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

Good morning, everyone. Thanks for joining us for Day 1 of the Wells Fargo TMT Summit. Looking forward to our next session, we have the CEO of Ceridian, David Ossip as well as recently appointed CFO, Noemie Heuland. I'll start off with some questions and have plenty to chew through here. But if anyone in the audience has questions as well, you can shoot me an e-mail. That's [email protected]. I'll do my best to layer those in also. David, Noemie, thank you both for joining us virtually.

Maybe a good place to start is you moved your earnings calls to Zoom, you just hosted your own virtual conference INSIGHTS at, I think if the stats right, 5x the attendance of last year in the physical world. So any highlights, customer feedback, takeaways from that event to share? Are you able to get similar levels of engagement with these virtual events as compared to what you're used to in the physical world?

So first, everyone, thanks for joining us today. It's great to be here, Michael. Always a pleasure. INSIGHTS this year, we moved it to a virtual summit. And as most of you know, we usually do it in Vegas where we get about 2,000 people or so attending. This year, we had well above 10,000 people who registered for the events. The format is slightly different, and there were some benefits to the actual platform. Notably, as we moved through the days, we had all of the content available for people. And we found that a lot of people would go back and they would watch the sessions they had missed. So if there were 4 breakout sessions at the same time, instead of being limited to just one, they're able to attend multiple of those breakout sessions in that same time zone. And another benefit we got is that all of this great content, whether it be demonstrations of the products or customers speaking about the value that we create, it's all recorded and it's all produced, and it's now all available for people to actually consume. In terms of engagement level, we did, we saw very high engagement level, possibly more engagement levels than we've seen with our [indiscernible] top-of-funnel type of activities. And definitely going forward, when COVID ends, I'm sure that we will have a virtual aspect to our INSIGHTS summits in the future.

Okay. Interesting. I mean, I think the topic du jour, for everyone, is 2020 versus 2021. So maybe we can level set for some investors who haven't followed the story as closely throughout the course of the year. I think 2020 presented some headwinds in terms of the business. Ceridian showed ability to power through those. I think you've demonstrated resilience throughout the course of the year, but maybe help level set where we are currently. Your expectations that you're laying forth suggest acceleration of Dayforce into Q4 and into Q1. So what lies in those assumptions ahead? And how are you thinking about the shape of next year?

Sure. So in Q3 Dayforce, the growth on Dayforce recurring revenue came in at 17.9%. It obviously is quite a strong number given COVID. As we go into Q4, Q1, you will see continued improvement with probably a step-up into H2 of 2020 back to our usual levels of growth. And just as a reminder, we were about that 30% year-over-year growth of Dayforce recurring. Where that confidence comes from is when we look at the sales numbers, and we call that ACV. In Q2, we came in slightly above Q2. In other words, we actually sold more in Q2 in the heart of the pandemic than we did in the prior year. In Q3, we sold -- sales numbers come in at our beginning of year projections. And so at the beginning of the year, prior to COVID, we had very robust expectations on what sales would be and sales growth would be year-over-year. And in Q3, we actually hit that. So we saw sales return to pre-COVID levels. It takes about 9 months from a sale to go to revenue. And that's why you see the step-up in the second half of next year. Now not only did we have a good quarter in terms of revenue and sales, but also when we look at profitability, even with the headwinds that we had from COVID, which obviously of float and employment levels being down, we saw the gross profit on recurring improved as well by 40 basis points year-over-year. And if we would have actually corrected for float, it actually would have been up by at 1.9% year-over-year. So with the kind of environment, I think, we've been able to run the business very well. We're obviously confident when we look towards the float for the future. The confidence comes from looking at the actual pipeline and the strong execution we have.

Got it. Is there anything that you're seeing that's creating -- and we're seeing this in some of the other cloud markets and software we cover, too. Is there anything that you're seeing that's helping create a more compelling use case? You've got, I think, more moving pieces than usual within a lot of HR departments. There was move to temporary furloughs. I think everyone became more focused on their benefits and some things that maybe weren't getting as close of attention. So is there anything that you've seen that also just helped solidify the need and the value proposition of Dayforce and cloud-based HCM?

Yes. Let me actually just -- when we looked at the market, and if I go all the way back to the very beginning, we saw an opportunity to create a lot of value for our end users, predominantly the managers and the executive organizations, but also for employees. And as we were building out the Dayforce platform, for each of the modules, we focus on the specific KPIs that impacted that company and make sure we could measure those KPIs and translate that into dollar savings, a dollar value amount. And taking that approach to market from 2012 until today, it's obviously been very successful, almost 5,000 customers live on the platform. And we've built up a tremendous portfolio of examples and case studies where we have created true value for our customers. Now in a COVID type of environment, you see the focus go back to value. And those are platforms really orientated to create this quantifiable value for our customers. That's obviously resonated very nicely over the last 9 months or so. Second area of growth during this period came from digitization. And I think we've all heard it, there's been an acceleration of digitization, whether it be having meetings like this on a digital basis, our INSIGHTS Conference. And so with that, any organization that still had on-premise types of solutions or any type of pay per movement inside their HR processes, moved very quickly to try to get into the cloud, systems like us. And so we've obviously participated in that. And you see evidence in that. If I look at some of the customers that we've won during this COVID period, they've come from really industries that have actually been impacted, so not only from surge industries, and that's really because companies are rushing to move to the actual cloud. And then the third area is, as you pointed out, you do -- you all see now the rise of the worker. And one of the ways that rise of the worker manifests itself is that you're seeing a lot of temp agencies stand up. And these temp agencies are creating these markets for gig workers, largely around things like professional workers, health care workers and the like. Now when these people work, they like to get paid almost immediately. And so the technology that we have with Dayforce Wallet, which really allows someone to work a day and to get paid at end of day, net of all taxes and deductions, obviously, has been a -- something that's really ignited sales on our side.

Yes. I mean, Wallet was one of the -- it's been one of the focus areas. I think those investors who follow the story more closely are also focused on it. We noticed a number of sessions at the INSIGHTS Conference. I think we also have seen you brought on a new GM of the product with financial services experience. You mentioned on the last earnings call, 80% attach rate with new customers. Can you just kind of speak more to the value proposition there? And then is that attach rate -- it sounds impressive given it's a newer module, but is that in line with your expectations or your ambitions that this is something that the vast majority of customers could eventually adopt?

Yes. So let me just talk first about the actual product, and then I'll talk about what we're seeing in terms of success in the market. When I look at the actual market all the way back in about 2010, 2011, and I looked at the payroll market, we all know that the payroll market is very large, about $20 billion in the U.S. and Canada, another $20 billion globally. So very, very attractive. I needed a way to inch the market where I can differentiate ourselves in a way that we could create real value to customers to obviously entice people to sign with us. And what we found was that the basic workflow for payroll was a little bit antiquated. All of the systems in the market, at that time, had separation of date between time and payroll. And that meant that the payroll people couldn't start their busy work until after the pay period had ended, it was a 2-week period. And during the other time, they were largely idle and then largely rushed, leading to not great quality to pay. We sold that by bringing pay and time together into one engine such that we always had a continuous calculation always on payroll, which meant that, at any time, you know exactly what people were being paid net of all taxes and deductions. And once we had that, we then look towards the employee experience. And we said, look, we got this construct of the pay period. And a pay period really means that the person is being paid in arrears, lending money to their employer for no interest. And the construct of a pay period really came from 1940s technology. It's the old IBM mainframe batch technology that required you to kind of hold the data and then process it. But in today's age, it takes like hours, you don't need that. So we believe that we could create tremendous value for the employee by allowing them to access their net earnings at any time that they wanted to. And when we did a study of the market, we found about 80% of people really kind of oscillated between being cash-rich on payday and cash poor towards the end of the actual pay period. And many of them would have to rely on these very expensive financial instruments, whether it be credit card debt or whether it be going to payday loans in order to fund themselves. And when we look at the cost of financing, as payday loans sometimes with annualized rates of about 400%. Now there were alternatives in market with various types of products. But typically, there were usage fees for employees. And you effectively were kind of doing an estimate about what the person would earn during the actual period, and you would have given an advance and you would charge them either the loan fee on actual usage, or there would be some other fee that would go into the background. And we saw a way of actually delivering this a lot more elegantly. So we could take the always-on payroll, allow the person to see how much they've made, add that to their Dayforce card. When they add it to the Dayforce card, we would run a true payroll for that person, which meant that we would create a legal payslip for that particular jurisdiction. So if you were in California, New York, it will be specific with all of the requirements of those jurisdictions. We would also do the necessary remittances at the federal and at the state level the very, very next day. And from a company's perspective, we felt that we could solve this without changing the way that they would fund payroll. And we could do that by acting as a commercial lender to the employer, allowing the employer to pay the person through a true payroll as opposed to a payday loan coming from us. And there obviously are many advantages of that. And the way that the system works for us is, obviously, we participate or we benefit from the interchange. The interchange in the U.S. is about 125 basis points, about 140 basis points in Canada. After our revenue share with the program manager and our cost of lending, we net out at about 80 basis points per spend. And the potential for us, obviously, is quite large because we move, as you know, about $300 million and about half of that reaches the employee in terms of net earnings. So 100% penetration, we're giving about $1.2 billion top line and bottom line benefits to the actual -- to the company. Obviously, it will take a very long time to get there, but there is a very strong potential. We launched the Wallet effectively at the beginning of May of this year. By the end of Q3, we had over 60 customers who were already using the Wallet. And over 200 others that had signed up. And as you pointed out, on new sales, we've seen an attachment rate above 80%, which means about 8 out of 10 new customers elect to actually use the Wallet. We're also finding that it's a benefit for Dayforce new sales. We're finding that it is a competitive advantage that customers or prospective customers do value highly and is one of the reasons why people are choosing Dayforce.

Excellent. It sounds like a pretty compelling opportunity. You've always done a nice job of laying out a series of growth drivers and helping investors walk through the progression, I think, since Ceridian came back as a public company. I think the one that has kind of piqued our interest most recently is just the move upmarket. I think we've noticed both the Dayforce revenue and incremental Dayforce revenue per customer moving up nicely even in this environment. We've seen the stats on some of the customer wins and the tens of thousands of seats. And so maybe you can just provide some additional context around what's driving that upmarket activity? Is it adding more capabilities into the platform? Is it just better brand recognition over time, the improved go-to-market? What are some of the things and the attributes that you see that are helping drive that upmarket success?

Sure. So just by the numbers, as you pointed out, the average revenue on a trailing 12-month basis went up by 13%, and the average of new Dayforce incremental customer went up by 72% in the quarter, which, by the way, has been consistent with the last few quarters as well. When Leagh Turner joined the organization, and I believe it was about 2, 2.5 years ago -- by the way, it's Leagh's birthday today. So happy birthday to Leagh.

Happy birthday, Leagh.

When Leagh joined, at that time, we really had 1 go-to-market approach for both what we called mid-market and large market at the time, which meant we sold the same way. And when Leagh joined, she kind of looked at it and we created a major market segment that went up to 6,000 employees. And then we've created an enterprise segment above 6,000 employees. And with -- inside that enterprise segment, we decided to focus on a number of specific verticals. And for those verticals, we created some product features that are specific to that vertical. We created sales teams that were solely focused. We brought in value architects who could articulate what were the KPIs specific to that particular industry that we could impact and create value through. We've created implementation of professional services and customer support teams around that particular vertical. And obviously, that's had a nice impact in terms of where the numbers are. The second aspect is really our [ fourth ] area of growth. So just again, 5 areas of growth. One, we're acquiring new customers, and we do that at a clip of about 600-or-so customers per year. Two, we go back to the customers, extend our platform with additional modules and we go back and we add on those modules, adding more revenue per customer. Third is what you spoke about is the move into the enterprise segment. And the fourth area of growth is that we take advantage of the global TAM. Again, about $20 billion of our TAM is the U.S. and Canada, $20 billion outside of those countries. And so we started the move globally -- to move globally a few years ago with a native payroll for the U.K. and then Australia, Ireland, New Zealand, Mauritius. We're building out Germany at the moment. We acquired Excelity last year, 11 different countries. And so -- but what you typically find is any organization with more than, say, 1,000 employees or so, most likely has a global footprint. And so our global capabilities, where, again, we are quite unique in that we have one database, one rule engine that covers all the compliance characteristics of payroll and workforce management and global HR and talent, allows us to get more wins in our sales perspective moving upmarket. But also the global capabilities allows us to win customers on a global basis.

Yes. Can you talk to us a bit more around Excelity? I think when we saw that, we thought APAC specific in terms of its reach. But you mentioned the global opportunity. And so I'm wondering how much of it is region-specific versus unlocking some of this global opportunity? And then when you look across some of the regions that you've rolled out, it sounds like this is a very repeatable playbook. So is it fair to assume that you can continue to add regions at a sort of a similar clip or at a -- with sort of a patient cadence over the foreseeable future as well?

Yes. Well the reality is, Ceridian was very much the same model to Dayforce, right? Dayforce had great new tech, a great vision about how to execute. Ceridian had market knowledge, market presence and customers. We brought the company together in 2012, and obviously, it's been quite successful. The move with Excelity is something very similar. So Excelity plays in probably about 13, 14 countries in the APJ region. Obviously, we already have capability in Australia and New Zealand. So we're adding about 11, maybe 12 countries. The performance of Excelity has been very strong since time of acquisition. So if I look at Q3, we had 11 global deals that utilize Excelity capabilities and ability to pay people in those countries. And one of the other benefits that we have from Excelity is that when you're playing on a global scale, having capabilities in APJ allows you to win additional customers, whether they be in North America, whether they be in the U.K., whether they be in Germany, because you can provide a solution for a good percentage of their employees who happen to be in those jurisdictions.

Okay. I'm going to -- Noemie was kind enough to join us, too. I'm going to give David the opportunity for water break and switch gears for a moment. You recently came on as CFO, congratulations on the new role. Just wondering if there are initial focus areas, observations you can share since you've come on board, what you've seen thus far?

Sure. Thanks for the question. So in terms of what I've seen thus far, it's been an impressive couple of months. I've came to know the leadership team and the entire Ceridian organization, which is very much a culture focused on innovation with customer focus in mind. So that was something that I was really much looking forward to coming from SAP. And so far, that culture and that innovative spirit and desire to serve customers is really something that impressed me even beyond what I was expecting. In terms of priorities, I mean, you've heard David talk about the growth potential, the market share that's up for grasp. I think that's definitely the priority #1, is support that growth in the different initiatives that David outlined. We'll continue to focus on developing the Wallet. We have a new CTO who joined from Workday recently, who has a very exciting technology road map that we certainly want to fund and make sure we give that a high priority to expand the platform capabilities. And I think he's got some great insights and great road map that he'd shared also at INSIGHTS. In terms of global expansion, what I find very exciting is we're already, today, capable of supporting our customers on a global scale. We provide [ 27 ] support to our customers across different countries. And I think, as we are growing, we want to be able to grow at scale, which means getting more efficient in the way we support customers. So there's a lot of things, initiatives underway in terms of how we support our customer, how we deploy our resources, how we automate certain things so that we can really provide a white glove treatment to certain customers on-site and have more efficient operations in the back end. And I think that's very exciting for me to come on board at this time with a lot of momentum, and I'm really looking forward to the next few quarters, actually.

That's great. I think you've probably already heard this a number of times, but one of the first questions you'll get from investors is just this balance of growth and margin. Obviously, there's a tremendous opportunity. The business has strong momentum behind it now. So it would seem like growth is the first priority. But how do you balance those two going forward? And then is there any reason Ceridian, longer-term, as we look towards a more mature state, couldn't have margins in line with the broader HCM software space as you continue to mature and turn those dials?

Sure. You've seen the -- actually, David, just referred to the Q3 cloud recurring growth margin expansion despite some of the COVID headwinds that we've experienced in Q2 and Q3. And I think that's a good testimony to our ability to scale and be more efficient as we support our customers. We have also an increased number of customers who've been live for longer than 2 years. And as we're growing into the enterprise segment with larger customers, we'll be able to continue to scale and be more efficient in our cloud delivery. So that's definitely a very significant lever of improvement in our profitability, and we'll continue to focus on that. There's no reason, as you said, for the cloud recurring gross margin to not hit the mid-70 to even higher, as we said for some time. So that's definitely an area where we're very much focused in continuing to improve that cloud recurring gross margin, which will drive everything else.

That's helpful. Let's see. Just a few minutes left here. I want to go back to Q3 for a moment. Just it -- I think the focus continues to be on just the shape of recovery. What kind of assumptions on the macro unemployment levels are embedded in your expectation? What needs to happen for Dayforce to kind of hit this escape velocity where growth starts to rebound over the next couple of quarters and beyond? And then thinking more holistically or optimistically around a rebound at some point in time, if you were to see some of this more pent-up demand start to come through, can you talk about -- are you geared with partners? Is the overall sort of team just geared to respond to just a faster cadence where that hit at some point in the next year?

Sure. So in terms of assumptions, we're assuming about a 1% improvement in employment levels going into Q4, which would be inside our guidance. I think we put it out in the shareholder letter. Obviously, if there is a tailwind coming from the recovery, which I'm actually quite optimistic that there will be, obviously, we benefit just naturally from the growth in employment numbers. And in terms of SI partners, yes, you're right as one of the ways that we're moving upmarket is by developing considerable partnerships with the larger size. We said a bit about that in Q2 and continued in Q3, and we'll talk a bit more about that in Q4 as well when we announce it. But that obviously extends our capabilities on a global basis and specifically in enterprise space to do much more. One thing that I should actually point out just on the enterprise side is we recently got included in Gartner's Magic Quadrant for cloud solutions above 1,000 employees, which, again, is just testament about our ability to deliver and create real value in the enterprise space.

Just a moment or 2 left, I want to see if there are any last parting thoughts you'd like to leave investors with as we head into '21. David, maybe a bit of a follow-on. You mentioned you're optimistic around the recovery. Obviously, none of us are great at prognosticating, but I mean, it sounds like, obviously, you're out there touching customers and have just a more tangible look into your business. So anything you can provide as investors are starting to think through 2021?

Yes. Michael, as I spoke, when we talk about Q3, we have access to a lot of data. So we look, we know what the employment numbers are, and we know where they're going. And that trend seems to be quite positive and continues to be quite positive. The second piece of data is we look at our pipeline. And as I mentioned, when we talk about attendance at INSIGHTS and top-of-funnel type of pipeline build, we're seeing quite a lot of growth over there, which means that the market is actually moving. And the third data point that we have is when we look at decision-making, we see customers making decisions to buy our software. And we're seeing customers continue to go live with the implementations of their software. And so those 3 things combined, give us a little confidence and optimism.

Got it. I think that's as good a place to stop as any. Insightful as always, David, Noemie. Thank you all for joining. I appreciate the time.

Thank you. Thank you, and everyone, have a great day.

Thank you.

Okay. Thanks. Take care, all.