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

Okay. Welcome, everyone. I am Mark Murphy, Head of Software Research with JPMorgan. Thank you for joining us. And it is great privileged to be here with Jeremy Johnson, who is the CFO of Dayforce. So first off, Jeremy, I just want to thank you for taking the time out of your schedule to travel here, and it's great to be here with you. .

Thank you for having me. Good set of quality meetings here today. So thank you very much. .

Great. Great to hear. Maybe you can briefly introduce yourself in Dayforce just for the benefit of anyone out there who's not already familiar. .

That's good. Yes. So I'm Jeremy Johnson, I'm the CFO of Dayforce. I've been with Dayforce collectively for, gosh, probably 11, 11.5 years. I am technically a boomerang employee back to Dayforce. So I was with Dayforce for -- from 2012 all the way to 2020, I left to be the CFO and interim CEO of another HR tech private company, and then boomerang back to Dayforce to be CFO. I've been here in seat for now about 1.5 years. And Dayforce itself, for those of you who don't know, is a Human Capital Management software company. We're about $1.95 billion in revenue. We've got about 7,000 customers and 7 million users on our global people platform. We kind of cover everything from hire to retire and a full HCM talent suite.

I was thinking there must have been very smart recruiting that got to you to leave and then come back here. No [ pun ] intended. So Jeremy, we've always held a very, very, very positive opinion, especially of the technology at Dayforce. And I think what stands out is it's a company that's willing to take on the super hardcore engineering projects and trying to make these deep transformations of the way the HR industry works. I think a lot of your competitors would rather not try to be up for those big challenges. And the continuous real-time calculation engine is a big one. You have all these innovations in the wallet in the way you've architected to build that product. How would you explain the vision here and the core differentiators of Dayforce to try to distinguish it from the rest of the competitive set?

Yes. It's a great question. And look, it starts with product. The vision of Dayforce has always been to have a heart and a soul in compliance, but to have a full talent suite that accompanies that compliance and a single application across the whole human capital management suite. And it started in 2012 when Dayforce and Ceridian, were brought together. Ceridian had that core in compliance and had the tax engine and Dayforce had the software. And from 2012 until kind of our IPO, we focused on really building that pay and time core that we had. We were selling what we call the continuous calculation of net pay. The differentiation right there is that we have pay in time in a single application, so you don't have to wait for the time system to close in order to do your payroll. With every other company, you have to, right? And then you're stuck with the short window where you have to do run around like crazy and do your audits and do your checks. And eventually, you just do your payroll when -- not when you're ready to do your payroll, but when you run out of time. And with Dayforce, we -- the continuous calculation allows you to do those checks during the active pay period. So pay and time are in the same system. And that's sold really well from 2012 until our probably IPO or just after our IPO. But the plan has always been beyond payroll in time. It has been the full HCM suite. And post-IPO, we brought a guy named Joe Korngiebel from Workday. And Joe was, I don't know, employee less than 10, I think, at Workday. And his remit was really kind of basic. It was, let's go level up our talent capabilities inside of the suite. And we really want to get to the ability where we can sell full suite Dayforce on a single application. And Joe has been here now for 4 or 4.5 years and has done a fantastic job. We are now a Gartner Magic Quadrant leader for talent, enterprise solutions. And I think in Q1 this past quarter, we had in our major market segment which we sell to is the 500 to 3,500 employee space, almost 90% of our deals were full suite deals. In our enterprise segment, which is 3,500 up to 12,000 employees, it was all deals were full suite deals. And so we really leveled up our ability to sell into that pay -- beyond that pay in time into that for talent HCM suite. On top of that, we've got this product that we call managed and managed for us is where Dayforce is the payroll department for your company. It's not a full PEO type solution, but it is where we actually act as the quality check, the control check, we commit the payroll on your behalf, and we are essentially your payroll department. And for us, you think about this and what that does for us is the pay in time at about 1,000 employees gets you about $10 to $12 per employee per month. The talent suite when you add it all gets you again at that same level, about $10 to $12 per employee per month. Managed can get us another $10 to $12 per employee per month. And we're really leaning in on Managed because the margin profile, it's a recurring revenue stream. We build it on a per employee per month, but the margin profile is now equal to that of our software profile. So near 80% recurring gross margins on that business. And so we can not only get a lift on the recurring revenue, but make sure that it's really a solid recurring revenue with high margins. In Q1, we had 70% growth in our managed services revenue, which -- our managed services ACV, which is beyond anything we've done. So we're really leaning in there. The last piece of this puzzle and the vision here that we've had is around the data. And with a single application, you can really imagine that we have an advantage. We have a data advantage that it's all in one. It's all formatted nicely. It's in one single application. And you can do some nice analytics. You can do dashboarding, you can do things like co-pilot or AI assistant on top of there. And the hub experience, which is really the landing page of Dayforce. You log into Dayforce, and it's kind of a [ wix ] type experience where administrators can go in and put content and add different things and take it off really easily without the need for IT. And we think that can get us another over time, $10 to $12 per employee per month when we combine that with the agentic approach that we're taking across the platform. So it's a building block that currently, I think if you look at our total revenue and you divide it by the number of users we have, we're at about $12, $13 per employee per month. We've got a nice runway up of continued growth and that's where our customer base sales team comes in, and we're having great success in customer base sales.

Okay. So -- and it led to pretty robust bookings growth -- and thinking back on Q4, that also happened in Q1. I think your comment was new sales bookings growth of close to 40%. And I don't think we're seeing that across the rest of the landscape. There's also a comment that win rates had nearly doubled year-over-year. How do you think the stars are aligning to basically drive such a robust bookings growth, especially when in the backdrop of this environment, you've had the threat of a trade war.

Yes, it's really phenomenal sales performance. We -- just the specific numbers in Q4 of last year, we grew at about 40%. Our bookings are recurring ACV number and so a recurring annual contract value. 40% in Q4, and we think first half, we're going to have a very similar growth, around 40% through the first half of this year. So great success. The messaging seems to be really resonating with our customers, and our sales execution is phenomenal. And that's probably where I would dive in there a little bit. Mark, is -- on our sales approach, I mean you think about that and the story that I told about going from pay and time all the way to this full HCM suite. Initially, our approach to sales was pretty simple. It was we've got a single application allows you to do a continuous calculation and you can realize a benefit to that. It was something that you could -- salespeople could deliver really cleanly, really nicely and it resonated with customers nice and it was -- it resulted in sales. And then around the COVID time, we probably made a little bit of a misstep. We transitioned our messaging in the sales side of things to -- there's a complexity crisis in the world right now. And we need -- we're going to address that with our technology will help you address the boundless work force. And it was a difficult sales pitch to give. It didn't resonate quite so well with customers. And this last year, we actually pivoted -- now that we have the full suite, we pivoted to a messaging that I think is really working well. It's a 12:1 simplification, right? We're selling ROI. And when we say when we mean -- we mean when we say 12:1 simplification is we can replace approximately 12 different HCM solutions with 1 single Dayforce. And by doing that, we can replace 12 subscriptions. We can replace 12 teams that are supporting those technologies. We can replace 12 integrations with those systems into other technologies. And we actually show the math to the customers and the prospects, so that they can see their true ROI on the system. And that seems to be resonating really well with our customers. Our sellers can sell it and pitch that easily. Our customers can understand it, and we can deliver quantifiable value to those customers. I think the other 2 things that I'd say that are going well is our approach to these sales summit seem to be going pretty nicely. We have a sales summit pretty consistently throughout the year, and it culminates with what we call our annual user event Dayforce Discover. So we were in L.A. and then New York. Right now, David and team are in the U.K. We are doing a London Summit, we'll go to Australia and do a Melbourne Summit. We'll come back. We'll do Dallas. We do Chicago and then we finish it off in Vegas with our annual customer conference. And what happens at these summits is a pretty cool thing. We bring customers and prospects together. And they're all pretty similar. We get a customer that starts it off up on stage and says, I was you prospects about a year ago. And let me tell you why I chose Dayforce and what my experience with Dayforce is -- and then what happens throughout the event is we get customers and prospects talking to each other, and they share stories and they share pain points, and they share why I do this and what do I do there? And it really creates a pretty nice community. And some of our -- a lot of our customers end up doing a lot of the selling on our behalf. And it's a really nice thing. And it builds a nice bond. So then David gets up on stage and does a nice demo, and there's very few CEOs that can do a demo like David can of their product. And so that works really nicely. And then the last thing I'll say is the sales execution. We brought Sam Alkharrat again from Workday. And Sam has just leveled up the sales team, I think, quite a bit. He's brought in the right leaders from across the industry. He's put in the right discipline, the deal reviews, the deal scoring. We have every Friday, we have a call with our product team, our customer team, myself and David, along with the sellers, and we really go through deal by deal, and we've done a nice job there. So Sam's put in a lot of that discipline. He's put the pipeline into a spot where we really have a right to win this pipeline. And that's what's ultimately helped our win rates. And the last thing I'll say about the win rates, I think our win rates are improving because we're convincing customers to yes, if that makes sense. You think about a win rate and it's -- I'm going to go with Dayforce. I'm going to go with a competitor or I'm going to do nothing. And in the past, that slice of the pie that was due nothing was a little bit bigger than we'd like it to be. And we're convincing folks, I think, through a lot of the messaging and the discipline and all these things that we just talked about to say, yes, and that's ultimately what's helping that run rates.

That's a great and very comprehensive flow. And I think there's a couple of new learnings in there for us. When we think about everything, Jeremy, that you just described, which is giving you this kind of a surge in bookings above that of the rest of the industry, -- the -- at the same time, when we look at the growth of the recurring revenue, it was a little less robust in Q1. And I think the Q2 guidance for recurring is falling a little below the kind of multiyear trend line that we're looking for. What is the underlying dynamic? I'm wondering if it goes back to -- could it go back to prior sales periods. You mentioned coming off of COVID, there was a bit of a sales step. What is driving the spread between bookings and recurring revenue?

It is -- we bill on a per employee per month basis at go live, right? So we are implementing today what we sold 9 months, 12 months, 18 months ago, 24 months ago, sometimes. And I guess you can flip that around and say what we're selling today is expected to go live in September, October time frame for beginning of it, December, January time frame and then a little bit probably a year from now. So we are getting through those bookings. And I guess what I'd call it is just -- we're implementing things that we're probably from some of that messaging that we just talked about, where I think 2 things were happening. One, that messaging really wasn't resonating. So we had a bit of a pocket on the sales side of things, and we're working through that now. And the other side of it is we also were pushing up really quite a bit upmarket at that same time. And so you end up with these large complex global deals that take a long time to implement. And so as we work through that, I'm not surprised that the growth rate is kind of where it is right now. I do think that what we're selling today the largest success we're having is in major markets and in customer base sales. It tend to convert to revenue a lot more predictively a lot quicker, and they're a lot more simplistic sale. So I feel very confident in our ability to get those -- the revenue numbers -- see these bookings translate into revenue in the future.

Okay. So said differently, it's a temporary lull in a lagging metric. And given the way that what you just said right there at the end, I do want to ask you the thought of having confidence in where that's going to head, if you do end up having a few quarters in a row where you -- it seems like you probably will of growing the new sales bookings about 40% how would that then translate into future revenue growth? Because I think the proportionality between the 2 things matters a lot what we're trying to run that Math, right? .

That's right. Yes. I mean I wouldn't expect that sales or revenue grows at 40% because bookings grew at 40%. The denominators are different on those. But certainly, you should see it a step function change there, where it does translate into some better growth in the future. And I think you start to see that towards, again, the back half of this year and into next year. And what I feel like right now is we're just getting a lot more confidence in our 2026 and 2027 kind of revenue path to revenue here that we've set out.

Okay. Okay. The -- so nothing -- recurring revenue is not going to start growing 40%, but it's going to be -- it would be kind of lifting off this trough level -- and we can -- maybe one way to think about it is gaining comfort in the longer-term guidance ranges that you've given.

That's exactly right.

So I would be interested in how you're perceiving the macro environment because it's been -- the volatility has been incredible around the trade and tariff situation, the dose the [indiscernible]. It changed a day or 2 ago, right? A tweet can really impact things. And when we look at Dayforce's customers -- most of them would be pretty heavily on the hourly worker side. We believe you would have some exposure, right, to tariff-impacted industries like airlines and retailers and energy, et cetera. I should mention manufacturers, too. Do you see any change in those, maybe the tip of the spear types of industries?

What I can tell you is we haven't seen any real impact from the -- to the employment levels from the tariffs, any direct impact. I will say we expected this year to be relatively modest from an employment growth perspective, and that's exactly what we're seeing. Typically, in any given year, you can say we get kind of 2% to 3%, maybe sometimes higher, maybe just a little lower, but from employment growth tailwind and this year, we modeled it at kind of 1% or a little bit below that, and that's exactly what we're seeing from a growth perspective. So things are still growing employment levels on average year-over-year at our customers, but very, very slow and it's a headwind to overall revenue growth year-over-year.

So 1%, I mean, if you tie that in with, I think the ADP data that we saw recently was sort of less encouraging. There have been other employment updates that feel like it -- nothing has really changed. Are you in more -- should we kind of read it as you're more in that latter camp, like this 1% is -- do you think that's the zone we're going to be in maybe between now and your end?

I am -- that's what we've modeled is that at the same levels that they continue. I'm not an economist, and I don't claim to know but ...

Economists don't know either. .

But I'll tell you what I -- that's how we've thought about it. And outside of that, I'm not sure. The data is showing me that that's where it's at right now, though.

Okay. Let's talk about HCM expansion for a moment. The -- when we think back, Jeremy, from the time of the IPO and even prior -- we think of the strength in -- the kind of product level strength of Dayforce being in workforce management, right? In other words, you're going to be -- how do you manage the schedules of all these hourly workers -- and then the core payroll engine obviously, kind of goes without saying. How do you feel about the ability -- so if you think about Dayforce being on this long-term evolution, there's running the business, which is I think we put all that in that category. And then it's going to be managing the business, especially pretty strategically and you start thinking about -- if I oversimplified it, just say talent management or talent management and beyond, how are you thinking about that trend line?

Yes. I think it's something that we've seen as an opportunity for Dayforce over a long period of time. As we started through in that compliance core of pay time benefits and then expand it into the talent, I mean that's exactly what we've done. We've built out recruiting. I think our recruiting -- it's pretty close to some of the best in breeds and if not, like right there with some of our peers in market. So we feel really good about where we're at there. You think about learning management. We just did an acquisition last year of eloomi and completely replatformed that onto Dayforce in a very short period of time. And now we're not only able to sell our own Dayforce learning solution, but also sell content alongside of that. You think about performance management, compensation management, all the data things that we talked about. That's really about managing the employee, right? It's attracting the right talent, it's making sure they stay and that they're engaged. Think about things like succession, planning. Those are all the things that I think we've built out really nicely over the last few years and the benefits are starting to come through. You go into our add-on sales. I talked about the full suite sales, but the add-on sales were up 30% year-over-year. And that's us going back to our existing customers and upselling those. So we're feeling really good about our path there. And the monetization of that both through add-on sales and full suite sales at new.

And just going back to an earlier comment, you said the full suite deal, you said every deal in enterprise was a full suite.

Every deal.

In Q1, every single deal.

That's right.

Had that ever happened before? Or that wasn't happening a year or 2 ago. That's the first time. Okay.

It's the first time. And I think the major market deals were almost 100%. So we are like getting that traction. And it's a good thing to see because it's going to translate through the financials.

Yes. So it's a lot of PEPM. If I step back and think about what you're describing on the talent management side of the equation in recruiting and succession and comp and that type of thing. Every company is always saying, there's a shortage of skilled workers. We can't find the right people who -- we can't find enough of them. They're not -- the talented candidates are always hard to find. Do you think that -- I mean in practical terms, can you make a difference for these companies in trying to sift through all that, attract the right candidates and maybe retain them longer.

I think we can. And I think we've shown that our product allows customers to actually onboard and retain employees at a higher -- at a better rate -- and the way we think about the onboarding and the recruiting and the onboarding of people, it's really high-volume onboarding. A lot of our customers have employee churn in the 20%, 25%, 30%, sometimes 40% range, if you think about hotels and retail. That means that you have to not only hire those people, but then think about replacing them almost the next day. So you've got this constant churn where you need to keep a talent pool of people ready to go. You've always hiring and you're always onboarding people. I think our product does really well there for that high-volume stuff. The other thing that I'd probably mention here is we do have the continuous calculation that allows us to do the wallet. And the Dayforce Wallet has proven to really engage and retain employees at a higher rate than if they did for companies that don't have the wallet. And for those that don't know, the Dayforce Wallet is us allowing employees to not only calculate their earned wages during the active pay period, but then allow them to access those wages and then go spend on them. And we started with the Dayforce Wallet by going with a plastic saying, okay, download the Dayforce Wallet app, now go request your plastic. And once you get your plastic, you can go and add money, completely free and go spend and we earn money on the interchange associated with the dollars that are spent. So it was a really unique approach to kind of earned wage access and something that nobody else was doing. What we pivoted to more recently actually this year is what we call direct to bank. And we launched direct to bank this year because we found that the approach that we had taken to earned wage access was really focused on kind of highlighted folks around the unbanked population. Those people that didn't have a bank account that needed and wanted to access their earned wages. The direct to bank, we think can open the aperture a bit and actually allow us to access and allow employees to access earned wages that are banked. And what that does is it's not a separate app. It's right in the Dayforce app. You can either go through your regular Dayforce application or the website and you click on -- you see your earned wages, you click on, I want my pay. And whenever you access those wages, it goes either to your bank account or to the debit card if you're choosing, and we charge $3.50 for that. And we've seen the adoption and the uptake in that go really, really well. It's all about financial wellness, allowing people to access those wages during the active pay period that really encourages those that are working paycheck to paycheck ultimately.

It's a great reminder of wallet, and I had wanted to go there anyway. Before we -- I may come back to that in a moment, but I wanted to make sure we don't miss the opportunity to talk about how you're putting your imprint on the company, which we applaud what you've been doing, you've been -- you're coming up on, I think, 18 months in the CFO role. And shifting focus from adjusted EBITDA to free cash flow. I'm not -- I never have been the biggest fan of adjusted EBITDA -- the financial statements have been a little -- there were a lot of line items in here, you've been cleaning that up. There is a 5% reduction in force. I'm not trying to give you credit for absolutely everything that happened, but you've been doing some of this. And then you put out some long-term targets on both growth rate in margins. So there's been a lot going on. I want to ask you, what is your ultimate vision here for -- when you think about the business model and the financial presentation of Dayforce, where do you want to get to with this? Because it feels like cleaner, simpler, more efficient, but I'd love to hear about it in your words.

Yes. I think you're right. I mean when I first got back to Dayforce, I think almost the first thing I did was terminate the defined benefit pension plan. So we set the termination for that. That will end this year really about simplification of the business and something that should have been done, I think, a little bit ago. We hosted, as you mentioned, a Investor Day, we set out some long-term targets. The goal was durable revenue growth and increasing profitability and increasing cash flows. And that's really the vision of Dayforce. This quarter, we did some simplification of the P&L. And we removed a gross profit line. We moved depreciation into one line, really to try to make this a little bit more comparable and simplistic from a P&L perspective. We also simplified the disaggregation of revenue. It's these little things where get it's small, but it actually, I think, makes a pretty good difference in users of the financial statements.

You're going to save us one hour every time you report.

That's, hey, you know what I can do that 18 times in each of our analysts. But I'll tell you what the ultimate goal here is free cash flow expansion. We set this target for $1 billion in free cash flow. And we kind of set it alongside a $5 billion revenue target. And we feel really confident in our ability to get to that free cash flow expansion. If you look at this year alone, this is probably the most underappreciated. I think right now in our -- in this year, is we're expanding free cash flow margins from 9.7% to 12%. It's pretty good expansion. It's 230 basis points year-over-year. But even inside of that number, so it is our 3 headwinds that are really key for us to think about -- number 1 is float revenue, which is almost pure profit went from $200 million to -- we expect it to be $180 million. So there's $20 million that just got lopped off year-over-year. I also did, as you mentioned, the restructuring here, the 5% restructuring. That comes with a $25 million restructuring charge, cash restructuring charge. That's included in that expansion. The last thing is this pension that I talked about. There's a $25 million pension termination that's a onetime charge inside of there. So you start to talk about each one of these things. That's $70 million that's non-real -- like nonrecurring inside of there, that's a headwind. So I'm feeling, I guess, the point is very positive about our ability to get to real free cash flow expansion in, obviously, this year in 2026 and 2027, such that I think we get to parity with the peers really quickly and then hopefully beyond that, feeling nice.

Okay. That's a great reminder on the headwinds that are embedded in great margin expansion. In the last 1.5 minutes, I'd love to get your take on what's happening across the industry in terms of layoffs, because historically, I would say the last 20, 25 years of covering the software industry, a company wouldn't do layoffs unless it was really struggling. Growth was going sideways and a market was kind of saturated and tapped out. And recently, we've got very healthy companies and I'll give you 3 examples: Intuit, CrowdStrike, Dayforce, you can add Microsoft this morning. They're chugging right along with double-digit growth, but they're doing layoffs. And I'd love to know what you think is changing in this cycle. And to what extent would you look at Dayforce or other companies and just say, structurally, to run it, we don't need as many employees because of AI automation.

There is a lot of -- I would actually point to automation and AI as a key driver in our -- in getting people more productive. And needing to hire less, maybe needing fewer people in certain roles, -- you talk about entry-level developers, probably don't need entry-level developers right now or as many of them. You talk about -- I mean, you can go to people and customer support teams -- we are setting -- we have set up our teams with AI and allow them to reduce the workload and get ahead. Same thing with the implementation side of things on productivity. We -- so there is, across the board, a finance, HR, every person can be more efficient at their job, which means we can do more with less. And I think that's what you're seeing. And we're certainly pushing that, and I think you'll see us continue to push that and other companies continue to push that.

It's a great note to end on. I think it ties everything together with this whole efficiency move and the growth move that you've got. So I want to thank you, Jeremy, for taking the time to be here with us. Thanks a lot.

Thanks for having me, Mark.