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

Alright. Great. Thanks everyone for joining us today. I am Matt Pfau. I am the analyst here at William Blair that covers Ceridian. Today, we have with us David Ossip, CEO of Ceridian. Thank you very much, David, for joining us here today. I'm also supposed to mention that for a full list of our disclosures, you can visit www.williamblair.com. And with that, we'll get into Q&A.

So David, I think most people are somewhat familiar with the Ceridian and Dayforce story. So maybe it makes sense to sort of talk about the target market here and how that's evolved over time. Since you've become public again, you've consistently signed larger and larger customers on the Dayforce platform. It seems like every quarter, you sign your largest customer ever. So maybe just help us understand a little bit better the evolution of your go-to-market strategy and addressable market and why you've been so successful signing these larger and larger customers?

Sure. So just for everyone's background, we started building the Dayforce product in probably that 2012 timeframe. Now the history before that is that I had ended a noncompete from a prior company. I was looking at reentering the marketplace. And the previous company had played in workforce management, and the adjacent market was payroll. And when I did the analysis of the payroll market, I found a very large market, probably about $20 billion in the U.S. and Canada, another $20 billion globally. The other characteristics were wonderful, very long life of customer, above 10 years. The requirements were largely homogeneous, which meant there was no customization requirement, so you could build and deploy with scale. And when we did field research and spoke to payroll people, we found that they were asking their payroll customers -- payroll companies, sorry, for other modules, like performance and comp and recruiting. So those are platform play. One area that we identified in terms of difficulty was the whole tax compliance and payment side. And we didn't see a way as Dayforce of building that ourselves in under 10 years, and that led for me to actually approach the owners of Ceridian at the time with the idea of, hey, Ceridian buys Dayforce and I'll take over the company and obviously, simplify the company, redo the culture and build out this Dayforce product. The area we saw that we could differentiate came from the field research, which it was very clear that the incumbents in the marketplace, they had separation of system between time and attendance and payroll. And because of that separation, it meant that the payroll people couldn't get access to their data until after the pay period had ended, which left very little time for them to do their busy work to ensure quality of pay. And we felt that we could solve that by building pay, benefits and time all as one system. So when we took the product to market, we kind of identified 2 segments that we were playing. The first segment was what we call major markets, which is 700 employees to 6,000. And the second segment is enterprise, which is 6,000 and above. In the 700 and 6,000 segment, we identified 2 competitors, and those competitors have been consistent for the last, I suppose, 7 years, 7, 8 years now. They are obviously ADP and Ulti. And in both of those incumbents, they had the separation of systems between time and pay. The one using a mainframe payroll, the other is using really a client server payroll engine with a Web front end and then various components with timing, attendance and talent and such. And so our differentiation in that major market segment became, first, we have one database, one user experience, one rule engine across all of HCM, and we see that [ patent ]. We're typically replaced because of those pain points. We sell the full suite in that particular type of market. The second differentiation that played in major markets, but also started to resonate even more in the enterprise side, was this continuous calculation side. That any time someone would change their employee record, clock-in and clock-out, we calculate the net earnings immediately. And we did that to allow the payroll people to access the data earlier in the pay cycle. The larger the organization, the more worth that is because it gives you more and more time to ensure the quality of pay. The second piece came to the initial analysis of the market, which was half of the addressable market size was outside of the U.S. and Canada, and so we wanted to take advantage of that. So from the onset, we built the product to be global. So language, localization, culture, date formatting, numeric formatting, currency with FX, exchange rates, the ability to do data localization, not just label localization, building a rule in a tax engine that we could extend to different jurisdictions very efficiently and very economically. And that single system on a global basis, that vision resonates very well in the enterprise segment and the upper end of major markets and also differentiates us against the 2 competitors, whether it be ADP or Ulti, in that we are quite unique that we have this global system.

Got it. And within that enterprise segment, I think you've changed your go-to-market strategy and made it a little bit more verticalized, the approach. So maybe just talk about how that has progressed over the past year or so?

Yes. So we brought Leagh Turner as President probably about 2 years ago. He came to us, where he was a global COO at SAP. And one of Leagh's original observations was that our go-to-market really wasn't different between major markets and enterprise. So Leagh immediately put in a verticalized strategy for enterprise, where we already focused on a number of verticals, financial services, professional services, retail, health care, government. And for each of those verticals, we have a dedicated sales force. We have a slightly different feature set that we emphasize, certain different features in different verticals, a dedicated implementation team and support team, and that's obviously allowed us to be quite successful in the enterprise side. And as you pointed out, if you look at the actual numbers, you can see every quarter, the size of the average customer is going up. So if I look at kind of Q1, the average Dayforce revenue on a trailing 12-month basis went up by, I believe it was 13%. And if I look at the Dayforce incremental revenue per new customer, grew by 63% year-over-year.

Got it. And you talked about it a little bit, but building out this payroll offering that's addressing multiple countries is something that we haven't really seen other SaaS providers attempt to do previously. So maybe talk about where of -- why hasn't that been an area that has been -- had more focus by some of these other SaaS providers? And besides just the way you developed the platform, you've also made some acquisitions in that area. So maybe talk about how that strategy to get you into new markets?

Yes. As I mentioned, half of the TAM is outside of the U.S. and Canada. And so from the very onset, we designed the product to be global in nature. That's quite different than what the competitors did. The competitors effectively focused on the U.S., and it's very hard to retrofit a product to be global -- to be proper global. So that gives us a very strong advantage. In terms of build-out, we started to build out first with the U.K. about 2 years ago. We then added Australia. We then added the Ireland. We did the U.K.-Ireland region. We added New Zealand recently to complete the ANZ region. We're currently building out Mexico, Germany and Mauritius. Mauritius is about to go live. It gives us presence in EMEA. Germany will give us a strong focus in Central Europe. And obviously, Mexico gives us a very good footprint into Latin America. In addition to that, we did an acquisition of an organization called Excelity, which gives us coverage in another 11 APJ countries. The kind of the logics behind Excelity is very similar to what Dayforce did with Ceridian. There's a lot of opportunity on a global basis where you find the incumbents who have slightly outdated technology, haven't been able to extend the product across the full suite of HCM, but they have a good customer base and very good go-to-market capabilities as well as all the different licenses in the various jurisdictions. Those sorts of opportunities, we feel we can acquire about 2, 3x revenue, which is kind of the range of Excelity. And then over time, we can move their customers to Dayforce, gets a lift as they get a kind of a wider breadth of HCM coverage. And as well, we can use their go-to-market capability. So when we launch Dayforce in that jurisdiction, we aren't trying to build from 1 customer or 0 customers, but rather we can move very, very quickly into the actual market.

Got it. Okay. So I think the topic on everyone's mind is the impact from coronavirus pandemic. So maybe it makes sense to jump into that, so we have plenty of time to address it. So you talked about it on your earnings call and what you're seeing. But maybe just give us an update here on the trends you've seen, the short-term impact and maybe longer term, what you're expecting to come out of this pandemic?

Sure. So just a few things. On Dayforce, we get paid for both inactive and active employees. Inactive employees are the furloughed employees. So when employees are furloughed, we aren't impacted from a revenue side. So if I look at it from a recurring revenue perspective, on the Dayforce side, we had expected employee counts to be up about 22%. Because of COVID, we saw them only grow by 17%. So it was about a 5% impact. We have another product as well called Powerpay, which is a small business, Canadian payroll product. On that product, we do get paid by pay. At least 40% of the recurring revenue is dependent on the number of pays we do, the other 40% is based on fixed fees and then 20% would be additional services. And on the Powerpay, which is a small business, we saw a bigger impact. We saw a drop in headcount of about 13%. So 13% times 4, 40% kind of impact. From a sales perspective, sales continued, but there were headwinds towards the end of Q1. Some of those accounts that didn't close closed early in April, which I mentioned on the earnings call, and I called some of them out. Our sales has continued as expected throughout the quarter. In terms of implementation, we get paid on recurring revenue when the client goes live. We saw about a 5% impact to go-lives in Q1. The go-lives obviously did continue. And as we mentioned in April, we had expected -- we had seen proper activity on the implementation side. In terms of pipeline, we switched very quickly to a digital marketing approach, and that's gone very well. In fact, the pipeline has grown since, say, the middle of March because we find the digital marketing, we're able to reach more people, and we seem to get very good quality of leads from the digital marketing events. And so even after COVID, we expect it will have a bigger balance of digital marketing than we had before COVID. In terms of headcount, we mentioned this on the earnings call that we had seen employment levels begin to stabilize in the middle of March -- sorry, in the middle of April. And we also have seen a shift from inactive to active employees, and that's largely consistent with the jobs report that came out last week.

Yes. Got you. And I think, David, one thing that really surprised people, and you mentioned this, is how well the pipeline has done because I think prior to you guys and some of the other HCM providers reporting, there was sort of this perception that a lot of HCM deals were just going to get put on the back burner and people were not going to switch their payroll or HCM system in this type of environment. But obviously, that hasn't been the case. So maybe just discuss why that hasn't been the case? And then why you guys have been able to do quite nicely with your pipeline?

Well, a few things. I think any company that didn't have a cloud solution for HCM was put in a difficult position when people started working from home. Maybe their system was a, say, an in-house AS/400 system or an on-premise ERP solution. When COVID hit, you didn't have the people in the office to maintain the boxes, and you couldn't get the key function outside of the office. So that obviously lit the fire under a lot of people to start looking for cloud solutions for HCM including payroll. In terms of our type of solution, when we designed Dayforce, every module, we identified the KPIs that we could impact at the customer that we could measure and tie to a dollar savings. And we've always led with a very strong ROI value proposition for our clients. And during COVID, it does become even more important. And now because we attract those metrics at all of our clients, we have lots of case studies of how we have measured and saved organizations a tremendous amount of money, which obviously resonates nicely enough.

Got it. And one of your newer products that you're coming out with -- that you came out with, Dayforce Wallet, has a lot of relevance, especially in times when people are a bit perhaps economically challenged. So maybe we can just kind of go over what that product is and what you're seeing in terms of interest in this soft economic environment?

So the basic need is that 80% of all people live paycheck to paycheck. So they oscillate between being cash-rich and cash-poor. Cash-rich, when they get their paycheck, cash-poor, in the middle of the pay cycle type of thing. Most of these people turn to either a check cash-in facilities, payday loans or they use very expensive credit card. That averages at about 20% from a cost of borrowing perspective. At the same time, everyone is paid in arrears, which means a week -- you work for either a week or a 2-week period. And after that, you get paid your check for the last 2 weeks. That's no longer necessary in today's environment. Now there are alternative solutions that have entered the market. You get companies like DailyPay, ActivePay. And what they do is they work with an organization to get an estimate of the person's earnings for the next pay period. And then for a fee, they allow the employee to access a percentage of the estimated earnings, and that's the form of a payroll loan. From our perspective, we felt we could solve it more elegantly. The Dayforce continuous calculation engine means at the end of every shift of every day, we know exactly how much is owed to the person, net of all the taxes and reductions. The Dayforce Wallet allows a person to see how much they've earned, and they can choose to add that to the Dayforce card. When they add it to their Dayforce card, we generate a compliant earnings statement for the employee, and we do the necessary remittances the next day at the federal and at the state level. So it's a fully compliant payroll as opposed to a payroll loan. The employee then goes off and spends some money using the Dayforce card, which is a Mastercard. And when they do that, we get the interchange, which is about 125 basis points. We then share the interchange with our program manager, and we, at volume, get about 75% of that interchange. Now the way that we help the customer fund the payroll is that we act as a commercial lender to the employer, and our cost of borrowing is probably about 8 to 10 basis points. So each time the employee spends on the card, we make a spread of about 80 basis points or profit of about 80 basis points, and that funds the entire model. So it's a very elegant solution. Now where we are with that? We launched it around our earnings or around the middle of April. We now have over a dozen customers that are using the Dayforce Wallet. However, at those customers, we're constraining the rollout to about 5% of the available population so that we can make sure that the experience is optimal for the employees to make sure that the activation of the cards works well, the personalization of the card, that people get through the KYC pieces very, very easily. And once we're assured of that, we'll start to accelerate the rollout both across more clients and across greater populations at the client. As of the moment, it looks quite promising and it's interesting and exciting opportunity for us.

Yes. Good timing on your part with the development and release of that product. So with the impact that you've seen from the pandemic, has there been any difference in terms of the impact on your business, whether it be by size of customer or by geography? Obviously, there's certain verticals that are probably more impacted. But just in terms of customer size or geography, any difference in terms of impact there?

We continue to see good penetration on a global basis. I know countries like Germany didn't react as extreme, as I'll say, the U.S. or Canada did. So we seem to be -- we saw a good pipeline in good kind of customer closes in that geography. In terms of customer size, it's very -- it's consistent with what we have seen previously move, really, into the upper end of the major markets and obviously, more success in the enterprise side.

Got it. On the competitive environment, there's been some changes there over the past year or 2 with Ulti going private and then merging with Kronos, and then also again, ADP with their larger enterprise product, they sort of scrapped their old one and are trying to come out with a new product there. So from your perspective, any sort of change there, either benefit or impact you've seen from those changes with your competitors?

No, not yet. I mean still early days for Kronos and Ulti for the merger. And look, they both are very good companies, both have good cultures, have a lot of respect for Aron. But it's a challenging merger to do. You've got big organizations. You have to merge 2 very strong cultures together. You're going to have to rationalize the technology stack at some point in time, and you have to somehow reform the massive amount of debt that you have on their company. So he's a very bright guy, but he's got a big challenge over there. And on the ADP side, we haven't really seen much of an impact. Their new payroll product, I think, is actually more geared towards their Workforce Now customer base than to the large enterprise side. I think they've been a bit more conservative to make sure it works properly before they take it up market.

Got it. And as we think about the growth over the next several years, does this continue to be just primarily, you're targeting adding new customers versus selling additional products? Or how do you think about that opportunity to further monetize your customer base longer term versus adding new customers?

Yes. We've been consistent on our growth strategies. We have 5. The first is, obviously, we're acquiring new customers. And every year, we get between 600 to 700 new customers on Dayforce. The second is that we continue to build the products. We add new modules. We just released engagement surveys, the hubs have already come out, Dayforce Intelligence, a few other plus modules, and that allows us to go back to customers that are live and add on these additional modules to drive additional revenue from them. And to date, about 20% of our monthly revenue comes from add-ons. The third area of growth is obviously moving up market, and we spoke a bit about that before, focusing on enterprise, specializing on verticals. We're seeing great evidence of success there. Fourth is going global, we spoke about, which ties back to when we did initial analysis of the market that half the TAMs outside the U.S. and Canada. Going global, by the way, also reinforces our move upmarket. As I pointed out, having a global capability, it differentiates us in the upper end of the market. And finally, our last growth deck is what we call adjacent markets, which is how can we drive more revenue from the employees that are working at our customers, and the Dayforce Wallet is an example of that, where we can drive -- traditionally will not be viewed as HCM revenue from employees that are live on the system.

Right. Got it. And I think one question that I get quite frequently that I think people sometimes have a hard time understanding is if you look out at all these different SaaS payroll providers, it seems like everyone's doing well. And so the question inherently is always, well, how is everyone doing well? And when is the market opportunity going to run out? So from your perspective, as you look out at your growth potential and market opportunity, how do you guys think about that?

Well, our market share's about 3%, 4% in major markets and probably less than 1% in enterprise, probably close to 0% on a global basis. So there's still tons of room for us to grow inside the market. At the same time, as you pointed out, the overall size of the market is expanding, largely because what's considered HCM always grows. So things like doing on-boarding, we are replacing paper, moving to engagement surveys, again, which we'll be using kind of third-party consulting companies to do that; going into compensation management, where you're replacing spreadsheets; going to things like the hub, where you're placing other CMS or Internet types or solutions. So what's considered HCM already is expanding it all the time. There's no -- you're not focused on one payroll market per se. You really are focused on optimizing the user experience around the employee.

Got it. One of the markets that or verticals that you sort of added, I believe, last year was the government vertical, and there was this opportunity out there with the Canadian government. So maybe just talk about what you've been seeing in that market? And any sort of changes there recently or updates?

Yes. Mostly, a lot of we're seeing governments at the municipal level, who have been quite successful on that. And these are multimillion-dollar systems that they seem to be doing quite good. The Canadian government, obviously, is somewhat shut down given what's going on at COVID. So we'll have to wait, I think, until next year, to see what happens on the next steps.

Got it. Okay. I think the last question that I have for you is as you look out at your customer base and the different verticals you're exposed to, I think there's a little bit of a perception since you do have a lot of strengths with the workforce management product, with hourly employees, that there might be some overexposure there to some of the more impacted verticals. But maybe just give us an idea of how your exposure is sort of spread out amongst different industries in your customer base?

Yes. So in retail, we obviously are strong, but we aren't really exposed into big box retailers, which are the ones that I think have been impacted the most. We have good penetration in midsized groceries and groceries like Trader Joe's and such, which have really been surging during this particular type of environment. We have no exposure to what I would call higher education, which is one of the verticals that I think will take a long time to recover. We have almost no exposure into the airline industry. So again, not impacted with that. We have very little exposure really into hospitality other than in what I call quick service restaurants, which are doing quite well during this particular type of period, too, and those are that were impacted will be coming back rather quickly. Manufacturing seems to be doing well. And I think we all noted, we see the manufacturers are going back to work, and I think they're struggling now to keep pace with the demand for their products.

Great. Well, I think we're almost out of time here, and that are all the questions that I had for you, David. So thanks a lot for joining us here today, really appreciate it. And thanks, everyone else, for being on the call.

Matt, really appreciate it. And everyone, thank you so much for joining. If you do have additional questions, please reach out either to myself, [email protected]; or Jeremy at [email protected], and both of us can get back to you pretty quickly with more detail. Thank you very much.

Great. Thanks a lot.