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

As you can see, I have already switched my virtual background to a different virtual background, just to mess with everybody. But thank you, everybody, for joining. This is the Inaugural Wolfe Tech Conference. My name is Alex Zukin. I run the enterprise software research effort here at Wolfe. I am very excited to be joined by another Founder-CEO, David Ossip, from Ceridian; and CFO, Noemie. So first of all, guys, thank you for joining again, inaugural conference here at Wolfe. So excited to have you.

Great to be here as well, Alex. Thank you.

Thanks for having us.

The hope is that we do not have technical difficulties, and we have a wonderful 30-minute fireside. As always, for all those listening and tuning in, please feel free to ask questions in the chat. I will ask them. Your name will show up. [Audio Gap] Brief backlog and what is the value prop for -- what is the value prop for the company.

Sorry, Alex, unfortunately, I think we lost you about the last about 15 seconds. If you could maybe repeat it, it would be helpful.

Okay. What is the -- I just want to give you an -- give an intro to Ceridian for the company.

An intro for Ceridian, oh my god, okay. So we're a global human capital management company. I think many of you know us quite well. What we do is we provide core HR, talent acquisition, talent management, workforce management, payroll and benefit solutions. The company is kind of founded around the Dayforce technology that we launched in 2013. Since that time, we've taken live over 5,000 customers across the globe on the platform. Top line numbers, if I look at Q2, Dayforce recurring revenue growth grew ex float about 30%. From a guidance perspective, we increased guidance for both Q3 and Q4 to 31% to 32% and in Q4, 32% to 33%. The total revenue for the company grew also by 30%. In terms of profitability, we look mostly at what we call our gross profit on recurring revenue. And on that, we saw a nice improvement as well by about 1.3% year-over-year to 72%. As I mentioned, as of Q2, we had 5,164 customers live on the platform, which was up 125 customers in the quarter. The business, obviously, is very robust, growing very, very nicely, strong pipeline. Technology is quite differentiated in the market in a number of ways. We compete usually against 2 companies, one being UKG and one being ADP. Against both of those, we are differentiated in that we have a solution built on a single database with a single rule engine. And that allows us to do the compliance calculations better and quicker. And we have, what we term, a always-on or continuous engine for Payroll that allows us to pay people immediately. So as people work, we can actually do the legally compliant payrolls, do the fund transfer, pay them through the Dayforce Wallet. And that is quite different. The second way to be differentiated is our global platform. We have a global HR system, global workforce management. We have global payroll. We have native solutions, meaning there's all continents in Dayforce, across the U.S., Canada, U.K., Ireland, Australia, New Zealand, Mauritius. We're bringing on board about another 10 countries in the next few months, including Germany, Singapore, Philippines, Malaysia, South Korea and the like. Alex, is that a good background?

It is fantastic. Almost like you've done it before. First of all, you guys can see me, hear me, I'm good? I'm coming in clear?

All good. All good.

So let's dig into this first. Let's -- the way I've been starting these after the brief kind of intro and summary is, let's just talk about the demand environment. What are you seeing at the moment? How does it compare to the last few months, quarters? And what are you expecting for kind of the back half of this year?

The pipeline is very strong, and it's been growing consistently, I think, throughout the year. We're seeing a lot of deals in progress. So there's a lot of volume. In fact, I'd say, in the major markets and enterprise space, you've seen higher volumes than we've seen beforehand. It seems to be spread right across industry. In terms of employment counts, we've seen the employment counts go up. So employment counts are how many active and inactive employees do our customers have. And we've seen quite rapid hiring year-over-year and particularly over the last 90 days inside the marketplace.

Perfect. The other question I ask, particularly for Founder-CEOs, David, are -- if you -- if investors could see a metric in the business that you are looking at and seeing, what would be the -- how would you kind of classify their enthusiasm? What would they be most excited about? Like if you could show them a metric that you're constantly looking at, a KPI, what do you think would be most -- they would be most excited about seeing?

Look, at the heart of us, we're focused around our customers. And so we track net promoter scores quite religiously inside the business. We track them on implementation and on customer support. And if I look at our NPS scores, we are world-class now. So very high on implementation and exceptionally high on customer support. And I think that really does differentiate us the most. Because those NPS scores or the customer satisfaction scores are typically what it leads to referenceability pipeline. There are other numbers that you see that come out from that. If I look at our sales to existing customers, it's about 25% of our sales go back to the base. If I look at our net retention, we're about 105%, 106% year-over-year. And as you know, in a cloud company, when you're looking at your unit economics, the retention rate and your ability to increase the spend across your customers is paramount. And so that obviously translates into very, very strong metrics across the unit economics as well.

And what are you most focused on in the business today? Where is most of your energy and time being spent right now?

Look, we have 5 priorities that haven't changed from the time of the IPO. We look towards growth by first acquiring new customers. And as I mentioned, we do about 500-or-so per year, 125 per quarter. The second is we continually invest in the platform. We've widened it, we add additional features. And then we go back to the base and we sell those features. And if I look at the actual numbers today, about 35% of new customers now are buying the full suite and 25% of customers -- of the monthly sales go back to the existing base. Third, we look at going up market. And if you look at the actual data, you can see that the average recurring revenue per customer is up by about 11% year-over-year. And if you go back a year ago, remember, it was up significantly. And that's obviously quite important. Fourth is we look at global. About half of our TAM is outside of the U.S. and Canada. And we are very differentiated in our global payroll platform of global workforce management solutions. If I look at global, deals are up about 5x year-over-year. And if I'm trying to go up market, it's very important that I have global capabilities as most companies beyond a certain number have global employees. And lastly, we look at adjacent markets, which is how do we drive additional revenue from the employees of our customers. And there, we have the Dayforce Wallet, and the metric in the Dayforce Wallet are great. I mean, we've got over 200 customers live on the Wallet, about 600 have actually purchased the Wallet. If I look at the top quartile, we're seeing registration rates of over 40%. If I look at the usage of the wallet, it's definitely indicative of top card behavior. In other words, people use the wallet about 24 to 25 times per month. So this is probably the card they use most frequently. And those are basically the 5 growth priorities that we have. And surrounding that, you see how we've invested in people in the company, bringing on really exceptional people who are experienced both in global and at scale. We're doing a tremendous amount of work around product innovation. If you read the shareholder letter around Pages 8 and 9, we detail a lot of that for the expansion of the platform and expansion globally. And I think we've proven to the market that we can predictably release product at a rapid pace. I think that is one area that we -- I think we do shine out, right? So that, I think, forms the heart of the company.

Perfect. I want to get to know the involved here. So let's shift the conversation a bit to growth, right? While knowing that your business has many corners of visibility, investors pay a lot of attention to Dayforce recurring revenue ex float, which grew 30% in 2Q. We're mid-20s when you strip out the contribution from Ascender. What's the right way to think about the growth of this metric from here? Is it durable 30-plus percent growth? Ex Ascender -- with Ascender, what level of growth comes from Ascender, just give us that -- the blueprint there that we should think about going forward.

Yes. So I can talk about the second half guidance that we've provided. I can obviously not give details around the next year, as we're building our plan and we'll get more into that as we release subsequent quarters. But as you saw, we've increased our guidance for the third and fourth quarter as a result of better-than-expected employment level recovery. So we've expected an improvement of $3 million in Q3 and another $1 million in Q4 versus what we had previously said. So that's actually driving a significant growth in our cloud recurring -- Dayforce recurring ex float. About Ascender, I think the way I would look at it is, really, that's part of our strategy. David referred to our growth in global expansion with new markets that we're tapping into, with native payroll as well as acquired customer that we expect to grow and migrate to Dayforce. So I don't think I would exclude those going forward. That's really part of our business to acquire new customers and migrate those to Dayforce and an upsell to the base. So that's the way I would look at that.

Got it. And David, Noemie brings up an interesting point that I want to ask you. You were actually one of the more conservative, I would say, speakers with regards to COVID. When you were talking about it originally, you talked about the variance, you talked about it taking longer for things to get back to normal. With the emergence of multiple variants now, what's the right way to think about, not just the demand environment, but the structural changes that you're seeing in some of the cohorts and segments that you're selling to versus ones that are more temporary? Like again, give us the sense that you're seeing out there in the market today from that perspective.

Look, Alex, if I look at it, I think the employment levels are equal, if not above, where they were pre-COVID today. And we measure it, and as you know, we religiously look across our client data every day. We saw very rapid hiring, I would say, in the early part of the summer. It has stabilized, but I don't think that's because companies are not trying to hire. I think it's because we've reached, basically, full employment of the economy again. And so some of the metrics I look at is I look at the average employee count per customer. I look at the percentage of furlough versus active employees across our customer base. I'm also seeing quite a bit of wage inflation hit. And the wage inflation actually ticked up if I look at it really in the month of August. So if I looked at the actual data, June, July, it was pretty much typical aside to the inflation, what would have been a traditional inflationary index. However, in August, it does look across both hourly and salaried that the salary rates did increase. So people are actually spending more, and I expect that we'll see quite a bit of inflation coming to the actual marketplace. From a buying perspective, we're seeing a lot of activity in the market. The salespeople are very busy. We have our Ceridian World Tour, which is a smaller version of our annual INSIGHTS, somewhere between a Summit and an INSIGHT. We're seeing good registration for the event that starts in Vegas, and I'm sure the New York event will also be quite well attended. So we are seeing people getting out there, traveling. I've been going about quite a bit to our various offices. I've done a number of town halls in [ Tampa ] and Fountain Valley and Minneapolis, Chicago. I've met with customers, both in kind of more intimate dinner settings and larger events. And there is definitely an excitement of people wanting to get back to there. And I haven't really seen it wane much, even with the Delta variant. In fact, if I go to a surge in states like Florida, things are quite open and people are very mobile. And I don't think I've checked in a plane, a flight that hasn't been oversold, and I fly about quite a bit. So I think the economy actually is coming back very, very strongly. The challenge that I think most companies have today is on the talent acquisition side, that the market is tight because, again, employment levels are high again and people have adapted to working from home. And that, obviously, has created opportunities for organizations like us that help improve the digital experience of those types of workers and also allow organizations to operate on a more global basis.

Does that change the product strategy at all, given the importance that's now being placed and this is over the last, call it, 9 months around retention of talent, acquisition of talent, wellness of talent. How does -- how do you think about this? Because when I ask the channel, that's definitely where the buying energy, where the change agent energy is going in these organizations. And so how do you access that? Are you accessing that?

Yes, we do. So if you come to the World Tour, you'll see that we'll show a new user experience. And the user experience is really around the personalization of the application with the organizations' branding, with tight communications built directly into the app. So how do you actually communicate what you need to, to the different people that you have, regardless of location, regardless of brand and, et cetera. And we've seen a tremendous interest in that. When we start to think now about talent management and talent acquisition, over there, our innovation has really been how do you move away from list management. So if you're doing recruiting, I don't want to look at a candidate report and have to sort through the list. Can I move to more of a recommendation approach similar to what you see with Netflix. So we've done quite a bit of that, and that obviously has a big impact for our customer base. Compliance also is driving a tremendous amount of demand because as people have continued to work from home and work remotely in different jurisdictions, the complications for organizations on how to be compliant from a tax perspective becomes quite complex because now you're having to generate W-2s and track hours, of the calculations in many states that you might not have done before. And there might even be challenges with people working cross-border. Obviously, we do very well on that.

I want to take a question from the audience now. We have 2 that popped up. The first question is, how do you maintain the culture that you and the company created since 2013 as the company scales and gets larger. Do you track employee NPS? And what is the trend in the past 18 months?

So I'll start with the second part. Yes, we track employee NPS. We actually use our own product for that. There's also some fantastic engagement tool inside it. ENPS scores, as it's called, is up several percent year-over-year. So I think we've done a very good job on increasing culture and making sure that we have a kind of a powerful community inside the organization. Now culture is a difficult one because as you grow from what I call a founder-led organization. And a founder-led organization is a typically a strong founder surrounded by a close team of people that can backstop almost anything. And in the founder-led culture, you already grow tremendously through what I call heroics. And you can only scale so much so much through heroics. So at some point, you have to move to much more of a culture, what we call, equality, where people are -- have a kind of clear description as to what the performance criteria are for their particular role. They know what the KPIs are that measure success in that particular role, and you add processes to allow you to scale. Now to do that, my belief is that you run the company very much like a sports team, that as you have budgets, you bring in superstars for particular functions where those people know how to continue growing the company beyond the level of scale that you currently have. And I think we've done that really successfully over the last number of years. You saw kind of people like Joe Korngiebel who came in as Chief Product and Technology Officer a year ago. He came from one of the large ERPs where he was CTO. He brought in quite a lot of people inside his network. So kind of like head of design, very, very strong people on the data side and on the talent side and on the product management side. About a year before that, I think that was Steve Holdridge. Steve came in to run the Services Organization. We saw a much better forecasting and predictability inside the actual services group. Finance, you have people like Noemie. More recently, on the revenue side, we brought in Rocky. Rocky came in from another ERP where ran about a $2 billion business. So you continue to bring great people who know how to maintain -- not maintain, but evolve a culture to your next level of growth.

David, on that, I'll ask a follow-up on the personnel. You had -- I think, was it Jim Jensen that I saw just retired. I guess, what -- talk about the shifting, kind of what precipitated that and what's the plan there. There's been a lot of, I think, evolution of some of the more senior executives on the team. Just help us understand that a little bit.

Look, it's very much that as you evolve the company, you need the right person for the scale of your organization. Today, we're a $1 billion organization. Jim, who I think everyone knows, I think he's tremendous. When Jim joined us, he kicked off our partnership program, which really started off from developing the Dayforce software partner program, bringing in third-party software vendors into the actual mix. We started with the SI program. And then probably about 1.5 years, 2 years ago, we brought in another guy named [ Roger Nacho ] who joined us also from one of the ERPs. And Roger has continued to build up that program. So if I look at it from an SI perspective, today, we have 23 SIs that have trained resources on our product. And we've started to transition from us doing the implementations to have many SIs, prime implementations, and that obviously allows us to move into things like [ pay-per-month ] provisioning, where we can charge our software from the instantiation of the instance as opposed to from a go-live perspective. Roger, as well, brought in a very strong team of people specialized on software partners, on SI partnerships and the like. And so for a guy like Jim, he's just fantastic in that founder-led culture side. It's just a natural transition type of thing. And a lot of the other execs is very much the same. As I mentioned, we brought on [ Steven ]. Steven came in and replaced Adrian, and Adrian also was spectacular. But again, certain people have the sweet spot in terms of scale, and I think making sure that you're continually bringing in strong, strong people to take you the next level of growth is very important.

Perfect. Let's talk -- I'll bring Noemie to this question as well, about the Wallet. You talked about some of the traction, the momentum that you're seeing with sign-ups, adoption, attach rates. When does it become something that's impactful for the numbers? And how impactful could it ultimately be? Meaning, is this a -- like what is the -- because I want to frame this concept and construct over the next few years. Is this something that can be, I don't know, hundreds of millions, if not billions of revenue over the course of a long arc of time. Is it something that's that impactful to the business where we think of Ceridian equal parts as fintech and enterprise software? Or is it something that is an add, that can add 10% to 20% incremental value to each deal that you sign because of the adoption it generates. I'm not as concerned on specific numbers or guidance, but just framing the future around this product and opportunity.

Yes. I guess I can start on what we're focused on today. We're focused on driving adoption on our customer and registration rates. You've seen -- we launched the product about -- over a year ago, and we're very pleased with what we've seen in terms of attach rates. We're actually attaching this to any new sales now pretty much. And we see customers adopting and increasing the registration rate at our customers. We've also had some very interesting statistics around retention at our customers, and the population using the Wallet. We've seen significantly higher retention at those customers than less attrition for those populations using the Wallet. So that's a very strong value proposition for our customers and their employees that we continue to drive in markets for prospects and new customers. That's really what we're focused on today, is really driving increased registration rate. We're adding new features, and soon, we'll have direct deposit features that will further drive adoption. So I'll let David comment about the potential and kind of what was behind the vision and then how far we can take it, but that's really our focus right now in terms of immediate steps. And I would expect you'll start to see some additional disclosures around the Wallet sometime next year as the numbers get more material and as we increase registrations.

Perfect. David, any more emotional or passionate commentary about the longer-term impacts of Wallet, and how you think about it framing the business in general?

Look, I think the construct of a pay period, which, as you know, most people get paid weekly, biweekly or monthly, is an artifact from the 1940s. And if I look at the impact we can have to people's lives by giving them better financial flexibility, which allows them to avoid things like credit card debt or taking on payday loans, the impact is actually quite tremendous. So I think that the market is going to shift to, if you like, same-day pay or what we're showing at the World Tour, is a streaming of payroll, which means as you earn, you see your Wallet balance go up. We've already found it to be a strong differentiator in the market on the competitive side because I don't believe there's another company that can do it. I think we have quite a lead, and that the others don't have the always-on payroll engine that we have. As you know, we built that into the system from day 1. Now once we have that and we start to see a lot of the funds flow through the actual Wallet. And as I mentioned, if I look at the usage of the Wallet, 24, 25 times a month, you have a very good platform to build out a number of financial wellness types of offerings. And you'll see us start to bring those 2 markets. Noemie mentioned the direct deposit, 2 days early, interest-bearing accounts, insurance origination, rewards programs, referral programs and the like. I believe that we can build up quite a business around those particular offering just given our very, very low cost of cardholder kind of acquisition.

So I'm going to end this with a big picture question then. In 5 years, David, as we look back and think about framing Ceridian, is it an enterprise software company? Is it a fintech company?

It's a very good question. Look, I think our goal is to become the people platform for global workforces, and I think there are a number of fintech offerings that are going to become embedded in that. And I think, today, of how we view traditional software companies is going to evolve quite a bit over the next 5 years as the focus shifts from the organization to the people inside the organization. And if we can deliver that wonderful experience, we can obviously deliver a tremendous impact to the customer and we should be able to become the preferred choice of system for the people in the workforce, regardless if they are full-time, part-time, contingent or GIC. And as Noemie mentioned, we're already asking impact to the urbanization. If I look at the voluntary turnover rate of people who have registered for the Wallet versus those that haven't, in the same organization, we've seen a reduction of voluntary turnover by 42%. And if you convert that into a dollar number, it's massive. I mean, if you're a 1,000 personnel organization, instead of losing 100 people per year, you lose 60. So you save 40 people. And with an average replacement cost of, say, $10,000, that's a lot of money that benefits you each year.

Perfect. Well, guys, thank you so much for joining. Always great to have these conversations, and I look forward to inviting you to our Fintech conference soon as well.

Looking forward to it. Thanks, everyone.