now more commonly known as ~~the~~ cloud computing, ~~model,~~ to organizations ~~based~~with employees in the United States, Canada, Europe, Asia Pacific, and ~~Canada, including those with~~other global ~~workforces.~~locations. At the close of ~~2017,~~2018, we had more than ~~4,100~~5,600 organizations as customers and more than 3748 million people records in our ~~HCM cloud.~~cloud environment. We attained our leadership position, we believe, through our exclusive focus on ~~unified HCM,~~solutions that help companies manage their employees in an engaging way. Key factors in our success have been our people-centric product design, cloud technology, and strong customer ~~relationships.~~relationships nurtured by our services team and throughout the Ultimate organization.

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~~talent acquisition and onboarding, HR service delivery and 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 and functions on mobile devices such as the iPhone, iPad, and ~~other~~Android 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 and develop the talent in their workforces more strategically. UltiPro provides our customers intelligent tools ~~to analyze workforce~~and insights for engaging workforces and understanding organizational dynamics, analyzing trends for better decision making, ~~identify~~identifying high-performing talent, ~~within their organizations, predict~~predicting who future high-performers and what retention risks will be with a high degree of accuracy, ~~find~~finding critical information quickly and ~~perform~~performing routine business activities efficiently.

Our cloud offering of UltiPro provides web-based and mobile 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 and scheduling management; (viii) payment services; (ix) wage attachments; (x) ~~UltiPro ACA toolkit~~HR service delivery; and (xi) other optional features (collectively, “Optional Capabilities”).

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 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)~~revenues and operating income, excluding non-cash stock-based compensation and amortization of acquired intangibles ("Non-GAAP Operating Income"); and (iii) retention of our customers once our solutions are sold (“Customer Retention”). For the three months ended March 31, 2018, our (i) recurring revenues grew by 24.5%, compared with the same period in 2017, and (ii) Non-GAAP Operating Income was $56.1 million, or 20.3% of total revenues, as compared with $37.7 million, or 16.5% of total revenues, for the same period in 2017. As of March 31, 2018, our Customer Retention, on a trailing twelve-month basis, was approximately 96% for our recurring revenue cloud customer base. See “Non-GAAP Financial Measures” below.

income. 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 and Estimates

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. Actual results could differ materially from those estimates. Ultimate’s critical accounting estimates, as discussed in "Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations," included in the Form 10-K, have not significantly ~~changed with the exception of our revenue recognition policy due to the adoption of Accounting Standards Update No. 2014-09,~~ ~~“Revenue from Contracts with Customers (Topic 606)”~~ ~~(“Topic 606”).~~changed.

Results of Operations

The following table sets forth the unaudited condensed consolidated statements of income data of Ultimate, as a percentage of total revenues, for the periods indicated:


	For the Three Months Ended March 31,				For the Three Months Ended March 31,
	2018		2017		2019		2018
Revenues:
Recurring	85.5	%	83.1	%	85.9	%	85.5	%
Services	14.5		16.9		14.1		14.5
Total revenues	100.0		100.0		100.0		100.0
Cost of revenues:
Recurring	22.7		21.9		24.7		22.7
Services	15.2		17.4		14.0		15.2
Total cost of revenues	37.9		39.3		38.7		37.9
Gross profit	62.1		60.7		61.3		62.1
Operating expenses:
Sales and marketing	25.7		30.4		25.6		25.7
Research and development	17.0		15.8		19.3		17.0
General and administrative	11.5		13.2		13.6		11.5
Total operating expenses	54.2		59.4		58.5		54.2
Operating income	7.9		1.3		2.8		7.9
Other income (expense):
Other (expense) income:
Interest expense and other	(0.1	)	(0.1	)	(0.2	)	(0.1	)
Other income, net	0.1		0.1		0.1		0.1
Total other income (expense), net	—		—
Total other (expense) income, net					(0.1	)	—
Income before income taxes	7.9		1.3		2.7		7.9
(Provision) benefit for income taxes	(0.5	)	1.8
Benefit (provision) for income taxes					1.1		(0.5	)
Net income	7.4	%	3.1	%	3.8	%	7.4	%

~~The following table sets forth~~Operating income decreased 5.1% to $9.7 million for the ~~non-cash stock-based compensation expense resulting~~three months ended March 31, 2019 from ~~stock-based arrangements that is recorded in our unaudited consolidated statements of~~$22.1 million for the three months ended March 31, 2018. In addition to the changes discussed below, operating income for the ~~periods indicated (in thousands):~~

For the Three Months Ended March 31,
2018 2017
Cost of recurring revenues $ 3,432
$ 2,816
Cost of services revenues 2,373
1,989
Sales and marketing 16,338
17,411
Research and development 3,309
2,777
General and administrative 7,745
8,873
Total stock-based compensation expense $ 33,197
$ 33,866
three months ended March 31, 2019 included an increase in employer payroll tax expenses (as reflected in labor and related costs discussed below) from the vestings of employee restricted stock-based awards (which vested at a higher stock price in February 2019) and certain expenditures incurred for merger-related activities.

Revenues

Our revenues are derived from recurring revenues and services revenues.

Total revenues increased ~~21.1%~~21.0% to $335.0 million for the three months ended March 31, 2019 from $276.8 million for the three months ended March 31, ~~2018 from $228.5 million for the three months ended March 31, 2017.~~

2018.

Recurring revenues, primarily consisting of subscription-based SaaS revenues, increased ~~24.5%~~21.7% to $287.9 million for the three months ended March 31, 2019, from $236.6 million for the three months ended March 31, ~~2018, from $190.0 million for the three months ended March 31, 2017.~~2018. The increase for the three months ended March 31, ~~2018,~~2019 in recurring revenues, 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 March 31, ~~2017,~~2018, including the UltiPro core product and, to a lesser extent, Optional Capabilities of UltiPro. Cloud subscription-based SaaS 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 customer base was approximately 96% as of March 31, ~~2018~~2019 (calculated on a 12-month rolling basis), which is consistent with the same period of the prior year. 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 ~~4.3%~~17.2% to $47.1 million for the three months ended March 31, 2019 from $40.2 million for the three months ended March 31, ~~2018 from $38.5 million for the three months ended March 31, 2017.~~2018. The increase in services revenues for the ~~three-month~~three month period was primarily due to additional implementation revenues to support increased sales, from both Ultimate's implementation consultants as well as third party implementation partners and, to a lesser extent, an increase in ~~other services~~Other Services revenues mainly attributable to our print services for certain ~~customers and, to a lesser extent, additional implementation revenues to support increased sales.~~customers.

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 ~~16.8%~~23.5% to $129.4 million for the three months ended March 31, 2019, from $104.8 million for the three months ended March 31, ~~2018, from $89.7~~2018.

Cost of recurring revenues increased 31.4% to $82.6 million for the three months ended March 31, ~~2017.~~

~~Cost of recurring revenues increased 25.6% to~~2019 from $62.9 million for the three months ended March 31, ~~2018 from $50.1 million for the three months ended March 31, 2017.~~2018. The increase in the cost of recurring revenues for the ~~three-month~~three month period 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 costs related to a development project to be sold in the future as a cloud product only (the "Development Project") which resulted from product modules becoming available for their intended ~~use since March 31, 2017.~~use.

For the three months ended March 31, ~~2018,~~2019, the increase in cloud costs was 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 ~~increases~~increase in Customer Support costs for the three months ended March 31, ~~2018~~2019 was primarily due to higher labor costs commensurate with the growth in the number of cloud customers serviced.

Cost of services revenues increased ~~5.7%~~11.8% to $46.8 million for the three months ended March 31, 2019 from $41.9 million for the three months ended March 31, ~~2018 from $39.6 million for the three months ended March 31, 2017.~~2018. The increase in cost of services revenues for the ~~three-month~~three month period was primarily due to the increased ~~cost~~costs of implementation, including higher labor and related costs, and, to a lesser extent, the increased use of ~~third party~~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 ~~2.6%~~20.3% to $85.6 million for the three months ended March 31, 2019 from $71.2 million for the three months ended March 31, ~~2018 from $69.4 million for the three months ended March 31, 2017.~~2018. The increase in sales and marketing expenses for the ~~three-month period~~three months ended March 31, 2019 was primarily due to increased labor and related costs (including the impact of an increase in sales personnel) and, to a lesser extent, higher advertising and marketing ~~expenses, partially offset by lower sales commissions resulting from the adoption of Topic 606 due to the longer amortization period under this new standard.~~

expenses.

Research and Development

Research and development expenses consist primarily of software development personnel costs. Research and development expenses increased ~~29.9%~~37.3% to $64.5 million for the three months ended March 31, 2019 from $47.0 million for the three months ended March 31, ~~2018 from $36.2 million for the three months ended March 31, 2017.~~2018. The increase in research and development expenses for the ~~three-month~~three month period 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. During the three months ended March 31, ~~2018~~2019 and March 31, ~~2017,~~2018, we capitalized a total of ~~$14.6~~$14.3 million (including ~~$1.0~~$1.1 million in non-cash stock-based compensation) and ~~$12.6~~$14.6 million (including $1.0 million in non-cash stock-based compensation), respectively, for internal-use software costs from the Development Project. The capitalized costs for this Development Project were from direct labor costs and, to a lesser extent, third party consulting fees for the three months ended March 31, ~~2018.~~2019. During the three months ended March 31, ~~2018,~~2019, there was ~~$1.8~~$3.4 million of amortization associated with certain

product modules of the Development Project which were ready for their intended use, as compared with ~~$1.0~~$1.8 million for the same period of the prior 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 facility costs, external professional fees and the provision for doubtful accounts. General and administrative expenses increased ~~5.0%~~44.1% to $45.7 million for the three months ended March 31, 2019 from $31.7 million for the three months ended March 31, ~~2018 from $30.2 million for the three months ended March 31, 2017.~~2018. The increase in general and administrative expenses for the ~~three-month~~three month period was primarily due to higher labor and related costs, including increased personnel to support Ultimate's growth in operations, increased professional fees, ~~and~~ an increase in the provision for doubtful ~~accounts.~~accounts and expenses incurred for merger-related activities.

Income Taxes

~~Income~~For the three months ended March 31, 2019, consolidated income taxes were a benefit of $3.8 million and for the three months ended March 31, 2018, ~~included~~consolidated income taxes were a ~~consolidated tax~~ provision of $1.3 million. The effective ~~income~~ tax ~~rate~~rates for the three months ended March 31, 2019 and March 31, 2018 ~~was~~were (40.3)% and 5.8%~~. Income taxes~~ respectively, with the rate variance primarily attributable to a higher excess tax benefit of $9.6 million recognized for the vesting of stock-based compensation in the current quarter and lower consolidated net income before taxes. The consolidated income tax benefit of $3.8 million for the three months ended March 31, ~~2017~~2019 included a ~~consolidated~~$1.6 million income tax benefit of $4.2 million. The effective income tax rate for the three months ended March 31, 2017 was (140.1)%. The effective income tax rate for the three months ended March 31, 2018 included the reduction in the federal statutory tax rate from 35% to 21% effective January 1, 2018 duerelated to the passing of the federal Tax Cuts and Jobs Act (the “Tax Act”) by the federal government on December 22, 2017. Although the statutory tax rate decreased, the increase in the effective income tax rate for the three months ended March 31, 2018 is primarily attributable to a significantly higher pre-tax net income for the three months ended March 31, 2018. Consequentially, the impact (benefit) to the effective tax rate of the excess benefits resulting from the application of ASU 2016-09 was significantly lower for the three months ended March 31, 2018. For the three months ended March 31, 2018 and March 31, 2017, we realized an excess tax benefit of $8.1 million and $7.1 million, respectively, from the application of ASU 2016-09. For the twelve months ended December 31, 2017, we realized an excess tax benefit of $20.9 million from the application of ASU 2016-09.

~~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.~~

The carryforwards expire from 2018 through 2035, for federal and state income tax reporting purposes. Utilization of such net operating loss 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 law provisions.

As of December 31, 2017, we had $8.9 million of gross unrecognized tax benefits resulting from a research and development credit attributable to the years 1998 through 2017, that if recognized would affect the annual effective tax rate. 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.

We recognized $22.1 million of deferred tax assets, net of deferred tax liabilities, as of March 31, 2018. If estimates of taxable income are decreased, a valuation allowance may need to be provided for some or all deferred tax assets, which will cause an increase in income tax expense.

The Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting required. The Company, in accordance with SAB 118, will record and revise reasonable estimates of the income tax effects of the Tax Act in the first period further analysis and future guidance is available. 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 includes state taxes and withholding taxes that arise from repatriation under IRC Section 965(n), which are not material.

PeopleDoc SAS consolidated group.

Liquidity and Capital Resources

In recent years, we have funded operations primarily from cash flows generated from operations.

As of March 31, ~~2018,~~2019, we had ~~$147.9~~$103.9 million in cash, cash equivalents and short-term corporate investments in marketable securities (collectively, "Cash"), reflecting a net decrease of ~~$17.2~~$58.1 million since December 31, ~~2017.~~2018. The total decrease in Cash for the three month period was primarily from cash used to settle the employee tax withholding liability for vesting of restricted stock awards and restricted stock units of ~~$50.3~~$66.1 million and cash purchases of property and equipment (including principal payments on financed equipment) of ~~$24.4~~$25.0 million ~~(which includes $13.6~~primarily consisting of $14.3 million ofin capitalized labor costs (excluding non-cash stock-based compensation of $1.1 million) and third party consulting fees, paid in cash, associated with the Development ~~Project),~~Project, partially offset by cash provided by operations of ~~$56.6 million and proceeds from the issuances of Common Stock from employee and non-employee director stock option exercises of $2.5~~$35.2 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 directly related to our services, payments under arrangements with third party vendors who provide hosting infrastructure services in connection with UltiPro, related sales and marketing costs, costs of operations and systems development and programming costs. Net cash provided by operating activities ~~increased $10.2~~decreased $21.4 million during the three months ended March 31, ~~2018~~2019 to ~~$56.6~~$35.2 million, as compared with ~~$46.3~~$56.6 million for the three months ended March 31, ~~2017. This increase~~2018. The net decrease of $21.4 million was primarily due to decreased cash from working capital of $40.4 million, partially offset an increase in cash operating income (after adjusting for non-cash expenses) of ~~$19.9 million, partially offset by decreased cash from working capital.~~$19.0 million.

The net cash used in investing activities was $775.2 million for the three months ended March 31, 2019, as compared with a net cash outflow of $665.3 million for the three months ended March 31, ~~2018, as compared with a net cash outflow of $472.3 million for the three months ended March 31, 2017.~~2018. The increase of ~~$193.0~~$109.9 million was primarily attributable to a net change in funds received from our customers using the UltiPro payment services offering (“("UltiPro Payment ~~Services”~~Services") of ~~$173.2~~$185.2 million and ~~an increase~~a decrease in purchases of property and equipment of $2.1 million, partially offset by a decrease in the purchases of marketable securities of ~~$22.1~~$34.8 million (which includes purchases for the period of ~~$119.2~~$79.0 million of funds held for customers being invested in marketable securities in addition to our corporate funds), ~~partially offset by~~and an increase in the maturities of marketable securities of ~~$2.4~~$42.5 million (which includes the maturities for the period of ~~$44.3~~$79.3 million of marketable securities originally purchased with funds held for customers in addition to our corporate funds). During the three months ended March 31, 2018, we capitalized software development costs related to the Development Project totaling $14.6 million (including $1.0 million from the non-cash impact of capitalized stock-based compensation expense), which was classified as property and equipment. We invest our customer funds in available for sale securities along with 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~~used in financing activities was ~~$596.9~~$689.2 million for the three months ended March 31, ~~2018,~~2019, as compared with ~~$425.8~~$596.9 million net cash ~~provided by~~used in financing activities for the three months ended March 31, ~~2017.~~2018. The ~~$171.0~~$92.3 million increase in

cash ~~provided by~~used in financing activities was primarily related to a net change of ~~$188.6~~$109.7 million in customer funds obligations for our UltiPro Payment Services, ~~and an increase of $0.9 million in cash proceeds from the issuance of our Common Stock for stock option exercises,~~ partially offset by an increase of ~~$16.7~~$15.8 million in cash used to settle employee tax ~~with~~

~~holding~~withholding liabilities upon the vesting of their restricted stock awards and restricted stock unit ~~awards, and an increase in cash used for the payments of other liabilities of $1.8 million.~~awards.

Days sales outstanding (or "DSOs"), calculated on a trailing three-month basis, as of March 31, ~~2018~~2019 were 6367 days as compared with 6463 days as of March 31, ~~2017.~~2018.

Deferred revenues were ~~$202.2~~$250.1 million at March 31, ~~2018,~~2019, as compared with ~~$198.9~~$239.9 million at December 31, ~~2017. The increase of $3.4 million in deferred revenues was primarily~~2018 due to ~~incremental~~higher deferred recurring revenues as a result of 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 March 31, ~~2018,~~2019, we did not have any material commitments for capital expenditures, except for anticipated capitalized costs associated with the Development Project.

Off-Balance Sheet Arrangements

We do not, and, as of March 31, ~~2018,~~2019, 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.

Quarterly Fluctuations

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 year or for any future periods. As a result of these factors, there can be no assurance that we will be able to 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.

Forward-Looking Statements

The foregoing Management’s Discussion and Analysis of Financial Condition and Results of Operations and the following Quantitative and Qualitative Disclosures about Market Risk 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 SEC. Other factors that may cause such differences include, but are not limited to, those discussed in this Form 10-Q and the Form 10-K, including the risk factors set forth in "Part I, Item 1A. Risk Factors" of the Form 10-K. Ultimate undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

~~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 and amortization of acquired intangibles, meets the definition of a non-GAAP financial measure.

We believe that this non-GAAP measure of financial results provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Management uses this non-GAAP result to compare our 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 our 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 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, we present our non-GAAP financial measure in connection with our GAAP result. We strongly urge investors and potential investors in our securities to review the reconciliation of our 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 (and the related non-GAAP operating income, as a percentage of total revenue (or non-GAAP operating margin)), as appropriate:

~~Stock-based compensation expense.~~ Our non-GAAP financial measure excludes stock-based compensation expense, which consists of expenses for stock options and stock and stock unit awards recorded in accordance with ASC 718, “Compensation - Stock Compensation.” For the three months ended March 31, 2018, stock-based compensation expense was $33.2 million on a pre-tax basis. For the three months ended March 31, 2017, stock-based compensation expense was $33.9 million 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 we do not consider part of ongoing operations when assessing financial performance. We believe 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 three months ended March 31, 2018, the amortization of acquired intangible assets was $0.8 million. For the three months ended March 31, 2017, the amortization of acquired intangible assets was $0.8 million. 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. We believe 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.

~~The following table reconciles GAAP operating income with non-GAAP operating income (in thousands):~~

For the Three Months Ended March 31,
2018 2017
Non-GAAP operating income reconciliation:
Operating income $ 22,089
$ 3,069
Operating income, as a % of total revenues 8.0 % 1.3 %
Add back:
Non-cash stock-based compensation expense 33,197
33,866
Non-cash amortization of acquired intangible assets 786
780
Non-GAAP operating income $ 56,072
$ 37,715
Non-GAAP operating income, as a % of total revenues 20.3 % 16.5 %


ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk

InThe quantitative and qualitative disclosures about market risk appear in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the ~~ordinary course of Ultimate’s operations, we are exposed to certain~~fiscal year ended December 31, 2018 and there were no material changes in 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~~for 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.~~

~~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~~quarter ended March 31, 2018, total corporate investments in available-for-sale marketable securities were $4.3 million. As of March 31, 2018, total investments with customer funds in available-for-sale marketable securities were $283.5 million.2019.

As of March 31, 2018, 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 2.3% and 2.0% per annum, respectively).

To illustrate the potential impact of changes in interest rates, Ultimate has performed an analysis based on its March 31, 2018 unaudited condensed 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 $5 thousand over the next 12 months and a decrease in the fair value of Ultimate's portfolio of investments with customer funds of approximately $2.0 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 $5 thousand over the next 12 months and an increase in the fair value of Ultimate's portfolio of investments with customer funds of approximately $2.0 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 significantly affect future net income.


ITEM 4.	Controls and Procedures

(a) 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-Q pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, Ultimate’s management, including the CEO and CFO, concluded that, as of March 31, ~~2018,~~2019, 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. In conducting our evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2019, we excluded internal controls over financial reporting associated with PeopleDoc which was acquired in July 2018. 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.

(b) Changes in internal control over financial reporting. There have been no changes during the quarter ended March 31, ~~2018~~2019 in Ultimate’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Ultimate’s internal control over financial reporting. Effective January 1, ~~2018,~~2019, we adopted Accounting Standards Codification ~~606, Revenue from Contracts with Customers~~842, Leases (“Topic ~~606”~~842”). Although Topic ~~606~~842 is expected to have an immaterial impact on our ongoing net income, we did implement changes to our processes related to ~~revenue recognition, deferred contract costs~~lease accounting and the control activities within them. These included the development of new policies based on the ~~five-step model provided in~~provisions of Topic ~~606,~~842, ongoing ~~contract review requirements,~~reviews of lease contracts, and gathering of information provided for disclosures.

PART II – OTHER INFORMATION


ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated ~~Purchases.~~Purchases

The number of shares of Common Stock repurchased by us during the three months ended March 31, ~~2018~~2019 are indicated below:

Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)
January 1 - 31, 2018 —
$ —
4,657,995
1,342,005
February 1 - 28, 2018 221,873 (1)
$ 226.77
4,657,995
1,342,005
March 1 - 31, 2018 18 (1)
$ 251.55
4,657,995
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.
(2) Under a stock repurchase plan originally announced on October 30, 2000, and subsequently amended from time to time, Ultimate is authorized to purchase up to 6,000,000 shares of its Common Stock. As of March 31, 2018, Ultimate had purchased 4,657,995 shares of Common Stock under our stock repurchase plan, with 1,342,005 shares being available for repurchase in the future. There were no purchases of Common Stock under the stock repurchase plan for the three months ended March 31, 2018.



	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (2)
January 1 - 31, 2019	—	$	—	4,657,995	1,342,005
February 1 - 28, 2019	198,896 (1)	$	332.41	4,657,995	1,342,005
March 1 - 31, 2019	47 (1)	$	332.02	4,657,995	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.
(2) Under a stock repurchase plan originally announced on October 30, 2000, and subsequently amended from time to time, Ultimate is authorized to purchase up to 6,000,000 shares of its Common Stock. As of March 31, 2019, Ultimate had purchased 4,657,995 shares of Common Stock under our stock repurchase plan, with 1,342,005 shares being available for repurchase in the future. There were no purchases of Common Stock under the stock repurchase plan for the three months ended March 31, 2019.


ITEM 6.	Exhibits



Number		Description
2.1		Agreement and Plan of Merger, dated as of February 3, 2019, by and among Unite Parent Corp., Unite Merger Sub, Inc. and The Ultimate Software Group, Inc. (incorporated by reference to Exhibit 2.1 to Ultimate's Form 8-K, dated February 3, 2019)
31.1		Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended*
31.2		Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended*
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended*
32.2		Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended*
101.1		Interactive Data Files pursuant to Rule 405 of Regulation S-T: (i) Unaudited Condensed Consolidated Balance Sheets as of March 31, ~~2018~~2019 and ~~March~~December 31, ~~2017,~~2018, (ii) Unaudited Condensed Consolidated Statements of Income for the Three Months Ended March 31, ~~2018~~2019 and March 31, ~~2017,~~2018, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, ~~2018~~2019 and March 31, ~~2017,~~2018, (iv) Unaudited Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Three Months Ended March 31, 2019 and March 31, 2018, (v) Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, ~~2018~~2019 and March 31, ~~2017~~2018 and ~~(v)~~(vi) Notes to Unaudited Condensed Consolidated Financial Statements.*

____________________

* Filed herewith

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		The Ultimate Software Group, Inc.

Date:	May ~~9, 2018~~1, 2019	By:	/s/ Felicia Alvaro

			Executive Vice President, Chief Financial Officer and Treasurer (Authorized Signatory and Principal Financial and Accounting Officer)

3026



	Balance as of December 31, 2017		Adjustments Due to Adoption of Topic 606			Balance as of January 1, 2018
Assets
Deferred contract costs, prepaid expenses and other current assets	$	71,602	$	(22,318	)	$	49,284
Total current assets	990,772		(22,318		)	968,454
Deferred contract costs and other assets, net	53,409		47,259			100,668
Deferred tax assets, net	32,696		(6,803		)	25,893
Total assets	$	1,377,211	$	18,138		$	1,395,349
Liabilities
Deferred revenue	$	197,088	$	1,909		$	198,997
Total current liabilities	843,086		1,909			844,995
Deferred income tax liability	251		170			422
Total liabilities	859,186		2,079			861,265
Stockholders' Equity
Accumulated earnings	125,788		16,059			141,847
Total stockholders' equity	518,025		16,059			534,084
Total liabilities and stockholders' equity	$	1,377,211	$	18,138		$	1,395,349



	For the Three Months Ended March 31, 2018
	As Reported - Topic 606		Balances Without Adoption of Topic 606		Effect of Change Higher/(Lower)
Income Statement
Revenues
Recurring revenues	$	236,587	$	237,030	$	(443	)

Operating Expenses
Sales and marketing	71,197		77,154		(5,957		)

Net income	$	20,994	$	15,480	$	(5,514	)

	As of March 31, 2018
	As Reported - Topic 606		Balances Without Adoption of Topic 606		Effect of Change Higher/(Lower)
Balance Sheet
Assets
Deferred contract costs, prepaid expenses and other current assets	$	64,290	$	76,219	$	(11,929	)
Deferred contract costs and other assets, net	104,582		51,692		52,890
Liabilities
Deferred revenue	200,576		198,107		2,469
Stockholders' Equity
Accumulated earnings	$	162,840	$	124,348	$	(38,492	)



	As of March 31, 2018		As of December 31, 2017
Computer equipment	$	188,575	$	185,034
Internal-use software	193,694		178,093
Leasehold improvements	47,292		43,556
Other property and equipment	24,021		22,572
Property and equipment	453,582		429,255
Less: accumulated depreciation and amortization	193,800		185,591
Property and equipment, net	$	259,782	$	243,664



	As of March 31, 2018		As of December 31, 2017
Deferred contract costs	$	28,899	$	38,519
Prepaid expenses	25,367		20,088
Other current assets	10,024		12,995
Total deferred contract costs, prepaid expenses and other current assets	$	64,290	$	71,602



Goodwill, December 31, 2017	$	35,808
Translation adjustment for the three months ended March 31, 2018 (1)	(195		)
Goodwill, March 31, 2018	$	35,613



	March 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Cumulative Translation Adjustment (1)			Net Carrying Amount		Weighted Average Remaining Useful Life
Developed technology	$	23,300	$	(4,943	)	$	(932	)	$	17,425	5.9
Customer relationships	4,700		(2,206		)	—			2,494		4.4
Non-compete agreements	300		(300		)	—			—		0.0
	$	28,300	$	(7,449	)	$	(932	)	$	19,919	5.7

	December 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Cumulative Translation Adjustment (1)			Net Carrying Amount		Weighted Average Remaining Useful Life
Developed technology	$	23,300	$	(4,355	)	$	(895	)	$	18,050	6.0
Customer relationships	4,700		(2,004		)	—			2,696		4.5
Non-compete agreements	300		(300		)	—			—		0.0
	$	28,300	$	(6,659	)	$	(895	)	$	20,746	5.9



Stock Options	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2017	114		$	29.24	0.4	$	21,476
Granted	—		—		0	—
Exercised	(84	)	29.96		0	—
Forfeited or expired	—		—		0	—
Outstanding at March 31, 2018	30		$	27.23	0.3	$	6,497
Exercisable at March 31, 2018	30		$	27.23	0.3	$	6,497



Unaudited Condensed Consolidated Statements of Income	For the Three Months Ended
	March 31, 2017
	As Reported		As Revised
Income before income taxes	$	3,015	$	3,015
Provision for income taxes	4,319		4,225
Net income	$	7,334	$	7,240

Net income per share:
Basic	$	0.25	$	0.25
Diluted	$	0.24	$	0.24

Unaudited Condensed Consolidated Statement of Comprehensive Income
Net income	$	7,334	$	7,240
Other comprehensive income, net of tax	24		24
Comprehensive income	$	7,358	$	7,264