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

Good morning, everybody. My name is Mark Marcon and [ I follow human capital technology and solutions] at Baird. Our next presenting company is Ceridian, a leading provider of payroll and HCM solutions on a global basis. With us today, we're very pleased to have David Ossip, the Chairman and Co-CEO of the company. David joined Dayforce -- or founded Dayforce and then joined Ceridian in 2012 as CEO when Ceridian acquired Dayforce. He currently serves as Chairman and Co-CEO. With us in the audience we've got Noemie Heulland, the CFO; and Matt Wells, the Director of IR.

David, I'm asking a couple of questions. I'm hosting 22 companies at this conference, and I'm asking 1 or 2 questions of almost every company just because we want to get a feel for it. So one is, and particularly with your computer background, I'm wondering what you think both the opportunities and threats are with regards to generative AI and how that impacts Ceridian over the next 2 to 5 years in terms of the way that you're thinking about it.

Sure. First, Mark, nice to be here. When I think about generative AI, I look at it really as a lift up of overall kind of platform capabilities. And I've been in the tech space for quite a long time. I, personally, I started off with machine language and then when assembler came up, it was like, wow, that's really great. And then after assembler, we had the 3GL languages, and I was like, well, anyone can write code today. And then they had the 4GL languages, and then they had kind of the databases like PL/SQL, Transact-SQL. And then you had kind of the move from a DOS to the web -- sorry, DOS to Windows, Windows to the web, mobile. And each of these, you've lifted up in terms of the capabilities of these platforms and how we, as users, can actually use them more day to day. Generative AI, I think, is another lift up generally in platforms. And each of these kind of inflection points, I've never really seen job loss. In fact, I've actually seen more people getting to tech and more people become users of technology. Right off the bat, I think there's some low-hanging fruit that vendors like us and others will probably leverage with inside our platforms. One example could be just modifying the UX platform. Anytime you have a text box, you could have a reference field or the reference field changes, you could bring up a generative AI kind of dialogue that says, hey, you entered in a new job name, can I write the description for you. You have a job requisition, can I write the job req that we're going to post to the different types of job boards? Is there a performance review? Can we do that? The next phase that you'll start to see us move into will be making the app easier to use, embedding things like the [ Celebro ] product we've built, which is a generative AI tool for customer support that we've trained it just with our knowledge bases and as well with our implementation guides. Currently, we're finding that it's able to answer about 75% of the support queries that are coming in. And we've set the confidence level all the way up. So obviously, that makes the product much easier for our users to actually use the product. We should see some benefits in terms of customer support efficiencies that you'll get from it. The next step will be the autopilots that will be showcased in at our INSIGHTS Conference. And a lot of the INSIGHTS Conference this year will be focused really around the use of generative AI in the actual product and the move eventually into more kind of the task-based automation, hey, can we do autonomous payroll where the system itself would be able to do not only the audits but as well some of the editing and the corrections that people do on a routine basis. So I think there is a great benefit to our customers in terms of they should become more efficient, which has been central to how we've always sold. There obviously are some revenue opportunities for us and some pricing opportunities that we have to do. From a cost perspective, it is expensive. It requires huge processing power. But obviously, we have to find the right blend between how we adjust pricing, how we handle the actual cost so that both us and the customer do well from it.

Great. And from a customer support perspective, you mentioned there could be some savings and some efficiencies there. What sort of magnitude do you think that could end up being?

Well, this is a path that we've been going. If you look at our financials, you'll see that we've increased the gross profit on recurring quite substantially year-over-year for the last number of years. One of the ways we did that is that we stood up Dayforce user groups where the Dayforce user groups did the frontline support for their peers. And last year, we saw the number of support tickets go down by 22% at the same time that we actually grew the actual business. And so I would think that the generative AI, the support tool, will have a similar type of impact where the customers themselves will be able to ask the tool the product. The system comes back with a response. Thumbs up if they like it. If they don't like it, it then goes to a support rep. The support rep then answers it, and that answer goes back into the knowledge base, which then goes back into the training database for the generative AI so it gets smarter over time. But I would expect to see that type of efficiency gain on the support side.

Great. And then another question I'm asking every company is you take a look at the BLS data. It continues to suggest that the labor market continues to grow at a fairly rapid rate. You actually ended up seeing an increase relative to plan in terms of employment during the first quarter. Are you seeing any signs of a slowdown or not because there's obviously concerns about a macro slowdown. Are you seeing any changes in terms of employment within your client base at this?

We haven't seen any kind of headwinds as it has been towards employment. Just a reminder that we typically focus on industries that are not as susceptible to a downturn. So we don't do a lot of software companies. Instead, we focus largely on health care, hospitality, non-profit, manufacturing, distribution, specialty retail, a lot to do around insurance and financial services. And in all of those sectors, we're still seeing quite a lot of interest at least on the buying side, and we haven't seen any type of layoffs across those customer bases. I don't expect that you will. Most of those organizations are still really, really focused on talent acquisition, and they still are struggling to get the people that they require to staff their organizations.

Great. David, when I think about Ceridian and I think about you relative to all of the other companies that I cover within this space, and we've covered literally every HCM payroll company in this space, you've changed -- Ceridian's changed the most over the time period that I've followed it. And even recently since the IPO, you've really transitioned to being a global provider for serving enterprises. I'm wondering if you can talk a lot about the way that Ceridian is currently perceived, the deals that you're starting to get into and that you're actually winning and the way that the organization has changed, noteworthy is this morning's announcement with regards to the Sam and replacing Rocky. So I'm wondering if you can talk a little bit about how much the organization has changed and how you're being perceived, both internally and externally.

Yes. Look, our strategy has been largely consistent all the way back to about 2012, 2013. And when I looked at it, there were a number of things that I was looking for in market. One, I wanted a very large addressable market that would be truly addressable. And so when I looked at the payroll space and the HCM space, it's about a $20 billion market in North America and about $20 billion outside of North America. And so from the very onset, we designed the product to be global in nature. And that's a long time to build out a global product. There's obviously culture, there's language, there's currency, there's compliance in all the different types of countries, money movement, jurisdictional rules that you have to do around the HR compliance side. And we've been very true to that, building out a true global platform. Started off the U.S. and Canada, then went to the U.K., Ireland, Australia and New Zealand, Singapore, the rest of APJ, we're launched in Germany this year. We'll do the DAC countries after we do that. But we've been very focused on building that out. We did that so we could address this full addressable market. The second component was when I looked at the actual market, it was clear that you had a small business sector, you had kind of a major, you had large enterprise and different types of buying behavior and different types of complexity in each of those different sectors. We built the product largely for the majors and above. We started off in the majors market because that is where Ceridian was historically, but we wanted to be able to grow into the large enterprise. And that required both the technology. We obviously need the global capability to do that. And then we also have to start shaping the systems integrator relationships as we saw them having a lot of influence over the buying decisions of those particular types of customers. And I think we've done that quite successfully. Another point that I saw when I was doing the research and when I was doing the research around payroll and time, when I spoke to people, they kept asking me about the talent components. Talent would be recruiting, performance, comp, document management, learning management. And so it's evident that you could have a platform play. But to have a sustainable platform play, you would have to build these modules very deeply. In other words, they have to do the complete solution that you could compete with the stand-alone vendors. And so we built the platform to do really cold HR on a global basis, but then fortify with recruiting and onboarding performance, and that's taken us some time to get there. And I think over the last 3 years, we've proven that we're able to compete against the stand-alone vendors on talent modules. In fact, we're now a part of the Gartner Leadership Quadrant is us in the 3 ERPs. In terms of the way that we're actually perceived in market, we're perceived as a leading solution for global HR, global talent, and we are by far the best in global payroll and time. In fact, Gartner kind of recognizes us #1 for compliance, #1 for payroll and #1 for product satisfaction. In terms of how -- another way to answer your perceived question, this morning, we announced that Sam will be joining us as CRO. Sam could go anywhere. I mean this is a guy whose background is just absolutely amazing. Most recently, he was at one of the large ERPs, where he was the Chief Partner Officer. For us, that's very critical. This whole focus around the systems integrators, we've seen a lot of traction. Also this morning, Deloitte announced that they had acquired Enforce in Australia. That's the second large systems integrator that we've seen acquire a smaller system integrator to get capabilities around the Dayforce product, which talks about the fact that we now see the large SIs building viable Dayforce practices. And when you combine that with Sam, and he's such a known entity around the big system integrators, we can obviously deepen and accelerate that. But the fact that you get star players like Sam joining us is just evidence that, a, we're viewed as a technology company, not a services company. Two, we're reviewed as a place where both customers, partners and people want to join. So there's a lot of momentum in the market around the actual company and around the product.

And then some of your systems integrators are -- they're eating the cookie. So can you talk a little bit about, I don't know if you publicly disclosed the name of the company that I'm referring to, but it starts with a P.

We've actually got more than just the PwC guys. So we're very proud of our PwC partnership. Separate to that, PwC implemented Dayforce last year. Great implementation. They kicked off in, I think, April, and they went live in December. What drove their decision was our ability to handle some of their complexity around the tax calculations. They have something they called convenience of employment where the employee is able to determine or pick the state that they would like to be taxed in. And that's quite a complex thing to do. So we obviously do that very nicely. Accenture, by the way, is also a customer. We took them live the year beforehand.

In Canada, correct?

North America. In the U.S. and the U.S. and Canada. It's about 70,000 or 80,000 employees, I think.

That's fantastic. And then you've obviously gotten some really huge enterprise wins. Can you talk a little bit about like how different the bake-offs are for some of those really, really large situations? So there's a logistics company that's worldwide.

Look, we built the product to be global and to scale. We had a hyperscale project we spoke about a year ago where we moved from service to more of a container approach, which allows us to really drastically reduce the amount of time it takes for processing. You're going from like 45 minutes to a few seconds type of delta. And so we are able to handle very large populations. Obviously, a very, very thorough type of evaluation, very much as I influenced as well. And so getting the SIs excited about the product has really played very well. But just on some of the large systems -- some of the large customers that we signed last year that are going live this year, you'll see the impact more so in Q4 than you will in Q3. So anyone who's doing the actual modeling, you should basically factor that in. They're scheduled to go live in Q3. So the revenue benefit happens in Q4, not in the quarter that they go live.

Great. And then one of the things that you've been very progressive about is looking at it from a global perspective. And I know the ERPs have always been global, but a lot of the competition that you're typically thought of against, whether it's ADP or UKG aren't as adept from a global perspective. Can you talk a little bit about like the adoption of best-in-class HCM systems, cloud-based systems on a global basis? Where are we in terms of the adoption curve when it comes to that because most HCM trends start in the U.S. and then start moving out?

Yes. Look, the world of work has changed, and it's not going back to the way it used to be. We would describe the workforce today as being boundless. And by that, we mean that a lot of organizations have had to move to more of a global operating model than ever before hand. One of the reasons is in order to afford a 5%, 6% merit in jurisdictions like the U.S., you have to move certain types of functions to local cost jurisdictions. We ourselves did that last year where we moved about 400, 500 positions from North America to the Philippines. And so you see a lot of our customers and a lot of other organizations following a similar type of strategy. In order to do that, you have to have a global people platform. And that's really the foundation of what Dayforce is. And it allows you to effectively look at your entire workforce in constant currency as opposed to from an FTE perspective. It allows you to be compliant in all the various types of geos that you're going into, and that's quite different. The way that employment works in different countries is not always the way it works in the U.S. Now in order to do that from a technology perspective, you have to build the product from day 1 to be global in nature. You're never going to be able to take a North American product and retrofit it. If you do that, it's just going to be a kludge of multiple databases, bolt-on types of systems, manual workarounds, bumps in seats and things like that. And the fact that we kind of looked at it all the way back to 2012, 2013, definitely has benefited us much more than any of the other competitors. Another part about it is when I look at each of the individual problems that we see all the customers have, there isn't any that is really complicated by themselves. However, unless you have a very well-defined data model that is clean and together, you can't solve anything simply, and so that's why you see us lead in terms of compliance and calculation capability is because we're able to leverage that very nicely defined data model that makes the calculations as simple as they were intended to be.

And that's one thing that's a huge competitive advantage for you is you've got this continuous calculation engine, everything is on the single database. How -- from your perspective, David, and you know the intricacies in terms of what the software looks like, how difficult would it be for some of your competitors to try to duplicate what you've got in terms of the continuous calculation engine?

Well, look, it's taken us about 10 years to get here. I think that's a very fast approach for this type of problem set. You have to get the foundation right and then you have to eventually kind of increase the depth and scalability as you actually go along. So I think it's going to take a long time for the others to duplicate what we've done. And remember, we're not holding steady, that we're continually evolving the product, extending the product, adding a really nice kind of analytical capabilities, a focus on data. We are really excited about the hub experience, which if you follow the customers, it's taken on its own life of its own. In that the customers have this unbelievable tool to create this immersive landing page for their employees. And because it's one with the data model, if people become say, active to alumni, or they changed position or they changed geos, the right experience is presented across the web and mobile to the people. You've got embedded kind of info card with deep link into various other applications. You have the ability to do approvals and workflows directly from it. And the best part is that a nontechnical person who is not a designer is able to create this beautiful experience that is their brand in, their look and feel everything very, very easy and quickly. I sort of kind of highlighted at the -- there's an external Dayforce user group that's run on base camp. About 8 weeks ago, I kind of just attended it just to order to see what the customers were saying and they had 3 members who did -- each did a 15-minute presentation on how their company was leveraging the hub, and it was amazing to actually watch and see.

The other thing that -- when we go to the client meetings that they talk about is the Dayforce Wallet and what it's done in terms of recruiting and retention. And one thing that's kind of interesting is a lot of them say, initially, they didn't want to do it and you talk to them into it and then ended up being a really seamless experience. Can you talk a little bit about the Dayforce Wallet, what's the level of adoption? How are you thinking about it? And where do you see it a couple of years from now?

Yes. Look, in terms of the Dayforce Wallet, we have over 1,500 customers who've signed up for the wallet and over 900 of them are live. Registration rates are slightly above 50%. The typical wallet holder uses the product about 25 to 30x per month with an average spend of about $27. So it's really it becomes a day-to-day type of card. The Dayforce Wallet leverage is kind of that continuous calculation, which means that at any instance we know how much a person has made, net of all taxes and deductions, and garnishments and the like. It's one with the system. So every time someone adds money to the wallet, we do an off-cycle payroll for that individual, generate a pay slip. In the next day, we do the remittances at the federal state or provincial levels. So it's fully compliant as a payroll. It's done in a way that we don't have to change the way that the customer does the cash flow in of their payroll. We act as a commercial lender to the customer for the first -- for a few days and then we pull that out of the actual payroll. And we funded through the interchange, which as you know, is about 120 basis points in the U.S. It's a strong differentiator for the product. Relative to the others in market, we typically use more kind of a bolt-on solutions approach. We extended the wallet into the U.K. this year and likely we'll probably extend it into ANZ next year. I would argue that the Dayforce Wallet which is really real-time payroll is just a feature of a modern payroll system which is -- and we're seeing that in almost every RFP. From a customer benefit, we've spoken about the benefits before, but our customers see voluntary attrition go down by about 20%. The time that it takes to close an open requisition with the advertiser wallet goes down by about 15%, the likelihood of an employee candidate accepting the job offer goes up by about 10%. So very, very strong kind of ROI for the customer. And that's kind of fundamental to how we sell. Everything we kind of build has to be founded. The foundation always is delivering a quantifiable value to the customers. They have to be able to measure the amount of benefit that they're getting financially from the actual module.

And that ability to quantify the value and to actually reduce total cost of ownership is something that should resonate both in good and bad times. And if we take a look at the last quarter, the revenue growth continues to be terrific. Can you talk a little bit about -- and obviously, would love specificity, but even on a general basis with regards to what you're seeing, given that there are some macro headwinds, it doesn't seem like that's really slowing you down pretty much.

Look, probably about 5 or 6 HR transformational themes that we're seeing in the industry, which I think are creating demand for products like ours. The first is a move to efficiencies, automation and having a people platform that cuts right across, allows us to eliminate a whole multitude of stand-alone systems. And for each of those systems, you're paying for the hosting environment, for the database, unnecessary integration between the systems. And so when a customer goes from say, hey, I'm using 12 systems to Dayforce, it's likely that their subscription costs are going to come down and they'll save a ton of money in terms of integration between the systems, just completely unnecessary. Closely tied to that is a lot of customers have grown through acquisition or even organically. But when they do that, they don't really have job harmonization or standardization. Instead, they have resources at every single location, separate processes at each of different companies. And so by automation, and moving to a shared services model generates a lot of savings from that. The next step is if they're doing shared services, they can then move into globalization. They can take the shared service center and move it to a lower class geo. And by doing so, they can leverage kind of the global people platform to do that, and that saves obviously a ton of money in doing that. Decision-making is always central. And the challenge that most customers have when they have the multitude of systems is they can't report on anything because if you actually look at the data elements, about 70% to 80% of the data elements are completely the same across each of the databases, but the value is only maintained in 1 of the 12 systems and you have to be like lucky to kind of choose which database do you actually go to get the actual field. And so with us, we actually really built out a beautiful reporting system where we have about 300 to 400 pre-prepared queries. The customer can modify the queries. We handle all the technicalities around the joins and such, just drag and drop. And when they hit visualize, we load a Power BI canvas populated and they can do any type of visualization that they would like to create, whatever type of dashboard or a report in a tool that they are really familiar with it, it kind of works like Excel. So the data becomes. And then also on the data, what we've done is we've incorporated the ISO 3414 measures directly in the product. So we're making it easy for customers to get proper reporting and analytics and KPIs directly out of the system. And then the last thing we typically see is around this experience which is the water work has changed. How do I maintain culture? How do I engage with my employees? How do I actually share new information and so the hub being built with one with the data allows them, as I spoke about earlier, to just create that type of experience. Now in all of these, there's a strong ROI, which means there's a strong savings. So when we go in, the business case usually is very, very positive. Typically, customers get a full payback in under a year. ROI is typically in very high double or triple digits and that obviously resonates very well with the CFO office and such.

Fantastic. Fortunately, we only have 30 seconds left in this room, and then we're going to go to the breakout session in the Aster Room B. For the people who've got multiple appointments, can you just talk about your level of confidence with regards to getting your -- to getting to your margin targets by 2025 in terms of the $2 billion in revenue and getting to the EBITDA margins getting into the 30% range.

Yes. Look, I think we're quite confident on the $2 billion mark in 2025. And obviously, we'll hit the 30% EBITDA target, adjusted EBIT target in the same era as well. That's largely predicated on the improvements that we're seeing on the -- sorry, the cloud recurring gross margin. Currently, last quarter, it was about 78.7%. So we're pretty close now to the 80% target that we wanted to hit the 30%.

Great. Unfortunately, we're out of time in this room. Please join me in thanking David for a terrific discussion. We are going to be moving to Aster Room B.