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

Good afternoon. Thank you, everybody, for joining us. With us, we have David Ossip, the CEO of Ceridian. Very excited to have David here. Ceridian is a company that's doing a lot of very cool and interesting things in the payroll space, which is probably not a phrase that happens a lot of times together, where cool and interesting comes up with payroll. So David, first, thank you for joining us. We appreciate you coming.

And I wanted to kick off, just to rip off the Band-Aid, we posted more than 10 companies up here today. We've asked the question to everybody we've seen. There's -- on top of investors' minds, there's a lot of macro cross-currents, right? On the one hand, you have a tight labor market, you have what looks to be a strong economy, then people are also worried about what that means around a slowdown. So let's just step back, and what are you seeing in your day-to-day conversations with different CEOs that you talked to or the customers when you're talking to them?

So first of all, you have to understand our customer base. 65% of the people that are on our platform would be what we would call low-skilled commercial workers spread across industries such as manufacturing, logistics, retail, different aspects of hospitality, health care and the like. All of those industries are hiring as many people as they possibly can. If I look at the actual numbers, employment is up by about 3.6% to 3.8% just over the last 90 days. And so that's obviously quite a robust market. If I go to the manufacturers, I see them struggling to produce the products that they've actually sold over the last probably 18 months to 2 years. Logistics companies are obviously trying to hire whoever they can to get the goods that they need to move moved. The health care industry is beyond backlogged across everything, whether it be at home health care, extended care, assisted living, acuity, but there's a real struggle just to find people to meet with the actual demand for their services. Every aspect of hospitality, whether it be restaurants, hotels, airlines, cruise ships, struggling to get back to capacity hiring people. All of the industries that service those industries, janitorial services, security guards, very, very similar, really struggling to actually find people. And in retail, there's been a shift back to in-store retailing, and the retailers are trying to find people to actually work in the stores. And I would say regardless of whether or not the economy has a hard or soft landing, I don't think the employment trends for those industries are going to change much. And obviously, that's largely where we do play. So on the macro side, it seems to be still quite a robust economy. When I look at sales, we had a very good Q3, Q4, Q1. Sales seems optimistic about Q2 as well.

That's a great lead-in. And I think that's great color about where your end market is. I'd add that you're also largely in 500-plus employee organizations. So if I remember, in 2020, that kept you relatively well insulated also. But maybe just as a follow-up then, are you -- what are you seeing in terms of the pipeline? How does the pipeline compare to maybe this time last year? And that doesn't have to be any context of what's happening in macro, but just company-specific like how does the pipeline look currently?

Well, our sales targets this year are considerably above what we would have had last year, and so the pipeline would obviously be in proportion.

Okay. And any change in like how long deals are taking? Or are customers trying to move faster because they're dealing with their own retaining of employees and a tight labor market? Anything that you've seen that's a change in the behavior?

We haven't seen any change in behavior.

Okay, okay. Maybe let's switch gears and go to the product side. As I mentioned, to kick this off, there's a lot that's going on at Ceridian. I wanted to maybe start on the core Dayforce side. When we talk to whether it's customers or partners, I think the company has invested a lot over the last several years in enhancing the UI and around the technology side. Are there any key new features or things that you wanted to call out from a product perspective that you think are really helping your pipeline and the demand that you're seeing?

So if I look at it from a number perspective as well, time of IPO, 2018, we predominantly were selling payroll time with a bit of workforce management. We would get about $12 to $15 per employee per month in terms of subscription. Since that time, we've continued to add about 2 to 3 new modules to the platform per year and now have a very competitive, not lead-in, full human capital management product. Today, when we saw that 1,000-employee company level, they're about $25 to $30 of PEPM. So we've over-doubled what we've been getting. From a product perspective, we are the leader in compliance. If you look at Gartner, they ranked us #1 in compliance, #1 in peril, #1 in workforce management. On the HCM side, we have become a leader, Joe Korngiebel, who's here today, joined us probably about 2 years ago. Joe had 3 or 4 top priorities. The first was to lift up the user experience. We released the hub in January of this year. It's really nice. It allows the organizations to make it their experience as opposed to our experience, brings in all the content in one place. It rolls out beautifully on web or on mobile. And that's gone very, very nicely. We -- the second area was to lift up what we were doing in terms of talent. We did an acquisition of a company called Ideal. Joe obviously had a lot of history in the talent space. So if you look at what we've done on talent acquisition or recruiting, in the use of AI, ML technologies to make the experience much more predictive than management, we've lifted up and I'll say we definitely are on par, if not ahead, of the ERPs inside the actual market. When it comes to products like engagements, so we have the ability now to do surveys of the actual employee base in real time and present an information via the hub to the actual managers so they can get feedback. That's far ahead of any other player who have typically bolt-on types of technology. On the talent side, we've gone up. On the data side, we brought in a guy named Dave Lloyd, who had 2 successful access around predictive tech companies. And he's done a lot in terms of visualizations, adding things like the ISO 30414 measures, doing intelligent nudges when we can forecast that someone's going to trip over a particular threshold. We can notify them at that point to take action, and that's becoming very big. On the global side, we've obviously done a lot of work in terms of [ Unify ], which allows us effectively to deliver payrolls inside the Dayforce system in 57 different countries at the moment. That's obviously helped us tremendously on our win rate in terms of the larger major markets in the enterprise space. And then finally, the Wallet continues to do well and very much is a differentiator, which has helped us on the win rate of payroll on human capital management and I think actually -- has actually changed the perception of what payroll should be.

So there's a lot there, and I want to unpack it. I'll work my way backwards. Just I think the Wallet is something that comes up in every investor conversation that we have. The company has given some kind of directional metrics around it. Maybe can you just help us understand how has usage looked now that we're in an environment where you're seeing wage inflation, you're seeing more competition amongst employers to hire? Have you seen kind of that average 25 transactions change? Or are you seeing more interest from your existing base to want to adopt the Wallet? So any trends that you're seeing there would be helpful.

So I think we actually got high usage numbers of the Wallet almost out of the actual base. Again, if I go back to the numbers, the typical Wallet holder uses the product 25 times per month, $30 typical spend per transaction. It goes through convenience, grocery, gas, fast food restaurants or day-to-day living. When you do the math, it amounts to basically 1/3 of their net earnings goes through the Wallet. And if you look at people's other obligations, whether it be mortgages, car loans, et cetera, that's probably where you get the [indiscernible]. On the actual Wallet side, there are a few interesting pieces. When we launched it 2 years ago, it was this novel thing that we would have to explain. Now we're finding in almost every HCM system out there a request in the features that we have inside the Wallet to become part of a modern payroll system. The second part about the actual Wallet, we've done a very good job in having customers sign up. In fact, 89% of new customers applying for the Wallet. Over 1,100 customers have signed up for the Wallet. About half of them are live. Now when a customer goes live, they typically take a percentage of their population and they roll the Wallet out [indiscernible]. And then they'd watch it for probably about 3 to 6 months to see what the usage is, the results are. We've seen very, very positive numbers come from this. And so the focus we have at the moment is working with those customers to include -- to expand the reach of the actual Wallet to the other employees. Usage across the eligible employees, employees who are eligible for Wallet, we're seeing the numbers are about 36%. They're going up by about over 2% quarter-to-quarter. Our customers that have been live the longest, we're seeing registration rates above 50%. And so if I were to predict, I would think it will be the norm for most people that they want to be able to control when they get paid.

That's great. That's really helpful. And then I think that the -- a key part of what makes the Wallet even possible is Ceridian's continuous calculation engine. And I think maybe it just would be helpful to understand if how much of a differentiator your customers see that as. And I know we talked about some of the newer things you're doing, but just how does that help you competitively on the core payroll side versus some of your competitors that don't have that same continuous calculation engine?

So the Wallet, as I mentioned, the Wallet's been asked for in pretty much every RFP we're seeing. The other players don't have the ability to calculate instantly. So the way that they actually do the Wallet is they have a partner product that they have to use by the Wallet capability. Now that other company has to make money as well, so they typically charge the user fees. Some of the companies pay -- or the employees pay up to $1,400 a year in terms of the other third-party wallets. That's not the right thing to do from an ethical perspective. From a company managing pay perspective, if you have a bolt-on product, the movement of money to a third-party wallet is actually a loan from the third-party company to the actual employee. And then you create what's called a garnishment against future earnings [ against employee ] that then have to get administered. The organization, the employer, typically has to give the third-party product a line of credit [indiscernible] for, say, $300,000 to $500,000, offset the risk to the third-party vendor that impacts their current liquidity or their cash flow perspective. When they close out pay, there are cases where the earnings after all of the other garnishments and deductions of the employee doesn't cover the payment or the garnishment repayment to the third-party product, and that creates a bit of a nightmare situation for [indiscernible]. But we don't have that because it's just part of the [indiscernible]. Every time the employee adds money to the Wallet, we do an off-cycle payroll for that individual. We generate the payslip. We do the remittances the very next day. It's fully compliant. It's nothing that the company has to do from a reconciliation perspective, and no fees charged from the employees as differentiators. And I would say it has impacted our win rate, and it has clearly explained to customers what it means to calculate instantly.

Great. Maybe shifting gears a little bit. I know the company has done strategic acquisitions as part of the international side of the story. And Ascender, Excelity, most recently, ADAM HCM. Can you help us understand how Project Titanium is allowing you to take these acquired companies and make it easier to move them over to Dayforce and really let them maximize the value of your platform?

So Titanium, we now call Unify from an internal -- external perspective, what Unify does is it allows customers who are using one of the pay engines that we acquired to not have to reimplement their system. Instead, we modified those pay engines that when they start up, they use real-time APIs to all data, typically HR data, [ time ] data. They do the calculation and they publish those back into [indiscernible]. There is one experience from a customer perspective with Dayforce. All of the data is housed inside Dayforce [indiscernible] reporting perspective, and it allows us to go to the customer and up-sell them on core HR, on workforce management, talent module in a very easy way to them. And where we are, we're in the charter programs now with the first few customers, APJ. With the technology, we expect to more broadly roll it out at the end of the year. In terms of the numbers, there's about $90 million, $91 million of what we classify as bureau revenue between the Ascender and the Excelity products. Most of that will move over to Dayforce for the next 2 years. And as we do that, intent to up-sell those customers the modules that I mentioned. And by doing so, multiply that $90 million by 2 as we do.

And has that been maybe the experience that you've seen with some of the earlier vintage acquisitions where you've seen this uplift on getting them over initially and then cross-selling them additional modules over time? Like is there -- have we seen that with like Excelity and RITEQ, which were a couple of the earlier ones?

RITEQ, we've actually sold more [indiscernible] add-on to the RITEQ customers than the revenue that exists [indiscernible]. But obviously, the [indiscernible] case would be to look at [indiscernible] and Dayforce. And as I mentioned, [indiscernible] just payroll, historically, when we moved those customers [indiscernible] add on all of these modules. And it keep on giving. About 30% of our monthly sales nowadays goes back to the base. We -- I mentioned [indiscernible] that we get from new customers double what we got in 2018 was back into [indiscernible]. It's very much the same playbook that we did back in 2013. It's just doing it in a way that it makes it much easier for a customer. They don't have to reimplement the actual payroll side. Makes it easier for us to do up-sell and to [indiscernible].

Great. And maybe sticking on the international theme. On -- how does the international native payroll side that Ceridian is working on fit into this, right? I know you're in several other countries now like the Netherlands, and I know everybody here, I think, understands how complex payroll is in the U.S. But is it as complex abroad? And is the use case as valuable?

So to answer your last part of your question, it depends on the jurisdiction. If you go too much of APJ, it's a much [indiscernible] type of product, at least in [indiscernible] if you go to Australia, it's pretty complex [indiscernible]. If you go to New Zealand, they've also got some crazy stuff. Germany, again, quite a complex type of jurisdiction. But yes, the U.S., just given the number of jurisdictions, about 50,000, the number of different levels of taxes you have here and the multi-j stuff, quite unique over here [indiscernible]. In terms of native, native basically means we have the ability to calculate instantly [indiscernible]. In terms of the native, we're only in our Germany at the end of this year. The sales are going really nicely. So we start with a big base, if you like, [indiscernible] in the -- in Germany. We've also built out a native pay engine for APJ that we've figured already was simple, probably the configuration because it's relatively [indiscernible] actually go from that [indiscernible] very nicely from [indiscernible] first.

No, that's great to hear. I know Ceridian's differentiated because you have international as part of your growth strategy in Wallet, too. Maybe if we pivot in directions and thinking about the go-to-market strategy. You mentioned strong sales in 3Q and 4Q and a strong start to 2022. Where is the company at in terms of sales force productivity? And what have been maybe the key drivers of that?

In terms of major [indiscernible] 500. Productivity is there [indiscernible] our pipeline also [indiscernible] into the enterprise space, very much the same as [indiscernible]. In the large enterprise space, we've [indiscernible] large enterprise sellers probably are about 6 from where I'd like to be [indiscernible] activity. But obviously, going to be [indiscernible].

Great. And what about in terms of hiring everybody that we talk to? It's a little bit of a tight labor market. I think that enterprise software sales, in particular, is high in demand. How's the company's ability to hire and retain inside of the sales organization been? And how should we think about maybe sales force additions as the year progresses?

[indiscernible] fully staffed. In the large enterprise, we might have 1 or 2 vacancy [indiscernible]. In terms of hiring other function, we actually haven't been challenged. We are making vision about moving certain positions, lower-cost jurisdiction under positions in Q1. Other savings of about $50,000 per person [indiscernible] on an annual basis. In addition, we're hiring more aggressively types of jurisdictions. Therefore, you'll see balance [indiscernible] kind of higher cost here [indiscernible] haven't really [indiscernible].

Great. You mentioned moving employees to lower-cost jurisdictions and savings. I think even up before then, you've seen a nice expansion in recurring cloud gross margins, and I think the company has been able to yield more efficiencies. What's been driving that up until now? And how should we think about that maybe going forward given the gains you've already made?

Every year, we increased the gross margin [indiscernible] recurring by about 2 months or so. That's really come from robustness of a product that as the product has become more tenured [indiscernible]. We also invested in custom [indiscernible] and we're now finding that the customer communities are handling a lot of [indiscernible] customer [indiscernible]. For example, in Q1, we see a number of tickets per customer go down by 30 [indiscernible] that obviously adds to the gross margin. In terms of longer-term EBITDA margin, there's a time factor involved here. At the moment, 85% of our business [indiscernible] and 15% of our business [indiscernible] professional services and other. Under professional services, we lose a little bit of money on that revenue, and we make a lot of money on the recurring. The ratio shifts more towards recurring as we sell more recurring [indiscernible] professional [indiscernible] and it compounds [indiscernible]. Yes, they just [indiscernible] after that. If we can make the shift from 85% [indiscernible] let's just say a 90% [indiscernible]. That 5% move translates to about a 12 [indiscernible]. And that just happens naturally over time. But our journey really began in 2010. At that time, Dayforce revenue was $100,000 also [indiscernible] Dayforce revenue of about $1 billion. Fair enough quite [indiscernible] relatively young relative to other competitors. Pay it out over the next 3 years, you'll get that 5%. In addition, at the moment, on cloud recurring, the gross margin is 75.5%. That goes up by several percent each year, so that will probably move to about 80%. Obviously, top of the 12% movement. And then lastly, we have recurring cloud and recurring bureau. Margin on bureau recurring is much lower. But as we move that to Dayforce [indiscernible] the added sales from the add-on module, the gross margins are very close to what we see outside. That also helps us quite a bit. Also on the EBITDA side, obviously, floats are a great thing for us [indiscernible] Fed rate. But as the Fed rate increases, that drops to the bottom line very, very quickly. Just [indiscernible] back to 2019, the average float rate was 2.3%. That yield [indiscernible] like EBITDA for the [indiscernible] 2021, the average float rate was, I think, about, 107, I think -- and at 107, it meant that the income dropped to $40 million or down about $41 million. If we assume that by next year, we go back to that 34% and the fact that the float balance has gone up by about [indiscernible] 20%, $5 million directly to [indiscernible].

What I'm hearing there is there's a lot of opportunities to drive EBITDA higher. And so I'm getting the flashing light. I have a lot more questions for you, but Dave, we're going to have to leave it there for time. I appreciate you joining. It's great to see you after a couple of years doing everything on Zoom, but it's great to see you in person again and look forward to doing this in person going forward.

I think the first time I'm seeing you outside of your apartment.

But actually, you know what, I take that back. You saw me one place because you called me the guy from Ted Lasso. I saw you at Dayforce, the World Tour in New York.

That's right. But thanks, everyone, for joining us today.

All right. Thank you, everybody.