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

All right. We're going to go ahead and get started. Hello, everybody. This is Mark Marcon. I follow human capital technology and solutions for Baird. Thanks for joining us for this call with Ceridian. With us today, we've got David Ossip, Chairman and CEO; Noemie Heuland, CFO; and Erik Zimmer, EVP of Corporate Development, Head of M&A and Investor Relations. I'm going to turn it over to Erik, who is going to go through a disclaimer regarding forward-looking statements, and then we're going to go ahead and get started.

Thank you, Mark. Yes, I appreciate it. Please note that this call may include forward-looking statements about our current and future plans, expectations and intentions, results, levels of activity, performance, goals or achievements or any other future events or developments. These statements are based on management's reasonable assumptions and beliefs in light of information currently available to us. Listeners are cautioned not to place undue reliance on such statements. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those set forth in such statements. We refer you to our previous filings with the SEC for information regarding the significant assumptions underlying forward-looking statements and certain risks and other factors that could affect our future performance and ability to deliver on these statements. We undertake no obligation to update or revise any forward-looking statements made on this call except as may be required by law. Further, as we are in a quiet period around our third quarter 2021 performance, this call will focus on our recent public announcement and how our Dayforce software supports our public sector business. I would also like to note that this time, we will not be taking questions from the audience at the end of the call. With that, I will turn it back over to Mark. Thank you.

Thanks, Erik. Hey, David, Noemie, Erik, congratulations on the win. David, would you like to kick it off just in terms of discussing the win? Because that's -- it's huge.

Well, thank you, Mark, and thanks, everyone, for joining us today. Obviously, we are very excited. We've always focused on helping our customers tackle their most complex problems. Enabling them to be efficient when it comes to managing complexity around global regulatory and compliance challenges. We've earned this opportunity to explore a partnership to innovate with one of the largest employers in Canada. And obviously, our goal here is to make work-life better for its hardworking people and to help them become an employer of choice.

David, you deal with a number of really highly complex private sector companies. Can you give us a sense for how your experience and performance enabled you to win these complex customers?

Thanks, Mark. As I mentioned, at the heart of our Dayforce technology is our ability to handle the complex pay and time rules that are quite common in organizations that have collective bargaining agreements. As you know, the design of the system that allows us to do that continuous calculation of net earnings taken into account complexities about rate calculations, various types of rules that typically follow the union agreements. And typically, we are able to accurately and very timely calculate pay. The other part as well, is, as you know, our brand promise has always been to make work-life better. And our focus over here is delivering a very engaging employer experience. And we have found that, that's been very helpful in the private sector, just to ensure that people have the best work-life possible. And again, that's our intention over here.

That's great. And you started on this journey a while ago. Can you talk a little bit about Dayforce's growing capabilities, including the digital wallet? And how that helps to further the mission of your customers to become an employer of choice?

Yes. So again, this isn't specific to the government of Canada. We've always been focused on how to develop a very engaging experience with the worker. Dayforce Wallet is part of that. If you remember that our journey began years ago, when we looked at payroll processes, we looked at the separation of data between payroll and time. And what that meant for the payroll administrative staff was that they could only get access to the data at the end of the period as opposed to the beginning of the period, they didn't have enough time to do the necessary quality assurance checks and such. We designed Dayforce, obviously, to do that continuous calculation, calculate net earnings instantly. Now we saw tremendous success with that. If we look at the history of Dayforce from about 2013 to now, we've taken live well over 5,100 customers, really focusing on that singular experience and their continuous calculation. However, the same research that we did back in 2012 looked at the way that people were being paid. And as you know, today, people are paid on their traditional pay cycle basis, which means you work for a period of time before you get access to your money. So in May of last year, we took advantage of the continuous calculation engine. We launched the Dayforce Wallet. And what the Dayforce Wallet allows people to do is that it allows them to see how much they've made, net of work or earnings and deductions and other obligations to that point in time, and they can elect to add that to the Dayforce Wallet and they can then have access to spend it, whether it be online transactions, debit transactions, ATM withdrawals and the like transfers. And as you know, that's been very, very successful. In the private sector, what we've actually seen is that voluntary attrition rates have gone down by about 42% when you're comparing the same organization, those employees who have the Wallet versus those employees that don't have the Wallet. So it ties very back to how do we create that quantifiable value for the customer. And again, that's not specific to the [indiscernible], but it talks a lot about how do we really make a great experience for people. The other areas that we really focus on is how do we drive engagement communication, making sure that people have access to information that is time specific, allowing organizations to put their branding onto the actual experience. For anyone who's come into the Ceridian World Tour in Vegas or New York or London, you'll see us actually show this new user experience, which again is focused really about bringing people in to the [ know ] of organizations, sharing information very readily, making to the people are aware of other opportunities inside their organization, have access to learning management, performance and management and all the rest of it.

I mean, obviously, a 42% reduction in terms of turnover is a high ROI proposition and should really benefit you. Can you talk a little bit about Ceridian's broader experience and really, the overall competitive position in the public sector? Because we don't talk about the public sector enough. So how would you frame Ceridian's position relative to the other players that are out there?

Sure. As you know, Mark, I've always used to view the growth of our business in a very typical [indiscernible] type of fashion, a series, if you like [indiscernible]. In the private sector, obviously, we established that [indiscernible] probably about a decade ago, and we extended it, if you know, into various types of verticals, whether it be financial services, professional services, retail, manufacturing and the like. And that's obviously gone tremendously well. On the global side, which is also an expansion of the addressable market, we've made significant progress in the build-out of Dayforce as a global system. As you know, we've been very successful across EMEA or across APJ, even into Africa at the moment. And obviously, that's gone very nicely. In terms of the contingent workforce, that's the excitement about the Dayforce Wallet and what we can do as we transition more into an employer of record, and we've discussed that. And then finally, we look at the public sector, which is a large percentage of the overall workforce. As you pointed out, the Government of Canada, for instance, is one of the largest employees in Canada. So about 3 years ago, we started to invest quite heavily in building out a very focused public sector practice. What that means is we have dedicated sales. We have industry experts. We have dedicated services for implementation and customer support focused around the uniqueness of public sector customers, and it's been quite successful. Today, we have about 100 government customers across the globe at all levels of government. So whether it be federal, state, provincial or municipal. We've discussed previously, for example, in Australia, we pay over 250,000 employees across 35 public sector clients. And now these customers came along from our Ascender and Excelity acquisitions. But as project titanium, and remember that project titanium is the extension of our major payroll capabilities across APJ, which comes along -- which will be coming online in, say, the next 6 to 12 months. We would now be able to take those clients and bring them across over to Dayforce and make available to them the HCM talent capabilities and our very strong workforce management features as well. Outside of Australia, a lot of success as well broadly across APJ. For example, very successful deployments in Singapore and the like. If I go back to what's great here is that this really aligns with our purpose of obviously making sure that we handle all of the compliance complexity. In other words, ensuring people can get paid on time and accurately, get access to great tech like the Dayforce Wallet, but more broadly, it's all about making work life better for the hard-working people inside the government.

That's great. And I mean it sounds like project titanium is going to be really exciting. And obviously, the government of Canada is going to be really exciting. Can you -- what can you tell us about the actual contract scope and terms for this most recent signing?

So a lot of it is available publicly. And what is publicly available is that Ceridian has been selected by the government of Canada to deliver the design and experimentation phase for the next-gen HR and payroll initiative. The contract was awarded to Ceridian on September 14 of this year. The amount is $16.9 million. The details, you can find, they're available on the government's procurement website, which for everyone is www.buyandsell.gc.ca. The contract includes both recurring revenue and configuration services. The software subscription allows the government to test the software in department in accordance with their next-gen pilot strategy. However, the services statement of work is only for 1 department, which is the Canadian Heritage. The first phase is obviously expected to begin very shortly. We anticipate that the pilot phase will be completed in a time frame of about 18 months.

That's great. And what are the implications of the contract on your product road map and product features?

So as we spoke out on the compliance side, on the calculation side and the engagement side, I think it's a very good fit for the Dayforce product. However, there are 2 areas that we have committed to make product investments. The first is around accessibility to ensure that all people are able to use the Dayforce. And the second area is to ensure that Dayforce adheres to the French Language Services Act.

Great. And then -- in terms of this contract, I mean, you just signed it. How should we think about it in terms of the second half of this year and FY '22 in terms of the top line?

Sure. So considering the date of the signature of the contract, we do not expect this to have a material impact on our second half 2021 Dayforce recurring revenue. We expect the contract to have a positive effect on our Dayforce revenue for fiscal 2022, considering the timeline of delivery of the implementation and the services in the statement of work. We can't really be much more specific at this stage, considering we're in the midst of our quiet period.

Okay. Obviously, this is a high visibility contract. And I would imagine lots of consultants and systems integrators are going to be looking at this. It obviously increases the visibility. How are you thinking about that?

Sorry, Mark. Could you just be a bit more specific as to the question?

Well, just it would seem to me that given the high visibility of this contract, there's got to be a lot of consultants and systems integrators who've noticed, and that's got to be helpful from a long-term marketing perspective.

Yes. Look, as you know, we've made a concentrated effort to move into the large enterprise space. And as part of that, we've also been investing very heavily in the system integrators. As you know, as of last quarter, we reported that we had 23 global system integrators that had trained resources on the Dayforce product. This contract, obviously, is quite a high-profile award and so that I would expect that our global system integrated partners will be taking note. And obviously, I think it does talk about the capabilities of the Dayforce product, especially for the large enterprise market.

Great. And then switching gears, can you give us a little bit of an update with regards to the Wallet adoption?

Yes. Again, I can only speak at the end of the last quarter. As you know, we released the product in May of last year. Recently, we extended it to [ Canada ] as well. We have over 250 customers that are live on the Wallet. Well over 600 customers have signed up for the Wallet as well. In terms of registration rate, if we look at the top, if you like, quartile, which is generally the customers who've been using the Wallet the longest, we're seeing registration rates above 40%. The usage metrics we're seeing on the Wallet are great. The typical Wallet holder uses the card 24x to 25x per month. The type of transactions that we typically are seeing are grocery, convenience store, gas, fast food, ATM withdrawals. In terms of the demographic profile, generally, it is above 35 years of age, at present, over 35. A slight skew to more of a female user, which typically indicates as head of household, and that correlates quite nicely with what we're seeing in terms of the transactional spend that's actually going through the system.

That's great. And can you talk a little bit about the wallet product enhancements that you're focused on?

Sure. There are several, and a lot of these are really about improving the benefits and the experience for the cardholders. Shortly, you'll be able to see things like reward programs, which is effectively, I can look at the mobile app, I can look around me, I can see where I can go to get a cash back. I, then, as a cardholder, go and make the purchase. I get a 4%, 5% cash back. As we've discussed, we expect to also benefit from that as well to the tune of about 90 basis points of that purchase. We'll be adding referrals. The referral is, "Mark, you're not a user. Please use my code to register. When you register, the first time you put money onto the card, you get $10 and I get $10 as well," which I think will be great. We recently just introduced 2 days early deposit. So if you're a Wallet holder in the U.S. and you use us for direct deposit, you will get your deposit, your access to your funds up to 2 days early. And so that's actually now live. We're just validating that it's actually working properly before we do the marketing pieces around that. We'll be looking at savings. So we're actually seeing people leave their balances on their actual cards. And so we will begin to offer savings amounts on the actual balance of the cards relatively soon as well. And then if I look at more broadly around the card, and if you come to the World Tour, you'll see us showcase in the [ streaming ] of pay. So if you look at the cards at the moment, there are a number of ways I can add money onto the card. One is I can use the card for direct deposit. And at the end of the pay period, I get access to my money a few days early. The second way is I can do it on demand. And so I can look at the app at any time, see what I have earned, net of all of my taxes and deductions and other obligations and then say, I'd like to add $50 or $100 onto the card. And when I do that, the money becomes available at any time. The third way that we'll be showcasing is that I can elect to just screen my payroll. And how that works is as I work, the balance on my card goes up without me having to do anything. So every day, you see automatically, the balance on the card going up, and then I have access to that money, which means I can allocate it to a savings bucket where I will be earning interest. I can use it to do any type of purchase. I can transfer it out of the actual system, if I would like. And we believe that's a tremendous amount of benefit. In all cases, any time the money flows to the wallet, we do a legally-compliant payroll, which means that we generate that earnings slip, which is compliant at a federal level, at a provincial level, at a state level. And the very next day, we do the remittances, which means we move the money as required to the various jurisdictions or third parties as required from a payment perspective. And because it's all part of Dayforce, at the end of the pay period, there's no reconciliation. So it's quite unique in marketing that. We aren't doing an approximation of what the person is meant to earn, instead only the money that they have earned is available. And when the money moves, as I mentioned, we do a legally-compliant payroll. So there's no reconciliation at the end of the pay period. A lot of the other products, which are third-party products. There are certain cases that can get you in trouble. For example, I think Mark is going to make $1,000 inside the period. I allowed to take out 50%, $500. Mark takes out the $500, but he actually doesn't work that week. So how do I actually claw back that money, which becomes very messy? [indiscernible] time, we don't run that. In terms of the actual Wallet, the way the financials work, as you know, is we don't charge a membership fee to the employee. We don't charge any usage fees. When you load money on to the wallet, there's no fees for that either. There are no direct fees of any type for the employee. And then for the employer, we don't charge any membership fees or PEPM fees over there either. And we don't have them change the way that they fund their payroll. They still fund their payroll on their regular pay period basis. What funds it, obviously, is the interchange, which covers the program management fees, the banking fees and the lending fees and it seems to work really, really nicely.

And can you just remind us in terms of the economics on the interchange? And what percentage of the time does that interchange come through with regards to the 24x to 25x per month that somebody would typically access?

So generally, if I look at the U.S., the interchange is about 125 basis points, so about 1.25%. We have a program manager that gets about 25%. So the remainder comes to Ceridian. We then act as a commercial lender to the organizations. They don't have to change the way that they're funding payroll. Our cost of borrowing is about LIBOR plus about 200 to 250. If you take the duration of the commercial lending agreement, it's typically about 7 days. So 7 divided by 365 times LIBOR plus 250 means our cost of funding is about 6 to 8 basis points. And so net of all of that, we target to make about 80 basis points at the moment. Once we start to add rewards on that portion of spend, we'll get another 90 basis points from the share that we get inside the actual network on the cash back. And then as we move into other types of financial wellness products, there's an opportunity to increase that take rate to higher levels.

That's great. And I mean, your take rate's already really impressive. And with all the new programs that you've got in place, streaming rewards, et cetera, I mean, I would imagine that the conversations have really picked up in terms of what a big benefit this can be to employees and therefore, how it can end up helping with retention and attraction.

Yes. Look, any time we build something, we try to identify that KPI that we can impact at the customer. And as you know, we make sure the KPI is measurable and convertible into a dollar saving. When we started to build out the Wallet, we believed that we could impact retention at our customers. And in today's world, that's become even more important. So after the first 100, and I think it was 150 customers had gone live, we went back to those customers, and we measured what was the turnover rate across the Wallet holders versus the non-Wallet holders. And there, we found at those companies, the voluntary attrition rate had gone down by 42%. The other KPI we track was the time to hire. So the recruiting systems is typically a very visible metric. And we found that when companies have positioned the Dayforce Wallet, the time to hire is 1.9x quicker. So it's a very strong validation. And then if you look at some of just the stories of the people who are using the wallet, you can just see some great stories about how this has made a big difference. And the underlying start is about 80% of all people, regardless if they're salaried, if they're hourly, need to bridge their finance in between paychecks. So as you know, our financial commitments happen in real time. But if you paid it on a pay-period basis, you have some periods where you don't have the cash on hand to cover, so you're [indiscernible] or something like that. So that addresses that very, very nicely. We recently did a survey in the U.S. of people who earn more than $100,000. And we found that 83% of them, I think the number was, would like to get paid on a daily basis as opposed to pay period basis. It's just a huge value creation. And it's actually an unbelievable benefit for people.

That's fantastic. And that's a nice segue because with these client success stories that reinforces what you can talk about when you host virtual INSIGHTS. You had great success last year. Can you give us some color on what you expect for virtual INSIGHTS for -- in the next 2 weeks?

Well, the great thing, it's not virtual. It's -- we're doing an in-person event. We're going to Vegas. So I would expect us to have about 400 customers at end. And in addition to that, I would expect well over 1,000 customers to also attend virtually. So I think it will be a great hybrid type of event. After Vegas, by the way, we're going to go to New York and we'll do another similar type of event in New York. And then we're going to London, England. We'll be there, I believe, in November 30. A similar type of event, similar type of attendance. What we'll be showing really at the World Tour is what we've been doing over the last 18 months to 2 years in terms of product. We've got some just unbelievably great speakers that are speaking there. If you look at the press release, you can see that we're going to have, I think, [ OTG ] and Amazon come and speak in the keynote session. Obviously, I'll be taking people through the actual product from start to finish, all the various experiences for employees and managers and administrators. Joe is going to be showing us just what I quoted a lot of technical goodness. So it's the new user experience, which is amazing. I mean, put in perspective, when I saw it, I actually asked him if I could use it for the cover of the last shareholder letter. And he actually didn't allow me to do that. But it's really, really exciting. There are things like you can take a Dayforce Wallet widget, put it on to the home screen, and you can actually see the money going up as you're kind of watching the screen. So I mean, I think that's really exciting. But it's all about this kind of really immersive experience that allows organizations to put their brand in what's important for them on the screen, deep-linking into our application, KPIs could be added through different types of widgets. It works beautifully on mobile devices or across the web. So it's the same type of capability that you have from it. We'll be showcasing a lot around our intelligent search. So for example, intelligent search is I can use Slack or I can use Teams to interact directly with Dayforce, and I can ask questions like, "Hey, tell me what the pay policy is for this particular region." Or if I'm an employee, it could be something important to me. "Can I take a Thursday off? And if so, please could you ask my supervisor. Or if I want to shift trade, can I trade shifts with Mark?" And it comes back, yes or no. So quite immersive through that. We'll be sharing a lot around data, what we call it intelligence or talent intelligence. So where you [ moving ] over there is how do we actually use ML and deep learning to really make processes not only more efficient, but also more accurate. And so if you get into things like recruiting instead of having this list-based approach, when you list-based approach, a lot of HR today, I look at the screen, I filter it out. I sort through it, I find the record and I act on it. If you think about your personal life, it doesn't really work like that anymore. When you log on to Amazon, it kind of says here, the recommendation and what we think you're interested in. If I go to Netflix, it does the same sort of thing. If I get into my car, Waze pops up and it says, "I think you want to go here," right? So the same thing applied to talent intelligence, which is if it's recruiting, if I'm the recruiter, these are the candidates we would recommend for the [indiscernible] job requisition. If I'm a candidate applying, instead of having me go to the job page and search through lists and whatever, it looks at who I am and then it makes a recommendation for me where I will be a good fit with inside the organization and engagement and things like that, so they can actually have that immediate dialogue with the candidate to ensure that they are directed and that they're engaged through the actual process. And so there's just a lot that we will be showing. I don't want to say all of it because I don't want to kind of spoil what Joe's -- and I call it the Joe show. But we obviously are very excited, just a lot of, as I say, technical goodness will be shown.

It sounds fantastic, David. Unfortunately, we've come to the -- we're out of time. So David, Noemie, Erik, I want to thank all of you for this. This is really informative and really look forward to INSIGHTS. It sounds really exciting. Thanks, everybody, for joining.

Thanks, Mark. Thanks a ton for arranging and everyone on the phone, thanks a ton. Apologies, we couldn't do a Q&A, but we have to, as Erik pointed out, we are in our quiet period, so we had to keep it very focused today. So thank you very, very much.

Thank you.

Thank you.

Thanks, Mark. Thanks, everyone.