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

We can see you now, Dan.

Fantastic. All right. Are we all set to begin, everyone?

We are. We are.

All right. Fantastic. Well thank you and good morning, everyone. My name is Dan Jester. I am one of the software analysts here at Citi. And thank you very much for joining us for our 2020 Virtual Global Technology Conference. So this morning, we have Ceridian with us today, and we're very pleased to have them. We have David Ossip, the CEO, and we also have Jeremy Johnson, Vice President of Investor Relations. So just a couple of quick things on logistics. If you have any questions, please e-mail them to me, daniel.jester@citi.com, and I'll do my best to incorporate them into the flow. And I'll announce your name and firm with the question. We've got about 45 -- 40 to 45 minutes today, so we're going to end at the bottom of the next hour. And I believe that's it. So David, why don't I turn it over to you? I think most of the folks on the line have a good background with Ceridian, but there might be a few investors new. So could you just start us off with maybe 1- to 2-minute overview of the background of the company?

Sure. I haven't been asked that for a while but gladly. The story of Ceridian starts in about 2010 when my non-comp of my prior company had ended. And I looked at reentering the HCM space. My prior life really existed in workforce management. And when I decided to start Dayforce, I looked at the adjacent space to workforce management, which was payroll. And what I found was quite attractive. At first, the size of the market was very large, meaning that the HCM with payroll market in the U.S. and Canada is about $20 billion. And on a global basis, it's about another $20 billion. The second observation was that the average life of customer across payroll vendor was in excess of 10 years. So fantastic unit economics. The third was that the requirements were driven by the different jurisdictions, which meant that the requirements across customer, regardless of size or industry, were largely consistent, which meant that you could build a truly scalable cloud product. And the fourth observation was that the -- our users of payroll system are asking their vendors for additional product, recruiting, performance, compensation and such. And that meant there was a platform play. A platform play meant you could add revenue without cost to get more scale for your cloud system. So I started to go further into the actual requirements. And what I was trying to determine was, was there a way that I could enter the market in a differentiated manner such that I could get a competitive advantage? And so we did a lot of field research, speaking to payroll people. And what we found was that the fundamental workflow used by the incumbent systems at the time were not efficient. There was separation on the data between time and attendance where people punched in and punched out and payroll where people would actually get paid. And because of the separation of systems, I meant that the data resided in the time system for the duration of the pay period, which typically was a 2-week pay period. And only after the pay period had ended plus 1 day if the data transferred to payroll, and then payroll people would have just a very short window, particularly a day, to do all of the audits, data corrections, adjustments before they would pay people. And that obviously creates a lot of anxiety, a lot of time pressure, a lot of errors. And we knew we could solve that by building pay and time together into what we called a continuous calculation engine such that any time anyone punched in, punched out, we would calculate the net earnings immediately, make that data available to the payroll people and other business users. And by doing that, we felt we could radically improve the work they used for paying people. Now as I was doing the actual research, and if you remember at the time I was still at Dayforce, I came across a requirement, which is effectively the tax requirement, particularly in the United States. In the United States, there are about 14,000 different jurisdictions and every jurisdiction is quite different. And I don't see a way of building robust tax in under a 10-year period, largely because the requirements aren't really specified anywhere. Every requirement is quite different than the other jurisdiction. So I still look from a partnering perspective as if he would have robust tax and I came across 2 organizations, one being Ceridian. And when I did a lot of research on Ceridian, I saw an opportunity. And so I approached at the time the owners of Ceridian, which was Thomas Lee and Fidelity National Financial, with the idea of Ceridian Buying Dayforce, I would take over the company and effectively with our 3 priorities. The first is I would -- a focus of business on human capital management by divesting anything that wasn't tied to the growth of our business. Second is I would read you the culture of the company at the time the Glassdoor score was under 2, but today, we're well about 4. And the third is we'll build this Dayforce platform with a differentiated continuous calculation engine, a single database and route from there. That happened in 2013. And since that time, honestly, the story has been very strong. Compounded annual growth rate on the Dayforce business has been in excess of 50% compounded. Even our growth rate this year as recent as Q2 where Dayforce recurring revenue exploded grew by 24.2%. So very, very rapid growth. We have over 4,500 customers live on the actual product, are growing still very, very aggressively. So Dan, hopefully not too much information, but hopefully a good background.

No. That's perfect. So maybe we can start the conversation about sort of how you're seeing your current clients deal with the situation. You reported about a month ago, but we've had a couple of employment reports. So maybe just to help us level set the conversation, what are you seeing today at your current clients? Are they hiring back? And how does that impact how you see the third quarter and the fourth quarter progressing?

So as we reported on the earnings call, the peak of COVID was felt in terms of employment numbers very late April. And since April, the employment numbers have improved marginally. So they got down and they've gone up probably about 1%. There's still a 4% headwind in terms of employment numbers relative to where we would have expected them to have been at the beginning of the actual year. In terms of the mix, we get paid for both inactive and active employees. So we get paid for furloughed employees. However, often get asked as to what's going on with the furloughed employees. We've seen furloughed employees go down quite significantly since the end of April. So if I were to look at the absolute trend from March until April, the number of -- the percentage of furloughed employees went up by about 4x. And that number has gone down such that it's probably about 2x where it will be at this time of year. So the employment trends appear to be quite positive. In terms of Q3 and Q4, first, we saw sales recover in Q2. So Q2 sales were ahead of where they were in 2019. And as we reported or discussed on the earnings call about a month ago, we expect Q3 to come in, in terms of new sales, at levels where we would have expected them to have been before COVID. So we seem to be back to the same level, a dollar level of sales that we would have expected in Q3. And we're obviously quite confident on the entire second half of the actual year. In terms of how customers are reacting, we're seeing customers continue to -- continue on with implementations. We took live 123 accounts in the second quarter. In terms of customer dynamics, we saw the average size of the Dayforce customer over the last 12 months go up by about 13%. And we saw the average size of incremental Dayforce customer go up by 68% in the quarter. So we're obviously seeing a trend towards larger types of accounts. We have success across the industry, quite honestly. We had success in industry, so I wouldn't have really had expected at the beginning of COVID. So we discussed a large rental car company that purchased the system. We discussed a movie theater company where we displaced an incumbent. And obviously, they purchase from us. And obviously, we're seeing success across all other industries, as you would expect. Sorry, Dan, I seem to be muted.

So again, focusing on sort of your current customers, can you talk about sort of what they're doing in terms of taking new modules, upselling? And when I look at that 13% revenue growth for the average Dayforce customer, is that all being driven by customer size? Or is it because they're taking potentially more product as well?

So the increase is obviously coming from both, the move-up market, but also typically in every quarter about 20% of our sales are add-ons to the base. So let me just actually rewind a bit. We've got 5 growth vectors for the company. The first is that we acquired new customers. And currently, we have about a 3% to 4% market share in North America. So we have tons and tons of room to grow just in North America. The second growth vector is that we continually expand the Dayforce platform, adding new modules like benefits intelligence, the Dayforce Hub, employee engagement surveys. And we go back to customers that are already live and we sell them the add-on margins. And that obviously gives us a 20% per -- each month or each quarter. The third is that we move up market. And about 2 years ago, Leagh Turner joined us as President, and Leagh made changes to our go-to-market strategy for the enterprise segment where we started to focus on specific verticals, brought in industry experts for each of those verticals and obviously have done some product buildout for the verticals. And now we're beginning to build relationship with the large system integrators, which allow us to grow upmarket even more effectively. The fourth area of growth is that we expand globally, and that somewhat is tied to the move-up market where there's a need for global customers. Currently, we have major payroll in the U.S., Canada, U.K., Ireland, Australia, New Zealand, Mauritius. We're currently building out in Germany and Mexico. We did an acquisition of Excelity in, I believe, Q2 that added another 11 countries where we now have payroll on the Excelity platform. And we also have a product called Dayforce Connected Pay, which allows us to do the aggregation of payroll and HR data, and we have that, I believe, in about 140, 150 different countries. So there's tons and tons room for us to grow globally where we currently have less than 1% market share. And finally, a last area for us is moving into adjacent markets. What that means is places where we can drive additional recurring revenue for the employees who are live on our system. An example of that is the Dayforce Wallet. We took live the first customers on the Dayforce Wallet in April. The Dayforce Wallet is effectively uses or leverages the continuous calculation engine that I spoke about previously. So that at the end of each day, the employees are able to see exactly what their net earnings are during the active pay period, and they can choose to add that money to the Dayforce Card, go off and spend the money, do bank transfers, ATM withdrawals and such. They get access to their money without any direct fees whatsoever. And that obviously drives additional revenue through change.

Got it. So that's very helpful on the different growth vectors. Again, maybe just focusing just on your current clients for the moment, are you seeing from them any, I guess, concern about changes in sort of retention or churn? And are you being asked by any of your customers in terms of like billing relief or extension of payment terms or anything like that? Just trying to gauge kind of what the stress level is in the current client base today.

So first, we haven't seen any changes to retention rates. They still remain very, very strong. So well above 95% as we reported at the end of last year. In terms of concessions, it's been very minimal. We have a group inside Ceridian that if someone does ask for a concession, we're able to explain the value that we create or we deliver, even for furloughed employees where there's obviously a lot of complexity and a lot of support calls that come in, but we haven't really seen any pressure from our existing customer base for concessions. And in terms of -- if I look at employment levels, as I discussed, we've seen employment levels increase since the end of April, and we've seen the percentage of inactive or furloughed employees go down and the count of active employees go up.

Got you. So then maybe changing to a different growth vector about new business. You commented previously that your expectation is that you're going to be back to new business trends at a sort of a pre-COVID level relatively soon. I mean, what gives you confidence that you're going to hit that forecast? Is it kind of how the summer progressed? Is it seeing some specific metrics internally that gives you confidence? Can you just walk through the pipeline and how you see that building right now?

Sure. So firstly, we have a very disciplined forecast process with inside Ceridian where every week, we have a Friday call, and I believe that the sales team actually has daily calls as we approach the end of the actual month. And each segment leader gives us their forecast, high and low, for the month and for the quarter. For the confidence in Q3, it's largely based on a bottom-up build of the sales forecast on an account-by-account basis, looking at accounts that we're very far in the sales process, going through final negotiation or contracts with those particular customers.

Got it. And then as you think about building that pipeline, are you changing kind of the composition of it and moving away from industries that may be under a little bit more stress and repositioning towards accounts that have a greater product propensity to close? Or are you doing any sort of managing of the pipeline? Or are you still -- I mean, obviously, in the last quarter, you had a movie theater in a, I mean, that's not exactly what you would expect in this type of environment. So can you talk about how you're managing specifically the pipeline?

So we chose to lean into COVID, which meant that we continued investing in sales and marketing and in product and in our organization. So leadership team during this particular period. And I believe we've been quite successful at that. The sales team has become much more disciplined. And I don't know if I would say focusing on specific verticals, but I would say it's more on an account basis, focusing on accounts that are likely to build. We also changed the way that we went to marketing. So we shifted very early on to digital marketing events. We saw the attendance or the reach of these events increase what we typically would be able to touch by about 2x, and that's led to quite healthy build at the top of the actual funnel. And we've been able to leverage our digital kind of marketing maintenance sales means as a way of progressing the actual pipeline.

And on the last call, you mentioned that you're still -- or you have seen some customers kind of slow play the implementation process or potentially kind of extend it depending on what they're seeing with their own business. What are you seeing in terms of implementation delays? Is there anything you can do to accelerate that? Or is that all based on the customer need? And how does that impact kind of how you see the next quarter or 2 progressing?

So we saw some headwinds in terms of global utilization in Q2. A lot of that was really at the very beginning where we saw customers transitioning to a work-from-home type of environment and some of the customers had some infrastructure buildout that they needed in terms of VPN or tools to allow people to work effectively, remotely. I would say that we largely are through that, that most organizations out there have now adopted to work from home. So we're seeing the build hours and build utilization numbers going up. In terms of Q3 and Q4, our revenue -- you're seeing really the flow-through of some of the headwinds that we saw in terms of the end of Q1 and into Q2 in terms of sales agency. And as you know, with our business, it takes about 6 to 9 months for sales to flow through to revenue. And so those are some of the headwinds that we have.

Okay. And in terms of some of the new client conversations that you're discussing, any change in terms of initial deal size or kind of how many modules they're looking? Any sort of change in what you're seeing in the marketplace today from that perspective?

No. There's nothing that I can point out specifically.

Okay. So as I look at the product, you mentioned earlier a couple of the new products, benefits intelligence, a feedback and survey tool that you launched as well. When you look -- when you think about at a high level, I mean, what does the post-COVID business need that could maybe change how you develop the product? Is it going to be more engagement focused? Do you need to have a better mobile application? Like, as I think about the next year, how are you going to pivot on the R&D side to think about what customers are going to need in the back end of this recovery?