Dayforce, Inc. (DAY) Earnings Call Transcript & Summary

Okay. Wonderful. Good afternoon, everyone. I am Mark Murphy, software analyst with JP Morgan. And I'm very pleased to be hosting Ceridian's CEO, David Ossip. I am going to kick it off with a handful of questions, but we're also able to take questions from the audience. [Operator Instructions] I can then pose that question to David. So David, thank you again so much for taking the time and joining us.

Maybe you could begin by just giving us a 2-minute overview of the idea behind Dayforce and the types of problems that it solves.

Oh, wow. We'll be going back to basics.

Give the 1-minute version.

Okay. So the idea came back in about 2009. At that time, my noncompete from my prior company had just been ended. And at my prior company, we did workforce management for very large organizations. It was quite successful, but eventually ran out of markets and the company was sold to Infor in '07. So in 2009, noncompete is ending, and at that time, cloud technologies have become quite well adopted. And cloud allowed me to overcome the barrier that I had before, which was I couldn't take the product down to mid-market accounts because they couldn't administer the tech stack. As I was quite sensitive in terms of addressable market size, I started to look at the adjacent space to workforce management, which is payroll. And what I noticed was that the size of market was massive, probably about $20 billion in the U.S. and Canada, another $20 billion globally. Second thing I noticed was that the average life of customer was about 10 years. Third thing was that the requirements in payroll seem to be largely consistent regardless of size of company or industry, which meant I could go for scale. And lastly, it seemed that everyone I spoke to was asking their payroll vendor for HCM functionality around performance, recruiting, compensation management and the like, which meant that there was a platform play to be had. So the more I looked at payroll, the question became, is there a way I could enter to create real value in a differentiated market? And I spoke to a lot of payroll people and the finding really was that there was a distinction between time and attendance and payroll, where you would have 1 system for time and attendance where people would punch in and clock out and another system for payroll that would do the taxes and the deductions. And the data resided in the time and attendance system for the entire duration of the pay period plus 1 day. So if you were on a 14-day pay cycle, biweekly pay, the payroll team could only look at the data on day 15, and they only would have a day or 2 to do their check-in and qualifications. And as such, they were paying people with errors. The idea came out was, why can't we combine pay and time together, 1 database, 1 calculation with what we call continuous calculations? And if we did that, payroll people could access the data from the very beginning as opposed to the end of the pay cycle, more time, higher quality of pay, and you could use that information for other business purposes. Now in order to do that, we had to effectively do tax calculations and remittances. And when I look at the base requirements for that, it became very, very difficult. Over 10,000 jurisdictions in the U.S., everyone somewhat of a snowflake, and I didn't see a way of building robust tax in under, say, a 10-year period. So I did a sweep of industry, and I found 2 companies that had robust taxes, one being Ceridian. So I started to focus on the Ceridian organization, and this now is about 2010, 2011. And obviously, at the time, Ceridian was under a difficult time. They haven't had any new product innovation in about 15 years. Sales were declining -- or revenue was declining by about 15% per year with continual reduction in workforces and the like. Ceridian at the time was owned by 2 private equity firms, Thomas H. Lee and FNF. So I approached them with an idea of, hey, why doesn't Ceridian buy Dayforce? I'll take over the organization, and I'll focus on 3 ideas. One is I'll simplify the business by divesting everything not related to the growth of cloud. Second is I'll redo the culture of the company. And three, I'll build out Dayforce starting with 1 system across core HR, payroll, benefits and time, distinguish myself inside market, and then over time, I'll broaden the base to full talent. And that's effectively what happened. Acquisition happened late 2012. I took over in 2013. Since that time, we've taken live almost 4,500 customers on the Dayforce platform, obviously done very, very nicely from a growth perspective. If you look at the Q1 results prior to COVID, Dayforce revenue ex float constant currency grew by 31.9%, which was up by 25.3%. Really doing well on the profitability side, gross profit on recurring increased 250 basis points from 70.1% to 72.6% during that period of time. So that's generally the story. Hopefully, it answers the question.

So David, you had this incredible technology vision way back in time. You've executed very well on it. Can you help us to understand how that vision is aligned to the way the typical workforce is changing today? If you think about some of the demographic trends, millennials, you've got the gig economy and the kinds of technology expectations that are coming from the HR managers and also the employees. Help us understand how that vision you had is aligning to those trends.

So I'll break it up because you've probably got 3 questions in there. The first is when we set out to build the Dayforce product, we needed a methodology to determine how to prioritize the build. And what we chose was effectively scoring every module across 2 axes. The first axis was what is the strategic value of that particular module, and the second axis was what's the frequency of transaction. And we focused first on the modules that had the highest amount of value and the most frequent interaction. For each of those modules, we identified 3-or-so KPIs that we could impact at the customer. And what -- those KPIs had to be measurable so that we could quantify the value that we could deliver to the organization generally in terms of cost savings. And obviously, in today's environment where there's a lot of uncertainty, that mantra of really focusing on quantifiable value to our customers resonates very, very nicely. The second part was by creating a system that would be one, 1 database, 1 user experience, we could look at the different types of experiences that managers and employees were going through, and we could solve them or deliver them from an experience perspective as opposed to individualized modules. An example would be employee onboarding. In a traditional system, you would have some paper, you would have a self-service system you might use. You would then go -- and you would go to your benefits system and you're entering some additional information. You might have to go to a different URL to get into learning management and the like. Whereas, when we looked at onboarding, we said there's one experience, so why don't we deliver some learning management to introduce the person to the organization, use the forms and workflows to capture the information policy sign-off. We already have the person's information and their dependents', so let's do benefit enrollment at the same time without asking them to go to a different URL to reenter the information. And what you'll end up with is a much more consumer friendly type of experience. The third piece is, as you pointed out, the demographic has shifted. People today have certain expectations about the apps that they intend to use. Mobile-first is one thing that comes to mind, the leveraging on more predictive types of technologies and all of the various experiences. And we've always done that. If you go to, for example, the Apple App Store, you'll see that we're rated about a 4.5, 4.6 on the App Store across over 100,000 reviews. And every day, we have well over 1 million people using our mobile apps, obviously, very successfully. And that's always been part of the DNA, just given when we started to build out the company. Now in terms of gig economy, that's somewhat related to what we're doing with Dayforce Wallet. And so much like we do for organizations, we typically look at the workflow and see where we can unlock value by improving the actual process. When we look at how people are paid today, people are paid in arrears, which means you work for a week or 2 weeks and during that time, you've earned wages but the company hasn't paid you. So you have to wait effectively 15, 16 days from the time you work to get your paycheck. We believe that's inefficient, is not right because the money is owed to the employee. So we leverage the continuous calculation engine of Dayforce, which always shows the employee how much they've earned, net of taxes and deductions, and we allow them to access that money during the active pay period. And you're creating now a lot of value both to the organization and the employee by streamlining that. That obviously sets the basis for a gig play because what we now have with the Dayforce app is ability to clock in, clock out anywhere. And when you clock out, you -- immediately, we calculate your net earnings, and with the Dayforce Wallet, we have now the ability to pay immediately. And so as we go into the future, you will see us into the gig economy with instant pay types of solutions for people who working different hours.

Okay. So David, that's a fantastic overview. And I actually want to come back and talk about -- I want to spend about 5 minutes talking about the wallet in just a moment. So I'll come back to that. I want to ask you about the HR buyers themselves and whether they're becoming more selective and sensing the differentiation. We pick up these anecdotes in our survey work. They talk about it being a really slick product, true global platform coming up strong. Are they -- is it showing us they're getting to a point where they're more sophisticated and more savvy in kind of sensing the differentiation or being able to compare and contrast Dayforce and it's more obvious to them the limitations of these older architectures?

Look, I think that is true. I think that a lot of our investors have done a lot of field research, spoken to customers, spoken to prospects, in many cases, to our competitors as well. And the way that we built the system obviously has proven to be quite a good idea, and it does deliver true value to the customers. And I think the outbound calling has educated a lot of the market as to the advantages of having a single application that's built to be global. Now one of these reasons that companies typically move to us is that they have pain points. So if you're using a vendor where there is separation of data, separation of UI and you're trying to do any type of -- and workflow, you're going to be challenged because, most likely, the systems don't have the same data hierarchies. One system might have 8 levels of hierarchy, another one might have 5. How do you do the edge cases? Effective dating of the records might not be the same. And even worse, often data fields are duplicated across the multiple databases, and there's no real way to determine what is the true value, right, because if someone makes an update, it may not be kept in sync and generally, it isn't kept in sync. And whenever there's an exception like that, that creates a bunch of pain, either for the end user in inaccurate payroll or they don't get the benefits that they're expecting or for the administrator who has to keep things running and do a ton of manual calculations and work or for the organization in terms of not being regulatory compliant and being hit with a law -- class action lawsuits and the like. And those are typically the problems we solve. On the global side, we focus on major markets and enterprise segments. And it's very, very likely that if you're in those segments as an organization, you do have a global footprint, yet you want to have the same employee experience across all of your employees regardless of where they live or work. And the fact that we designed the product to actually be global makes a big difference.

Okay. Now you did touch on, David, a moment ago, the mobile app. I see the virtual sign before you -- says makes work life better. I want to ask you on this topic of employee usage, where one of your competitors, we've noticed, is pivoting and they're marketing primarily on the basis of employee usage. So I think it's this notion that the employee is going to go in and make all the changes to their personal information rather than calling the HR department and asking them for their help. We -- I looked on the Apple App Store a couple of days ago, the Dayforce iPhone app has 123,000 ratings with 4.7 stars. And I was a little bit taken aback by that, the volume and how strong that is. Is that -- should we read into that there's a lot of employee usage happening on Dayforce as well?

Look, I know when I use Dayforce, I access it through the mobile system. But what I'd say about that is that I don't know how any company today or vendor goes on and says, hey, we have a mobile-first platform. I think if you didn't have a mobile-first platform, you probably should put out a disclaimer. In today's world, if you don't have a mobile app that's well designed and it's -- I'm not quite certain what you really are doing. So we've always had mobile. It's always been highly, highly used. Much like the rest of the application, we're very careful about what features we add to the mobile app. We make sure that there are simple experiences that allow people to do the transactions that they're trying to do most often. And hence, you see the ratings, which is quite a lot. I mean 120,000 ratings gives you an indication about how frequently used these apps are. If you look at the Dayforce Wallet app, which is now available as well, you'll see the experience is wonderful, really, really designed nicely in a way that you'd expect any other consumer app to be designed.

So let's go straight into the wallet. I think you gave us the overview of what that product is. Your first customer, I want to say, went live about a month ago. I think you said on April 9. What have you learned so far?

So let me talk about where we are with Wallet. We spent the last year building the actual wallet, optimizing how we could really benefit from the interchange and then leveraging the enterprise -- the interchange to come up with a pricing model that would make sense to corporations and not have us to charge any direct fees to employees. In the first quarter, we launched it internally, and we got feedback from our employees as to how the product was working, where we could improve. We made the necessary optimization. There were some changes we had to do for California in terms of earning statements because each time you add money to your wallet, we do a same-day pay for that employee. We do the remittances immediately, create the earnings statement. So that is not a payday loan. It's a true payday for the employee. There's a little bit of work we're still doing in terms of New York State for some of the regulatory stuff over there. We then started to open it up to some customers. We currently have a backlog of customers who would like to use the wallet. But we're being conservative because we want to make sure that the user experience is optimal, and we want to make sure that there's no kind of teething issues during this period. So we're plucking certain customers out of the wallet. In terms of customers in the backlog, there isn't any vertical concentration. A lot of people ask me, is this really for part-timers, retail establishment? We haven't seen that in the data. We're seeing really demand really cross vertical, whether it be financial services, manufacturing, health care, obviously retail and hospitality in there as well. But there seems to be strong demand across all types of employees using the actual system. The initial feedback has been very positive. I did 1 post on LinkedIn today from 1 user's feedback, which was obviously very nice. And so we're quite encouraged. But it is early days, and we ask that we're given a bit of time to get some usage metrics before we share that with the market.

And David, do we have any idea how many actual users today are using the wallet in very round numbers? And I know you have some internally as well that are using the Dayforce Wallet. Can you speak to any of the numbers or any of the internal experience?

Yes. Mark, we haven't disclosed that. So we have to just be -- we have to stay within the balance we had in the stockholder letter and such.

Okay. Is there -- are there any learnings from how it's been used internally? Any response or feedback from your own employees?

Well, it's all -- it's very positive. And we really did it nicely. We did A/B testing ahead of time to kind of work out should we do the feature this way or that way. We did A/B testing to determine what features we should put in, what features we should take out, A/B testing around language to put it in a way that people liked it. We spent a lot of time making it very easy to activate the wallet. So for instance, you go in the Dayforce mobile app, if the customer's activated, there's a banner. You click on the banner, it takes you to the App Store, either Apple or takes you to the Google Play App Store. You download the app, and much like if you're adding Instagram and you have Facebook on your device, it copies over your credentials. So you don't have to set up a new account. That's automatic. We have -- do the transfer of the KYC information to the wallet app. We ask the user to basically just confirm it. And within a few minutes, you're up and running. You've got your virtual card inside your device you can use for touch transactions, you do the personalization and a couple of days later, you get your personalized plastic in the mail.

Okay. And I want to mention we've received a couple of questions from the audience. Feel free to keep them coming, and I'm going to get to some of that probably in about 5 or 10 minutes. David, before we do that, I wanted to ask you, first off, did you ever think you'd see an unemployment climate like the current one? I think it's 33 million unemployment claims in the U.S. in a span of 7 weeks. It's a smaller number that would be continuing, but it's still a pretty big number. And so it's kind of like a sickle came through and just cut all these jobs off. Can you help us understand what that's like compared to what you've seen in your career, other recessions, other contractions and maybe just what are -- what your customers are communicating to you about this employment climate?

Look, obviously, it's unprecedented in terms of unemployment levels. We are somewhat lucky in that we get paid on active and inactive employees, which include the furloughed employees. So the impact to our employee count has been somewhat muted. The ratio, whether it be the jobs report or internal data that I spoke about on our earnings call, it seems to be about only 25% of those who are filing for unemployment are actually terminated, 75% were furloughed. We get paid -- for furloughed employees exactly the same way we get paid for active employees. Now that -- it's a bit of a shock to the system. Operationally wise, we've had work-from-home policies in place for a few years. We had the tech stack already in place and people used to working from home. And most of our activities are nontouch, whether it be sales or implementation or customer support, so we were able to remain productive right through the actual transition or the initiation of COVID. We did see some headwinds in terms of sales and activations in the last 2 weeks of March, but sales did continue all the way through to the end of March. Activations, the impact in Q1 was about 5% pushed to later quarters, which is the amount of $1 million to $2 million. Also of activations, the process staff is still very busy doing activations this quarter. In terms of where we are, if I look at the data -- so I mentioned last week, if I look at employees at Dayforce accounts, we see -- we saw the numbers stabilize, go up slightly week-over-week, and we saw a shift between furloughed to active employees, which was promising. I think the shape of the recovery will be dependent on whether or not there's a wave 2 or wave 3, which I think we should know within a few weeks' time as to how it's going on. In terms of other changes that we made, we immediately shifted to digital marketing, which, in retrospect, we should have done prior to COVID. So instead of doing an L.A. summit on site, we shifted to a virtual summit. You saw attendance go up by 3 to 4x, and we've seen the impact of the virtual summit to be very similar in terms of pipeline growth, pipeline development, what we would have seen in terms of a on-prem summit. We also have helped organizations understand the regulatory changes. It's provided us with an opportunity to really demonstrate that we are expert in this particular domain. We understand how to do taxes, how to do remittances, how to do reconfiguration. The product platform obviously is very flexible and very capable handling those types of changes. And I think that's further strengthened the Ceridian brand and helped us on the pipeline side. In terms of decision-making, we're obviously focusing on surge industries. And so from a seller perspective, we've directed the sellers to build their forecast on customers that are more likely to purchase during this particular period, and that's obviously worked out quite nicely as we saw continued sales into April and obviously now into May as well.

Now David, I think, normally, what happens is jobs in the broader economy can be lost quickly, but they're -- they get replaced pretty slowly. I think many of us are wondering, could this be a little different situation, right, because it's been a voluntary case of social distancing really driving it? And I know no one has a crystal ball, but I mean, if you had to guess, how quickly do you think these lost jobs maybe could be replaced as some of these countries and states begin to reopen? Do you have any personal guess on the rate at which that could happen and what the economy could look like a year from now?

Look, I think there are a couple of trends. I think this has really provided an opportunity for organizations to recalibrate the size of their workforces. So there'll be some impact to that. Second is, I think, it's largely based on industry. So there are some industries that are surging, that are actually winning during this particular period, and I think they'll continue to grow and to be successful. There are other industries, which, luckily, we have limited exposure to, those will be like travel, higher education, where we really have limited exposure to, where I think there'll be a long tail in terms of them coming back. We already are seeing, I think, a return to work in manufacturing areas of specialty retail. Grocery has remained strong obviously during this particular period. So I don't think they were that impacted. But much like others, I think it's going to depend largely on what happens with wave 2 and wave 3.

Wave 2 and wave 3 of the pandemic itself?

That's right. There are a lot of states returning to work right now. Whether that is too early or whether the Swedish model is basically the way to go, I think we're going to find that out in the next, say, 2 to 4 weeks.

Yes. Yes, you're probably right. Now what about the mindset of the typical HR executive that you're trying to get the attention of in this environment? I imagine they had an initial rush of work to try to stand up a remote workforce. Where are they today in terms of how they're spending their time? Are they through that?

They are through that. I think organizations now have gotten used to working from home. The first 2 weeks for many of them were difficult, but I think nowadays, it's really a status quo. I think there is going to be another flurry though with the return to work because you do have to modify your premises and your policies when you bring people back in. You have to have cloth mask available for your staff. You have to have some level of distancing in the workplace. One complexity if you have office work that's going up and down elevator banks. The logistics of maintaining only a few people in an elevator would become somewhat complicated. And so there are going to be areas of minutia. Now within the Dayforce application, we have added some functionality to help with this. We added self-service forms that allow people to indicate if they're positives, have symptoms. We know which locations they are attended, and we can obviously do the analysis for the company of sending our broadcast messages to those that might be at risk of having come into contract with an infected person. So there are some features that I think are quite useful from Dayforce that will help customers on that. In terms of getting access to the HR people, the fact that everyone is at home, everyone's in front of a couple of screens all the time and everyone doesn't really have that much to do when they're not working, it means that the accessibility to the HR professionals as well as the decision-makers remains pretty good.

Have you been finding prospects, Dave, that maybe feel a little flat-footed, if they've been on more of a legacy HR, payroll, time and attendance system, something on-premise, something that's more of a service bureau where they were just flat-footed and couldn't really respond to this environment and maybe it actually is increasing their desire to speak with you?

Yes. Look, I think everyone knows that if you hadn't made a transition to the cloud and you still had on-prem servers and on-prem stuff to maintain those and you had to do the configuration changes yourself, as this came along, you were in a very difficult spot. And so companies that weren't in that obviously are going to accelerate the movement in systems like ours. In terms of Bureau, I think the complexity is rather had the vendor made changes to the mainframe code to accommodate theoretically changing regulatory environment. And the answer to that is, it's tough. And so if you're on a modern cloud system much like ours with a flexible rule engine, you can obviously navigate and respond to your customers much quicker. By the way, if you go to the Ceridian website under the Support Portal, you will see all the great content that we provided to our customers about configuration and so, gives you an idea of how we responded or how we respond.

Okay. Very helpful. We'll take a look at that. Let me take a couple that have come in through the Q&A window, David. One of them says, "Please ask for the strategy behind the acquisition of Excelity in Singapore. What are the growth plans for APJ in China? How does he view existing competition in those markets?"

Sure. So let me start again. When we did the analysis back in 2010, 2011, we identified that half of the TAM, half of the addressable market was outside of the U.S. and Canada. So when we designed Dayforce, we designed it to be global from the onset, which means you handle things like culture, like currency, language localization, data localization. You have a rule engine that is flexible enough to go outside of the U.S. and Canada. And I think we did that very successfully. We know that we can build a native payroll engine in about 12 to 18 months at a cost of about $0.5 million to about $1.5 million, depending on complexity. And we've done that quite successfully. We now have U.S., Canada, U.K., Ireland, Australia and New Zealand. We're about to go live in Mauritius and are currently building out Germany and Mexico. From a global expansion perspective, I've spoken about this before, but we believe that there are opportunities to replicate what Dayforce did with Ceridian, which is effectively to identify incumbents in local markets that understand the demand very well, that have market presence but don't have the technology platform that is current and don't have a technology platform that can be extended into true human capital management. And for those, it's an opportunity for us to acquire at about a 3x multiple. And then over a period of time, we can move the countries over to Dayforce, and we can begin to upsell them. In the case of Excelity, it's very much within our sweet spot, about a $20 million run rate business acquired at about 3x, so right in kind of where we've been -- we've said we would play. It gives us a native payroll engine that's active currently in 13 countries in APJ. And so right off the bat, we can go to our existing clients and say, if you have employees in any of these 13 countries, we can provide a payroll solution immediately, and you can access it through Dayforce, if you like, through our connected pay module, which does the aggregation when we use in-country payroll providers. Second is, on the major markets in the enterprise segment, global is a base requirement. Any company that's operating, say, 1,000-plus employees most likely has a global footprint, and they want, say, an experience globally for their employees. So for us to go out and say, hey, with the Excelity acquisition, we now have coverage in close to 20 different countries, gives us really a very, very viable story to tell to those customers and also explains very precisely what the road map is, which is, in APJ, we obviously prioritize the countries that all have the highest per employee per month revenue. We're talking about Singapore, Hong Kong, Japan, South Korea, et cetera, which is where we'll take the Dayforce product. And in parallel to that, we're still continuing with the native builds, as I mentioned. Mexico, which gives us a footprint into Latin America and we'll expand from there; and then Germany, which really gives us a very good footprint to handle all of the countries surrounding Germany as well in the medium term.

Okay. And David, you mentioned acquiring them at about 3x. Is that just -- is that what the going rate is overseas?

Well, it's -- I think it's an indicator for those types of companies. So the big delta is that if you play in the U.S., you've got a massive homogeneous market, and that size of market really allows you to invest heavily in R&D so you have a modern cloud platform taking advantage of AI, ML, mobile, et cetera. And you can also expand the platform beyond, say, just payroll but go deep into recruiting and performance and compensation, products that are very similar to best of breed. When you go into these smaller markets, the market size isn't that large. So companies are started 20, 30 years ago on a technology platform for specific solutions. And the size of the market doesn't really allow them to rewrite their product onto a cloud platform, and it doesn't really allow them to expand into adjacent modules. You take that North American product, you bring it into a local market like one of these countries and now you've got a much wider, much more modern type of product and meets the user and management requirements much better. And the fact that we built the product to be global, whereas if I look at most of our competitors, they didn't do that, they built it specifically for the U.S. market, it gives us really a nice kind of competitive advantage.

Okay. I think great note to end on, David. We are up to the end of the allotted time. And I want to thank you very kindly for having spent this time with us today. And congratulations on all the great success you're having.

No, really appreciate it, Mark. Thanks for the time and for arranging this today.

Okay. Have a great day.

Thanks, everyone.