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

Okay, good morning, everyone. I am Mark Murphy, enterprise software analyst for JPMorgan. And it's a real pleasure to be here this morning with David Ossip, who is the CEO of Ceridian; as well as Noemie Heuland, who is the CFO of Ceridian. Doing my best there to get the last name pronounced correctly. So welcome to all of you, and we really appreciate you taking the time. I want to mention to the audience that you should be able to submit a question through a chat window below your video screen, and we'll be able to get to that a little towards the end of the session. Shorter is better. It's quite difficult sometimes to digest what's going on in some of these really long questions that we get. But again, welcome, David, and welcome, Noemie. Maybe you could start with just a very brief introduction of yourselves and the company for the benefit of anyone who is not familiar.

Great. Thanks, Mark. Pleasure to be here today. Hello, everyone. I'm Dave Ossip, CEO, Chair of Ceridian. Mark, would you like me to go into the background of the company, or I'm not following?

Just if you -- I wasn't sure if you had any prepared remarks or a 10-second overview of the company for the benefit of anyone who's not familiar, or we can dive right in. And David, we did lose your video feed. I'm not sure if it's -- oh, there we go, there you are.

So just on the quarter, I've seen most people know the story there. We obviously had a very good quarter. Dayforce recurring ex float came in at 21% growth. We gave guidance for Q2 in the range of 28% to 29%. And for the remainder of the year in the second half, we expect to see Dayforce recurring ex float to be above 29%. We expect to reach a significant milestone this year, and that total revenue for the company will exceed $1 billion. We obviously did the acquisition of Ascender inside the quarter. For those of you that are doing the math, Ascender contributed $1.8 million towards Dayforce recurring inside the quarter. And you can expect it to contribute $1.5 million for Dayforce recurring in the second quarter and in the second -- in Q3 and Q4. And also, obviously, $5 million of Bureau revenue and about $500,000 of service revenue per quarter.

Excellent. Perfect. That's exactly what we were looking for.

So David, I want to come back to this underlying strength that you've seen in the business. I want to come back to that in just a couple of moments. Perhaps just to step back a moment and touch on what it is that's happening in the world that is driving the acceleration, the demand, the success that you're having. Can you speak a bit to some of the demographic trends? We have millennials that are -- we have the aging of the workforce as a trend. You've got the gig economy. You've spoken to that in terms of the Ceridian -- the Dayforce Wallet, excuse me. There's definitely a post-COVID dynamic, right, where we could have more remote workers. We could have more hybrid work scenarios. Can you help us just connect the dots and weave that together and help explain how Dayforce's role is evolving in this world?

Sure. So in the early days of the pandemic, we saw a move, obviously, to accelerate digitization, which meant that any type of paper processes or on-prem solutions as they're related to human capital management companies in that -- who had those types of processes or on-prem systems moved very quickly to get into the cloud. And obviously, organizations like us benefit quite a bit from that. As we go forward, we can still see that the digitization is still very, very strong. In other words, very strong demand for our products across the actual board. In terms of our customers, what I'm finding is that most of them are rethinking how do they maintain culture when people have been at home for over a year and when the return to work most likely is going to be a flexible workplace policy. So how do you use tools like us to bring people together? Along those lines, I think, as you know, we released a product called the Dayforce Hub, which was specifically for that. It's a way of publishing information, bringing people together, putting our own branding on the actual skin of the product, making information very time-context to individuals to bring people together. We've obviously seen great success of the Dayforce Wallet. We released it about a year ago. Currently, about 150 customers are live with the Wallet. And with the Wallet, we're seeing really a very significant benefit for our customers and that the voluntary attrition of the Wallet holders as measured against the peers who haven't registered for the Wallet goes down by 42%. Now this is very important because when I do speak this year, not only are they worried about how do they maintain culture, but people are quite concerned about how do they ramp up, how do they recruit and how do they retain their people. So anything that you can do to lower the voluntary turnover of your staff is very helpful. And as well from the Dayforce Wallet, we've seen that companies are more likely to close an open job requisition by advertising the Wallet. And also when you submit a offer to someone, there's a higher probability that the person will accept when they use the actual Dayforce Wallet. And lastly, if I follow your question, if you're asking where I think the workforce is going, I think that we're at kind of an interesting kind of cross, if you like, where companies are ramping up again but the supply for people has gotten very tight. And at the same token, I think there is price inflation inside the market. And the price inflation might be exceeding wage inflation, which means that I think a lot of people are going to have to augment their primary job function with, let's call it, gig work or some temporary work. And obviously, having a product like the Dayforce Wallet and where we expect to take the Wallet into effectively the ability to take the Wallet to any workplace, clock in, clock out and kind of get paid at the end of your shift, we believe will help people in that situation as well.

So David, how would you explain to someone -- and we probably have some people who are generalist investors as well paying attention to this session. How would you explain to them what is different about the underlying architecture of Dayforce, which you conceived of many years ago, that sets it apart from some of these legacy payroll software companies that have been around a long time? For instance, I believe I recall you saying at the last Ceridian user event -- excuse me, I should call it the Dayforce user event, that this whole notion of the pay period is really an artifact of batch processes from, I don't know, the 1940s or 1950s. Can you just -- can you help to simplify and explain what's different about the architecture?

Yes. So Mark, as you know, I rely very heavily on field research before I start companies. And when I was looking at the HCM space, in particular, payroll and time and attendance, and I reached out to a lot of different people, the fundamental problem that I saw was that payroll people couldn't get access to their data until after the end of the pay period. And the reason for that is what is typically thought of as payroll really consists of 2 separate products: time and attendance where people clock in, clock out, and you calculate what's called the gross hours; and then a payroll system where you apply your deductions and taxes in order to workout net earnings. And because of the separation of those systems, it meant that the data was in the time system until after the end of the pay period. Think of a pay period as effectively a 2-week period. And that meant that the payroll people couldn't start their busy work, which was verifying the quality of pay until after the pay period, and they only had about a day or 2 to do all the busy work, and that led to challenges in terms of quality of pay. Now business users couldn't access the data either. And in fact, when I used to go see customers, I used to see on the walls of the lunch room the data from about a month ago. And that made no sense to me. So when we conceived Dayforce, we decided to build pay and time, core HR and benefits, all as one, which meant that any time a data element would change, a time record, benefit record or HR record, we would immediately recalculate net earnings and make it available to the business users of the company. And that had just a wonderful effect. The time to process payroll went down by about 80%, 8-0 percent, a tremendous return on investment to all of our customers. The success of the product has been tremendous from 2013 until now. We've taken live over 5,000 customers on the Dayforce product. And as you know, very, very healthy growth over that period of time. Now when we look at how we were differentiating in the market, and as you know, we already compete really against the guys at ADP, UKG, upmarket possibly against the guys at Workday, we're differentiated and that we have this continuous calculation engine and a single database that spreads across all of the components of human capital management. And when we look at it from an employee perspective, we said, well, employees are paid on this biweekly or bimonthly pay cycle. And during that period of time, they have cash flow needs that aren't being met. And in fact, what people are typically doing is we're going to payday loans, about 20% to 30% of the population goes to payday loans or they are relying on very expensive credit card debt. And they're not going to have the money at the end of the pay period because they have to pay bills during the pay period. And so what we started to do is we launched a product called the Dayforce Wallet, which allows people to see how much they've made, net of all deductions of taxes at any time, and they can elect to add the money to the Dayforce Wallet. And when they do that, we do a legally compliant payroll, which means we generate an earnings statement, and all of that is compliant at a federal and at a state level, recently launched in Canada, so at the provincial level as well now. We do the remittances the very next day. And the employee gets access to the funds on their Dayforce Wallet, which has an accompanying credit card or debit card, which allows them to go off and do online transactions, debit transactions, ATM withdrawals, fund transfers and the like. And that's obviously gone very, very nicely because you get much better financial flexibility as an employee. We don't charge the employee anything for the use of their Wallet, and we don't charge the employer any fee for providing the Wallet. And as well, we don't have to have the employer change the way that they fund payroll. In fact, Ceridian acts as a commercial lender to the organization for the few days outstanding. The way that the model works is that we benefit from the interchange, which in the U.S. is about 125 basis points, in Canada is about 140 basis points. And after sharing some of that with the program manager and acting as a commercial lender, we net about 80 basis points on spend.

Okay. Now, David, I'd like to go back and rewind a couple of minutes back. You had made a comment about -- I hope I don't butcher this, but that I think you said price inflation exceeds wage inflation. One type of inflation was exceeding another type of inflation. And we can't help but notice, there is this bizarre imbalance in the world today. And when you look at job openings, they're actually above the pre-pandemic level. When you look at employment in the U.S. anyway, it is way below the pre-pandemic level. Can you help us connect the dots on what do you think of that imbalance? And then what were you referring to there in terms of the 2 types of inflation?

Yes. So Mark, I think there is a timing difference over here. So we all know that if I post a job opening, I don't close it today. I would say that it probably takes between 4 to 8 weeks for most organizations to go through the process of having a job requisition, posting from the various types of job sites and et cetera, getting the candidates in doing the selection of the actual candidates, given the offer letter, and then you typically have to wait several weeks, if not a month or so before the person joins the organization. So when you see a job posted at a kind of a very high level, I would suspect that you'll see job growth that would follow that, but it's not going to be tomorrow. You have to think out a few months at the very least. Now when you look at wages and you look at price inflation, one follows the other. So obviously, there would have to be a catch-up in terms of wage prices in the general market. And if we look at the general inflation rate, whether it be on a quarter-over-quarter basis, we can see it's gone up quite a bit in this last little while. I would expect that wage inflation would follow. And that's going to have to happen just to have the supply demand curves meet in terms of fulfilling the market for jobs.

Okay. You're seeing the leading indicators of that in your data. I presume that this -- the wage inflation will follow the price inflation.

Now if I look at just some of the numbers we published, if I look at the actual float, we saw float balances still up by 6% year-over-year, even though we had an employment headwind of about 5%. And so that, I think, is a strong indication that people are being paid more than they were being paid last year.

Okay. What -- can we go back to your notion of enabling an elastic workforce? This was one of the key parts of the vision that you had outlined at the last user group meeting. And I think your comment was that anyone can work anywhere with a fluid on-demand workplace. Can you walk us through how do you envision that working a few years down the road? And then what else do you think you need to build, if anything, right, to be enabling this elastic workforce?

So the concept was a 3-part strategy, which I think the first step was we built out this continuous calculation engine, such that any time anyone worked we could calculate the net earnings immediately. The second part of the strategy was we had to work out a mechanism to pay people immediately, and we built the Dayforce Wallet for that. So again, I clock in, I clock out, we calculate how much you're owed with all the various types of pay policies, all the different types of state or federal city minimum wages, we do all the taxes, and we can pay you immediately as you actually work. The third place was basically -- the third part of the strategy is really to build out a Dayforce identity. Now once you download the Dayforce Wallet, we know who you are through the KYC. We know that you have the right to work based on the workplace where you currently are working or workplaces where you are currently working. And so the final piece is basically to become an employer of record for the actual person. And if we do that, an individual will be able to take the Dayforce Wallet, go to any workplace. And without being on-boarded or off-boarded at the workplace because they already would be part of the Dayforce, they could use the app to clock on, clock off at end. And as soon as their hours are approved, we could pay them immediately and then obviously do the reverse invoice into the workplace to do the settlement or the actual wages. And so the third part is that we currently are beginning to plan out at the moment, and it could go in 2 ways. We can either become employer of record or we can become a settlement engine for the various types of marketplaces that are out there. And by settlement engine, I mean we do the payment of the person according to all of the jurisdictional requirements, minimum wages, overtime, shift premiums and the like. We do the generation of the W-2 or the 1099, the T4s, et cetera, in Canada. In other words, we do all of the annual filings that are required and produce all of the different types of tax forms. And we do all the various types of remittances as required. And we believe there's a great market for that.

Okay. Very helpful. Maybe -- so now, David, I wanted to come back to your opening comments, which were very helpful to just set the table in terms of how the business is performing. Could we talk about the cadence of new logo bookings, which are important to your engine? The -- and the reason I ask, in Q4, you saw some elongated sales cycles, and that was the COVID wave 2 impacts. And then the pace -- the cadence of this felt a lot better in Q1. Do you feel that, that -- is that activity all the way back to normal now? Or is it trending back towards normal by the end of this year?

So Mark, it's a difficult question to answer. As you know, Q1 was a very strong sales quarter. We saw a lot of activity in terms of deals closing. We also saw record attendance at the summits that we did digitally, 700 attendees attending. Our pipeline has grown quite a lot year-over-year. So the pipeline is very healthy. Sales momentum continued into Q2. So there's definitely a lot of activity inside our market. I think a lot of the other competitors gave similar types of comments as well. I suspect that we'll have a strong year of sales. Now there's a bit of pent-up demand because, as you know, last year, some decisions were elongated, and now those are the people are making the decisions. And then there is the move, as I mentioned, to more and more companies accelerating digitization. We've seen a lot of growth in up markets. And as I think you know, we invested very heavily in the SI channels. And we're now seeing SIs bring deals to us. In fact, I think I spoke about one early Q2 deal on the call that was brought to us by one of the large SIs in Europe, and we closed the sale within 8 weeks, now multimillion-dollar sale that the SI kicked off the project a few days later. We've also had a lot of success on the global front. And as you know, these are both going upmarket, building up the SI channels and expanding globally were all strategic goals that we set probably about 2, 3 years ago. And so we're obviously getting traction along those. The acquisition of Ascender and Excelity obviously has strengthened our global footprint across APJ. And we should have the Dayforce payroll factory for Asia up and ready in the second half of this year, which gives us native capability across most of the APJ region, which I think is actually quite important. And that's obviously helped us quite tremendously as well. And lastly, the Dayforce Wallet is a strong differentiation of the product in North America. And we're seeing that we're getting about an 80%, 8-0 percent, attachment rate to Dayforce Wallet to new deals, and that's obviously having an impact on our win rate. So when you combine all of those together, there's obviously a bit of a tailwind when it comes to sales.

Okay. So the -- it's interesting because you started out by saying it's hard to say, but I think your conclusion is, if you look at the logical flow of all these factors, what's happening with pipelines, the demand they continued into Q2 what's happening globally, the way Wallet is resonating, the traction with SIs, that logical flow is that there's a net tailwind...

Yes. The difficult part is trying to distinguish. We have 5 growth levers that we've spoken about since the time of the IPO, and we leaned into the pandemic. We didn't find over a slowdown. So when we look at 2024, you don't know this economy coming back, which obviously it is, or it is the fact that we're having a lot of traction on the 5 growth initiative. I suspect it's a combination of both.

I understand. Okay. How do you feel about your own ability to hire? Because we have -- clearly, you would have a competency in that. And the company has a strong culture, strong employee satisfaction, strong customer satisfaction, you're a destination employer. But we hear so commonly that this is a tight and difficult hiring climate. So how do you feel about the ability to find the right talent this year?

So another aspect -- another kind of the 2 aspects to that. One, I think we have invested very heavily in the executive team at Ceridian over the last number of years. We brought in Leagh Turner. Leagh was an absolute talent magnet. And from Leagh, we brought in Steve Holdridge, who heads up our services organization. And Noemie, who also joined us from SAP. Recently, we brought on Rocky. He was the General Manager for SAP's largest region. He joined us as CRO. We brought in Joe Korngiebel as Chief Product and Technology Officer. He joined us also from one of the ERPs, where he was one of the -- where he was CTO over there. We strengthened our kind of HR organization. We brought in Eric Glass to head up our corporate communications out of the U.K. We put on Seth Ross to head up the Dayforce Wallet Group. And all of these people were just tremendous hires. And each of them have actually been able to bring in people that they have worked with or have known beforehand. So if I look, for example, at Joe's team, Joe has assembled just an unbelievable product team by bringing in people around the user experience, people around data. We recently did the acquisition of Ideal, which gave us access to a large group of data scientists very familiar, if not expert around talent acquisition and general HCM. So we built up a great team over there. So from a talent perspective, we have been doing very, very nicely. The second part is that we are a global organization. And so we have centers, whether they be in the U.S., Canada, the U.K., across Australia, across India, Philippines, Malaysia, Mauritius, also in Germany. And so we aren't constrained from one particular city, one particular local labor market. When we look at expanding the company, we're able to look more from a global perspective, and that gives us the ability to really attract people from a much larger pool than when we were just limited to one geography.

I see. Okay. So David, I think we were focusing for a moment there on new logo bookings patterns. And I think we think that's the most important growth lever for you. What about employment levels themselves at your end customers? Can you just touch on that? That's an element to this. It's not all the way back to where it was. How do you think about employment levels? And then what do you think is happening in some of the affected industries, hospitality, retail, et cetera?

So if we look at Q1, we had a $7.5 million headwind from employment levels. Employment levels still being lower than pre-pandemic. That broke down between $6 million on Dayforce and about $1.5 million on Powerpay. If I look at our Q1 numbers, it came in largely where we had expected. So we had expected that headwind level on Dayforce. We'd expected a bit more on Powerpay, which is our small business Canadian product. We did a little bit better over there. For Q2, we've assumed the same headwinds. So $6 million and $1.5 million, $6 million for Dayforce, $1.5 million for Powerpay. And when we look at Q3 and Q4, we're expecting about a $1 million improvement in terms of employment headwinds. Now if I look at what's going on in the market, that obviously could change. And if it does, we'll report it out alongside our Q2 earnings.

Okay. The -- always impressive, by the way, the fact that you have all those very detailed numbers and the slice and dice of all those numbers at your fingertips, we really appreciate that. I wanted to spend just a moment more on Wallet because I think this one stat truly jumped out at us. I was taken aback by this, the 80% attach rate for your new logos that you're signing up. That's surprising to me that they would launch -- kind of latch on to something that is a new innovation maybe quite that quickly. Is that surprising you? And I want to ask you, just in your discussions with investors, do you think people have their heads fully wrapped around the implications of this Wallet trend?

Look, I don't know if it's a trend. It goes back to what you said beforehand. The construct of a pay cycle today came from the limitations of batch-based technology from the early mainframe days from the 1940s, 1950s. And so most people work for 2 weeks and then they wait another 3 to 4 days before they get their paycheck. And so they're typically are paid on those termed arrears. And during that period of time, if they have bills to pay, they have to typically either going to savings, and as you know, most people don't have savings, or they have to use credit or payday loans. And that doesn't really make much sense. What the Dayforce Wallet does is allows people to get paid immediately. And this quarter, we're actually going to be starting a PoC on the streaming of pay. So the streaming of pay is, instead of doing an on-demand request to get paid, so currently the Dayforce wallet, I look at my app, I see how much I've made, I say, I'd like to add $100 to my Dayforce Wallet. And once I view that, I get my earnings slip and I can go spend the money. The streaming of pay is I just do a check box. I'll say, you know what, just stream my pay, end of every day, transfer into my Dayforce Wallet, what I've made, net of taxes and deductions. If I'm a salaried person, it's just a prorated amount on a daily basis. If I'm an hourly person or a part-time person, it's based on the hours that I've worked, and the money flows in all the time. Now on the Dayforce Wallet, in H2, we'll start to offer interest on the balances of the actual Wallet. We should have rewards program in process as well. So in other words, you can get cash back programs or points that you can use to do future discounts as you go forward. We're bringing to -- beginning to roll our financial wellness offerings to people as well. And so you get a full-fledged, if you like, financial product that automatically updates at the end of each day. And so where do I think the payroll industry is going to go? I think it's going to move very quickly to the streaming of payroll because if I look at any other aspect of our life, I no longer go to Blockbuster's to get a movie, right? I stream it from Netflix. And I've become impatient. If it's on Netflix, I'm not prepared to watch a series episode by episode. I'll get online with my wife and we'll look for, I don't know, 8 seasons, and we'll watch it every weekend. If I go on Amazon, I click the Amazon Prime thing and then I normally look for same-day or next-day delivery. And that's just the way that we work. And so there's no reason from the payroll perspective, it shouldn't be the same way. And there are steps, like when we look at the likelihood of people who are willing to work overtime, when an organization says you will get paid at end of your hours, obviously, people accept it because they can get their money. And that's no different how it used to be years ago that you would work the day, work the overtime, get paid immediately. It has a very big incentive. And as I said beforehand, if people need to make ends meet, having the ability to just go to any workplace, work some hours, get the additional money, net of all your taxes and deductions, is a high, high-value for most people.

Okay. Well, I must be using Netflix wrong because I've never watched 8 seasons in a weekend, but I'll try to try that. The other thing I keep thinking is the payday loan business is going to be a bad place to be if people really -- if there's a lot of uptake of this streaming. David, maybe you can help us understand, though, because that's a pretty forward vision as well. What are competitors going to say? What do you expect competitors are going to say that either don't have any type of wallet capability, right, or that have some type of initiative that's a little earlier on?

Well, I think most do have a bolt-on product that they're using now. And so the bolt-on products typically require very difficult reconciliation for the payroll team at the end of the pay period. It's complicated how to handle the edge cases. Typically, you have to charge the cardholder a fee to use the actual wallet type of product, which I think is wrong because I think that's -- you don't need to. There's enough money in the interchange and the movement of money to cover that if you do it efficiently. And the third piece is all of the competing products really are payday loans that if you have been given a payment based on what you're going to earn in the future and then you have to deduct it from my future pay period in a week or so, that's just a payday loan. And so it's very difficult from a state perspective because the legislation around that is quite difficult. Us, it is -- I don't even know if it's very innovative in that. If you work for an organization and you leave the organization, the company has to give you payment on your last day at work. You don't wait until the next payroll cycle to get paid. So the money is owed to the individual after they work. From an accounting perspective, the company has to take the actual accrual for the wage of work as it's been worked. And so all we're doing is we're facilitating the live payment in a way that it should always have been designed. So I would say we're just doing it properly.

Okay. Very compelling vision. I think it's a great note to end on. David, I want to thank you very much and Noemie as well. So it's a real pleasure, and we appreciate you carving time out of your busy schedules. So thank you so much, and have a wonderful day.

Thank you. Thank you. Bye-bye.

Bye-bye.

Take care.