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

Good morning, everybody. My name is Mark Marcon. I follow human capital technology and solutions for Baird. Our next presenting company, which we're very pleased to have here, is Ceridian. As I think most of you know, Ceridian is a rapidly growing provider of payroll and HCM solutions with the core offering of Dayforce, targeting companies with 100 to 100,000 employees. With us today, we're very pleased to have David Ossip, Chairman and co-CEO of the company. David, I've known for a long time. He's a fantastic leader, an entrepreneur, really understands the technology. And he founded Dayforce after starting up Workbrain and selling that off. And then he sold Dayforce to Ceridian in 2012, and became the CEO when that occurred. So he currently serves as Chairman and co-CEO. David, thank you so much for joining us. What I'd like to do is to turn it over to you for just a couple of introductory remarks. If you have a slide to show, that would be great, and then I've got a number of questions to ask.

Sure. I think most people know the story. Just -- does anyone not know the story of Ceridian, Dayforce in a bit of time? So I assume that people know that. And I think we've done the circuit quite a bit since earnings. So rather than going into the overview, it might be best just to go directly into questions.

Perfect.

To make time as well for people. .

Okay. And so some of the questions that we're going to copy -- going to cover, and there's obviously lots of different things to discuss. I want to talk a lot about some of your major growth levers. So specifically, enterprise, international, Dayforce, want to delve into some of the key aspects there. I also want to talk a little bit about the margins and going through what the trajectory of the margins are going to be. And then to go through something that's really topical right now, which everybody is talking about and maybe it's a good place to start, would basically be like what you're seeing in terms of the current macro environment. I had Workday report last week, and they ended up saying, "Hey, we've got some clients that are pushing things back." We all heard Jamie Dimon and Elon Musk and how they're thinking about things. And so I think it would be interesting to start with just what's on everybody's mind, which is what are you seeing in terms of the current environment? And in addition to that, thinking through, hey, it was only 2 years ago that we went through a downturn. And you went through it spectacularly. Dayforce ended up growing 14%. So the first question is basically, from your vantage point, how do things look? Where do we sit from an environmental perspective? And then I want to delve into like how you went through the last downturn.

Yes. So I'm surprised by the question about macro. I didn't expect that at all today.

I'm sure you're shocked.

So from a macro perspective, we still see quite a strong economy. We have access to a lot of live data across our customer base. If I look at this, and I look at the employment levels across our client base, just over the last 90 days, we've seen employment levels go up by about 3.6% to 3.8%. And it seems to still be accelerating. So if I would have gone back a little while, maybe 4 weeks ago, it will be slightly below that. And should I look last night, it's probably closer to 4%. That's just the growth over the last 90 days. So it's quite a robust environment. For us, we cater across industry, but about 65% of our workforce would be in what we call low skilled commercial workers. And that would be across manufacturing, logistics, retail, all areas of hospitality, health care and various types of services. The manufacturers seem to be trying to hire as many people as they can. Obviously, to go through the backlog of programs that they sold over the last few years, the logistics companies are trying to find people to ship all the goods that they need to. Retailers are moving back to on-prem and trying to staff up again. Hospitality is just crazy at the moment across everything, from restaurants, hotels, airlines, cruise ships. Healthcare is backlogged across everything, from acute medical all the way to extended care, assisted living, at-home healthcare. And the services companies who service all of those companies, think about janitorial services, construction services, it's very much the same. So we see still quite a robust hiring environment. In terms of wage inflation, looking at our data, it looks like it peaked probably about 2 months ago. It seems to have come down slightly. So I think we're kind of adjusting to more of a normalized environment at the moment. In terms of execution of the business, we continue to do very well. Dayforce recurring grew over 30% in the first quarter. We gave quite robust guidance for the second quarter. We've had several very strong quarters of sales: Q3, Q4, Q1. The sales force is confident on Q2 as well. So from a business perspective, it's going well. The Fed rate for us, obviously, it's like a gift. If I just look at it going back to, say, 2019, when -- if I looked at our average Fed rate, it was probably about -- I think it was 234. 234 basis points. At 234 basis points, we made about $81 million of EBITDA from the float. If I look at it last year, it dropped down to about 103 basis points, even though float balances went up by about 10%, 15%. It dropped to about $40 million. So if we assume that it goes back up to like a 2.34%, which I think it will, by end of year, we'll probably be about 1.9 average. It will continue to go up just based on the phasing of the actual float balances. And if we assume that the float balances have gone up since '19 by about 15%, there's probably like another $55 million to $60 million of profit just right through there as well. So from our perspective, we benefit from as the Fed goes up, it flows directly down to the actual bottom line.

Fantastic. And then you did a great job in terms of managing through the last downturn. Obviously, nobody truly knows what's going to happen. But if we do go into another recession, one of the things that, from our perspective, we view the space and your company as being very attractive is the resiliency during a downturn. So Dayforce ended up growing 14%, all during 2020. How would you envision if we have a more typical recession? Because obviously, last time, we went from a, basically, 3.5% unemployment rate, all the way up to over 15% in the course of 2 months, which was unprecedented. The prior recession was a rate financial crisis. If we have something that's more of a standard recession, whatever that is, what would you envision? And what would your playbook be like?

So first of all, we get paid for furloughed employees. So if you look at kind of the peak of COVID, where you went from, say, a 5% typically furlough versus 95% active employees to like an 85%-15% split, it doesn't impact us from a recurring revenue perspective. Companies typically don't terminate employees. They lay them off, so they don't have to pay the severance. So we're protected from that. From the new business side, usually, we sell based on compliance. We're ranked #1 by Gartner for compliance. And having to pay people accurately is needed because if you don't do that, you get lawsuits. You get very, very expensive penalties that happen as well. And most of the clients who switched to us do that because they've had significant pain points around those axes with other vendors. So typically, we continue to do quite well. Also, whenever there is an inflection point in the economy, the jurisdictions go nuts in terms of levying new types of schemes on the organizations in calculating taxes and such. And that's our strength. So each time there's something like that, we typically do quite well because companies have to adjust very, very quickly to a change in jurisdictional environment. So I think we're quite -- our type of industry, and you've heard from the others in our space as well, it's a very resilient industry because it's not an optional type of system. And our pricing model differs from the others who typically pay by -- who get paid by the corporate payer of their control.

And then the other aspect of it is that not only are you resilient during the downturn. But when we go back into the next upturn, historically, the industry has performed extremely well. And as you mentioned previously, one thing that's very different in terms of both the great financial crisis as well as during the COVID pandemic, the Fed was in the process of slashing rates. So you ended up with some uncertainty with some clients in terms of delaying bookings or whatever, which is kind of natural. And then in addition to that, immediate drop with regards to -- well, not an immediate drop because of the duration that you have it set up with your float, but a drop in terms of the interest income. So this time around, we're actually going to see a tailwind from that.

Yes. That's correct.

What about managing internally in terms of thinking through -- if we go into a recession, are there areas that you would make any cutbacks in or do anything? Or would you just say, we've got a game plan, we're playing for 3 to 5 years at least. That's what we're going to focus on.

So in terms of overall profitability, because the question always is what do you invest in growth versus profitability, a lot of that, for us, is time-based. So the backdrop is, if I look at Dayforce revenue in, say, 2012, we probably were at a couple of hundred thousand dollars. This year, we're slightly above $1 billion. So it's been very, very rapid growth on that. At the moment, our business is 85% recurring and 15%, what we term, onetime. The onetime would be professional services revenue, implementation, clock sales. On the professional services and other, we lose a little bit of money. So we lose money on that 15%, and we make a lot of money on the recurring. The recurring, currently, on the cloud side, we're at 75.5% gross margin. And that goes up each year on the cloud side by about 1% to 2%. It goes up because we get better on the technology side, there's less incoming support calls. And also, we sell a lot to our base. We still add on modules, which increased the recurring without increasing the cost. Currently, with inside the overall recurring, we've got probably about $100 million or so of what we call Bureau. The Bureau would be the recurring revenue that we've acquired. Typically, it's payroll only. So it has a much large -- a much smaller gross margin than we do on the cloud side, where we have a full HCM suite. What we're doing with the recurring that we acquired, the Bureau revenues, we're moving it over to the cloud side. And as we do that, we multiply the revenue because we start to sell core HR and all the various talent modules. So that 10%, if you like, of the Bureau side will become much more profitable over time. Now if we just assume that we go from that 85%, 15%-split, 85% recurring, 15% onetime to a 90%-10% split, which happens each year because you sell more recurring than you do onetime and the recurring compounds each year, that's about a 13% boost to the EBITDA line alone. So to answer your question, we obviously have 5 growth vectors that we're focused on. We're acquiring -- we're acquiring new customers each year, about 500. We continually extend the base, as I mentioned, which means we build new modules, go back, and we upsell the existing clients with the new modules. The third is we go up market, larger customers. The fourth is global, being very successful on a global basis. And the fifth growth vector is that we look at adjacent spaces like the Dayforce Wallet, which says, "Hey, we've got millions upon millions of people who use our products daily, is there a way that we can drive recurring revenue from those people as well?" And a lot of those are long-term gains because, at the moment, we've got about a 4%, 5% market share. It's lots of white space for us to grow. And if we continue doing what we're doing today, focusing on the fundamentals of the actual business, we'll continue to grow at a very healthy rate, and the profitability improves tremendously as well. And as mentioned, I'm not that concerned that if there is a recession, that the growth rate of the company will be tremendously impacted. In the long run, I don't think it will be impacted much at all.

Perfect. And so just staying on profitability, and then I want to shift over to the growth leverage because that's the fun part of the discussion. But in terms of the margins, you basically -- at other public venue, you basically mentioned in 5 to 6 years, we could probably get to $2 billion in revenue. If we do that, we could take the adjusted EBITDA margins towards 30%, with the gross margins basically getting from 72% to 80%. Does that feel accurate? Does that -- and how linear would that progression be in terms of the margins, following the uptick with regards to revenue?

Yes. So on the margins, in Q1, we were at 75.5%. So we've already increased quite significantly. That happens just naturally. If you go back to the time of IPO, we were probably at about 10% lower. So if we just go through another about 3, 4 years, you'll see the margins go up to about 80%. If I look at it from a G&A perspective, there's probably a 1% or 2% over there. On the float side, there's a onetime lift of a couple of percentage over there as well. We're quite efficient on our sales and marketing spending. We're very efficient on our product and technology side. But if you just do the math, and as I mentioned, just changing from that 85%-15% split to more of a 90%-10%, and over time, we'll probably go even higher than that, it drives down to the bottom line very, very quickly.

Perfect. And then let's switch over to the fun part. All right. So you mentioned a number of the different growth vectors. One that I want to start with is just basically expanding within the enterprise segment. So you've done a lot of things organizationally. You've done a lot of things in terms of expanding internationally. And you're clearly moving into the enterprise space. And I think there's probably a misperception out there with some investors, not all, but with some investors where they'll -- basically, they have a hard time distinguishing between Paycom versus Paylocity versus ADP. And they basically put everybody into the same bucket. But I mean, you're really changing where you're competing. And a proof point of that is, during the last quarter, you announced the signing of the second largest consultancy in the world. That's obviously a huge achievement. I'm wondering if you can just elaborate a little bit in terms of what you've done organizationally to move to be a true enterprise player. And talk a little bit about the competition that you went against in terms of winning that large client and why they chose you.

So first of all, just to level set, we really have 3 segments that we talk about: majors, which goes from about 700 employees to 3,500 employees; enterprise that goes from 3,500 to 10,000 employees; and large enterprise, which is above 10,000. Where you started was talking about the payers. The payers typically compete in spaces where the average employment is about 100 to about maybe 200 people. And occasionally, you might see them going up. But the way that they've architected their product is really designed for the small business. In other words, when they do things like effective dating or at the pay period level, not at the day level. And the sophistication of the software is designed for their market, which is a simpler type of organization. For them to modify their software to go to the upmarket would really impact them negatively in the low end of the market because you need that simplicity to be successful over that. When we look at us from a technology stack, we are differentiated. And if you do the field research, you'll find that we're quite unique. We built the product from a single database. We have this engine that runs all the time so that net earnings is always calculated. From a user experience, there's one, or from an analytic experience, there's one. And there's no one else in market that does that. The value that we're able to create to our customers is significant. And so if you look at, for example, on the payroll side, if it takes the company 22 hours to process payroll, we can take it down to 2 hours. If we look at it from an employee perspective, we can effectively stream payroll to the individual so they can get paid whenever they want to as opposed to waiting for a pay period without having to rely on a bolt-on technology to do that. When it comes to things like the user experience, we have brought in a very, very strong team, led by Joe Korngiebel, about 2 years ago. Joe lifted up the user experience tremendously. We just released the hub, which allows the clients to make our experience their experience. Effectively, they can put their brand in on it. They can put the information that is important to their people based on where they work and who they are. They can bring different pieces of the data together, and that gives us a very, very strong advantage. When we compete in the majors and the enterprise space, we typically would see a UKG in market, we'd see ADP in market. We do very well against both of them. Occasionally, we would see the ERPs like Workday come down into that market. Where we win is on the compliance side, and we win based on having one app that goes across. As we start to go up market, the competitive set is mostly the ERPs that we compete upon. The larger a company, the more likely they are to have global employees. And we're quite differentiated in that we now cover 57 different countries, where we can do core HR, workforce management and payroll, all with inside a single system. And that makes a very, very big difference to organizations, especially post COVID. Before COVID, companies are much more domestically focused. If you're doing things like labor planning, you would do it on an FTE basis, full-time equivalent, because the cost differential across the different areas where you were working wasn't that great. But if you look at today's world, most companies have really dispersed outwards, where you've got people all over the world. And because of the differences in labor rates, between the different jurisdictions, you have to basically do your labor planning in a constant currency, U.S. dollars, whatever currency you happen to have at head office, and we obviously do that very, very nicely.

Perfect. And then if we think about -- you mentioned international. That's one of the major changes that distinguishes you relative to the other players. We are hearing from other companies, like ADP and Workday, where they're focusing a little bit more on international. Can you talk a little bit about like what you're seeing in terms of multinational corporations in terms of their desire to consolidate their systems? And how well you're positioned to go after that? You've made a number of significant acquisitions: Ascender, ADAM, Excelity. If we think about those, and particularly in Asia Pac, and then thinking through also the elements with regards to just development of native payroll and developing that organically, you just rolled out in Singapore, if you could expand on the international opportunity and how it's actually transforming right now and how well positioned you are to get a big share within that.

So when I did the research on the industry, which dates back to about 2011, 2012, about half of our TAM was outside of the U.S. and Canada. It's about a $20 billion market in the U.S. and Canada and about another $20 billion outside. So as we built Dayforce, we built it to be global from the very onset, which -- it's very difficult to take a product like a UKG or even the ADP products and retrofit them to become global. There's just too much that has to get done. So we started with a very strong foundation. And when we built the Dayforce engine, we built it in a way that we could localize it by different type of jurisdiction. We've always had very strong workforce management. And as you get out of the U.S., the complexity is really more on workforce management than it is on the payroll side. So if I look at payroll in the U.S., it's about 15,000 different jurisdictions. And each of those 15,000 jurisdictions can levy any number of taxes in any way that they want to. If you go into areas like the U.K., there are 2 taxes that you have to do from a payroll side. So it's much simpler. However, when you get to the workforce management side, it's completely reversed. The EU, the U.K., most of Australia and New Zealand, a lot of APJ have very complicated rules about how people get paid. For example, if you go to Australia and you're looking at things like minimum wage, the minimum wage depends on the age of the person, where they're actually living, what industry they happen to be in, what is their tenure. Whereas, over here, it's just a very simple minimum wage type of construct. So we're very, very strong on that. From a global perspective, we do the, obviously, already, in Dayforce, the global HR. So think of a global employee record. And then below that, you could have work contracts by different type of jurisdiction. We do the global workforce management. We've had some very, very large clients that are live on a global basis, big retailers out of Germany that will be active in, say, 20, 30 different countries, with hundreds of thousands of employees in each of the companies. On the payroll side, we do native payroll, which is the Dayforce payroll engine that's been localized for the local -- for the different country. Obviously, the U.S. and Canada, the U.K., Ireland, Australia, New Zealand, Singapore, Mauritius. We're about to launch Germany as well. For APJ, we actually built a native payroll engine that we actually just localized for Singapore, but we'll extend it to a few more countries this year as well. And then we have something that we call unify. And what unify is that we did a number of acquisitions over COVID, where we acquired Excelity and Ascender in the APJ region and ADAM in Mexico, Latin America, Brazil and the Caribbeans. And we took those pay engines, and we made them headless, which means there's no user experience. When they start up, they call real-time APIs to pull the data from Dayforce, from the HR system. They do their calculation and then they publish their results back to Dayforce. So it's just another engine with inside the Dayforce framework, if you like. And from a user experience, you're in Dayforce, it's a Dayforce screens, it's a Dayforce self-service, Dayforce analytics. And with that, we are now going online with unify across APJ. The importance of that is that, if I look at my recurring revenue, I've got about $90 million across Excelity and Ascender, and that is recurring revenue with inside these engines for payroll only. And once unify comes online, we can now approach those customers and say, "Hey, look, you're using Dayforce? Would you like to use core HR? Would you like to use recruiting, performance, compensation, workforce management?" So it gives us tremendous ability to upsell those particular customers, to increase the revenue, increase the margins on that. Now with that, with unify and with our native pay, we cover about 57 countries in total, which is quite significant. And as I have said, larger organizations need this single system on a global basis to manage their people.

And so when you think about the evolution of those large multinational systems, I mean, what inning are we in now relative to where we may be 5 years from now?

So if I look at the overall market space, as I mentioned, about half of it is outside of the U.S. and Canada. So on a long-term basis, I would expect it to be a 50-50 type of ratio. But we're quite a ways off from that because we have a $1 billion business in the U.S. and Canada, and we have a very small business outside of the U.S. and Canada. But when I think about it, I really kind of think about durable growth, that I am building a company not for the next 3 years or 5 years, but I want to have decades of growth. And to do that, the global side allows me to do that. If I was looking at short-term profitability, I would obviously focus more domestically, not focused on the global side. If I did that, I would reallocate the sales and marketing expense to be here. And that's the one area that we are constrained from a growth perspective, what's the budget we can afford in sales and marketing? And given that the market share is only 5%, we could still grow very, very rapidly over here for whether it be 5 years or 10 years. But from my perspective, I'd like to have this advantage on a long-term basis. And when I look at how we beat the competitors, we have a few things that really go for us. The first is our global capability, especially for the larger organizations. Second would be the continuous pay engine with the Dayforce Wallet, which, again, differentiates us quite significantly in market. We are seeing about 89% of new customers sign up for the Dayforce Wallet, and it's become very much a feature of a modern payroll system. Whereas when I came up with it about 2 years ago, it was viewed as, oh, my God, what are you guys doing to the market type of thing. So it's become a norm very, very quickly. And then the single database paired with the very strong analytics, what we call intelligence. So another area that Joe, our Chief Product Technology Officer, focused on the last 2 years was adding intelligence throughout the system, things like intelligent nudges, intelligent search, the ability to basically forecast where the various types of HR measures are moved into, and based on the forecasting of those trends, alerting people in advance so they can take action on items. And having just a clean data model allows you to do that, where the others have all of these pieced-together systems. And with the pieced-together systems, so the data are separated, you can't really build an ML model, or you can't really do any type of AI on the data.

That's fantastic. Unfortunately, we're out of time. It goes by very quickly. Please join me in thanking David for a terrific discussion.

Great. Thanks.