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

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Hey there. Good morning. Thanks, everyone, for joining us for Day 1 of the Wells Fargo TMT Summit. I'm Michael Turrin, software analyst here at Wells. We're pleased to have a great list of software companies participating throughout the course of 3 days. Joining us for our next session this morning are David Ossip, CEO; and Noemie Heuland, CFO of Ceridian. I'll start off with some questions, but if anyone tuned in does have something they'd like for me to ask, you can e-mail [email protected]. I'll do my best to layer those in as well. David, Noemie, thanks to both for joining us, albeit virtually this morning. I appreciate the time as always.

Thank you, Michael. Appreciate and [indiscernible].

Excellent. Maybe we can start with the world tour. David, you're back on the road. Ceridian World Tour, we've seen Vagas, New York how would you describe the energy, the feedback thus far and just how exciting is it to get back out and tell us the Ceridian story in person.

Thanks, Michael. I'm actually in London today. at the CWT in London, I just took out some time to do the specular call. It's been actually a great event over here. We have literally a packed room, standing room only for the actual event. And we've seen some of it in both New York and in Vegas beforehand. So just a desire, I think, for people to reconnect with get back together. If I look at the actual room probably about 40% of properly prospects, 30% or customers and 30% would be partners. And we're just seeing a lot of excitement, obviously, around the product. And I've actually been quite amazed, just seeing how many people are attending these events.

Is there any change in the conversation as far as interest in some of the engagement modules? Is there something that you would characterize that has just maybe created a closer focus on HCM, just given I think there's more emphasis on culture now than ever before, but we're in kind of a remote hybrid world. And so maybe stitching all that together is also more difficult? Are there new points of conversation you're seeing springing up around Stayforce?

There's much warmer date and emphasis on data that I think as people have worked over the last about 18 months during COVID, they found that it was very, very difficult to get a wholesome view of their organization, especially when they had people cross-borders. The fact that people started working in a hybrid environment made it a bit more difficult to do that. Some of the hot topics in HCM today have to do around things like recruiting, been able to attract people and to do mass hiring. I've seen a bit more emphasis on communication platforms, for example, like a Dayforce Hub, we can put your own branding on and you can effectively use it. It's a very effective way to get the appropriate message in 2 people. Compliance still remains very much in focus that during the last 18 months the way that the jurisdictions change the various types of rules, compounded the complexity for a lot of organizations. Global is always in topic nowadays, especially with how organizations have really come out of COVID as much more global organizations and some of them are seeing the benefits of that as well.

Yes. That's great. Before we get into some of the points that you laid out in some of the go forward. I think just to level set for investors, it might be useful just to provide context around where Dayforce is and just the path of recovery you've seen up until the most recent results. So we know that there were some headwinds or mix impacts over the course of the pandemic. You've shown steady reacceleration coming out of that. I think Dayforce revenue growth is the best number you've seen in 2 years. So can you just provide some context around what's driving the improvement and how you're thinking about just a more normalized profile as we head into next year?

Yes. Look, if I look at the last quarter, Dayforce recurring ex float -- on a GAAP basis, we grew 33%, 31% on a constant currency basis. As you know, as well, we increased and narrowed our guidance slightly to $1.14 billion to $1.19 billion for the year fiscal '21, which is up from about $1.8 billion to $1.18 billion beforehand. We also, as you know, saw an improvement in profitability. We saw the gross profit on a cloud increase by 280 -- 290 basis points kind of on a year-over-year basis. So overall, it's a very, very good quarter. But within the range of what we had given guidance towards the market, slightly obviously better on the top line and on the bottom line. If I look on a going forward basis, I think that, obviously, for Q4, we're quite confident on the numbers in the guidance today we have actual market. Going into next year, there's going to be some mass that has to just flow through the system. As you know, it takes us, in some cases, about 9 to 18 months to get customers live on some sales to revenue. So there could be some impact that we're trying to model out still. But I think you will continue to see strong growth from day forth as we go into the future. And Noemie, anything that you would add to that?

No, I think you pointed out the main items. So nothing specific on my end.

As far as -- I mean, 1 of the things we've observed is we've continued to move upmarket. I mean we've talked about multinationals. So we've seen some of the average customer size metrics continue to move upwards as well. does that create more of a seasonal profile for your business when we're thinking about Q4 and the puts and takes of what you might see relative to what prior historical periods would have looked like does that movement market change the shape at all? Or is that maybe not the case because of just the visibility you have into the period then

We've always had some seasonality, especially when it comes to go live. We already have 2 large go-live periods. One is at the end of Q4 and the second is typically the end of with Q2. With Q3, it largely depends on the number of working days. This year, as you know, Labor Day was a little bit late. So we lost effectively a week. So if I look at the go-live forecast for Q4, I think it will probably be a record number in terms of customers, or at least employees that we take live on the actual system. Noemie anything you would add there?

No, I think in terms of the customer profile and the move upmarket, you'll probably see a bit more seasonality towards the large 2 quarters that David just referred to in terms of June and Q2 and Q4. But we also have a pretty steady volume base in the mid-market and smaller segment that also is pretty sustainable across -- throughout the different quarters. So you won't see a material change there.

You've always done a great job framing out just the sequence and the number of growth drivers you have ahead. I want to just spend some time stepping through a few of those because I think they're just very important for investor understanding of the Dayforce story. Maybe first and foremost, just in terms of extending the platform, you touched on a few things that are top of mind. From the customer side or the prospect side at the outset, David, you brought Joe on board and his background is certainly impressive. Can you just speak more to the R&D efforts and what you're doing to just extend ad modules and capabilities into the platform?

Yes. So Michael, just to rewind for everyone. We have 5 growth levers that we always talk about. First, we're acquiring new customers around 500, 600 a year. The second is what you're talking about is that we extend the platform each year by adding additional modules, going back to the actual base. We've been quite successful doing that. As you know, 25% of our sales are back to the base. Our net retention rate is 106%, 36% of clients are buying the full suite today. We've seen a great -- a big improvement in the target happen, the target pricing that we have for a full suite. If I go back a few years ago, it would have been in the 20s, whereas today, it's almost 50%. And that's come, as you mentioned, by adding additional features to the actual product. At the world, we've spoken about some of the new pieces that we're bringing. One is the Talent 2.0 roadmap, whether we bring in a lot of ML, AI and data into the talent acquisition, performance management and other talent components. The second is when we start talking about things like career intelligence, where employees are able to see exactly what competencies they have, what learnings they need to have, what jobs are available on map out there own career planning. We think that will be very important. We've also demoed pieces of HR delivery, which is effectively allowing people to interact with the system through a natural language, also through platforms like Teams and Slack, where you can effectively ask the system. Am I eligible for this? What is the policy about that? When is my next pay day, why did I get paid this certain amount where you're taking load of people and move it on into actual technology. We've done a lot of investment on the AI side and ML side as well within our kind of bot technology. So we pretty to engage with candidates when they actually interact with the system, either through web chat or whether it be a chat on there and text messaging on their mobile phone. On the global component, we've done just a huge amount, launching about 9 new countries next year. and the road map for 2023 is also very aggressive as well. We've done a significant amount of work on the core HR side, adding things like next-generation physician management, which allow organizations to have a lot of agility when it comes to managing their organization. Now all of these are both adding to the base, which allows us to go back and forward additional revenue increase the percentage of accounted by the full suite, but also they tie into our third and fourth growth levers. The third one, obviously being moving into the enterprise space, which as you know, we've done quite successfully. And the fourth taking advantage of the global addressable market size, which, again, we seem to be doing a lot of -- we've been doing very well on that as well.

That's all great context. I'd be remiss if I didn't also just ask a question on wallet. Clearly top of mind, I think it's an important element of the bull case around Ceridian. You've talked about streaming pay. But maybe before we go into the forward vision, the business model is also very smart. So if you could just help articulate some of the stats that you've seen, I think some of the engagement stats you've seen are compelling and just step through the business model and the vision around Dayforce Wallet?

Sure. So right of about the wallet ties into the fifth growth lever -- fifth and final growth lever, which we call adjacent markets, which are ways that we can drive additional recurring revenue from the employees of our customers. The idea of the Dayforce Wallet is that people today get paid in accordance with a pay cycle. Pay cycles, either weekly, biweekly and in some cases, monthly. Technically, there's no reason for that. And as you know, the Dayforce technology is differentiated in market in that we continuously calculate net earnings. So what we have done since we launched the product about a year ago, is we allow an employee now to see what their net earnings are. So that is they can see their gross earnings, net of all the deductions, taxes that go into that calculation. And they can choose to add the money to the Dayforce Wallet. When they do that, we do a legally compliant payroll, which means that we generate a legally compliant earnings slip, compliant in all the different states and provinces. We do all the necessary remittances that are required at the federal, state and provincial levels the very next day. and we fund the card immediately. And we do that in a way that the organization doesn't have to change the way that they fund their payroll. Ceridian acts as commercial lender to the organization for a few days that the money is outstanding. They don't have to change the way that they close out payroll. They still close out payroll on the regular pay cycle. And there's no reconciliation that's required because it is all part of 1 system. Employees can't pull out more than they've earned. So there's no type of clawback situation. We don't charge any direct feed to the employees either. And the way that the business model works is that we take advantage of the interchange, which is about 125 basis points in the U.S., slightly more in Canada. After our program management fees and after our cost of lending, we make about 80 basis points of profit on the actual spend. Since the time that we launched the card, we have sold over 800 wallet systems to customers. Of this 800, about 300 of them are now live on the system. And the registration rates overall at the end Q3, the average was 29% of the employees, who had access to the wallet. When we looked at the top quartile of customers who have been live for more than a year, we saw that, that registration rate jumped to over 50% and in many cases, much higher. From a usage perspective, we're seeing people load the card about 67x per month. The loads equate to typically about 1/3 of their net earnings, and they are using the cards about 25x per month with an average spend of about $30. So we've seen a lot of what we call top of card the behavior. The road map for the wallet is also quite aggressive. We've now -- we recently began record 2-day early direct deposit. So customers are able to use the Dayforce Wallet instead of direct deposit or paper checks. When they do that because we don't have to go through the ACH system, we can fund the wallets immediately. It means that the people can get paid an extra about 1 or 2 days early. So what we typically see is a 1/3 comes out prior to the end of the pay period. And then the remaining 2/3, they're able to get up to 2 days early as well. We've begun piloting cashback internally. And so that is a look at the app and the shares the merchants around where I get a 4%, 5% cashback. We expect we'll make that GA in the January, February time frame. On that, we expect to make 90 basis points of the spend that goes through the cashback types of programs. We're also about to do referrals, saving goals. We're looking at our partnerships on the buy now pay later, where I'll be able to look at my past transactions, so like any of these transactions for funding. And obviously, we would expect the revenue with on that as well.

I mean, the stats there are great. They're impressive. The business model sounds frictionless in a lot of ways. I'm wondering, I think sometimes investors, maybe they're not the target demographic for this, so they don't see it as directly. But -- are you finding certain industries, certain customer types that are most receptive to wallet. It would seem like in a tight labor market, enabling more for your employees is the right thing to do?

So it's an interesting piece. So let me just speak about the benefits first. So as you know, we've grown our business by focusing on what we quantifiable value. Before we build a module, we come up with the KPI that we believe we can impact at the customer. The KPI has been measurable and convertible into a money saving, with the wallet we believe that we can make an impact to attrition or if you like, the retention rate of employees. So after the first 150 customers went live, we went back and we did a lot of measuring. What we did is we looked at the attrition rate at a company for people who had downloaded the wallet versus those who haven't. We found that the attrition rate went down by 42%. More recently, we've started to look at what is the impact in the first 90 days. So if you hired some one, the highest turnover rate is always in the first 90 days, and we found that the attrition rate went down by 21% in the first 90 days. We also looked at a secondary KPI, which was the time to hire. We found that the time to hire went down by 15%. And lastly, we looked at the probability of closing a open job break, and we found that you were 1.9x or slightly to close an open job break. So really, really solid metrics when it comes to creating value to the actual clients.

Great. That's great. I think the other area I'd like to just spend a moment on is international. Historically, more North America focused, but you've made strides to expand international talked about the ability to address multinational and how important that is. Can you just provide some context around some of the acquisitions that you've made? How extensible the platform has become from a global perspective and what that opens up that might not have been the case if we look back 3 or 5 years?

Yes. So as I mentioned, I'm currently actually doing the call from London, where we're doing our world tour. And as I said, it's just been an absolutely spectacular event. From London, we're actually focusing on the EMEA region. For us, it's native payroll at the moment in the U.K., Ireland, we're launching Germany next year, so customers from across that, and that's going very well. We made some significant investments during COVID in APJ. We did the acquisitions of Excelity in the acquisition as well of Ascender. Across the 2, we have picked up 1,500 clients in that particular region. And over the last 18 months, from a technology perspective, we've been focused on what we call Project Titanium. Project titanium effectively is taking the various pay engines that we acquired making them headless and making them part of the Dayforce application. So no different than the other pay engines that we have. Those all come online -- online, sorry, next year. So we'll be adding another about 9 megapay engines in that region. And as well, we've already started positioning the full Dayforce, which is workforce management, core HR and talent modules, alongside those particular pay engines in market. When I look at payroll only versus the four HCM suite, it gives us a significant upsell capability across those 1,500 clients. The other thing that we've done from a global perspective is that we pivoted from being a North American company operating globally, which typically limits you to basically sell to companies that are headquartered in North America that may have global operations to being really having a true global operating model, where we have strong leadership in region, complete with sales, services and product and technology. Now obviously, operating in a matrix type of environment, but that allows us to target companies that are headquartered in those particular jurisdictions, and we seek a lot of success from that.

Excellent. Noemie, given all these investment opportunities in front of the business, how do you balance that with the thoughts and the focus on margin? You've been able to deliver gross margin improvements throughout the course of the past couple of years. But when you think about the near-term investment opportunities versus the long-term margin potential of this business? How are you viewing those trade-offs? And how do you prioritize?

Sure. So maybe just a brief recap around Q3 and our full year guidance first before we look into the long-term horizon. We've delivered 15.3% of total revenue in adjusted EBITDA in Q3. For the full year, we expect to be the adjusted EBITDA to be in the range of 15.4% to 15.9% of the total revenue, which is pretty consistent with what we've guided before. We continue to make some investments in our product and technology. And you heard David talk about the innovation goodness. And if you look at the Joe's keynotes in the various world tour events that you'll see there's a lot of investments, opportunities to expand the platform to build the wallet offerings and the like. We're going to continue to do that. We're very successful in attracting talents want to point that out in the development organization despite the tight talent market. Our cash spend on R&D was historically lower than our peers. We're kind of catching up and now have a cash invested on R&D, which is 13.6% of total revenue, up from 9% a year ago. We're also ramping up our delivery capabilities, something we haven't mentioned is our recent acquisition of Data Fusion which increased our compliance offering in areas customers construct government contracting. It's an offering that helps customer with certified payroll capabilities, prevailing rate calculation. So we're now investing in making that integration success, and we see already momentum in our pipeline for Q4. We also have investments in sales and marketing that we continue make throughout Q4 and beyond with our invested capabilities for sales to go after the large enterprise segment. It not only requires quota carriers on the street, but also a lot of partners, ecosystem build, training those partners, building materials for those partners to go after those large transformation project at our customers. So there's a lot of opportunities for us to invest to grow the Dayforce recurring top line and go after the market share that we don't have. As you know, we -- today, we have about 5% of market share and there's a lot to go after, and we're going to continue to do that. So that's why you see happening in Q4 and beyond. We haven't provided guidance for the subsequent year yet. We're working through our different trade-offs, as you said, and different bets for fiscal year 2022 and beyond where you can expect us to continue to invest heavily in product and technology in native payroll capabilities in wallet offerings and the like as well as global expansion. And over time, you'll expect that margin -- adjusted EBITDA to go up year after year. The other thing I want to mention as well metric that we're heavily focused on is the cloud recurring gross margin. You heard David mentioned that it went up by 290 basis points in Q3 exports That's really what we're focused on. It continues to go up quarter after quarter because that's what really drives the long-term profitability of the business. I should pull back all the other investments in sales and marketing and product, then you get a very profitable business overall. So that's really the metric I would focus on and will continue to track pretty heavily as we're making those investments to fuel the top line growth.

That's great. Great context. One of the things that we're getting -- we get a lot of questions on that you mentioned maybe isn't as big of an issue for Ceridian is just the ability to hire in this environment you've always had a great culture. There have been a number of staffs and surveys that support that. Is that helping? Or what else is helping you stay on target and keep pace in this environment?

Look, the hiring perspective, you're right. I think we've done a fantastic job. And as you know, I haven't been shy about really bringing in great talent into the organization. It's been required for a number of reasons. One, I needed an organization that can continue to grow and grow through process and structure as opposed to growings. I needed an organization that could grow globally. A big part of our investment is on the SI channel, system integrators and partners. And we've invested heavily in that. And as I mentioned, if I look at the event that's ongoing today, about 30% of the room is partners, and we had a separate partner event yesterday that was really well attended. So we've seen great -- a great kind of results from that. We did a lot of, I would say, uplifting of the sales organization over the last 18 months. brought in just some unbelievable leaders like a [ Rocky ], is our CRO, great experience, both with the SIs and on a global basis. And that's obviously going very, very nicely. We're quite confident on the second half of the year in terms of sales, and the December and November and October numbers look quite promising in this particular point in time. Although there is a tight labor market, I can't say that we've been impacted. In other words, our ability to hire across the business is very strong. One other thing that ties to the margin as well as through the acquisitions that we have, we should be able to lower operating costs by basically taking advantage of some of our global service centers as well.

That's great. That's fantastic. The time goes by quickly, given we have so much to cover with Ceridian these days. But maybe the last question is just the closure, the thoughts on the forward vision, understanding you're not providing financial targets for next year, but looking forward into 2022 and beyond, what measures of success for Ceridian like what are the metrics or indicators that you're focused on? And how will you define success in the coming years, David?

Yes, look, it's always a balance as you asked, Noemie, how do we balance growth and profitability. And remember, a lot of the investments that we've made on D&T, really do drive and require investments in the other parts of the business. So we're launching 9 new countries next year, which obviously is great from a growth perspective, maybe not in year but on a longer-term basis. And remember, on a global basis, our market share has to be pretty much close to 0 at the moment. So tons and tons of weight space. But that's going to drive, obviously, investment in sales and marketing and services. in those particular types of jurisdiction. We try to remain somewhat balanced with a little bit of a focus on the growth side. So the goal would be success would be kind of getting attainment to the [ rule of 40 ], slightly more on the growth side, slightly less on the profitability side.

That's excellent. A lot lot of useful color in the conversation. David, Noemie, appreciate you joining us today and for the event and wish you the best. Thanks so much.

Thank you.

Thank you.

very much and thanks for hosting us.