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Ultimate Software Gains Momentum, Beats Street, Raises Forecast

Shares of enterprise software maker  Ultimate Software Group ( ULTI ) jumped 6% in morning trade before settling back, following Tuesday’s impressive first-quarter report, which beat Wall Street’s top and bottom lines. Ultimate, which specializes in HCM SaaS — human capital management software as a service — reported first-quarter EPS up 40% to 73 cents minus items, eight cents beyond consensus, on sales up 29% to $187 million, where Wall Street expected $180 million. With 2016 gaining momentum, Ultimate also raised its full-year forecast to 26% sales growth from 25% “and now claims 99% visibility into this goal,” noted Evercore ISI analyst Kirk Materne. Materne raised his price target to 200 from 195 “based on the continued acceleration in the business, especially in the midmarket,” he said in a Wednesday research note, reiterating a hold rating. “All in all, we believe the company remains on track to hit its $1 billion revenue target in 2018; and with the company’s current (2016) guidance implying (an approximately) 275 basis-point decline in recurring revenue growth in (the second half vs. the first half), we expect that estimates could potentially have room to move higher over the course of the year.” More bullishly, FBR analyst Samad Samana said in a Wednesday research note, Ultimate ultimately “can deliver accelerating revenue growth and margin expansion in 2016.” Samana raised FBR’s price target on Ultimate to 220 from 205 while maintaining an outperform rating. Climbing the right side of a 25-week cup base, Ultimate stock jumped 6% to 209.71 in morning trade before settling back to a 0.5% gain near 198 in the stock market today , 8% off a 216.27 record high set Nov. 9. Ultimate’s enterprise rivals and peers were mixed Wednesday, with Salesforce.com ( CRM ) down 1.5% to 75.05, while SAP ( SAP ) was up 1.2% to 80.43, less than 1% from recent highs. Legacy software developer Oracle ( ORCL ) was down fractionally. Microsoft ( MSFT ) was off 1%. One stock in IBD’s Computer Software-Enterprise industry group, that of cloud advertising software developer Rubicon Project ( RUBI ), enjoys a slightly better IBD Composite Rating than Ultimate: Rubicon’s best-possible 99 vs. Ultimate’s 98. Salesforce carries a 93 CR and SAP 72. Outside the group, Oracle is rated 60 and Microsoft 43. Ultimate’s 40% EPS growth rate was the best in eight quarters, but its 29% sales pace was the best in at least 19 periods. For the second quarter, Ultimate guided its adjusted operating margin to 20% and total sales to $187 million. Analysts polled by Thomson Reuters are expecting earnings of 77 cents per share minus items on revenue of $185 million. A year ago in Q2, Ultimate earned an adjusted 62 cents per share on sales of $147 million. Needham analyst Scott Berg said he was “impressed” that Ultimate reported consecutive quarterly deferred revenue growth exceeding 30% in the first quarter and year-to-year deferred revenue up 34.5%, its best in at least six years. He reiterated a buy rating with a 220 price target.

After 16 Quarters Of Revenue Declines, When Will IBM Bounce Back?

The IBM ( IBM ) revenue numbers stand out like a broken arm. Deep into a major transition that has shed multibillion-dollar businesses, IBM has reported 16 straight quarters of year-over-year revenue declines. And it’s not done yet. Another three quarters of declines are expected by analysts polled by Thomson Reuters. In the past several years, Big Blue has shed computer hardware units, reshuffled its software businesses and realigned its workforce to reduce costs as it focuses on growth areas such as cloud computing, Big Data analytics, security and mobile computing — areas that it calls strategic imperatives. Since 2010, IBM has invested about $30 billion in these areas. They include the creation of a new business unit, Cognitive Business Solutions, with its backbone being IBM’s advanced Watson computer. Watson is being used in health care, the Internet of Things, analytics and other fields. IBM says Watson can address a total market opportunity near $2 trillion. “We continue to make significant progress in our transformation to higher value,” IBM CEO Virginia Rometty said in the company’s first-quarter earnings release last Monday. “We strengthened our existing portfolio while investing aggressively in new opportunities like Watson Health, Watson Internet of Things and hybrid cloud.” The IBM transformation is showing progress. IBM revenue from strategic imperatives rose 26% in 2015 in constant currency to $29 billion, compared with a 12% decline in overall revenue to $81.7 billion. Strategic imperatives now comprise 35% of total revenue, up from 22% two years ago. IBM has targeted strategic imperative revenue to reach $40 billion and at least 40% of revenue by 2018. But when will the revenue slide reverse?  UBS analyst Steven Milunovich, in a research report, says that 2017 is likely the turning point. “IBM is trying hard to transform its business and also to change the narrative from legacy loser to cloud and cognitive winner,” Milunovich wrote. He added, “Just because strategic imperatives gains the upper hand does not mean IBM’s top line is off to the races, but it could mean the worst would be over.” As to whether Watson and its Cognitive Business can save IBM, Milunovich says that it’s too soon to know, as IBM does not disclose the Watson-driven revenue just yet. “Old IBM is in secular decline, but we believe cognitive eventually could create a material new revenue stream drawing from outside existing IT budgets. We don’t expect revenue to be material for another three years, but the narrative is important now, and eventually Watson could be a $10 billion business,” he wrote. Milunovich has a neutral rating on IBM and price target of 150. IBM stock was flat, near 148, in afternoon trading in the stock market today . IBM stock hit its all-time high of 215.90 in March 2013. It hit a six-year low in February but is up 27% since then. IBM Turnaround Remains ‘Painful’ Credit Suisse analyst Kulbinder Gracha has a more negative view on IBM and says that revenue won’t stabilize until 2018. “We see a painful multiyear turnaround from here, which drives underperformance,” Garcha wrote in a research note. “We believe that large parts of IBM’s business (hardware, operating systems, services) are being impacted by the cloud.” As to Watson, he said, “While we do believe the opportunity here is significant, it is also very early, with the commercial impact of such initiatives that may take several years, if not decades.” Garcha has an underperform rating on IBM stock and a price target of just 110. Other giants in the information technology field are also going through transitions and struggling to accelerate revenue growth. They include Hewlett Packard Enterprise ( HPE ), Oracle ( ORCL ), EMC ( EMC ) and Cisco Systems ( CSCO ). “We believe the competitive challenges are emerging from companies seeking to build a business model similar to IBM’s, notably Hewlett Packard Enterprise, Cisco, Oracle, EMC and Dell,”  wrote RBC Capital Markets analyst Amit Daryanani in a research note. Of these competitors, he says, HPE is closest to IBM’s model, with Cisco another. Dell is acquiring EMC. Daryanani has a sector perform rating on IBM stock and a price target of 155.

Here’s Why IBM Fell Despite A Solid Q1 Earnings Beat

IBM ( IBM ) closed down 5.6% at 144 Tuesday, following a first-quarter earnings report late Monday that beat estimates but still left room for concern. IBM has been undergoing a major transition, shedding older technologies while making a concerted push into growth areas such as cloud computing, Big Data analytics, security and mobile computing — areas it calls strategic imperatives. The transition helps explain why revenue growth has declined each quarter for the past four years. In its Q1 earnings results, IBM reported revenue of $18.7 billion, down 4.6% from the year-earlier quarter but edging the Wall Street consensus estimate of $18.3 billion. Revenue from strategic imperatives rose 14%. Total cloud revenue rose 34%. Earnings per share ex items of $2.35 easily beat views of $2.09, as polled by Thomson Reuters, but were down 19% and marked the fourth quarter in a row of EPS declines. IBM stock fell in the stock market today  presumably on the view that Q2 expectations are below estimates. IBM does not provide formal quarterly guidance, but its implied EPS guidance of $2.85 for Q2 is below the consensus estimate of 3.01. Despite the Q1 beat, IBM did not increase but instead maintained its full-year earnings outlook. IBD’s Take: How healthy is IBM’s stock and how does it stack up vs. rivals? Find out at IBD Stock Checkup RBC Capital Markets analyst Amit Daryanani maintained a sector perform rating on IBM stock, and a price target of 155. “We believe the competitive challenges are emerging from companies seeking to build a business model similar to IBM’s, notably Hewlett-Packard Enterprise ( HPE ), Cisco ( CSCO ), Oracle ( ORCL ), EMC ( EMC ), and Dell,” he wrote. Of these competitors, he said, Hewlett-Packard is the closest. Another is Cisco. ‘Attempting To Recreate The IBM Model’ “Beyond Hewlett-Packard and Cisco, there are also others attempting to recreate the IBM model,” he wrote. A harsher report on IBM came from Credit Suisse analyst Kulbinder Garcha, who reiterated an underperform rating and a price target of 110 on IBM stock. “We believe the quality of earnings was again low and the manner in which IBM has chosen to manage its business seems unsustainable,” Garcha wrote. “We believe the secular and structural challenges facing IBM remain, and specifically see limited improvement in Services and Software margins.” UBS analyst Steven Milunovich maintained a neutral rating on IBM but raised his price target to 150 from 132. “The quarter was mixed with revenue and EPS beating due to currency improvement, acquisitions, and the Japan tax rebate,” he wrote. “We give IBM credit for changing the narrative,” with an emphasis on becoming a leader in the new category of Cognitive Computing, which includes its Watson computer business, he wrote. Drexel Hamilton raised its revenue forecast, maintained its EPS projection and raised the price target to 166 from 160.