Notes

Since 2017, Ultimate’s Enterprise sales team targets companies with 2,501 employees and larger, including companies with 100,000 employees and more; our Midmarket sales team targets companies with 501- 2,500 employees; and our Strategic sales team targets companies with 300 to 500 employees.

Gartner and Forrester have disclaimers noting they “do not endorse any vendor, product, or service.”

The term “Non-GAAP Operating Income” is a non-GAAP financial measure that is defined by Ultimate as operating income excluding stock-based compensation expense, amortization of acquired intangibles, and transaction costs related to business combinations. For more detail, see Note 5 below.

The years ended as of December 31, 2016, and December 31, 2015, were revised in connection with an immaterial correction of prior-period financial statements. See Note 17 in our Notes to Consolidated Financial Statements, included in our Form 10-K for the year ended December 31, 2017, for further details.

NON-GAAP MEASURES This Annual Report contains non-GAAP financial measures. Ultimate believes that non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to Ultimate’s financial condition and results of operations. Ultimate’s management uses these non-GAAP results to compare Ultimate’s performance to that of prior periods for trend analyses, for purposes of determining executive incentive compensation, and for budget and planning purposes. These measures are used in monthly financial reports prepared for management and in quarterly financial reports presented to Ultimate’s Board of Directors. These measures may be different from non-GAAP financial measures used by other companies.

These non-GAAP measures should not be considered in isolation or as an alternative to such measures determined in accordance with the generally accepted accounting principles in the United States (GAAP). The principal limitation of these non-GAAP financial measures is that they exclude significant expenses that are required by GAAP to be recorded. In addition, they are subject to inherent limitations as they reflect the exercise of judgement by management about which expenses are excluded from the non-GAAP financial measures.

To compensate for these limitations, Ultimate presents its non-GAAP financial measures in connection with its GAAP results. Ultimate strongly urges investors and potential investors in Ultimate’s securities to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures that are included in this Annual Report under the caption “Unaudited Reconciliation of Non-GAAP Financial Measures” and not rely on any single financial measure to evaluate its business.

Ultimate presents the following non-GAAP financial measure in this Annual Report: non-GAAP operating income and non-GAAP operating income, as a percentage of total revenues (or non-GAAP operating margin). We exclude the following items from these non-GAAP financial measures, as appropriate:

Stock-based compensation expense. Ultimate’s non-GAAP financial measures exclude stock-based compensation expense, which consists of expenses for stock options and stock and stock unit awards recorded in accordance with Accounting Standards Codification 718, “Compensation - Stock Compensation.” For the years ended December 31, 2017, 2016, and 2015, stock-based compensation expense was $146.4 million, $113.9 million, and $82.4 million on a pre-tax basis, respectively. Stock-based compensation expense is excluded from the 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. Ultimate believes that such exclusion facilitates the comparison of results of ongoing operations for current and future periods with such results from past periods.

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 years ended December 31, 2017, 2016, and 2015, the amortization of acquired intangible assets was $3.1 million, $1.1 million, and $1.0 million, respectively. 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. Ultimate believes 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.

Transaction costs related to business combinations. In accordance with GAAP, operating expenses include transaction costs for third-party professional services received in connection with business combinations. As we do not acquire or dispose of businesses on a predictable basis, the terms of each business combination are unique and can vary significantly from other business combinations. Significant expenses can be incurred in connection with a business combination that we would not have otherwise incurred in the periods presented as part of our continuing operations. There were no transaction costs incurred related to business combinations for the year ended December 31, 2017. For the year ended December 31, 2016, the transactions costs incurred related to business combinations were $0.9 million. There were no transaction costs incurred related to business combinations for the year ended December 31, 2015. Transaction costs related to business combinations are excluded from Ultimate’s non-GAAP financial measures because it is an expense that Ultimate does not consider part of ongoing operations when assessing its financial performance. Ultimate believes 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 business combination histories.

UNAUDITED RECONCILIATION OF NON-GAAP MEASURES

(Dollars in Thousands)

201520162017
Operating income$43,318$41,684$44,546
Operating income, as a % of total revenues7%5%5%
Add back:
Non-cash stock-based compensation expense82,416113,877146,427
Non-cash amortization of acquired intangible assets1,0341,1153,129
Transaction costs related to business combinations874
Non-GAAP operating income$126,768$157,550$194,102
Non-GAAP operating income, as a % of total revenues20.5%20.2%20.6%
Directors and Officers