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

Good morning, and thank you, everybody, for joining us. With us, we have Ceridian's CEO, David Ossip; CFO, Noemie Heuland; and IR, Erik Zimmer. So thank you all 3 of you for joining us today. We really appreciate the time.

And maybe just to dive right into it, I think with last quarter, the company had a really strong print as far as new bookings. Like I think there's a lot of momentum behind the company. Why don't we maybe start off with how you view the macro environment right now? There's a little bit of back and forth about how the world is shaping up. So David, maybe let's start with there and the demand environment and how you currently view it.

Yes, Samad. So demand environment, we're still seeing it very high, seeing a lot of transactions. So I would say more transactions than we've seen beforehand. In terms of employment levels, we've seen employment levels continue to rise throughout the quarter. I would say that there is quicker at the earlier part of the -- at the start of the quarter than they are at the moment. They still are going up day over day and week over week, both on the U.S. side and on the Canadian side. So from a macro perspective, I think the -- we are on track as per kind of the guidance we gave for the quarter.

Great. And then as I think about some of the -- as I think about the company, you're returning back to doing in-person events. And I know that this fall, you have both your own company-specific events going on, and I know HR Tech is just a few weeks away as well. How should we think about maybe the current status of doing in-person events and still doing those even with maybe there being a little bit more squishiness around the Delta variant? And should we expect those events to still happen?

So Samad, I've been traveling quite a bit over the last month or so. And a lot of smaller client events, a lot of in-person meetings with our staff. And I find every time I do these types of events, there is a tremendous amount of energy and excitement and happiness of people getting out. As you pointed out, we have our Ceridian World Tour, which begins in Vegas on October, I think, the 5th. And for that, the format will be kind of between what traditionally we'd have as a summit and an insights. They're a bit more of an intimate grouping, several hundred people as supposed to several thousand people. Compressed schedule, but very rich schedule. For us [ C-level tees ], all about taking people through the product road map, the innovation that's coming out and what we've done on a delivery perspective in terms of broadening the HCM platform, focusing on data, the global expansion. So it should be a very exciting format. And I'm sure that it will lead to higher conversion of our pipeline.

Great. And then maybe just as I think about the decision-making process, it appears -- whether I look at Ceridian's results itself or maybe more broadly in software, that companies are more comfortable making longer-term, more strategic decisions around HR payroll again. And so I'm curious just in your conversations, David, since you just mentioned you've been getting in front of customers again in person, do you find that similarly that customers are again willing to start to think about not just worrying about getting through the current environment, but maybe thinking more strategically as they think about HR payroll? And how is that impacting the company's own pipeline?

Sure. So Samad, the economy is doing very well. You've seen great growth numbers coming out of both the U.S., Canada and on a global basis. Unemployment levels are back to the levels that we had prior to COVID or an all-time kind of COVID low. As you know, companies are hiring tremendously. One common objective, if you like, we see across our customer base and across the prospect base is the need to maintain culture and build culture in the new work environment, which as you know, is a hybrid type of environment where people predominantly do their solo-based activities at home. So if you're acting like as an individual contributor, you want to work from home, but you still may want to go to the office to do collaboration types of events. And so how do you actually use a platform like ours to bring people together to disseminate information in a very efficient way? How do you create that engagement with your staff? The second area is we've seen a big focus, obviously, on talent acquisition. How do you attract people? How do you differentiate in markets? Are people are going to join you? And how do you work on the retention side? For that, obviously, the Dayforce Wallet, which we -- as you know, we launched about a year ago. The numbers from it are great. When we look at the voluntary attrition rates of Wallet holders versus non-Wallet orders, we're seeing the voluntary attrition rate go down by 42%. So tools like that are one of the reasons that we find organizations are looking for HCM solutions.

So you mentioned that actually brings to something interesting. I think I was seeing -- it was either in the Wall Street Journal or in The New York Times, but the number of job openings relative to people searching for jobs, I think, just hit a record in the spread. And so I think it's harder than ever to get the right talent for companies. And I'm curious for talent and retention, since you're managing it, Ceridian has always, I think, been thought of very highly in terms of what you can do on the workforce management side. Do you think it's showing even more so the kind of the competitive differentiation? And is it helping driving adoption of your noncore modules? So on the recruiting side, on the workforce management side, time and attendance, how is it impacting trends even, let's say, from existing customers?

Well, the Wallet itself, as you know, builds on the workforce management and the payroll capabilities and a very strong compliance that we have in the product, which allows people to be paid at any time. And remember, that's a legally compliant payroll. And so the fact that people are choosing the Wallet, drilling out the Wallet to get that better attrition rate, in other words, less people turning over in the company. And we've actually found that if you advertise the Wallet, you're 1.9x as likely to close an open vacancy than if you don't have the actual Wallet-type of capability. But that being said, in today's environment, there's a lot of compliance challenges that we're finding our customers face. That with people working from in home, in across different jurisdictions, it makes payroll a lot more complicated to do. And if we don't pay people correctly, obviously, there's a retention issue that flows from that as well. If you come to CWT and you look at the new [ erects ] that we're rolling out, you'll see us already design about this immersive employee experience of how do you really bring people into the organization to keep them focused on what their goals are and to make sure that they are reaching their own potential.

Great. Since you mentioned Wallet a couple of times, it was later in my list of questions, but I'll jump ahead to it. It's probably the thing that comes up single most often when we talk to investors. I think there's a lot of excitement around it, both from what it could mean for Ceridian, but that it really is something that's fairly disruptive in the market, right, as far as offerings go. Can you help us maybe think about any metrics you could give? Like how should we think about how often the end employee is using it, maybe dollar amounts when you think about the average either swipe or a portion of their pay? Just so we can start to do some measurement on how much success Wallet is having.

Sure. So there are a number of numbers that we actually are quite excited about. The first number is we look at the top quartile of Wallet holders, and these would be obviously the customers that rolled out the Wallet first. We're seeing registration rates well above 40%. The second metric that we talk about is that the average Wallet holder loads their Wallet 6 or 7 times per month or about $120 per time. And the third metric we speak about is the typical Wallet holder uses their card 24 to 25 times per month. And that metric is probably the one that we're most excited about because that says that the Wallet is really their top card in wallet; they're using it almost daily. And the types of transactions are what you would expect: grocery, convenience, gas, ATM withdrawals and the like. So they're being used very, very frequently. So the idea of being able to take the Wallet and to expand it into a more broader financial wellness offering is very real and obviously very exciting to us.

No, I think it really opens the door for a lot of different opportunities, and especially if you can get the direct deposit side of it, which are you seeing maybe more of the employees opt in for direct deposit where there -- where it kind of creates this automatic behavior, and they don't have to think about it as an active behavior?

Yes, there is -- so you're right. So the Wallet actually has 3 different ways that money gets loaded onto the Wallet. The first is on demand, which is, I as a person can see exactly how much I've earned inside the period and say I'd like to add $50 onto my card, but that requires an intervention. The second way that money can come onto the card is through the traditional pay card capability. And the Wallet is a true pay card. In other words, you can use it to give more than one card to an employee like if someone's leaving the organization. That's not a tremendous percentage of the money that comes onto the Wallet, but it's an important feature to have in order to replace the existing pay cards that a customer might have. The third way is through direct deposit, and we're seeing direct deposits increase quite substantially week over week. And how direct deposit works is, I go into the application and I say instead of going to my checking account, I'd like it to go to my Wallet. And so at the end of the pay period, the money moves across. But it doesn't only just move across on par with your direct deposit, it hits your bank account 2 days early. And that 2-day early payment is something we've actually just turned on with inside the system for Wallet holders. We'll start to make announcements about it probably in a week or 2, but we think that's a very exciting feature. Where we're going with the Wallet next, and we'll be showing this at CWT, at the World Tour, is the idea of streaming payroll. So again, I can go on demand, add my $50 to the card. I can do direct deposit, get it at the end of the pay period 2 days earlier relative to the traditional banks. The third way will be, I can elect to just check a box to say just stream my payroll. And as I'm working throughout the day, I will see my Wallet balance go up based on my net earnings. And it's quite a sophisticated model in that it's event-driven. So if you're an hourly employee and you come early for work and you work, say, a pre-shift overtime segment, when you start your regular day, that pre-shift overtime segment will be available in your Wallet. When you leave for the day, that money immediately becomes available. There's all kind of event-driven, lots of streaming of payroll. If you were to ask me where the industry lands up is I think it goes to a streaming of payroll construct very similar to everything else that we consume in life, which has to be instant. And the benefits that you get for the employee really is tremendous.

It sounds like a fascinating logical conclusion point where we reached that where it makes sense. When somebody get -- they should get paid as they are completing the work, especially for somebody who's maybe an hourly employee. So that's definitely interesting to hear. Maybe just rounding out last question on the Wallet, and then I'll move on. But just is there a type of customer that it's better suited for, right? I mean are you seeing just as much traction at a financial services firm as you're seeing at maybe a group that is like a restaurant group where you may have more -- or does it index more towards companies with hourly employees? Who are the power users as far as the type of customers go?

So it goes right across the industry. In fact, we have published a survey a few days ago, with the survey was based on people earning more than $100,000 per year. And we found that 83% of those individuals wanted to get paid instantly. So the more sophisticated the person is, the more they realize that they have 2 options. They can either wait a 2-week period plus a few days to get paid. During that time, the money is owed to them by their employer. Effectively, they're lending money to their place of employment. They earn no money on it. They can't put their money to work. If they get bills, credit cards, if they have to pay off, they have to find alternative ways to finance those types of payments. The second alternative is they can elect to stream that payroll. If they stream their payroll, as they earn, it goes directly into their Wallet. Next year, we'll start to offer interest on the actual balances of the Wallet. And so the person can either earn money on the streamed wages or they can put that money to work. So it resonates very well with a more sophisticated type of investor. On the other side, when you look at the employees who are hourly or shift-based, and it could be a health care worker, we've seen very, very good adoption in health care. It could be someone in a manufacturing organization, a retail, hospitality. It could be a part-time worker, a gig-time type of worker. And in that case, to be clear, the people need the money more frequently and so getting paid is a great benefit to them.

Great. Maybe let's switch gears to another key leg of the growth story, and that's on the international side. On the last few years, the company has made multiple acquisitions, RITEQ, Excelity and Ascender. I'm curious just how should we think about the success you've seen to date in terms of driving conversions and how we should think about maybe the typical time line for converting a base over, right? Do you think it's -- does it take several years? Is there low-hanging fruit, usually? Just how should we think about the success of those acquisitions based on how you've seen them so far?

So there are 2 ways that you really should look at it. The first is you've got the migration of the payroll module to Dayforce. And the second is you've got the upsell of the Dayforce platform, which includes core HR, talent acquisition, talent intelligence, all the talent management components, workforce management and the like. In that, there's obviously a tremendous potential. In fact, if we look at RITEQ, which was much smaller, but we acquired it probably about 2 years ago, we've now sold more Dayforce recurring to the RITEQ customers than existed at the time of the sale. And so we would expect the same to happen with the Excelity and the Ascender customers. In terms of global expansion, we saw global deals go up by about 5x year-over-year. So obviously, it's going very nicely. On the technology side, we're about to increase our major payroll offerings to include Germany and then right across APJ, so Singapore, Philippines, Indonesia, Malaysia, Hong Kong, Thailand, Taiwan and South Korea, all in the next, say, 6 to 12 months. The way that we've actually done that is 2 ways. We've got the Dayforce payroll engine itself, which can be extended to the different jurisdictions. And then we also have another project that we actually call internally Project Titanium which effectively, we've taken our payroll screens and we've made them so that we can call real-time APIs to do the calculations that return it instantly, much like with the Dayforce payroll engine. Instead of effectively having one Dayforce payroll engine, we can have multiple. And that allows us to tackle and to leverage some of the assets that we've purchased very, very quickly, and also to make the migration path for those customers smooth with as little change as possible. And obviously, from a speed and cost perspective, very advantageous to that customer base. So we're allowing them to very quickly plug directly into the power of Dayforce, get that single experience across the actual HCM and core HR platform that we have. And from our perspective, to drive additional revenue from the talent and from the workforce management modules.

Understood. And you mentioned -- actually, maybe first one on the M&A. It's largely concentrated on the APAC side. But I think in EMEA, you haven't really done any acquisitions. Is it -- is there opportunity for a similar M&A playbook in EMEA? Or is it just serve you better to go with the native build-outs in that region?

So remember, in APJ, we did native build-outs as well. We started in Australia and New Zealand. In EMEA, we have -- remember, the U.K., we have Ireland, we have Germany coming on. Once we have Germany coming on, obviously, we're going to extend that to the DAC countries and beyond. From a workforce management perspective, we're right across Europe already. In fact, our largest customers are a German based that work right across the European countries. When we look at do we acquire or do we build, a lot of the decision comes down to market penetration. And what we're trying to do with those types of acquisitions is replicate the success that Dayforce had with Ceridian where effectively, you're finding an organization that has great knowledge, know-how about the industry, how to pay people, how to move money, how to do workforce management and talent, that have a customer base and have a partnership and a go-to-market strategy, but might be lacking a little bit on the technology side. And we can solve the technology side very quickly with the Dayforce platform. And then as we've done with Ceridian in North America, or even with the acquisitions we've done in APJ, we can bring to market the full Dayforce platform, leveraging their know-how and leveraging as well their go-to-market. And that's effectively how we look at it. But yes, there are quite a few companies in Europe, in Latin America as well that are quite attractive.

Great. Maybe just something maybe focusing on Ceridian's own organization or your own employee base. Just in terms of sales hiring, I know that one of the things that's challenging about the labor market is companies actually hiring for their own organization. So I'm curious maybe just how your own sales organization hiring is tracking? And maybe how should we think about headcount investments in sales that are focused on, let's call it North America versus international?

So from a sales perspective, obviously, we've driven a lot of change through the organization to make sure that the sales organization is able to execute on our corporate priorities. Our corporate priorities, by the way, were to engage the SIs, the system integrators, because that's important to go up market and to expand globally; to focus on PEPM on provisioning, much like most of the other cloud companies do to improve linearity. Now to do that, we had to build in that capability into our sales organization. So we brought us some tremendous leaders into the sales group like Rocky, who joined us from one of the large ERPs, where he ran about a $2 billion group with the inside that organization. We have Greg, who joined us from another large ERP company, also driving a tremendous amount of success for them. And both of them have obviously been able to leverage their networks to bring in fantastic people from the typical players that you would expect in our industry. So from a recruiting perspective, I think we're doing tremendously well. And we've done that, as you know, consistently right across the organization since about 2018. And we've brought in fantastic people like Leagh Turner who brought a lot of structure and scale to the organization. People like Noemie; Joe, who joined us on the product and technology side; Stephen, who joined us on the services side; Susan, on the HR side. And I've always believed that to be necessary to get continued growth for an organization.

Great. And maybe you mentioned the PEPM on provision and some of the other kind of components. Just maybe if I step back, maybe a broader question on just you mentioned on guidance that the company is tracking to kind of initial expectations based on employment, et cetera. I'm just curious in terms of your view of sales productivity ramping? Are you also on track there? And -- or is productivity running ahead of schedule? How should we think about maybe how the organization itself is ramping with all the changes that you just mentioned in mind?

Yes, I would say we're on track according to our plans. We've always focused on sales productivity, all the way since the time of the IPO. If you were to ask me, I think there's still a lot of room for us to actually grow in terms of improving the productivity of the actual sales force. And I think that actually extends right across the organization. There's always room for growth, and that's why we drive a lot of change through the organization.

Great. And then maybe just one on the margin side. Gross margins have been actually expanding quite nicely even with float revenue headwinds, right? And maybe I was just wondering if you could unpack that a little bit? And what's been the driver there? And maybe how we should think about that going forward?

Yes. So just for everyone, if I look at Q2, we saw the gross profit on recurring go up by 130 basis points with the float headwinds. Without the float headwinds, it would have been 200 basis points. If you unpack the math, it shows that Dayforce recurring revenue is growing, but the cost of supporting the Dayforce recurring revenue is not. And so that really, I think, just talks about the inherent profitability of our -- products like ours in industry, which as you get more revenue, the actual margin goes up with the actual growth. And as you know, not all products do that. So it's actually a very positive piece. And, Noemie, anything that you would add to that?

No, I think you covered it well. We're really focused on the cloud recurring gross margin because really, that's the driver for long-term profitability. And that's -- we also look at that on a deal-by-deal basis. We look at the actual profitability of the unit economic of each customer and each transaction, and we look at that very closely. And the other thing is I want to make sure that you realize that we'll continue to make investments in product and technology to support the global expansion as well as all the features on the Wallet side and continue to enhance our sales capabilities to work with SIs and go after the large customers. So that those trends will continue to be reflected, and we can talk about that as we talk about 2022 guidance.

Great. Well, I know if I ask it, you'll tell me that you guys aren't prepared to give 2022, so we'll save that for when you report next. But I'm getting buzz that we are out of time, but I appreciate it, as always. David, Noemie, thank you so much. And Erik, thank you for joining us. Really appreciate it, and we look forward to talking to you soon, and wish you all the success in the world in the meanwhile.

Thank you very, very much. Thank you.

Thank you.