Dayforce Inc. (DAY) Earnings Call Transcript & Summary

Welcome, everybody, for joining us for day 1 of KeyBanc's Technology Leadership Conference. We are very pleased to have Dayforce's CFO, Jeremy Johnson, joining us today for a 25-minute fireside chat. And my name is Devin Au. I'm part of software research team here, and I'm sitting in for Jason Celino, who is super bomb, he couldn't make it today because he's just having a second kid with his wife. So I'm sure his wife would appreciate him being home. But with that, let's move on to some hot questions since this is a fireside chat after all.

So Jeremy, maybe if we could just dive right in, can we start what Dayforce is seeing from kind of a Go Live and forward-looking perspective because kind of from our seat, Dayforce has seen kind of a dichotomy between current reported revenue performance and forward-looking bookings commentary. So if you can kind of explain the air pocket of demand from last year. And that has kind of like led to a decel in top line growth a little bit. So maybe if we could just start there, that will be good.

Yes. Yes. Definitely. It's good to see everybody, and thanks for coming to the presentation today. Look, Dayforce is, I don't know how else to describe it, but on fire from a demand perspective. We are having about 3 straight quarters of 40% plus bookings growth. And that started in Q4 last year and has continued in through the last second quarter here. And all indications are that Q3 is shaping up to be a nice quarter as well as we had a nice strong July. The 40% plus bookings growth that we're seeing is in contrast, as you said, to the Dayforce recurring revenue growth that was growing at about 14% constant currency this last quarter. And you can't really say that 40% bookings is ever going to get you to 40% revenue growth unless you grow consistently for about 8 years, I think, at 40%, just because of the difference of bookings and our $2 billion kind of revenue base. But over time, as we continue to have success, you should see those 2 lines converge. And that's really what you're seeing in our forecast and our guidance. Our guidance, I think Q2 was the low point and you kind of call it an air pocket. I think we're feeling the slower demand from the last year, early part of last year and even the year before in 2023. And that's, for us, Go Lives take about 12 months to get -- sales take about 12 months to get to revenue. So on average, you'd say that we are essentially taking things live that we sold last year at this time. And that takes a little bit of time for the revenue to get through the pipe. And that's what we're feeling in our forecast right now is that in Q3, our forecast is expected Dayforce recurring 13% to 16%. Q4 at 16% to 19%. And we've signaled that we expect to maintain that strength as we go out through 2026 and beyond. So we are seeing a ton of demand. We're executing on that well. I think our message is resonating really, really nicely with prospective customers. On a couple of fronts, you'll see that our add-on sales are surging, 40% of our total sales this year-to-date period so far have been add-on sales back to the base. Managed Services sales which we can touch on, on that strength. 17% of our total sales were managed services sales and managed services where we actually act as the -- essentially the payroll department for the companies. And for us, it can double our per employee per month revenue that we get for every customer. And I think across the board, we're just really -- messages continue to resonate on this 12:1 consolidation play. So what we go out to a new prospect with is you probably have a separate provider for payroll, a separate provider for time and attendance, a separate provider for recruiting and performance management and compensation. And we're able to take all of those and put it into 1 single application that's Dayforce. And that's kind of the 12:1. We sell it on an ROI basis. So you can not only save a bunch of different vendor costs and software subscriptions, but we also -- you can save internal labor costs for maintaining all those subscriptions and the APIs and the tech behind that with 1 single Dayforce. So the message just seems to be resonating. That's what's driving the demand. And ultimately, we feel confident that the strong demand can continue in the future and then also drive strong revenue in the future.

Okay. Yes, it sounds like a lot of good news happening within the business. Maybe just kind of go back to the customer Go Lives. I think quarter-over-quarter, the past 2 quarters has been around like in the 50% range, right? And I think historically, the Go Lives have kind of averaged closer to like 70% or maybe even 100 plus, depending on the quarter. I mean, you mentioned a lot of things that are happening. The messaging is resonating -- do we see that Go Lives quarter-over-quarter number get back to that historical levels? Can you just kind of speak to that?

Yes. The Go Live number that we're referring to is essentially the change in our live Dayforce customers. And that means it's a net number to start with, right? It's the increase net of any customer churn that we have. And what I don't love about that number is it doesn't actually depict what we're taking live. We have a lot of smaller customers on the workforce management only side that tend to churn a little bit faster than our normal 98% gross retention that we have of our customers. If you go to an enterprise customer that we have here, our retention rate is well above that 98%. So these companies don't churn much. But we do have some smaller customers that churn probably in line with a smaller business provider, that 90% range, and you get some elevated churn that doesn't really have much revenue impact at all. That said, the live customers and the growth in the live customers plus, we also disclosed a figure called the Dayforce recurring revenue per customer. And the combination of the growth of those 2, it was 5% last quarter on the customer side of things, and it was 11% on the revenue per customer side of things, generally adds up to at the total Dayforce recurring growth or pretty close to it. And if I look out in the future and say, do I think the number of live customers is going to grow or the revenue per customer is going to grow faster. I'd probably say the revenue per customer grows faster than the live customers. And that's okay to have that dynamic in my side of things. That means, number one, we're selling a larger customer size. So average is $170,000 per customer right now. I'll tell you that most of our new business customers coming on are much, much larger than that. And so we know that, that average can continue to go up. The second thing is, as we go back and sell additional functionality to our customers, so that 40% of our total bookings, you're not going to increase the number of customers alongside of that. And then the managed side of things, as we mentioned, it can continue to raise the size of the customer and the revenue per customer. So I do expect those 2 -- obviously, you're going to see those continue to go online. But if you go out to our guidance of in Q4, for example, of 16% to 19%, the 2 that need to add up the number of customers plus the revenue per customer, I'd probably say it probably goes up for both of them, but a little bit higher on the revenue per customer, if I had to say.

Okay. That's helpful. And then I just want to go back to bookings again. Maybe just 1 last question here. I know you kind of mentioned, aside from net new sales, the back-to-base motion some of the add-ons has been going well too. Is there any way for us to like conceptualize or even parse out how much strength of the back-to-base motion from the 40% plus bookings growth you've talked about? Any way for us like think about just how strong back-to-base motion is?

Yes, it's growing faster than new business bookings. So if I go back to that 40% that we sold, that is add-on sales back to the base of our total last year, that was probably in the low 30% range. So we're increasing the total I think where we're having more success on bookings is customer base sales, and that team is just firing on all cylinders. And we really built that team out starting really early 2024. And we've grown that team from basically nothing into a team that's performing just exceptionally well. Where they're selling is really 3 key areas. The first is product back to the base. If you go back to kind of 2013, I don't know, all the way to about 2019 just past our IPO, we were really selling a compliance base of software. And that's for -- compliance for us is payroll, time and attendance, some benefits administration type things. But really, we call that our compliance suite. That's the core kind of pay time and benefits. We brought in a guy named Joe Korngiebel to really elevate our product team. So he's our SVP of -- actually, sorry, he's our EVP of Product and Technology. And his goal was straightforward. It was build out the entire HCM suite beyond the compliance things so add in performance, adding talent, at in recruiting and really get that up to par with the other players in the space. And we've done that really nicely. He's done that really nicely. So we now can go back to the customers that we sold from 2013 to 2019 and actually sell them more product. The second thing that we're seeing really strong sales in is, I mentioned managed. So our customer base sales team is actually going back to our existing customers and saying, "Hey, we can take this administrative burden of you guys being your own payroll department off of you." And we can be that. We maintain all the compliance behind the scenes and partner with our customers to then commit payroll and do all the audits and all the checks and it's a really nice service that we offer. If we had to guess, I would say that if we fast forward a few years, the majority of our customers will be buying managed from us. And then the third thing is global that our customer base sales team sells. And global for us is where we go, and we're doing the software payroll workforce management, time and attendance for North America, for example. So you have U.S. and Canada, and we'll go and add other countries that this company has. And we have a network of in-country providers. We have owned technology in the APJ region that we utilize. And we have our own native solutions across Australia, New Zealand, Singapore, U.K., Ireland, Germany, Mauritius, Mexico and obviously, U.S. and Canada. So we've got a really full global suite that our customer base sales team can go back and sell to. So those are the 3 things that are really driving our customer base sales.

Okay. Maybe just want to dive deeper into the second point, which is product. I know a lot has come out. I remember at the conference, the Joe Show, a lot of projects were being introduced a lot of exciting products. I think the one thing I want to maybe dive deeper is AI just because that's kind of a hot topic. If you don't mind, can I just ask a difficult overview of kind of the AI products you guys have today? And kind of what's your monetization strategy there?

Yes. So it's obviously been a key focus for us the last probably 2 years here is building AI capabilities ahead of what our peers are doing. Dayforce, before I start with kind of what we're offering today has a foundational advantage that we have a single application with a single database. And that is something that no other vendor has. The single database allows you to actually build AI on top of that database so that you can actually do some pretty unique things, whereas our competitors alternatively have a separate time and attendance solution, a separate pay solution, a separate recruiting solution. It's really difficult to do AI across all of those when you have different systems that need to speak to each other. And we have 1 single database with a single application on top of it. And with that competitive advantage, I think we were the first to launch what we called initially a copilot, we're calling it an AI assistant right now. And the AI assistant sits on top of the experience hub. The hub is the landing page when you log into Dayforce. And it's a really nice landing page that HR departments can manage include things that they want employees to know about. It benefits enrollment time, get your W-2 here, hear some company announcements here. And you actually -- you can index all of your company documents loaded into the experience hub and index all of those documents so that you can train the AI assistant on your own company documents so that employees of our customers can go in and ask specific questions about their payroll about their benefits, about their time off policies, anything that they really want to ask about the company and can be answered through the AI system. And it's a really nice solution. Year-to-date, we've attached it to about 50% of our sales. And it's resonating really nicely. It enhances the user experience. Where we're going next is agents. And so we're aggressively launching kind of agents to then take the next step to do tasks, ultimately for the user. And the user, in this case, can be either the employee or it can be the administrator on the payroll side of things. So audit might pay, do the checks and tell me if I'm ready to commit pay and then I can commit. Similarly on the recruiting side of things. You can think about someone posting a job. I need to post a job, let me walk you through the steps and just do it for you ultimately. We can write the job description, generate the drive description. You can edit it. And the use cases go on and on. We're in the plans of launching about 30 AI agents across the stack over the next few years.

Got it. Maybe just a follow-up there. I know -- do you have a question Matt?

Yes. How are you charging for that, the agents?

Yes. So right now, we're charging a per employee per month charge so a monthly subscription fee. We are likely going to bundle the agents together into -- you have access to all the agents or a subset of the agents and create a pricing module around that. We are monitoring the usage to understand if we need to charge on a usage basis and have kind of an upsell type thing that would happen for the enhanced usage. But given that we're in the early stages of it, it's just on the monitoring side of things. We haven't yet seen it on the copilot or on the AI assistant yet. But as we go into the agents, we'll continue to monitor.

Yes. Thanks for the question. Just a quick follow-up here. I know a lot of your peers in the HCM landscape have also launched their own kind of agent assist chatbot or whatnot, maybe more of like a conceptual question as more companies provide these products and agents. Do you view these products as like a table stake for the industry in the long term? Kind of how should we think about that?

I do think AI is going to be table stakes throughout our industry and throughout all other software. I think it will clearly define the winners and the losers. I think it will certainly change the way a user interacts with the software. And I think we're seeing that already so I think that's exactly the way we look at it. And I think our competitive advantage on the data side of things gives us a huge leap ahead from our peers.

Okay. And then I just want to switch gear back to maybe like the customer side of things, but also kind of macro end market. I know you guys have done really well going upmarket, winning large enterprise customers, government of Canada, I think there was like an earlier win within U.S. Fed. Can you just speak to the strength that you're seeing there? And what enabled Dayforce to win here? It seems like everyone is kind of maybe struggling and seeing challenges, especially in U.S. Fed. So can you just speak to why are you guys winning in a dynamic backdrop.

Yes. It's Dayforce itself, the sweet spot of Dayforce is really probably 1,000 employees up to around 5,000 employees. And we've done that really well. We've expanded inside that kind of base of customers -- of industry really well, and we've done well. I think as you look out, there is a path that you have to go down that says, you go lower and compete on the small end side of the world or you go higher. And we chose a number of years ago that we go larger customers. And we built out aggressively relationships with the large systems integrators as well as we attempted to bid for the government of Canada business for the replacement of their Phoenix product. We, I think, probably went into that saying we learned a lot, but there's a very small chance that we'll win this thing. And we exceeded our own expectations there. And the government of Canada has been a great partner in kind of pushing us on different areas to move up market and our SI partners have also done that. Our product scales now from -- you can go as low as you want all the way up to our largest customers, which are now 500-plus thousand employees. And we talked about that with not only the government of Canada, who were actively kind of taking live right now, and we're selected this last quarter as the vendor officially as the vendor that will replace their old system. But we also announced -- we took live our largest customer ever. It's a large logistics provider that we sold a few years ago. And they are now, I think, 300,000-plus planning to scale to 500,000 by the end of the year. As you mentioned, we had success in winning a large U.S. federal agency in the first quarter of this year, which was our largest single sale ever, and we'll work on taking that customer live over the next few years. So we're having success upmarket. We're doing a really good -- I think, a really good job moving the product up as well.

Great. That's certainly great to hear. I'll pause here and see if there's any...

I think for decades, most of us have heard everybody is taking share. Paylocity, Paycor, ADP ceding share. But ADP seems to be doing well. So where does the share come from? Is it greenfield stuff? You explained the dynamic, I guess, in general because everybody says they're taking share, right? Devin, you hear this, right?

Yes. Look, the market today, I think, is largely defined as Dayforce and Workday. And this is the enterprise side of the market, right? Because where we start is about 500 employees, and that's really where the Paycoms, the Paylocities and the other smaller players stop. But it's largely defined as Dayforce and Workday competing for ADP and UKG business. And I think we're continuing to do a good job at taking share from ADP and some of the other peers there, ADP is a great business. And the market is also growing nicely. You look at what we're selling today in a full suite sale and it's not just replacing things that the prior 1 single vendor would have had. I'm replacing, as I mentioned, 12 different vendors. And some of those vendors or in some companies, they might not even be vendors. They might be nothing. A lot of companies still use Microsoft Word and e-mail for performance management. They use spreadsheets for compensation management. So the market continues to grow. Our competitors continue to do well, and we just think we're doing a little bit better than them. And it's a really durable market and one that I think will continue to be a very large one over a long period of time. But I think you will see those dynamics of Dayforce continuing to grow and expand and others whether depending on the pace, continuing to slow down.

It's a good question. Any other in the audience before I move back into some of the more financial questions? Great. We have a few minutes here. I want to close out with a couple more financial questions, if I may, Jeremy. It seems like profitability has been a big focus as of late. You guys have raised the free cash flow margin to 13.5% to 14% margin, a 4-point expansion year-over-year, which is great to see. And I think you also talked about some incremental tailwinds from the OBBVA on the call. How should we think about maybe expansion for margins or free cash flow maybe beyond '25? Should we still expect the same cadence that you kind of laid out at the Analyst Day? Or should we perhaps see even greater expansion?

This has been my greatest area of focus since I came as CFO back at the beginning of 2024. At the time, I think we had free cash flow margins that were well below 10%. And my goal was to get us in line with our peer group and potentially even above our peer group. We set at Investor Day targets of $1 billion of free cash flow by 2031 or we said 2031 plus. And we kind of, at this earnings call, really said, we can hit that. We feel very confident that we can hit the $1 billion by 2031. And what that will mean is that we're going from 13.5% to 14.5% up to 20-plus percent by 2031. And in order to do that, we need to continue to expand free cash flow margins by 100 to 200 basis points a year. And I think we can certainly exceed those targets. We feel confident that and probably the most confident, I think, I'd say, in our ability to control costs, ability to improve the time to cash and the cash realization that we get. And I think the proof is really in our ability to do this over the last few years. So as you said, we're going from 9.7% margin up to 13.5% to 14%. There is a slight benefit from the taxes -- tax changes in the tax law, the One Big Beautiful Bill Act. We'll take that. And -- but even outside of that, I mean, we're up about 500 basis points year-to-date this year without any benefit from the tax. So we're getting more efficient and we're doing things, I think, that really benefit our ability to move up.

Awesome. And with that, I think we're out of time. Jeremy, I appreciate you being here and for the insights, and thank you, everyone, for joining us today.

Thanks for having me. Thanks, everybody.