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

Pleased to be a host this meeting with Ceridian, CEO, David Ossip. As of last week, he's actually going to be the sole CEO of the company once again, or is a sole CEO of the company once again. So Ceridian, it's soon going to be rebranded as Dayforce, which is your flagship product. It's a modern cloud-based payroll system for payroll and HCM, serving the global mid-market and enterprise customers. You've got a global vision to help customers run their HR and pay the people really around the world. So with that, I'll turn it over to David to kind of give you a quick overview of the company, introduce yourself and fill any kind of gaps with the vision I just [ spit ] out.

Well, Robert, that's a big question. Can I take it that people know the story? Is there anyone here who doesn't know the story? So maybe I can talk a little bit about how we actually look at revenue and how we try to design the business from a durable growth perspective. As Robert mentioned, we offer a full human capital management suite, and we go across global. The first aspect of durable growth for us is trying to get balance across segment. And we play in three different segments. We have major markets, which goes from 700 employees per customer to 3,000; enterprise 3,000 to 10,000; and large enterprise which is above. From a go-to-market perspective, we set our sales targets roughly equal across the three segments. Second area of durable growth or diversification come from the product itself. We sell payroll and the compliance modules as well as we're very strong on all of the talent components. About 30% of our sales today goes back to the base. But that ability to vary between acquiring new customers and going back to the base gives us a second area of, if you like, diversification. And then finally, the last piece is on a geo basis, we offer a global system for human capital management. And so having a balance and been able to focus on different geos, depending on what's going on inside the macro gives us a third area of diversification, which allows us to plan to get a durable and consistent growth rate regardless of what's going on in the macro side.

Got it. Okay. Makes sense. So let's talk to competition a little bit first. Where do you see Ceridian is having the greatest competitive advantage? Who are your biggest competitors? And where your wins generally coming from? And how would you say the landscape has changed over the last few years? Maybe not a ton, but it has changed a little bit.

We typically compete against ADP, UKG and the ERPs. We have very little interaction with the pays as they typically deal with the different segments, with the different type of product set than we do. Our wins typically come from -- on the payroll side, we're replacing someone. It could be an ADP, it could be a UKG, it might an SAP on-prem and might be a PeopleSoft on-prem. When we get into the talent components on the applicant tracking system, talent acquisition, you typically are replacing a best of breed. When we get into the other talent components, often it is still paper, might be spreadsheet, it might be casual conversation that we're replacing.

Got it. Okay. And then there was a little bit of noise recently in the payroll space with one of your competitors around self-service, errors, year-end corrective work. I'll leave this question a little bit open ended for you to take where you want you. But can you kind of talk to us about how impactful all those different factors are for Ceridian in terms of your revenue and kind of competitive positioning and any other thoughts you have?

Look, I found a little bit -- for me, it was a bit of an education. I didn't realize that in that segment, you're still charged on a payment basis, processing basis. Generally, cloud companies like us charge on a per seat basis. So we have a per employee per month. We don't have a construct of processing a payroll. In fact, any time you change a data element, we calculate immediately the net earnings, we call it continuous calculations. I've never seen organizations that benefit from having an inaccurate system or inefficient system. Normally, there should be penalties, not kind of rewards. So I was a bit surprised by that. We're diversed from that. We're not impacted by that. We've always had self-service in the application in a different segment.

Yes, yes. So one of the big evolutions of the company over the last few years, I think has been kind of the, you always had partners, but it's definitely been a growing part of the story, adding partners, adding SIs really to the ecosystem. Can you talk about the work you've done to change how you work with your partners over the years? How often do they actually help you win new deals nowadays?

So if I look at the numbers, about 40% of our deals, I think, in the quarter got kicked off by partners. We call that SI primed. What's notable about that is that our product is as manageable by third parties as us. Which means you've got a certain robustness to the actual product today, which I think is very positive. If I look at the SIs involved with the actual product, we probably have about 350 trained consultants from the SI firms. We would expect that to grow to about 2,000 by this time next year. And when we look at implementation, you're seeing more and more of our projects being kicked off by the third parties, which we want to give us better reach. It means we can focus on being a software company, not a services company. And obviously, we are seeing them impact or influence the actual deals we're playing in. And by the way, when we go global, it's about 90% of our deals are kicked off by SIs.

Great. So that's for a non-U.S. company, adding Dayforce.

Yes, the companies in the U.K. and Ireland across APJ, across EMEA, those are to be clearly led by SIs.

Got it. All right. And then you've come out with a lot of new products in the last couple of years. I'll start off with Wallet. That's something you came out with a couple of years ago. That I think it was kind of a different and better way of allowing employees to access their earned pay more quickly and more in real time. And that's also been kind of a key element of your early but emerging vision of the ideal talent marketplace. Can you maybe talk about both those things. Where you are with Wallet and the vision for the marketplace?

Yes. So Wallet is the -- as we calculate continually, employees can see what they've earned and they can elect to get paid for that when they want to. And when they do that, we do something called an on-demand pay, which means we generate a true payroll for them with a pay slip and we do the remittances at the federal and the state and the provincial levels the very next day, so it's a true payroll. We have about almost 1,100 customers that are live on the Wallet. We're seeing very high registration rates, about 55%. From a revenue perspective, it's probably about a $15 million ARR business by end of year. It will probably keep on growing. So next year, revenue will be a little bit above 20%, maybe exit the year, I don't know, $30 million of ARR. What we are seeing though is it is impacting our win rate tremendously on the payroll side. The ideal talent marketplace is a new product. We've actually just started offering. We have the first three customers going live this quarter. And what that is, it's -- if you're a company that has a lot of frontline workers, when you're building your schedules, if you don't have a worker, you can take that shift and post it to the Talent Cloud. And then people who have downloaded our application get notified of the shift. And we use the Dayforce skills engine to do the actual match. If someone says, yes, I'd like to work it. They show up on the schedule with all the other full-time or part-time employees. When they work, they clock in with the app, but they show up on the actual time sheet. When the hours are approved, we pay them immediately through the Wallet. And we do that without the person ever being onboarded or off-boarded at the company. We benefit in that we're able to take a percentage of the wage, probably about 20% that's has actually worked. The initial way that we're launching it is really to the alumni of our customers. If you take a typical frontline organization, the turnover rate could be as high as 100% at the company. When those people leave the organization, we onboard them into the talent marketplace. And then if a company wants a replacement worker, obviously, there's a trust aspect of, hey, this person has worked for me beforehand. They know our procedures of operation. We can bring them on for that single shift or group of shifts at a very kind of low cost basis.

Right. And I guess -- how quick do you think that can ramp over the next year or so? Is that sort of early that it's not worth worrying about the model? Or do you think it could be material?

We don't have it in any of our models at the moment. And look, it's early. It's a new concept. So we'll see how it goes at the end of this quarter, we'll get some experience. And then based on that, we'll be able to work at how do we fund it and what's the actual growth rate. But if that thing takes off, you can do very well.

Definitely. All right. So let's get into the top of the Azure software, also still in products. So at your conference, last month, Insights, generative AI figured pretty prominently. Can you talk about what you're trying to do there? Why you think you're well positioned to take advantage of the technology and how will you be able to deliver value to your investment with it?

Yes. So look, I'll start with the why. We're a very modern platform. We're built on Microsoft's public cloud, which means that we can leverage all of the Azure services of which OpenAI is one of them. So for us to actually embed generative AI throughout the platform really is a technicality. It's not really innovation. So for example, if I go to any form on the page, I can link two tax fields together. So if I change the name, I'll say a job, I can say, "Hey, you've changed the name of the job,would you like to use this as a description?" And then that's -- it's not innovative. It's just linking the two fields together. Our hub experience is really a knowledge management system. So when you upload documents, we can make those documents available for generative AI searching. When you're doing something like a job description for a job posting, we can obviously use the same OpenAI To do the write-up, if you like, of what the actual job post is going to be. When you gain performance reviews, we can leverage that as well. And with us, we've got this very well-formatted single database built on the Azure cloud which means that we can use generative AI as quickly as you can if you're using kind of a ChatGPT or something. So you'll see it coming out throughout our product really, really quickly. And that even goes down to the visualizations. We use Power BI as our visualization platform, which is Microsoft visualization platform. So our job really is, hey, how do I pass the well-formatted data, to Power BI, and then we get all the generative AI stuff from that as well. There are some practical use cases as well that we're doing from an efficiency perspective. On the support side, when someone goes into the intelligent search now, you can actually ask the question, how do I create a report? How do I configure a clock reader? How do I configure a time code or pay code? How do I do this sort of payout? And you can ask in English and then the copilot pops up with the actual answer and using effectively our implementation guide and our knowledge base as a source for that information. We expect we'll probably see a 10% efficiency benefit in terms of customer support. The testing we've shown to date is that 70% of our [ in demand ] support tickets are knowledge-based and the generative AI tech is able to answer 80% of those very accurately. And so we're embedding that now into the services and the support experience of our customers.

Got it. Makes sense. I'll open it up for Q&A in a second. First, I want to bring up your CFO change. Obviously, I don't expect you to make an announcement here today, though. Feel free if you'd like to, but maybe you can update us on where you are in the process of finding someone, what's your kind of ideal candidate,any kind of time line?

Yes. The time line will be the start of the year. I think that's what we're aiming for. And we're quite confident that we should be able to get that. There's always obviously a risk, but I think that's the time line. In terms of skill set, we're looking for basically simplification of the business where we can actually simplify the budgeting, the guidance processes within the organization. On the IR side, I think we want someone who can take some of the load from me, from that particular perspective. But our business model has largely been somewhat consistent for the last 5 years since time of IPO. And when we look forward, we're trying to simplify the business, not complicate the business. So looking to get some efficiency in that function.

And that's going to be an external candidate, right?

That's an external candidate.

Right. If anyone has any questions you'd like to ask David now would be a good time.

So that AI product you just talking about, is that fully implemented across the board right now? Or is it early days? And what are your client -- what's the client response?

So there's quite a lot that we have in co-pilots. We showed them at our conference that was probably last month. They start getting GA-ed in Q1, Q2. But the product is very real, released in charter. The support side, we've been using that probably for about 2, 3 months now.

Great. Anyone else? Great. I've got a few more. So margins, always an important topic, especially nowadays. Now the rates have come much higher. Can you talk about the evolution of your margin structure over the last few years? And then how you think you get to your margin targets in '25? And any thoughts beyond that, too?

Yes. So if you remember the journey at time of IPO, we're probably in the low 60s in terms of gross margin on recurring. As of last quarter, we're about 78.3%. So we've seen a nice rise. If you go back to the time of IPO, we actually gave guidance to that about 5 years ago. So we typically have good predictability. That's the largest driver of the adjusted EBITDA margin. So what's really going on there is that we're shifting the company to more recurring revenue. And as we do that, obviously, that falls to the bottom line very quickly. And as we improve the profitability on the recurring revenue, it flows to the bottom line as well.

How much is the mix away from the old service Bureau business into the modern Dayforce matter? Or is that kind of not that big of a factor.

Well, nowadays, there's very little left in there. But that business is probably about 60% versus the Dayforce side, is well above 80%. So as you shift more of it to Dayforce recurring, you get a slight lift. So if you would have gone back to the time of the IPO, the journey is from, say, the 60s to the 70s was largely the shift between the Bureau revenue and the Dayforce revenue. Nowadays, we're focusing on improving the Dayforce revenue profitability profile and really pushing the services to the size as opposed to us doing it.

Got it. Maybe we can talk about the go-to-market a little bit. There's been -- you brought in Sam to -- I believe he's the Head of sales or what's his title?

CRO.

CRO. Okay. So I mean he's definitely starting to make a few changes, but more I think is planned for next year. Can you talk about kind of what's planned, how that might evolve over the next few years, vertical focus, segmenting of the size, geo, anything else...

Yes. As I mentioned, we play already in three different segments. What you'll see next year is probably more of a weighting towards the enterprise segment, that 3,000 to 10,000. The reason for there is that we're hyper competitive relative to the ERPs and the others in that market, and we're able to sell the full suite. And when we sell the full suite in that segment, we can get into the $20 type of $20-plus range on per employee per month revenues. They really are healthy, very profitable type of deals. Our differentiation over there is really time to value and quantum of value to the customers. So we're competing against an ERP, we can go live in 6 months. And by that 6-month time line, the customer is fully versed on the product versus an ERP could take a couple of years. And then you're still going to have to have a big staff or consultants to actually maintain the system. So it's a very strong value prop for that. One of the things that Sam noticed when he came in is, when we look at the size of our pipeline, a number of opportunities versus number of reps, we probably have too many opportunities relative to the reps, which means that they spread too quick, they spead thinly or they simply just don't play in certain opportunities. And one of his observations were if you take, say, the major markets where 700 to 3,000 employees, the reps were playing closer to the 3,000 limit as opposed to the 700. And remember, a 1,000-employee company for us could be $0.5 million to $1 million of recurring revenue. So we need to get better coverage across -- covering, if you like, the white space gaps that we have with inside the segments, which we'll start doing a bit more next year with the go-to market plan. The second area is that there's always a balance between net new customers and sales back to the base. When we started the journey, we had no customers. So 100% was acquiring new customers. Nowadays with over 6,000 customers. And when we start planning and say the $2 billion to $4 billion journey, we have to be able to monetize the base. So being able to go back and to sell to the white space that we have in each of the customers is becoming very important. And then on a global basis, obviously, making sure that we properly balanced to get the growth rate of, say, Germany, UKI, APJ, where we've done quite a lot of product investments over the last number of years, and we now have product to sell. For example, Germany, it will be GA in Q1 also. And so we have to start selling in the Germany marketplace properly.

Robert, just a follow-up there, what's the appetite like for your current customer base to kind of increase their product spend [indiscernible], a pushback on that? Or are people receptive to that?

So 30% of our sales today is back to the base. And I would say that's without really a focused back to the base sales strategy. So we get two ways that we actually get back to the base sales. One of them is we go back with the additional modules that we have, and we sell them a new module. The second one is because we're global in nature when they go to different geos, we can pick up those employees in those geos as well.

Is there a margin difference or kind of active base versus -- I would imagine is higher margin assumptions.

Yes. if it was an add-on modules, almost 100%. So we don't have an increased customer support costs, and we don't have an additional host in expenses it's the same cost of service.

On database.

Yes. So it's the same cost of service, right?

A question on the different segments and kind of end customers and how you are going to kind of get your folks to focus on the white space, if you will. So first question might be a little bit [indiscernible] asked question on, do you have different teams for the different end markets or your reps selling to all the end markets that you are [indiscernible] companies? And secondly, how are you going to incentivize going forward if you have an answer, to go after those 1,000 employee type of businesses versus just weighing on the high end, like are you going have to incentivize those different teams differently or...

So we have different sales forces for segments. So we have a major market enterprise, large enterprise market. And we also have segmentation, if you like, on a geo basis. So we have EMEA sales force in North America and APJ. I mean, we typically -- it goes on where the head office of the company is located. In terms of getting better evenly spread coverage inside each of the segments, it comes down to account allocation strategy and possibly ways that we can look at segmenting with insider segment as well.

So I think implementations those tend to take longer for you than some of the other providers, partly because you're providing -- you're serving much more complex customers, but they take sometimes 9 to 12 months. But you have been bringing it down some. I guess where are you in the process of simplifying that, speed that up? What more can you do? And any other thoughts you got there?

So Robert, I didn't catch the first part because we are quicker than the competitors.

Well, it depends on which -- let's say that competitors as much as some of the other public cloud providers, but they're also serving 100 employees.

So we don't compete against the Payster. If we're doing that particular segment for us as well, it will be 30 to 60 days as well. When we compete in the major markets, enterprise, large enterprise, it's typically 6 months to 9 months would be the typical cycle.

But you haven't -- do some work to try to bring that down, right? And how much more can you...

I don't know if you can. We've added a lot of automation to that to take the effort out and get more consistent deployments. As we built out the Activate tools several years ago. Typically, you want to go live on a quarter start. And so if you sell, say, in November, you most likely are going to go live now for July 1. You might have the [odd] that goes live for April 1. If you saw in the Q1 time frame, if you're in January, maybe you can make the July 1. If not, you're going to make the October 1 deadline. So I think your time lines are more determined by that. When we're doing the add-ons, those you can actually go live in a 5-day time frame type thing.

Got it.

I have one more from an investor question basically, what do you think investors most misunderstand about your story or what's the investment community missing here in the story?

Yes. We get bunched too much with the Pays possibly because similar industry, similar-sized companies, similar type of growth rates type. But the reality is that's not our segment, right, that we actually go above that and we have more of a durable growth profile. And I'd say those particular types of companies. To me, I think that's the #1 item. If I take the number of questions I've had on Paycom, given that we don't really compete against Paycom, you could ask me about Microsoft as well.

slight exaggeration, but point taken.

Never, hey, we used to love the comps of Paycom. Yes. And by the way, I still think they're a good company. actually. if I look at what they've done there, the profitability profile, the growth profile, it's a good company. So is Paylocity and so is ADP, and so is Paychex and the other guys, the natural profitability in our industry is very high.

Yes. you've been moving towards trying to get PEPM provisioning, which for people who don't know, it means being able to charge customers, the recurring revenue before we've actually gone live on things. I guess, any thoughts you have on there and where you are in the process? How much how much of a tailwind can that be?

I think it's pretty much baked in today because we -- it's largely tied to where the SI is prime in the deal. So currently, about 40% of our deals are primed by our SIs. That will go up maybe another 10%, 20% next year and the PEPM provisioning follow suite with that.

Got it. And then maybe let's end on capital allocation. you've acquired a pretty good number of companies over the years, not any for the last, I believe it's two. What's kind of the current thinking there? Do you think you're more or less done on the kind of larger ones, if you do any, what would be kind of the most likely area?

Mostly, it would be a tuck-in acquisition types to get particular areas of IP or know-how, the benefit decision support acquisition went very well, Clearview Logix; the DataFuZion, which gave us a certified payroll and the rate calculations. What turned out great. Ideal, which gave us the machine learning for talent acquisition around candidate grading and job matching for the candidates were all great acquisitions. On the global payroll side, if I could find something in the Nordics, maybe areas of kind of South America, I might look at that, but we have no ongoing large acquisitions at the moment.

Got it. Great. I think we'll wrap it up there. David, thank you very much for this.

I appreciate it. Thank you for the time. Thank you.