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

Thank you. Thank you all for taking time out of your schedules today. I'm just going to do a quick introduction to David Ossip and then sit down. We're thrilled to have Ceridian here today. David Ossip, CEO. I'm Kevin McVeigh. By way of background, I'm the Credit Suisse HCM analyst. I've been at CS about 5 years now covering the sector more broadly for about 20 years. Really, really thrilled to have Ceridian here. I think David is one of the real visionaries in the industry. What I want to do is try to keep this as open as possible. I'm going to sit down, start out with a couple of questions and then really weave it into you folks as well to try to keep this as collaborative, but we've got plenty of questions. So David, thank you again.

What I wanted to start with, and it may sound a little basic, but Ceridian has differentiated itself so much in the marketplace really since you've transitioned the business. So maybe help the market understand how you've taken kind of from the traditional Bureau business and leveraging the Dayforce opportunity. And I'd love to kind of from a competitive perspective because one of the things we found so intriguing is I think one of the huge opportunities in the sector is how large the addressable market is. Now you've always differentiated yourself in terms of being more upmarket. So maybe talk about the competitive dynamic a little bit and really where you are in the process because I think as most of you folks know, we've got Ceridian as one of the top CS ideas across our platform because of the optionality it brings. But maybe your perspective on the industry a little bit because I think it's invaluable.

Sure. Thanks, Kevin. It's a long question. So I started looking at the space in about 2010. It was right after my noncompete from my prior company had expired. And when I did the field research on the market size, it turned out that the market for what I'd say, core HR, payroll and time and attendance in the U.S. and Canada was about $20 billion. And there was about another $20 billion available on a global basis, so outside of those markets. The second item I found was that the typical life of customer tended to be measured in decades. So when you look at the lifetime value of a customer or the client acquisition costs, all of the numbers were very, very positive. And the third thing I found was whenever I spoke to an HR or payroll person, they would always ask, can you also do recruiting, performance, compensation, document management? And so it was very evident that there was a platform play that could be had. And from a platform play perspective, you could add recurring revenue without additional cost. So the market looked very, very attractive. What -- my next question was, is there a fundamental challenge in market? And what I found was that there's a disconnect between, say, the CEO and the HR payroll offices. CEO would believe that there was one HR system that did everything. And in reality, the HR and payroll departments were using different systems for every feature that you would expect. So there will be a system for core HR, and another one for payroll, and another one for time and attendance, another one for recruiting and performance and comp and et cetera. And in each of those different systems, there would be different databases, different UX, different sign-on information. And because of that, you couldn't do any type of analytics because the data was kind of replicated and not synced up properly. You couldn't do any process type of efficiencies because everything was batch-based, meaning you had to complete a process in system A before you export or import into another system. So my thinking was, well, if I were to build a system with one database and one rule engine around this particular domain, I could differentiate quite substantially in market, and there'll be tremendous benefits to the customers. So first of all, I could lower their cost of running their systems because they wouldn't have to pay for multiple databases and subscriptions. So there'll be a big savings. And second, from an efficiency perspective, you wouldn't have to do anything in batch. You do things on a real-time basis. So I started off by first looking at the intersect between pay and time. And I took to market in about 2013, I guess, the Dayforce product. And we were differentiated in that we would continuously calculate net earnings. So other systems, effectively, you would calculate what they call the gross pay in the time system. You'd wait a week or 2-week period, which we call the pay period. You would then export the data out of the time system, bring into payroll. And the pain point for the payroll team was, hey, I can't do any of my busy work until I get my data, which I have to wait for this 2-week period, and then I only have a day to do all my quality checks. So I'm paying people with mistakes cleaning up after the fact. And it's like, well, if we calculate continuously, we can solve that, great efficiencies, increase the accuracy and then we could go from that. Now in order to do that, I needed to do tax, and tax in the U.S. is very complicated. That's where you do all the different types of deductions and remittances to all the different jurisdictions. And in the U.S., there are about 15,000 or so of these jurisdictions, and everyone's a snowflake. And if you don't get it perfect, the penalties are significant. And so I started to look from a partnership perspective first at Ceridian. I found Ceridian, and I thought there was an opportunity there. So really didn't have a tech at the time. Revenue was declining. It was a private equity sponsored deal. And so I approached the owners of Ceridian with the concept of, hey, you buy me. I'll take over the company. I'll simplify the business by divesting everything not related to the growth of the cloud business. Second, I'll redo the culture of the company and said, "I'm going to build out this Dayforce app, starting with pay and time, and then I'm going to go full broad into the full HCM spectrum." And obviously, that happened in 2013. The growth, as you know, has been quite tremendous. We started off probably in 2013 with Dayforce revenue being a couple of hundred thousand dollars. Nowadays, we're very much close to about $1 billion of recurring revenue. Top line is about [ $ 1.2 billion ], also for the -- $1 billion for the year or so. So it's been a tremendous growth trajectory. And we remain quite differentiated, first of all, on this continuous calculation single system. We've been able to take the product up market very, very nicely. We've got some tremendously big wins of hundreds of thousands of employees now that are going live on the system. We also built the product to be global. And so we're quite differentiated in our global offerings, whether it be core HR, workforce management payroll. We do payroll of non -- over 50 different countries across the world. And again, that's helped us a lot in the enterprise segment of the market. And we've also expanded into kind of adjacent spaces like the Dayforce Wallet, where we're able to basically allow people to get paid when they want to, and we profit from the interchange when they do the spend on the cards.

David, one thing and you mentioned it, but I think whenever we picture it in, the differentiation of the continuous payroll calculation. I mean, you're truly the only one in the industry that's able to calculate essentially real time and pay workers at the end of the day. Maybe talk to that a little bit. And within the context to that, you've had some tremendous wins, upwards of 700,000 employees. But let's start with the Dayforce not only in terms of continuous calculation, but also the wallet because it's interesting as we talk to institutional investors, the wallet feels like something that it's the second or third conversation. But a real growth driver for you, and I think is helped with the retention as well and 2 of the more differentiated parts of the story.

So again, when I looked at the market, I actually really couldn't tell where time and attendance ended and payroll started. To me, it was always the same calculation and had been separated for whatever reason. The continuous calc engine really was from the very onset, the way of us differentiating inside the marketplace. The benefit for the customers that they go from -- in the amount of time it takes to close our payroll, say, 1,000 employee level being like 22 hours drops to like 2. So the savings are just like completely different to what they've experienced beforehand. And then the on-demand pay piece, the reality is about 80% of all workers have to bridge their finances between pay periods. And the way that we solve that is that we are able to show them exactly what they've earned at the end of every day, at the end of average shift. And if they say choose, they can say, "Hey, I'd like to get access to that money." When they do that, we run a true payroll for the individual, which no one else can do, which means that we calculate exactly what their net earnings are, what all the taxes are. And we do the remittances the very next day. So it's fully, fully compliant. And then in that instance, the person can go off and actually spend the money. We launched it, I think, about 2 years ago. About, I think, 1,340 customers have signed up for the wallet. Around 750 of them are live. Registration rates on average across the eligible population is about 45%. And it's definitely top card in wallet because the average person uses the wallet about 25x per month with an average spend of about $27 per [indiscernible]. So they're using the product on a daily basis. What we've actually found it's been a very strong differentiated to sell Dayforce. So we're seeing attachment rates of Dayforce Wallet to new customers well above 80%. In some quarters, above 90%. And because, again, we're the only one who can offer it in a fully compliant way without fees to the employees or the company. It does differentiate us. And I'll go as far as to say today, when we see RFPs for payroll systems, our type of capability for the Dayforce Wallet has become a required feature. It's no longer kind of a novelty inside the market.

And David, I think one of the other real undercurrents because, again, Ceridian is an enterprise, very large clients, very complex implementations where you're competing against an ADP or Kronos. But one of the things I think that you've had an incredible amount of success with is optimizing the implementations. And that allows you, again, to win clients upward 700,000. Maybe help us understand that dynamic a little bit because I think part of the de facto thesis in the sector was, listen, companies love the capability, but the implementations are too complex and therefore, they stay. And I think you've been able to really solve for that. And part of our thesis is that will be a real growth driver for you. It is today and then going forward. And you can really see that based on some of the more sizable wins you've had.

So we haven't really seen much of a slowdown inside market. To answer your question about implementation, the demand for Dayforce in the early years was just off the charts. By 2015, we had a challenging -- in staffing the implementations. Back in 2015, if you purchased Dayforce, you would have to wait up to 18 months before we could actually put a project team onto the -- we just didn't have the people. So what we did at that point in time is we looked at the way we were doing implementations and we say, look, we're asking the customers for a lot of redundant information. Instead, what we're going to do is we're going to build out a tech called Activate. And using Activate, the customer will provide us their employee data. We will explore that data. And from that, we can instantiate an instance, and we can suggest what the configuration should be for that particular client, but just in discovery of the data. And once we did that, the cycle time to do implementations and the [indiscernible] implementations went down dramatically. So if I'm looking at big implementations today, like if I look at last year, big accounts like Accenture or, say, Centene, both of them well above 50,000 employees, both of them were completed in about 7 to 8 months. If I look at it this year, we have another very large accounting firm, probably the world's leading compliance going live. And they also -- they started the project in April, and they will be live by end of year. So you're in that type of time frame for those type of complexity. Now when you go into the hundreds of thousands of employees, there obviously is a longer implementation. So if I look at the courier company, which peaks up to about, I don't know, 600,000, 700,000 employees, there, you're going to do a phased deployment in certain waves, by geo, by whatever. And that could take 1.5, 2 years we see before we saw the full benefit. If I look at the logistics company in the U.K., which is close to 200,000 employees as well, that will be done in certain waves. But we found from a configuration perspective is very predictable. The clients go live. As expected, our Net Promoter Scores, which is probably the hardest measure of customer success, are very, very strong. We have implementation Net Promoter Scores now of close to 50, which is probably by far best in the industry.

Great. I've got a lot more questions, but I want to try to start the audience here, if there's any questions.

Can I just ask, I guess, some of the smaller players in the space, they are also maybe like one database. What's different about your system? Or can they also do this kind of continuous engine that you have and compete more effectively on kind of a payroll-type basis, time and attendance, whatever?

The -- it's very hard to retrofit the time side onto a payroll system. And it's very hard to add payroll to a time system because the data structures don't really align. And in particular, the effective dating of the records is done differently. So if you're looking at, I suppose, like a Paycom, Paycom will do the effective dating on a pay period basis. But to do the time and attendance calculations where you have rate changes that might be day-specific or shift-specific or you get into things like FLSA Overtime in California, you have to do effective dating at the day level. So that makes it very hard for them to actually do it. Also, time and attendance is a very, very complex domain to do it properly. You get into kind of constructs of like job step rates and hand in all the complexity of the collective bargaining agreements and such. And if I look at the actual market, there probably are only 3 global players, possibly only 2 global players really that can do time and attendance at the level that you have to do it in order to be properly compliant. And then to actually design the system as one is quite difficult. We've been doing this now for, I guess, since 2013. And I haven't seen any competitive gap that difference in the marketplace. When I look at the various types of pays, we don't really see them in market. We typically play above 1,000 employees. And the pays typically play 100 employees, 150 employees on average. You get into a lot of complexities as well when you start going across the U.S., and you get into the multi-jurisdictional type of calculations, where, again, you have to track the hours by day. So for example, we do about 50% of the NFL teams, highly paid, highly compensated individuals that have to track the hours by state so we know at the end of the year what W-2s we have to submit and such.

I think there was one more in the front here.

A quick question just on some of our acquisitions. I know in APAC in that region and transitioning some to Dayforce. Just wanted to get an update on some of the progress of like the internal technologies required to move those over and how we expect some of that to go through.

Yes. So the question has to do -- we did -- during COVID, we acquired 2 companies in the APJ region, the one being Excelity, which is mostly in kind of the Asian countries. And the second one being Ascender, which was mostly in Australia. We have a technology that we've built called Unify. And what effectively we did is we took the payroll engines, and we made them headless, which means that on startup, they call a series of APIs to pull the Dayforce HR data and time data into it, does the calculation. And then when it completes, it publishes the data back to Dayforce. And so from a UX perspective, I'm looking at my payroll screen, which shows all of my global paid groups and all of my employees. And I can inter-date or initiate a calculation in real time from the same screen. It's kind of doesn't know if it's a native Dayforce engine or Ascender or an Excelity engine. Where we are, we've completed the technology. We've done the configuration for the first 3 countries, which we now are chartering with the actual customers as well. In parallel to that, we've built out native Dayforce payroll engines as well for, obviously, Australia and New Zealand and for Singapore. And the Singapore engine is really a APJ -- sorry, is an APJ engine that we're able to extend across to the other countries, which we will probably do next year as well. In terms of revenue, it's very much of a play similar to what we did with Dayforce and Ceridian. So if I go back to 2013, Ceridian had payroll only. And if you're selling payroll only, the recurring revenue you get is not that high. And the play was, hey, we can take that revenue, move it over to Dayforce side. And alongside that, we can sell them core HR and time and attendance and recruiting performance and et cetera. And by doing that, we can increase the recurring revenue we get. So that migration, which is probably about $70 million, $80 million in aggregate, we'll start that sometime next year. Most of it probably will come in '24, '25, and we would expect to get a lift of revenue at the same time.

And David, just to remind us, I think historically, you've talked about the upsell on kind of the HCM suite as opposed to traditional Bureau was about 2.5x. Is that...

Yes. On average, it's about 2.5x. It was 2.5x at like time of IPO. But if I look at every quarter, about 20% to 25% of our sales goes back to the base. So it continually grows year after year.

And one thing I just -- we talked about the wallet, but one of the things I think is fascinating about the wallet is just really the economics don't cost your clients anything. And I think that's just another really important differentiator in terms of the economics of the interchange are such that the clients aren't charged any type of processing fee or anything like that. So maybe talk to the economics of that a little bit because...

Sure. It's changed a little bit because of the different geos. We've just launched the wallet in the U.K. And there, there's a different model because you don't have the interchange in the U.K. The interchange in the U.K. is about 40 basis points. So in North America, on the interchange side, we get about 120 basis points when someone spends using the Mastercards. We have a program manager. But even after that, we get, say, about 1%. We also act as a commercial lender to the organization. And so that means that the company doesn't have to change the way that they fund their payroll. They can still fund their payroll on the regular pay period, a weekly or biweekly basis. We effectively lend them money for that short duration of period. So if you take it, our cost of lending is like, say, LIBOR plus 2.5. And so today, that will be like 7% or something. And then you take that, you multiply it by an average days outstanding of like 7 days, divide it by 365, and you get the kind of the absolute amount that we're paying on it. And so we still yield about 80 basis points or so when we actually move the money through the actual wallet. In the U.K., we've taken a PEPM approach. So we effectively -- to offer the wallet, we charge the customer a small amount on their entire population of employees. And then from that, that allows us still to do the funding and make a similar type of profit from the actual wallet.

David, there's a lot of intriguing opportunity in Ceridian. One of the things that always a fun part of the real value is just the mechanics. I mean, the revenue is going to accelerate as the Bureau runs off, but there's a real margin expansion opportunity as well. I think you've talked about publicly a 30%-type EBITDA. So maybe help us understand some of the puts and takes because we're at the kind of mid- to high teens kind of today. And maybe help us bridge that kind of where we are today to get to that 30% and some of the puts and takes that get us there.

Yes. So look, if I look at the last quarter, on an adjusted EBITDA basis, we were about 20%. We've spoken about by 2026, we'll get to operating margins of about 30%. The majority of that really comes from the movement of revenue from -- at the moment, we're about 80 -- I think 87% or so would be recurring and about -- is that right, about 13%?

Yes.

Would be on a onetime basis. On the 83%, we obviously make a lot of money because it's recurring revenue, but we lose money on the onetime-type fees. Every year, it kind of moves a little bit. And so by 2026, that kind of makes an improvement by like 4% in terms of the actual spread. And the margin on recurring revenue by 2026 will be about 80%. So that nets like a 3% improvement. Now also inside the recurring revenue, we've got 2 types of recurring revenue. We've got Cloud recurring revenue, which, as I mentioned, will contribute it about 80%, today contributes at about 75%. And then we've got the Bureau revenue. And the Bureau revenue contributes at about 50%. And by 2026, almost all of the recurring revenue becomes a Cloud recurring revenue. And so that adds quite substantially to the recurring revenue. From a scale perspective, there's a little bit of efficiencies we'll get on the G&A line, possibly a couple of percentage as we just get above the $2 billion revenue line. And also, we would expect to see a bit of improvement on the implementation side, which is coming mostly from the fact that we're now engaging our size to do a lot of what I'd call the unprofitable type of work we did historically. And when you put those together, you comfortably get into the 30% range. The 30% range isn't the endpoint. If I look at our industry, I would probably argue that the natural profitability of our industry is in like the mid-30s. So over time, it becomes very, very profitable. The biggest give that you give to get there is obviously on the growth side. So historically, we've obviously been growing above, say, 30% in the Dayforce recurring, but it's expensive to grow because you have to invest in marketing and sales. And the marketing kind of hits the income statement in the same quarter. The growth perspective is to spend on marketing, that gives you your pipeline. Based on the size of the pipeline determines how large your sales force will be for the next year. You have to pay for the salaries of the sellers, and it's not just the sellers. It's the entire ecosystem around them. And so you have a bit of a formula. For us, we've taken the approach that we want to be in the rule of 40 next year. We want to keep going well above the rule of 40. And to do that, we'll compromise a little bit on the growth side to get the profitability path that I think the market is expecting.

And then maybe even -- I think those goals were set pre some of the incremental increase in interest rates. How are we thinking about float within the context of maybe reinvestment versus sharing some of that with the market? Just any thoughts.

The float is really part of our business. It's just it's taken about 10 years to recover from 2008. So if I look at it at the moment, I think our float income, if I look at it last quarter, was about 2.19%, which is up quite considerably from a year before when it was about 1.16%. And so that actually translates into quite a lot of additional money. So in the last quarter, we got about $21.3 million of float income, up from about $9.9 million a year before that. And if I go to next year, I would probably expect the float income to go up quite substantially. I think we've kind of given very good guidance about what our float assumptions are. But I would expect sometime next year the interest rates would probably be in the 4% range. Now we don't get there immediately because of the way we break up the trust funds between liquidity and the core portfolio. But eventually, we do. So it's a beautiful kind of tailwind to our business.

Finally, to your point, finally, I don't think we can give a session without talking about the macro a little bit. One of the things we've always found fascinating about this sector is how durable it is. And at the end of the day, I think part of it is just the addressable market is so large and just on a relative basis outperformed so many others. Anything to call out on the -- and again, when I think about HCM, as you sit up in the enterprise, it tends to be the most durable part of the payroll cycle just given the capitalization of the companies you service. But anything to call out on the macro front, just before again, we'll probably open it up to Q&A in the closing?

We've said it many times, and everyone in our industry has kind of echoed the same thing. Pipeline is very high. Sales activity is very high. Employment levels continue to go up nicely, and we benefit quite nicely from employment. We get paid per employee. The tailwinds of the Fed for us is like manna from heaven. So please go out, let it be 10% interest rates. It will be great for our business type of thing. When people are worried about a recession, we tend to do very well. Our focus from the onset always has been in delivering what we call quantifiable value. And what we mean by that is every time we build a module, we identify that measure that we can track at the customer, and that measure has to be convertible into a dollar savings. And in the very early days of Dayforce, we -- our mantra used to be make every employee think like a CFO. So very much the strong focus on that ROI side. And so one example, if you're using us for, say, core HR, payroll and time, but you have a recruiting system, you'll get a substantial saving by moving that recruiting capability into Dayforce because again, you're not having to pay for the database and the infrastructure of that particular system. So you get a savings right away, and then you get the efficiencies on top of that. And so we typically resonate really, really well from an ROI perspective. And the other thing I'd point out just in terms of external validation is that we're the only pure-play human capital management player in the Gartner Magic Quadrant in the leadership quadrant. All of the pays, I don't even think show up on the actual grid. And probably our closest competitor is a challenger, not a leader inside the actual market.

Again, I think one of the subtle points I've always appreciated is enterprise is so complex, and the fact you're able to stitch together a single cloud native architecture, which has been fascinating because a lot of times, your competitors are challenged with multiple disparate systems that they need to maintain, and that's just not the case.

Yes. Well, Kevin, I wouldn't say stitch because I think that's the wrong word.

Okay.

I think stitch is what the others do is where they try to kind of get kind of these add-ons and kind of build a Frankenstein-type thing as they go through. We kind of designed it very elegantly from the very onset to be a full HCM solution, to be a global solution, to have a single database and to have a rule engine that will cut right across problem domain so that you could really optimize the experience of the user. And it's helped us. I mean, we've got about 6,000 customers that are live on the platform today. And as you know, every single customer would have been a competitive bid and would have gone through an evaluation committee and would have gone through an implementation. If I look at it from an ecosystem perspective, we just had our INSIGHTS Conference. We had over 130 different partner organizations at the conference. And that's up so significantly from before COVID. Pre-COVID, we had like 20, maybe 30 if we stretched it. So you're finding a lot of success not only from -- in our company, but on the companies that are partnering with us. And we've got the world's biggest our size, and we've got the local players, and we've got the third-party software companies. And it's actually quite great just to see the energy. And I encourage you to read some of the articles that came out of INSIGHTS because there was a lot that spoke about customer satisfaction and excitement. I think we're the only vendor that when we do a conference, we invite prospects. And we had a record number of prospects attend, and we allowed the prospects to speak to the customers, right? Because we know that those conversations will be positive.

That's great. Listen, I think we're up on time, but anyone else?

Great.

If not, David, again, thank you so much, and thank you all.

Thank you. Thanks, everyone.