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

Next up, we have Ceridian, David Ossip, who's the Chairman and CEO of Ceridian. Really, really thrilled to have David. It's a pleasure to really host him. He had been a thought leader in this sector for a very, very long time, very innovative rather, terrific, terrific industry leader. What I want to do over the course of this is try to keep this as interactive as possible. We've got a lot of questions, but I want to try to open it up to the audience, too. There's -- if you either can [ put up ] questions through the iPad or we can send around a mic or alternatively, you can e-mail me, [email protected]. We'll get those questions.

But David, I think we started the same way last year, and it sounds basic, but I think the way you've transformed Ceridian over the course of time, I want to start there because I think it's been such a powerful transition. Maybe talk about what you saw in Dayforce that enabled you to essentially transition and essentially all done at this point, the Bureau business of Ceridian into Dayforce and why that's been so important, particularly given the next phases of growth, which the generative AI, which we'll get into in a minute, but that's going to be incremental growth drivers for you. But maybe start there because I think it's important and it really helps underscore why you've had the execution and success this year where there's been some not as much success in the market across all ATM today.

So Kevin, the opportunity we saw was a very large homogeneous market. And we saw that market cut right across segment and across geography. And when you look at the actual growth profile of our business, it is very durable in that we're able to diversify our risk across segments. We focus really on 3 different segments: 1 being major markets, which goes 300 -- sorry, 700 employees to 3,000. The enterprise market that goes 3,000 to 10,000 and large enterprise that goes beyond. And we weight about 1/3, 1/3, 1/3 and that allows us to adjust the business as the macro actually changes. We also get diversification by focusing not only on the U.S. but also on global. And we've got very strong capabilities in terms of global HR, global workforce management, global talent and global payroll. And that's also allows us to adjust the business based on what we see in terms of strength or weakness across the actual -- across the world. And the final area of diversification comes to product. We're not a payroll-only product. We're not a time-only product. We're not a talent-only product. We have all of them. We do a lot of full and suite HCM products, but it also allows us to focus based on industry need. Currently, the need that we're seeing is really tied to quantifiable value and time to return, and we do very well in that because some of the tools that we have in terms of talent acquisition, in terms of workforce management, labor planning, compliance, allows our customers to get returns very quickly and sizable returns and that's effectively. In terms of your original question, the opportunity I had seen was this very large market, and I felt if I could differentiate in the market in a sizable meaningful way to the customers that we could acquire a lot of new customers. And the opportunity we saw was the separation of HR systems. When I did the research about 10-plus years ago, I found that the typical company had over 12 different HR type systems, each with its own database. And that made it very difficult to do any type of analytics and made all of the workflows really batch-based in nature. It could only go so far in each individual module before you had to export the data or import the data. And finally, there was a demand for one system globally as opposed to all of these different regional systems across the world. And so the design of Dayforce was really around that. One database, continuous calculations, global in nature with a full suite of HCM capabilities across all the different product areas and that has differentiated us. Since the launch of the product in about 2013, we have over 6,000 customers live on the product right across industry, right across the actual globe. And we still only have probably about a 4% market share in North America, so just tons and tons of land grabs still available for us. And if I look on a global basis, well below 1%. And so we think we can according to that durable growth profile and design continue to build the company. We are focused, obviously, at the moment on the 2025 of hitting that $2 billion total revenue and 30% adjusted EBITDA with 80% margin on cloud recurring. But we're beginning to think now about what's next, how do we get to that $4 billion level, and the market definitely is there for that.

One of the things that's, I think, always been impressive about the Ceridian story too, David, is the amount of ability you have to kind of determine how much growth as opposed to maybe margin as you think about the business. And one of the, I think, big growth factors where you've seen a lot of success more recently and maybe we could talk about it and that is with your SI effort and how important that's been not only from help driving the margin, but also, I think, probably help start monetizing additional revenue opportunities. And again, I think that starts with, to your point earlier, the continuous payroll calculation and the optionality. But you've created, I think, intrinsic optionality, particularly in the enterprise space that may not have been there through some of the efficiencies, particularly on the implementation side. And I think that's Ceridian, a lot of the IP you've created, but maybe talk to that a little bit because I think the SI is a big part to the story that maybe the market doesn't fully appreciate.

So SIs are the system integrators. You get the Tier 1 players like PwC, Deloitte, E&Y, Accenture. You get to kind of BDO, who is almost in that category. And then you've got the Tier 2s like AXL, I think, Best Practice and the list goes on. We started building out the system integrators probably about 3 years ago. Where we are today, about 40%, 50% of the projects that we now kick off are primed by the SIs, meaning that they do the implementation. And one thing is actually a statement on the quality of the product that the SIs now can handle the product as well as we can. The importance of the SIs is it allows us to grow the company without becoming a service company. We can focus on the recurring software, which has a very high margin versus the services, which often has a negative type of margin, at least in our business. And you see that reflected today. If you look at our results year-to-date, you'll see Dayforce recurring, doing really well, but we're pulling away from the total revenue growth because we're actually giving the services work to the SIs as opposed to us doing that work. Today, we probably have around 350 trained SI resources across our partners. Next year, we'd expect it to be up, I don't know, 7 or 8x, it's been a significant growth. The SIs are all doing very well. They've been able to build nice practices. They're running, I would say, proper capacity and proper utilization. The next phase will be the SIs building out the go-to market, in other words, their sellers around our product. And I would expect at that point in time, you'll get a lift in terms of net new customers come in to us. So it's something we obviously are very encouraged on. I think it will be a big differentiator for us in the future as well.

Maybe, David, spend a moment on the competitive dynamics in terms of enterprise versus mid versus down, because I think there's sometimes, I think that gets lost in the market, but I think it's a really important differentiator in terms of your go-to-market strategy and enterprise and where you compete relative to maybe some of the other players. And if you can maybe tie that into some of the ERPs as well.

So we started about 700 employees, which is the bottom end of our majors. That's typically above the pays in the market. So if you're looking at Paycor, Paylocity, Paycom, the Workforce Ready product by UKG, the Workforce Now product by ADP, the Paychex product, the Rippling product, and there's a whole group in that lower end. We don't really compete against them. In our major segment, we largely sell the full suite HCM, so that's single system altogether, continuous calculations. And that just resonates very, very nicely. And that continues into the enterprise space, which goes 3,000 to 10,000, where we're becoming very, very competitive. Typically, the competitors we would see would be UKG and ADP in the major space. And as we go into the enterprise space and the large enterprise, it shifts over to mostly the ERPs that we compete against. Our value proposition against the ERPs would be time to value, quantum of value. And if they have a high percentage of frontline workers, the capabilities that we have around time and attendance in doing those wage and hour compliance calculations properly, in handling payroll all the way down to the actual payments, the ability to handle the global payroll component, a global workforce management component, typically gives us a strong advantage. And again, the advantage comes down in both the quantum of the value that we can deliver to those customers. And equally important today is the time to value. So with us, it will take about 6 to 9 months to get a customer live, ERP is much longer. When a customer goes live with our systems, they're fully are versed on our system. They can handle the system right off the [ bat ]. Whereas with some of the ERPs, it takes a lot longer, and you still are very dependent on third-party resources to manage your system.

And maybe switching gears just to -- because really year-to-date, you've had really, really good results and there's been some unevenness across the sector. And I think part of that is the average client size, but maybe talk to that a little bit and some of the pricing dynamics versus some of the other competitors in the space. There's been talk about some potential slowing mid-market, things like that. Just any thoughts on that?

I can't speak particulars of the others in the marketplace. We charge on a per employee per month basis as most cloud companies do. We don't charge on a control basis. So I can't speak about what was going on there or why. We don't operate towards that. We've done very well because, as I mentioned at the very beginning, across the diversification, across the 3 different segments, which allows us to be agile. It allows us to be nimble inside the actual market. And also the focus on the diversification across the product that has helped us a lot as well that we can basically move the lever as to how do we emphasize net new customers versus sales back to the base, gives us another piece. In terms of tail and headwinds, I encourage people to look at it really on kind of like the first derivative. You have to look at what was the growth in the prior year to see if you're [ lapping ] an easier or difficult quarter. And I suspect with some of the lower-end players who charge on a per pay basis, not on the cloud basis, they had a very -- I suspect that they had a benefit from employment coming back, whereas with us, we charge on furloughed employees. So we get paid regardless if they're furloughed or not, whereas the smaller vendors don't get paid on that. So they may have had a very high growth quarters the year before, that they're now beginning to lap. And so that might be part of the actual impact, but I don't know.

That makes a lot of sense. I may pause here, open it up, see if anyone -- we're about halfway through, anyone in the audience or online, have any questions? I kind of keep going. Maybe we'll talk about that Gen AI. I mean, it's something that has come up in the last 6 months, but you've been working at it for years. Maybe talk about what you're seeing in the business today on both the revenue and expense side and where you think the opportunity for that is longer term? And I also want to talk about Dayforce Wallet too as an aside, but just maybe start with the Gen AI.

So we have a very modern platform, probably about 10 years newer than anyone inside the market. And we're built on the Microsoft stack. So we use the Microsoft public cloud. We use all of the Microsoft kind of cloud services. And that allows us to really take advantage of the generative AI capabilities a lot easier than others in market. So for us, it's largely leveraging the large language model of OpenAI and for us to focus on how we curate the documents that we actually give to the engine. So areas that you can see it is we have intelligent search. And if you look at our overall user experience, we have what we call the hub and the hub really is a content management system that allows a nontechnical person to really create a very engaging and beautiful landing page for the application and for them to actually build out the navigation using their colors and their icons, and the areas that they would like to focus. If you load up a document to the hub, we're able to index search and to provide that over to the generative AI. And so you could do something like load up a paternity document. And then someone through intelligent search could say, "Hey, how much time can I take off? When do I have to come -- when do I have to come back?" And we're able to answer that kind of using the OpenAI APIs and to get that type of immersive experience. The Copilot as well allow us, again, to leverage the fact that we have this really single data model that's been very well curated. And by providing information to it, again, it allows us to leverage the OpenAI through the Copilot that we've built. So you could do things like which are my most expensive locations from a wage percentage perspective, which of my locations have the highest attendance issues, which of my locations are the slowest to hire people, and you can start to actually engage a natural kind of language and using that kind of single data model, you get back the data. And then we also leverage Microsoft Power BI for visualizations. And so you can now actually ask to see that data show it to me as a pie chart or show it to me as a trending chart. And again, for us, it's easy for us to deliver that type of capability because we're leveraging the Microsoft platform and the whole product is built on it. In terms of monetization, we'll obviously charge for the actual copilot. We're still going through that exercise. Every year, when we actually look at the pricing algorithms for next year, there's a lot of different variables that you basically have to weigh off against each other. And so as we get further in towards the end of the year into the beginning of next year, we'll have a bit more clarity as to what the pricing will be.

Switching gears. And again, I think one of the most differentiated parts of the Ceridian story is really the technology, right, the continuous payroll calculation. And so maybe talk to that a little bit, but then also within the context of the Dayforce Wallet, because I think it's that technological innovation that really helps differentiate and you see that in the core software margins. And again, as you remix the business more away from the professional services and the traditional bureau, there's a real nice tailwind to the margin trajectory, that's part of that 30%, target 25%. And then as you think about $4 billion in revenue and beyond, that 25% target, there's a lot of powerful drivers embedded in the model that just feel somewhat mechanical, if you would.

Look, as I said, it's a business where you have a lot of visibility, and you can design this kind of durable growth and profitability profile for the business. There are some decisions that you make in terms of each year as to how much you have to want to weight each of the different types of components. But I think we have a good confidence level around it.

Then obviously, you saw an opportunity to accelerate some of that with some of the floating benefit you saw in '22, which helps create, again, I think you folks are really disciplined in not being put a lot of fixed costs against that, but rather use an opportunity to accelerate some initiatives as opposed to fixed expense against that float.

Look, if I look at the growth rate of Dayforce this year, the true growth rate, I'd say, is in the low 20s. I could take that the Dayforce recurring revenue growth rate of 29% constant currency, but if I subtract out the benefit we got from the tax business, and if I take out the benefit that we actually got from float as well, you probably get to the low 20s. And when we look on a go-forward basis, it's a similar type of profile. You'll see us increase the adjusted EBITDA. This year, we'll end up probably around 28% or around that matter, 27%. And so you got a straight line, if you like, towards 30%, which we'll have to see next year halfway there and the remainder the year after. And then on the revenue side, if you do the math backwards from the $2 billion in 2025 to where we are today, is probably on a total revenue basis kind of just under 20% and eventually Dayforce becomes the entire company. So that's kind of the focus level we're targeting at this point. If the financial markets change again where there's more emphasis on growth versus profitability and operating cash flow, then we can make an adjustment, invest more in pipeline development, marketing, which obviously comes out of your EBITDA in the current year, but it gives you a bit more growth, if you like, a year later. So again, it's -- there's a lot of kind of control that you have in terms of the growth rate that you're trying to get and the profitability. What we do know is, given our market share of being 4% and differentiation of the product, there's a hell of a lot we can still grab in North America. So we're not constrained from a growth perspective in terms of market, market availability. It's more really being driven by what we're trying to do on the profitability side.

Very helpful. Maybe David a minute or 2 just on the rebranding. I see this [indiscernible] we're going to Dayforce. Just any thoughts. I know that the expenses in the guidance, but just what drove that decision? Is it just where you are in the evolution of the company?

So when we looked at, it wasn't an easy decision. We don't really have a very strong unaided brand awareness on either Dayforce or Ceridian. And so we have to develop that, but we can't build it with 2 separate brands. The second part is that the business today is an HCM business, not a payroll business. And a lot of the awareness around Ceridian is too much on the payroll side, which isn't what the product is today. So we felt that moving to the Dayforce as the brand, 1 creates simplicity, it makes it easier to tell the story. The second part, it reflects better who we are today. And if I look at it on our total revenue basis, almost about 90% of the business today comes from Dayforce, by next year is almost 95%. So that's the actual reason behind it.

Maybe switching gears again. Any questions in the audience or can we keep going? I don't see any. Maybe we'll talk about capital allocation for a minute. And again, I always try to ask this question because I think the inherent complexity of the models from a regulatory perspective sometimes doesn't get fully discounted. So you've done some M&A in the past, particularly regional M&A. Talk about that a little bit and where you are in that process. And I think a lot of that had to do with acquiring local expertise that, again, you pivot across the Dayforce engine drives a lot of incremental upsell revenue and ultimate incremental profitability, but talk to that strategy a little bit and how you're thinking about that longer term?

So from a global payroll perspective, we've got our native capability, which covers a lot of different countries, especially when we get into Africa and the Middle East. We've got very broad coverage there now. We have the engines that we acquired in APJ and in Mexico. And as you know, we've made them headless and we have the global payroll interface. And we use that same global payroll interface now with parties where we don't own the payroll engine, like in countries like France and the Benelux countries. It's the same user experience regardless of the engine that we're using from a customer perspective. In terms of acquisitions, we don't have any global payroll projects on the go at the moment. If companies did come up, we would look at them, we'd be opportunistic, but currently, it's not in the 2024 plan.

Helpful. David, I would like to end with is -- what part of the Ceridian story do you think -- is it soon to be Dayforce, do you think the market doesn't fully embrace?

Look, it's a very broad market, right? You're dealing with a market that is probably about a $40 billion, $50 billion market space. There's a tremendous amount of value in our client base. We've got over 6,000 of them and the white space in our client base, when we look at penetration of the HCM modules is very low. Our client retention rate, I think, is best in class at about 97% on a gross basis and over 100% on a net basis. And I think that really talks about the strength of the actual product. It's a lot higher than you see from the lower-end players and even from the ERPs. So obviously, we've got a very, very good product. It is very differentiated in a very large global market.

I think the client needs to your point of an enterprise client as opposed to mid- to down are much different from a module perspective as well.

The -- we find the module density from majors and the enterprise is that's our sweet spot. Those are the clients that typically are going to be buying that full suite product and if they buy the full suite product, the PEPM, the per employee per month fees that we can get from those segments is actually high. And so there's a lot of opportunity over there. And again, the customers buy from us for a number of reasons. The first is they're looking for simplicity, IT simplification, carrying from, say, 12 different systems to 1 system. The second comes down to decision-making. If you get the data all nicely formatted with generative AI and the visualizations we can do, we can allow an organization to understand where their labor costs are, what their time to hire is, where they're short of people, and that makes a very big business. Now the third area comes down to wage and hour and compliance. And so that is, are you paying people correctly? Can you avoid the very expensive penalties and class action lawsuits? Do you have the data available for internal audits for SOX compliance, from a GDPR perspective, from a cyber perspective, is your data protected and well run, which you have to be in the public cloud to do that? Fourth area comes down to globalization, which is effectively a lot of our customers have grown through acquisition or even organically to the point of complexity. And at some point, you have to do job harmonization, standardization. And from there, you typically move to shared services. And if you have the shared service, you can move to a lower-cost jurisdiction, which allows you to lower your operating costs. And we see quite a lot of that happening as well. And then we get into the more of the strategic areas where we do things like labor planning, which would be how many people do I require in order to service my customers, and can I do the allocation of that more cleverly, so that I have lower labor costs, at the same time I can generate more revenue. And we see a lot of that coming through as well. And the last area comes down to engagement of employees, which is how do I have this immersive platform across geo, across type of employees, where I can put on my brand in, and I can do that without being this technical guru or having a design background and effectively meet the employee where they're at. So they interact with our system daily. So they're in our system, looking at their schedules, clocking in and clocking out, looking at their wallet balance. Can I take advantage of that engagement with the person to communicate better with them? And we're seeing a lot of that. And with those, our tools aren't just web, we're very effective on mobile. In fact, if you look at the Dayforce mobile app on the App Store, you'll see an app that has a rating of about 4.7 across, I think, it's 500,000 reviews. There's some crazy, huge number. And that just talks about how frequently our products are used and how they are liked. The Dayforce Wallet, I think, has a 4.9 rating, which is just exceptional. These are highly, highly used apps. We never reset the rating. So a lot of vendors play the game, if they don't like the rating. You have the option of, hey, rebooting it back to nothing. We don't do that. It's just the rating over the like, which talks about the engagement.

There's the capability and then there's a meaningful cost savings for your clients too, right, because if they're not supporting 12 systems, if they're fully outsourcing that to you, there's a significant internal savings within their human resource departments as well.

The last point would be, I think, as an organization, we service our customers really well. Our Net Promoter Scores across implementation and customer support are probably the highest in industry. You can tell for myself, I'm a technical person. I know the product. I know the customers, I know our employees. And we act really responsively to our customers that they feel valued and they are truly valued.

I think even the SIs, the way they embrace the product. I mean it's -- they want it, they're going to sell it, not only on the implementation, but now they're selling it as well. Anything else? That's it.

Great. Well, thanks, everyone. Appreciate the time today.

Thank you.