Ultimate Software CEO Could Step Down 'In Near Future'

On Tuesday morning’s PreMarket Prep, Ben Axler, founder and CIO of Spruce Point Capital Management, joined Benzinga to explain why he sees The Ultimate Software Group, Inc. ULTI as the ultimate short-selling opportunity for traders.

Axler pointed out a number of reasons why Ultimate’s stock could take a big hit in the near future. For starters, he believes the company hasn’t been transparent about its contracts.

Lack Of Transparency

“Where we added a lot of value to the short case is we did a Freedom of Information request of a number of municipalities across the country to actually get Ultimate’s contracts,” Axler explained. “What we found is that the pricing that they’re actually getting is substantially less than what they’re telling investors.”

Axler added that Ultimate’s impressive growth numbers have come about as a result of aggressive spending and questionable accounting rather than growing demand for the company’s services. In fact, Spruce Point believes Ultimate’s true operating margins are under 5 percent and are in “rapid decline.”

Corporate Governance Chaos

Finally, Axler pointed out that Ultimate’s corporate governance is a mess. In addition to having former MLB pitcher Al Leiter on the board of directors, the chief financial officer of the company also serves as both the treasurer and the chief accounting officer. In addition, Ultimate’s audit chairman served in the same role at another company that went bankrupt when executives were convicted of fraud.

...All The Way To The Top

Axler even predicted that that CEO Scott Scherr will likely leave the company at some point.

“I think the CEO of Ultimate is likely to depart in the near future. Bear in mind he founded the company. He’s been there a long time. Definitely the company needs some governance changes.”

Justifications For Selling

On top of all the business and alleged accounting issues that concern Axler, he noted that Ultimate’s stock trades at a steep premium to its SaaS peers.

“Just me realigning the multiple in-line with peers, we see significant downside in Ultimate,” he concluded.

Spruce Point rates Ultimate stock a Strong Sell and Axler predicts 20–45 percent downside once the market fully appreciates the company’s shortcomings.

Ultimate shares are up 5.8 percent since Spruce Point’s original bearish report on the company on Dec. 13. Ultimate is expected to report fourth-quarter earnings after the market close on Tuesday.