Dayforce, Inc. (DAY) Earnings Call Transcript

Yes. All right, and we go into the next session. I'm Chris Merwin, I cover Ceridian here at Goldman, and I'm joined by David Ossip, CEO of Ceridian. David, thanks for being here.

Hey guys, nice to be here.

So I think that we can just quickly do a recap of Q4 earnings, which you reported, I guess, that was last week, and obviously, you saw some nice full year results, a nice acceleration in Dayforce. You clipped your target of 30% growth for the year. But I know in the quarter, there was an accounting dynamic where some revenue shifted out of Dayforce recurring into professional services. So maybe if you don't mind just talking a bit about why that happened? Why it happened so acutely in Q4? And how we should think about that accounting dynamic on a go-forward basis?

Sure. So we're operating under ASC 606 accounting. The way that 606 works is that if you sell professional services below the fair market value of what you would typically have to pay a SI to do the implementation for you, you create what's termed a contract asset that goes onto the balance sheet. And when the customer goes live, you start depreciating that contract asset against recurring revenue. So the impact of that is that you're effectively moving recurring revenue into professional services. When you're going through a growth period, you effectively are adding to the contract asset more so than you have in the past, which means once the customer goes live, you're creating effectively a revenue headwind against recurring revenue. The way that I've been trying to explain it to people is that, if you look at the results on a constant currency basis, Dayforce total ex float grew 38% year-over-year in the quarter. Dayforce recurring ex float grew 32.8% and Dayforce professional services grew 51.9%. If you move over and you look at the professional services and other gross margin, which came in at 5.9%, we had spoken to the street that we already were targeting to get that to a breakeven business, not to a profitable business. So you could choose some number between 0% and 5.9%, which is professional services and other gross margin, you would multiply that by the $44.8 million, which is the Dayforce professional services, add that to the 103.7, which is the Dayforce recurring ex float, divide that by the 78.1, which was that number a year ago, and that would give you a more realistic growth rate of Dayforce recurring ex float, which would be somewhere in the mid-30s.

That's great. And just to go back to the point of -- in Q4, why that gap was larger than it has been in prior years. It was just because of the magnitude of the acceleration in growth in the go-lives?

That's exactly that. If you look at the acceleration of Dayforce recurring, you effectively saw that quarter-over-quarter. So yes, 29.8, 30.4, 33.5. And so we obviously had a fantastic year in terms of taking customers live of activating these accounts. And as you go into the rapid growth period, the delta that you're adding to the contract asset is going up more and more. And then again, we had a great quarter. So going into 2020, you've now got this 606 adjustment that's going to hit every quarter.

Great. Perfect. Okay. I wanted to shift gears and touch on the upmarket success that you're having. I know it's been a concerted effort of the company to shift more into the enterprise. We saw a big increase in deal sizes this past quarter. I think enterprise deal sizes were up 100% year-over-year. So can you talk a bit about where you're finding fit so far in the enterprise? Who you're replacing there in terms of which incumbents and how we should think about the trajectory of that business?

Sure. So as you pointed out, we announced to the market when Leagh Turner joined probably about 18 months ago that we would be shifting a bit more upmarket. And we did that by focusing initially on 4 specific verticals, which were retail and hospitality, financial services, manufacturing and health care. And we've seen great success in all of those verticals. Specifically, for Q4, we had some tremendous wins. We spoke about a Tier 1 consulting company with 63,000 employees. Over there, we replaced, I believe, a legacy product called Cyborg, which -- Cyborg was a HR payroll business in the early '90s based out of Chicago. We also spoke about a quick service restaurant with 140,000 employees. Over there, we're replacing one of our competitors. We won an amusement park of about 50,000 employees. And so, you've seen us have really very good strong success, really across all of the verticals that we've been playing in.

Great. I guess, part and parcel with shifting a market is building out the partner ecosystem. So maybe can you talk a bit about to what extent you've done that so far? How that's helped to influence wins with some of those enterprise accounts? And also if we could see that reduce the mix of professional services going forward?

So going into 2021, you'll begin to see some impact from that. We're now beginning to build out relationships with the SIs. And it's not going to have that much impact in 2020 as it will take some time to get those relationships going. But we do have dedicated teams now focused on getting those SI channels going properly.

Great. So I guess on new products, at INSIGHTS last year, you introduced several new products. There was Dayforce Intelligence, Dayforce Hub and Dayforce Wallet, and we'll touch on maybe Dayforce Wallet in a second. But to start off, can you talk about the initial feedback on those first 2 products to date?

Well, these are all new products, so they're -- and are starting to sell right now. In 2019, the products that we launched were benefits decision support. We sold 180 licenses or instances of decision support. We've now extended decision support into benefits intelligence. What decision support does is if you go into open enrollment, instead of the employees selecting each of the individual options, which they likely don't understand, we look at what is the ideal best fit benefit plan for that individual based on if they're single, if they're married, how many dependents they have and how they utilize the various types of benefits. What benefits intelligence does? It brings it up to the corporate level. And it says, we look at your benefit design this year and predicting out what the ideal plans look like and what the adoption of those plans are going to be, how are your benefits costs going to change on a per employee basis and a percentage of wages. And then we allow the organization now to do what-if scenarios, where they can say if I change the employer contribution from $250 to $500 and I increase the deductible from, say, $50 to $100, run a tornado analysis, regenerating the ideal plans, repredicting the adoption of those plans, how does that change the cost of the employee and the employer. And that's a very powerful tool from a corporate perspective. So we're excited with that. Last year, we also launched the Dayforce Learning. We have sold at 350 times and continue to see that doing very, very well. Overall, 23% of our bookings in 2019 came from add-on sales to the base. That obviously excludes where we've sold the bundles as well. In 2020, we've just launched engagement surveys and engagement surveys includes sentiment analysis. So when you do your engagement survey, there is a comment section. We now interpret the comments to see if it's positive or negative. And if it's negative, we direct that to the HR department, which we believe will be quite popular. And so I expect that to go -- to be adopted quite quickly as well.

Great. So in terms of digital wallet, would you mind us walking through the value prop of that, number one? Number two, how the economics work for you all? And number three, from a competitive standpoint, is there something that makes a lot more difficult for competitors to offer this, particularly as it relates to your continuous payroll calculation?

Sure. So what the Dayforce Wallet is about, it's allowing everyone to access the wages that they have already earned. When we look at the overall market, 80% of all people, regardless if they are salaried, regular, hourly or part-timer live paycheck to paycheck, which means that if they have an unexpected expense or if they get a particular bill, they're unable to pay for it without having to use lending products, whether they be bank credit products, which average about 22% cost or they go to the payday loan locations, which are even more expensive. In terms of the prevalence of the use of those types of vehicles, there are more payday loan facilities or footprints in the U.S. than they are McDonald's. So it's everywhere. What we do is every time someone clocks in or clocks out, completes the shift, we calculate their net earnings. Net earnings is the gross pay less all the deductions and all of the taxes, all of the wage attachments. We allow on a mobile app the employee to see what their earned wages are, and they can elect to add it to the Dayforce card. When they add it to their Dayforce card, we do a same-day payroll, which means the very next day, we submit all the necessary remittances at the federal and at the state level. It's no different than doing an off-cycle pay run, which means that it's fully compliant, and it is not a loan to the employee, all we're doing is we're paying the employee their earned wages earlier than they typically would at the end of the pay period. From a design perspective, we've designed it to be adopted quickly by customers. So there's no additional software fee to the employer. We don't change the way that they fund their payroll, they still fund their payroll at the end of the pay cycle. We don't change the way that they close off payroll, they still close off payroll at the end of the cycle as well. And we have some configuration elements that allow them to throttle what percentage of the earned wages the employee can access. From the employee side, we don't charge any direct fees, which means we don't charge them a dollar to add money to their card. The way that the model is funded is that we effectively loan the money to the organization. Our facility is at LIBOR plus 200. And the amount of average days outstanding at maximum will be 7. The LIBOR plus 200 times 7 days divided by 365 gives you about 6 or 7 basis points. When the employee spends money on the card, there is the unregulated interchange that we get access to, which is 125 basis points. You subtract off the 6 to 7 basis points. And then we split that with our program manager in a ratio of 75:25, 75 to us, 25 to the program managers, which means that we should yield about 80 basis points on spend on the card. If the employee decides to transfer money from the card to another bank account, we offer 2 options. There is a free option, where we transfer it out by ACH, where there is effectively a 3-day wait period for the employee. And alternatively, if they wanted to transfer instantly, we go with the [indiscernible]. And in that case, we charge $0.25 plus 1% up to a maximum of $10, and that's our funds. In terms of the potential to us, we're selling this, obviously, to an already sold customer base. If we get a 100% penetration, we move about $150 billion of net earnings per year. And so 100% penetration and 100% utilization would yield a very large number, about $1.2 billion. Obviously, it will take time to get to a number that large, if ever. And so we would expect to see, hopefully, a double-digit adoption and over time, double-digit utilization.

That's great. And actually, on the competitive piece, some of the moats that you've built around this. I know there was a number of government compliance and regulatory issues you needed to overcome there. I mean what else would prevent another payroll HCM vendor from trying to introduce a similar product...

You have to have the continuous calculation. And the continuous calculation piece is, when we designed the Dayforce product, we looked at the overall workflow for payroll. And what we saw was a very okay workflow, where you have a separation of data between a time system and a payroll system. And the data would reside in a time and attendance system for the pay period plus 1 day, at which point you would transfer the data and the payroll person will get access to the information and they will have a very short window, typically a day, to close out the pay before they'd have to pay people. We solved that by building pay and time together. So any time you had to change the HR record or time record, you calculated net earnings, allowing the payroll person access that information at the start of the pay period, so that they would have the full 14 days to correct the data and they get a much higher quality of pay. And that obviously led to a lot of success. We've taken live over 4,300 customers in the last few years on Dayforce product. We're now leveraging the same continuous calculation engine for the employee, and we're saying, look, at the every -- end of every day, we know what you've made net of all your deductions and taxes. In fact, we've always allowed you to look at a preview of your earnings statement as the period built. We're now allowing you to spend the money that you've already earned. From our perspective, it's not a loan. It's owed to the employees, earned wages. From the other vendors, they can't do that, because they don't calculate pay and time together. Typically, they have a time system that holds on to the data and then only the payroll system gets access to it at the end of the period. So to do what we're doing, they would have to do what we do in pay and time services.

Wanted to touch on the competitive environment a bit. I remember, last year, we were on stage, and it was I think just a week or 2 before Ultimate Software getting purchased. And I think the calculus we were running through at the time was that, obviously, certain amount of debt service to take that business private, and that might limit their ability to invest in sales and marketing and R&D. Just curious how that played out maybe relative to your expectations? And how if at all the competitive environment has changed for you in last year?

Look, I can't speak a lot about Ulti as they have gone private. From our perspective, our win rates still remain very strong against the guys at Ulti. There's been a lot of turnover of senior management that I think has been disclosed quite publicly. The CEO Scott has left the organization. The CFO has left as well. So obviously, it's a company that's going through the typical transition, that you would expect that when you become owned by private equity. And having come from a private equity world, it's a different way of running a business.

Got it. But those win rates overall have been stable against Ulti, Paycom, ADP, whoever else?

We don't really see Paycom in market. We already see ADP and Ulti and nothing has really changed. As I pointed out, in Q4, we had a record sales quarter.

Great. So in terms of international, it seems like so far, you're leaning on M&A to establish a presence in a number of key geographies and effectively bringing your fully developed platform, and then tasking a sales force to sell that. And I guess you started in Australia with RITEQ, so maybe can you talk about how that integration is going? And how else you see the runway, I guess, for international? Share some light.

Just a slight correction. To date, we haven't used M&A to enter a new country. We've built out organically all of the different pay engines that we have for Dayforce. Dayforce now is in the U.S., Canada, U.K., Ireland, Australia and New Zealand. And the way that we decide where we go from a country perspective is we have one-off forecasts that the country has to pass. First, is there a customer in the country that has said, we would like to buy native payroll from you? Second would be, we look at where our customers have employees, are there countries where we have a high concentration of employees from our customers and have we spoken to the customers and have they said, yes, they will buy Dayforce payroll if we build it? Third is, have we sold workforce management in that country? And is there a probability that we can upsell payroll if we build out payroll? By the way, that's what we did in the U.K. and in Australia. We had presence already with workforce management. The last would be, is there an acquisition target, where there is a company that has a payroll presence using legacy technology, where we can purchase them at an attractive multiple, do a stop sale of their existing products, stop their R&D on their products, build out data with Dayforce native payroll and then over time, migrate the customers across and leverage their know-how to build the product, but also the go-to-market resources to launch. And that, by the way, is what Dayforce did with Ceridian in both the U.S. and Canada. And obviously, it worked out very well. So announcements we made on a global basis that we started to build out Germany and Mexico, both of these are substantial markets. Germany we chose because if you look at Central Europe, Germany is really in the center of it from an economic perspective. And once we have Germany going, it makes it much easier to go to the Benelux countries, parts of Eastern Europe, Switzerland and the like. Mexico because we have a strong demand from our U.S. manufacturing customers already. And as well, it gives us a beachhead into Latin America. So both of these are sophisticated and big builds for being -- for new markets more so than the Ireland and New Zealand that we did last year. In terms of RITEQ, we acquired RITEQ, I think it was Q3 of last year. RITEQ was a workforce management, not a payroll company in Australia. And we purchased them largely because it's difficult to find qualified people in market who know our domain. RITEQ, we landed up with a lot of people who knew workforce management, they knew payroll. They were in market, primarily between Sydney and Melbourne, a few in Perth, and et cetera. The integration is going very nicely. We've moved a lot of their R&D people already onto the Dayforce product, which allows us to get more capacity out of our Melbourne office, which eventually we'll use to do the build-out of countries like Singapore, Hong Kong, India, China, Korea, Philippines, all in that particular type of region. And we've also started now upselling Dayforce Payroll to the RITEQ customers. So we're happy with the acquisition.

And what can you say about the time and expense required to actually develop native payroll capabilities in new geos?

It really depends on the complexity of the geography. If we're looking at U.K., Ireland, Australia and New Zealand, it's been historically about $1 million to $2 million, and it's taken us about 12 months to launch. In the case of Germany and Mexico, these are more significant builds. So we've called out that -- in that $25 million of additional spend, about $12 million or just slightly less than half is tied to the build-out of those global markets. Why is it more expensive? Because there's more to do operationally, more to do from a go-to-market perspective given the different languages that we're dealing with now. And they are more sophisticated, more jurisdictions, more states in each of those countries.

Great. Just switching gears to touch on the Government of Canada deal. I know you're kind of in the selection process. Now would you just mind updating us on where you are right now, the next milestone for that process and the potential opportunity for that deal?