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

Okay. Good afternoon, everyone. I'm Mark Murphy, a software analyst with JPMorgan. And it is a great pleasure to be here with David Ossip, who is the Chairman and CEO of Ceridian, and navigated his way through severe airport difficulties and complexities to be here with us today. So David, thank you. We appreciate it.

Thanks, Mark. Pleasure to be here.

So David, maybe -- in case if there's anyone in the audience who isn't familiar with Ceridian, maybe could you give us just a 30-second intro or overview of the company or longer?

Yes. So we're a human capital management vendor. We started the story in about 2013 with the Dayforce product. I had recently finished a noncompete from my prior company before that and decided to reenter the market space. The market that we play in is probably about a $40 billion market space. Half of it would be in the U.S. and Canada, and the other half would be more broad on a global basis. Before I started the company, I did quite a lot of field research calling out to people to try and understand the space. The first thing that I found was that very large market space. Second was that the average life of customer, particularly around payroll and workforce management, was well beyond 10 years. So the unit economics looked very nice. The third was when I did research largely around the payroll side, people were asking me if you could do learning management, compensation, recruiting core HR. And it was evident that there will be a platform play, which meant that you could add modules, add recurring revenue without really changing your cost basis. And I thought long-term profitability tied with a long customer life would be very, very helpful. The last thing that I noticed was that the requirements seem to be driven for customers by the jurisdictions in which they played. And that meant that you could build technology that would scale. You wouldn't have to customize it by each particular client. So I quite liked the space and decided to enter it. At the time, it was a company called Dayforce that obviously I had started. And I needed a partner around the payroll space in order to do taxes. To do payroll without taxes is like selling a bus without the wheels. And so I came across Ceridian. Ceridian at that time had actually been taken private by Thomas Lee of Fidelity National Financial and effectively arranged a reverse takeover of Ceridian in 2012. To put the numbers in perspective, 2012, '13 Dayforce revenue would have been around $200,000. This year, Dayforce revenue will exceed $1 billion. So it's been a very fast-growing organization. The way that we compete is that when I did the research, I noticed that the incumbents had integrated suites of human capital management, which consisted of separate products with different databases and user experiences. So you would have a database for HR, one for payroll, one for time, one for recruiting, one for learning management and the like went on. Yet when I spoke to the customers, there was a desire to bring everything together into a single database so you could do things like reporting. The other thing I noticed was when I looked at the workflows across human capital management, they were largely batch-based because of the separation of data. And so the idea was if we could build on a single database, we could have a rule engine that could act immediately or continuously. And if we did that, it meant we could make a tremendous difference to user experiences. For example, if you were a payroll person with an incumbent, you would have to wait the entire duration of the pay period up to 2 weeks before you could get access to your pay data because the pay data would have been in the time and attendance system separate from the pay system. So you had just fundamental access to data issues. And that's largely how we built out the product, single database, continuous calculation engine. Today, if I look at the actual business, we have over 5,600 customers live on the product. I think we have the strongest retention in the industry on Dayforce. It's about 97.1% on a gross basis and about 106.5% on a net basis. We have 5 avenues of growth. Firstly, we acquire new customers each year. Last quarter, we added 175 customers to the Dayforce platform. Second avenue is that we continually extend the platform. We add about 2 new modules per year, and then we go back to the base, and we sell them those modules. And when we sell new customers, we sell more. If you look at the actual data, about 30% of our sales is back to the base today. And when we look at new customers, 36% of them buy the full suite. If I look at it on a pricing basis, time of IPO in 2018, we would get about $12 to $15 per employee per month, whereas today, we get well into the $25 and $30. So we've seen that expansion. Third avenue of growth is that we've extended the product upmarket. 2012, '13, we played around that 1,000 employee mark, and we've been continually going upmarket, and we've been quite successful at that. So larger companies all the time. And if you look at the average size of customer, the average amount of recurring revenue went up 10% year-over-year on the last quarter. Fourth area of growth is global. As you know, when I looked at the research at the beginning, half of our TAM would have been outside of the U.S. and Canada. And so we built the product to be global in nature. We have payroll capability now in 57 different countries. We're quite differentiated in market with our global platform. Global as well helps us in the enterprise segment of the market. If you're a company with more than a few thousand employees, most likely, you have global people. And then lastly, we look at adjacent markets with the idea being that we have millions of people who use our products on a daily basis, are there ways to drive additional recurring revenue from those people? One of those would be, for example, the Dayforce Wallet, which we launched about 18 months ago. Effectively what the Dayforce Wallet is, we calculate all the time. So we know at any instance how much anyone has made net of all their payroll, deductions and taxes. We allow the person to see what they've earned and added to their Dayforce card. And when they go off and spend, we get the interchange. When they add the money to the car, we do a true payroll, which means we generate an earnings slip fully compliant. And we do the remittances at the federal, state level the very next day. So quite a differentiated product.

I appreciate the extra detail on the retention rate. the 97.1%. I don't think any -- I've never heard any other company that takes it out to another decimal point.

I could go...

And the 106 point -- what was it? 106.5? What was the other one?

96 point...

You could take it another decimal.

We can. We can keep going, and we can keep going...

Yes. The numerical acumen, it's impressive. So -- and I think, David, you answered that comprehensively, but I want to ask you this from another angle. So the Dayforce product gets rave -- reviews, right? We think of it as the Tesla of the HR software market. Like it is a different experience. Can you explain to us -- because -- so there would be people in the audience that they're not running payrolls, right? So what is the -- of everything you just mentioned, what do you think are the core differentiators of your product? Would you -- if people were able to kind of understand it relative to the other competitors?

So we don't do that research back in, I don't know what it was 2010, '11. And I would speak to payroll people, and I would say, what's your fundamental challenge? The challenge was that they couldn't get access to the data, which meant that they couldn't start any of their busy work until the data was transferred from the time system into the pay system. Typical pay period would run 2 weeks, so they would wait, and then they would get their data 1 day after the end of the pay period because the supervisors had to improve the data. They would extract the data in a form of a flat file, and then they would read it into the payroll system, and then they would try and reconcile. And about 50% of the time, it wouldn't reconcile, and then they would have to decide what they were going to do. Once they had the data, they would then have to reprocess it, rebalance it. And only then could they start to do adjustments and various types of entries and start to audit, run their audits of the data. And so when I said, when do you pay people? The answer was when we run out of time, not when we're ready. And so I look to -- now this just makes no sense to me because there's no reason that you can't continually calculate and, if you do, allow the payroll team access to data so they can run their quality checks at the very beginning, do the adjustments at the end of the pay period you're done. Number-wise, without the system, customers would spend, say, 22 hours trying to close out payroll with the system, it drops down to about 2 hours. So significant. And then the quality of pay goes up. Now if I've got the data coming through all the time, it means it can be used from a business purpose as well. So if you're doing things like workforce management, if you're looking at your overall aggregate data, you have live data of how you're spending your labor cost, which is probably about 70%, 75% of your overall business cost. And you can start to act on that immediately. And we've added things like intelligent nudges by forecasting various types of KPIs so you can actually drive people into action. From an employee perspective, people bridge their financing, right, between pay periods. And about 80% of all individuals have to do it either through credit card debt, line of credit, payday loans, whatever you'd like. But legally, they've actually earned the money. So if I work an hour a day, it's my money, company owes it to me. If I leave the organization, I get a check as I walk out of the actual door. So we said, well, we have the data available. We can now allow people the ability to stream their pay directly into their wallets. They can go off and spend it immediately, and they can kind of do their financial balancing in a much better way. So these are fundamentals, I would say, on the payroll side where we are differentiated to every other competitor. On a further level, the global component is very big especially when you have a work-from-home perspective. So with a work-from-home perspective, people can live in multiple states. They can look across different types of countries. And as you do that, the jurisdictional rules begin to kick in. So if you're just in the states and you're moving across different state lines, you actually have to track the number of hours that you spend in each state to determine what W-2s are going to have to be generated for you at the end of the year. To do that without the time component is almost impossible, becomes very difficult. You then want to get into other compliance areas, like if you're in California, you're getting things like meal penalties, FMLA over time, also very difficult to do unless the data is all together. FMLA over time is I get a bonus 90 days ago. I have to recalculate my average rate over that period of time, and any overtime that was paid out has to be paid out at the now calculated average overtime rate. And I have to create an adjustment entry for how I paid overtime versus how I should have paid overtime if I would have known about this bonus that didn't exist at that period of time, all right? So to do it, you say, okay, numerator payroll, I need the payroll data, denominator, hours, workforce management, and the rate of pay is going to come from the HR system are constant. With us, it's all one system. So it's a very simple calculation. For all of the others, you're trying to blend 3 different databases, line it up to do it. Now the same applies across the broader aspect of talent management or human capital management. Simple things that you're trying to do, employee onboarding, which is one experience for an individual on all of the other systems would be, here, I'm going to do some HR self-service on this system, benefits enrollment on a different type of system. I'm probably going to be signing off on like policies and such, whereas us, we would have like a learning management module that will be used to make sure the person understands the concept before they sign off. But for us, we take multiple different types of, if you like, one experience, multiple different deliveries for us becomes one and on the others, it becomes multiple. So from a technology perspective, Look, we were lucky. We started building the system in cloud. We built it to be global. We built from this single continuous always-on pay engine, and that does differentiate us in market quite a lot.

You were just lucky and good.

Lucky, yes.

Okay. So when -- I want to double-click on the core payroll engine because this -- the concept of the continuous calculation engine, which you've just taken us through, is something that, for sure, your customers have been noticing. I am wondering, do you look at that part of this and say, well, the heavy lifting is done. We've done that. That's game over, and now it's on to the wallet, right, and other types of products? Or is this a constantly evolving kind of payroll engine?

So in North America, the wallet -- sorry, the pay engine is obviously very complete and very differentiated. We obviously are continually enhancing things like the wallet. Where we're spending time on payroll in regards the wallet would be around really kind of edge cases. So you're a company and you have, let's say, hundreds of different locations. When someone moves between each of the locations, which might be set up legally as independent FEINs, there are some edge cases where you want to automate the retro calculations. So we're doing things like that. And that's, by the way, completely different than anyone else would even think about doing it. On a global basis, this year, we're releasing payroll for Singapore, Indonesia, the Philippines, Thailand, Malaysia, South Korea, Japan. I'm not sure I've missed a few. We're in pilot at Hong Kong. We're in pilot at the moment in Germany. So on the global buildout capability allows us to configure those engines very quickly. And that obviously increases our TAM and also allows us to kind of increase the number of employees that our customers have on the system.

Okay. Maybe you can help us understand how you think about the growth algorithm and the amount of runway that you have in this business. The Dayforce recurring revenue grew 30% -- sorry, 31% in the most recent quarter. And as you mentioned, so that's happening on a pretty big scale. But you've been talking about 5 distinct growth factors. Can you touch on that a bit? And I think, David, the other question that always is coming up is, what is the amount of kind of replacement pipeline that you see out there where you're picking up things, for instance, where you're picking up churn that's coming off of ADP?

So it's more than just ADP that we obviously pick up.

Yes.

So when I look at the market, it's -- let me just go on the first 2 growth factors, which is acquiring new customers, and the second is expanding the platform, driving more revenue from all customers. We have a differentiated product when it comes to compliance. We really do. We can just do calculations so much cleaner and more accurate and quicker than others in market that there's a strong reason to move over to us. Some of the penalties that you have if you aren't compliant are many times the value of the actual system. Now in that, obviously, we do replace incumbents. And now the incumbents could be one of the legacy players, like, I suppose, ADP that you brought up. I would probably put Ultimate into the same type of bucket. The Ulti tech,as you know, is kind of Borland Delphi, SQL types of. There's a lot of old ERP, particularly around PeopleSoft, still a lot of PeopleSoft, kind of version 9, version 10 inside market. There's a lot of on-prem SAP that you find. You find older kind of MRP, ERP systems out there like JD Edwards. You still come across old legacy payroll systems like Infineon that haven't been around like 20, 30 years. MSA is still out there in pieces. Cyborg is out there. When we get into the HCM pieces, so HCM is human capital management. It will be things like recruiting, performance, compensation, learning, document management, career intelligence, career pathing. There's quite a lot over there. Most of that is actually still done on spreadsheets. The exception would probably be recruiting. And when you replace a stand-alone recruiting vendor, you obviously can do the onboarding piece much better, the management of the talent pools because you can look at the alumni of the organization, you can look at the people who are working actively, the part-timers, contingent workers. So you just have access to a lot more data to kind of do that. When I get into things like compensation management, which would be like merit bonus, LTIP, I would say 99% of companies out there are using spreadsheets today. When I do things like HR, self-service, which should be all of those paper forms that you fill out, a lot of that is still done on paper. So there's document management. You would have confidential information that will be on SharePoint sites, so they might be attached to e-mails, stored on some file share, which you know legally, you don't allow to do any of that stuff, right? That's just like, don't do that, you can get into a lot of penalties. Performance management, lots of performance management systems are there, very few are really adopted. Now I go around the room here and say how many people really did your performance reviews, your 360s, like no one's going to put up their hand, honestly. So there's just a lot of white space. And then when I look at it on a global payroll side, it's like the Wild West. It's like a global company will have one or 2 systems per year depending on what they've acquired in that particular. So there's just a lot of that. And so a lot of our growth doesn't just come from acquiring new customers and replacing the incumbent. But it comes from expanding what the solution is. And if you go speak to a CEO of any organization, they most likely believe that the type of system that we deliver, the end state is what they currently have, that they don't really know that they've got about 20 different systems and pieces of paper and bumps in seats that are doing what should really be in one simple system.

It's amazing because when you mentioned some of the systems that are still out there, MSA, Cyborg, I'm not even sure I've heard of them, right? And we come across that a lot. It just feels like that really does feel like the Wild West.

Yes. Look, I keep saying this, we're not launching something to Mars over here, right? What we're actually trying to do is we're trying to bring to market a well-thought-out comprehensive people system. And most of the different aspects of it, with the exception, I would say, of taxes and payroll and the workforce management side, there isn't a high difficulty in the equations. But what you have to have done right is a very clean data model and have to think about it from efficient workflows. And I think we've done that exceptionally well.

How are you feeling about the cadence of new bookings growth? I think your commentary has been positive, but if you think about exiting the pandemic, moving into reopening, is that all the way back to normal, right, across your customer base, even some of the pandemic-impacted industries? Is it back to normal? Is it above normal?

So I don't think it's back to normal. So I don't think the old normal applies. It just -- it doesn't happen anymore. So I'll answer in a few ways. I look at it from a macro perspective, we're seeing a very robust labor market. If I look at the last 90 days, the employment count looks like it's up about 3.7%. And that's very similar to what we would have seen last year. Maybe it's maybe 10, 20 basis points higher, but it follows a kind of a cyclical pattern. And so it seems to be quite robust. If I look at the number of open job requisitions, so job posts across our customer base, is at least 2x what I saw last year. So if I look at the forward indicator of labor, I think that's actually very strong. If I look at our underlying industries, manufacturing, they're in a labor shortage trying to hire as many people as they can largely because they're struggling to produce the goods tied to the programs that they've already sold. And I think it will take them a while to get through that. The logistic companies are struggling to find people to do the necessary distribution and shipment of the actual goods, so they're hiring as many people as they can. Retail, there's been obviously a shift from online back into on store, whether it be specialty retail or whether it be malls. And so you're seeing them struggling to find people to actually get the stores back and running. Hospitality is crazy. Any flight is oversold. Every hotel is oversold. You can't book a reservation for a restaurant. If you're thinking of going away in Christmas and you haven't made your reservation yet, you probably aren't going away. So they're hiring whoever they possibly can. Health care is completely backlogged. There's a shortage of labor, whether it be extended care or assisted living, acute medical. So they're obviously hiring as much as they can. We're an organization that runs on labor. So in a tight labor market, in full employment, we obviously do very well. In our contracts as well, we get paid for furloughed employees. So like when there was a downturn with COVID, many of the other players in our industry saw their revenue go down. We didn't because it's too expensive for companies to fire people, they have to pay out severance. So typically, they furlough people, we still get the recurring revenue during that period. So we kind of are quite protected. To answer your question around bookings, Q3, we had very good bookings. Q4, we had great bookings in Q1. We had a very strong bookings quarter as well. If I look at pipeline, it seems to be very good. If I look at the sales forecast for the year, they're very optimistic. So I'm not seeing a slowdown from a customer perspective at this point.

What was -- I just want to make sure I have my bearings on the 3.7% figure that you threw out. You said that was an employment change in a 90-day period? Or is that the year-over-year?

Last 90 days.

Wow. Okay.

Yes. If you do it year-over-year, and you're in double digits type of thing. But don't get -- there's a cyclical nature to labor. And so you typically find that at the end of the year, you peak after Christmas. And then there's a bit of a lull that hits you in kind of January, and then the labor starts going back up. So I would expect to see an increase of, say, 2%, 3% in a typical cyclical period. The only time I didn't see that was really in 2020 because of obviously COVID hit late March and so where you should have been going up in labor, the curve went the wrong direction. Last year, it actually started to follow the regular cycle, and this year, it is as well. But even year-over-year, so if I take it to the first derivative, I'm seeing a slight increase year-over-year.

Okay. Very clear. So -- and having heard what you said about -- we understand you're well protected in terms of furloughs and what you see in terms of pipeline and in the dashboards and the sales forecast is good. So what -- how do you respond if an investor says, Well, the yield curve has inverted, right? We have an inflation problem. We have rates moving higher. We have the Fed tapering. We have a war in Europe, right? And so at some point here, we could be really into a recession perhaps, right? And that then maybe the labor market would start to go the other way. How do you respond to that thought process?

So I don't think the labor market actually goes down. I think you might end up with furlough, but I don't see that happening right now. So if I start to break it up, you say, okay, the Fed rates going up, what's the impact? Well, if I go back to 2019, our average float balances would have been about 3 point -- I think, $4.27 billion at that point in time. And I think our average float rate around there was 2.34%. And so we yielded probably about $81 million of float income in 2019. If I go towards 2021, we saw the average float balance go up. I think it actually grew quite a bit, probably -- Noemie, what?

20.

About 20% went up. The interest rate went down to -- I think it was about 103 basis points.

107.

107, close. Okay, 107 basis points. And we yielded about $40 million to $41 million of float income. So we actually lost about $40 million. So I look at it today and if I assume we go back to the 2.34% -- we ended off Q1, by the way, about 93 basis points in terms of the float rate. So say it will end up the year at about 1.9%. And say, a year from now, it will be back to, say, 2.34%, something like that. That alone would give us another $40 million of EBITDA. And then if I apply the increase in the actual float balances, which were up 17% in Q1, so say it amounts to about 20% because each of the prior quarters is about 20% year-over-year increase, I can add on another about $15 million, $16 million to that. So we've got basically a tailwind of about $50 million to $60 million just on the float side as well. So yes, hopefully, flows -- let it go up. It would be quite good for us.

And that's big proportionally compared to your EBITDA.

It is. But even if I look at our EBITDA, remember there's a time component, which I'm not sure if the market fully understands. Currently today, 85% of our business is recurring, 15% of our business are onetimes. We lose money on the onetimes, you make a lot of money on the recurring. Every year, we sell more recurring than we do onetime revenue. So that number keeps going up. If we move from 85% to 90%, that's about a 12% to 13% difference on the EBITDA of the business, which just happens naturally over time. Now if I look at our gross margin on the recurring side, it goes up by about 1% to 2% per year. It goes up because the product is becoming more robust, and so the inbound support tickets is going down, dropped by 13% last year. It goes up because we add on additional modules that give us more recurring revenue without changing the cost line, and it goes up with the float component as well. So as that actually happens, that 75.5% on the kind of the cloud recurring keeps going up over time. The cloud, the overall recurring margin also is impacted by the legacy bureau business, which has a 51% contribution margin, and that drops every year quite substantially. And so as the gross -- as the recurring business becomes more Dayforce and as we get more modules and such, you see that blended rate from about like 72%, it will go up quite significantly as well. And so that gives us more of a bit of a tailwind on the EBITDA side. So it's just -- it largely is a time function as to where we are and how quickly we're growing.

Okay. We're down to about 3 minutes. So I thought I would just check and see if we have anything in the audience. If you do, just raise your hand, we'll get you a microphone. Okay. Maybe we can end on a quick discussion about your traction upmarket because the economics of that would be very beneficial to the business. I think the most recent quarter, you had a win. I think you said it was 52,000 seats. So those are some very large organizations. We know you've done larger deals than that. Can you help us understand which elements of the strategy you think are turning the tide on those discussions? It could be the wallet. It could be the continuous calc engine. It could be doing -- it could be what you're doing in terms of international markets. But what is making the biggest difference there? And if you can speak to how sustainable that is.

Yes. Look, the largest kind of headwind we have is really the brand of the company that we aren't known based on our capabilities. Often when we go into the large enterprise customers, the response we get is, well, we didn't understand what you have and how differentiated you are. So getting to the table is our largest challenge that we have. That happens naturally in a number of ways. One, we now have 5,600 customers live on Dayforce, very, very high retention rate, great customer sat scores, NPS scores, which I think are the strongest in the industry as well. And that obviously breathes. You get it through referenceability. Second, we've been working on the system integrated channels, the SI channels for about 2 years now. The channels have become quite well developed in EMEA and APJ. Most of the projects we do there are prime now by our partners. In North America, we've done a great job with the Tier 2 partners. And now we really are focusing on the SIs, the Tier 1 SIs, which we like PwC, Accenture, E&Y, and we're making a lot of traction there. As those partners get success and create value for their customers. We're confident that they will start to bring us into more and more of the very large deals. And when you play in the very large enterprise space, the large SIs are very influential into who gets to the table and what modules the customers buy as well.

This has been wonderful. But do you have any concluding comments or statements that you want to make before we wrap?

No. Just thanks, everyone. Full room over here. Thanks to everyone who's listening as well.

Thank you very much, David. Great to have you here.

Thank you.