Dayforce, Inc. (DAY) Earnings Call Transcript
November 18, 2020
Earnings Call Speaker Segments
Good morning, everybody. My name is Alex Zukin. I cover Enterprise Software at RBC. I am very pleased to be joined today by the Ceridian management. And of course, my audio went out. Can you guys hear me?
We can now. We can now.
Can you guys hear me?
Yes. Yes. We can hear you.
Okay. My audio went out, but I've gone to backup generators. Anyway I'm here with the Ceridian management team. Thank you so much for joining me, David and Noemie, as well as my favorite IR person, Jeremy Johnson.
David, I want to ask you first, you're coming off the INSIGHTS Conference but it's virtual for the first time. Weaving in why investors -- what's kind of unique about Ceridian? A 15-second, 20-second kind of just intro about the company. And what is the most impactful news out of the event that you want to make sure investors are aware of and attuned to?
Alex, I'm not following. Would you like me to give a brief overview of the company or just of the event?
I think probably the company really quickly and then the event.
Sure. So the story of Ceridian, I think, many people know. We're a global human capital management company. We launched our product in effectively 2013 called Dayforce. It's grown really tremendously since that period of time. We have almost 5,000 customers live on the Dayforce platform. Compound annual growth rate 2013 has been about 50% on the Dayforce product. It was successful across industry and across segment. Guys, I'm hearing quite a bit of background noise and I'm seeing some comments from people that it's very hard to share and understand. Could people maybe mute when they're not speaking to make it a bit easier? Thank you. In terms of company growth, we have 5 avenues for growth. One is that we acquire new customers, and we do that at a rate of about 600 to 700 per year. Second, we go back to our base, and we extend the platform. And every year, we release about 2 to 3 new modules. For example, in the last year, we did Benefits Intelligence, Dayforce Wallet, engagement surveys. The third is that we've been moving upmarket over the last 2 years. We changed our go-to-market strategies to be much more value advisory, and we've been quite successful. You see that in some of our numbers. If I look at the last quarter, average size of customer on a last 12-month basis went up by 13%, and the size of a new Dayforce incremental customer went up by 72%. The fourth avenue of growth is that we have been extending globally. And that came from when we looked at the actual market back in 2011, we noticed that about half of the available TAM was outside of the U.S. and Canada. So the size of the U.S. and Canadian market is probably about $20 billion and another $20 billion outside. So we've been extending the product. We started off with the U.K. We added Australia. We added Ireland, New Zealand, Mauritius. We're currently building out Mexico. We did an acquisition of Excelity last year, which gave us presence in 11 additional countries across APJ, and that's obviously going very, very well. In fact, since the Excelity acquisition, we've done over 11 global deals in the APJ region, and that's gone really nicely. And then finally, we are extending to adjacent markets, which are ways that we can drive additional recurring revenue from the employees of our customers. And with that, you now see the launch of Dayforce Wallet, which we launched at the very beginning of May of this year and already have over 60 customers using the product. Over 200 more have signed up, and we're seeing an 80% attachment rate of the wallet to new customers. What excited me about this space when I looked -- started looking at it in about 2010, 2011, were a few things. Firstly, market size, as I mentioned, is huge. It's about a $40 billion market. Second, when I looked at the requirements across customer, it seemed to be that the requirements were driven by jurisdiction. And while those jurisdictional rules and requirements are very difficult and ever changing, they are the same across customers, which meant that you could build a scalable cloud solution. The third was when I looked at the market, all of the incumbents seemed to have average life of customer above 10 years, which meant that the unit economics or lifetime value of the customer looked very, very promising. And the fourth was that it appeared that there was a platform play in that when I spoke to payroll people, they kept asking whether or not we could do time and attendance and we could do talent modules, our core HR and the like. And that obviously meant we could drive additional revenue with very little cost on customer base. The way that we entered the market was that we saw an opportunity in that all of the incumbent systems at the time back in about 2012 had separation of data and process across all the different modules across human capital management. And what we did is we set out to build one application with one database and one rule engine so that we could really simplify and optimize the workflows for all users of human capital management apps, whether they'd be the CEO, manager or employees inside the organization. And we started doing that by building really pay and time as one, which solved the problem in that in all of the incumbents. And even today, all of our competitors, the payroll people can only get access to the data after the end of the 2-week pay period. And we solved that by having this always-on, continuous calculation engine that allowed payroll people to access the data from the very, very start so that they could do all their busy work before the period ended, increasing quality of pay and providing a very valuable information to the business. Alex, that last question, what's really exciting about INSIGHTS. At INSIGHTS, we obviously highlighted the Dayforce Wallet, which is effectively, it allows people to get paid as they earn their wages, that you don't have to wait until the end of the pay period. And that I mentioned from the [indiscernible]. So a little bit of long-winded answer, but hopefully useful.
No. That was perfect. I guess when you think about the impact of the pandemic on the business, where you are today. And one of the questions I've asked every company, in a vaccine -- what does a vaccine world -- what does a vaccine mean for the company, for the demand environment, for the product?
Sure. So as I mentioned, we've had very robust growth over the last, I think it is, what, 7, 8 years. And if I look at Q1, Dayforce recurring revenue growth ex float was about 30.4%. The impact of the pandemic, obviously, has been a slowdown in the revenue growth. If I look at the last quarter, we came in at 17.9% growth. So obviously, slower than the beginning of the year. And that's obviously being caused by the headwinds of employment. We've seen that the average number of employees at our customers is down year-over-year by about 3%. Now what is positive is that if we look at the sales in Q3, sales in Q3 came in, in line with our very aggressive targets that we set at the beginning of the year prior to COVID. So we're back to kind of historical growth rates on the sales, when we look at sales year-over-year. And when we look at the pipeline for Q4, we're actually quite confident as well that it will come in with a double-digit growth again, which is -- the backdrop of that is last Q4, we had obviously a blow-out quarter, very, very robust sales quarter. And so we'd expect the same in Q4 of this year. With us, we recognize revenue when a customer goes live, which takes effectively 6 to 9 months from the time that we do the sale. So it's going to take probably until the second half of 2021 before we see the revenue growth go back to our pre-COVID levels. If I look at Q4, it will be slightly better than where we are -- where we were in Q3. And you'll see again another improvement in Q1 and Q2, with obviously quite a significant step-up into Q3 as we see the impact from the very strong sales that we had in our Q3.
There's a clarifying question from the audience. And again, by the way, I encourage audience members to submit questions. I will ask them as long as they're appropriate. The question is for clarification, by sales, do you mean bookings or revenue, David?
By sales, I mean bookings. We call it ACV, annual contract value. Revenue to us is revenue.
Okay. And so if you think about the -- now let's -- on a bookings trajectory, if you think about where the first half of '20 was versus the second half of '20 on a year-over-year basis and then to the extent that you see the comps, obviously, easing on a bookings basis, still difficult from a revenue basis, walk us through those different dynamics. Should we be back in Q1 or Q2 or even above your prior bookings growth trajectory? And then it sounds like in the second half of 2021, we will be back to a pre-COVID revenue growth potentially trajectory as long as not -- third shutdowns, fourth shutdowns, waves, notwithstanding.
The way that sales played out this year is that we were impacted in Q1 because, as you know, COVID hit in really the last 2 weeks of March. Q2, however, sales started to recover already. And as you know, from our Q2 call, sales in Q2 this year were in line with sales of last year. So they weren't below sales of last year. Q3 sales back to the pre-COVID growth rates, obviously, very aggressive. And Q4, very optimistic about that as well. So from a sales perspective, I think we have seen and I think we're through most of the challenges of COVID. In terms of implementations, implementations, slightly impacted in Q2, but they came back nicely in Q3 and would expect that to come back in Q4. So the revenue, if you like, line, as I mentioned, it's about a 6- to 9-month lag of the actual sales side. When we look at employment levels at our customers as well, we've seen a recovery. We saw the sales drop quite significantly -- sorry, the number of -- average number of employees at our customers dropped quite significantly in the Q2 time period. By Q3, it was down to about negative 4%. And as I mentioned, in Q3, it recovered to about negative 3%. So we're seeing higher employment levels at our customers. And on the furlough side, we get paid for furloughed employees. So it doesn't matter to us that employees are active, inactive. We do get paid. And obviously, furloughs to us are kind of a risk element that we monitor all the time. And we've seen the percentage of furloughed employees as a -- of the total employment at our customers drop down to almost the same levels that they were prior to COVID. It's probably a little bit higher now, but if I go back to the Q2 time frame, there was a significant number of furloughed employees across our customer base, so less risk. To answer your question about the vaccine, obviously, everyone is very optimistic about the vaccine. And if the vaccines can get distributed nicely, I think that there will be tailwinds towards businesses in general. And given that we get paid based on the employment levels, it would obviously create a tailwind for us as well.
One other tactical question about Q3 is, was 3Q in line with pre-COVID plans because of pent-up pipeline? And is 4Q in line or better than pre-COVID plan because of that? Or is there some new -- was there -- was it more -- less timing dependent or based?
So it's very hard to answer that because typically, our sales cycles aren't that long. What we did when COVID hit us, we chose to lean in to the pandemic as opposed to bump it down. So we continued investing in our go-to market, into our executive team, into product. Obviously, from a value advisory perspective, we started to quantify value for prospective customers in different ways given the pandemic, much more of a focus on value creation, which by the way, has always been one of our strong points. And so we shifted which segments we were already targeting and which modules we were effectively are trying to sell. So the pipeline changed slightly. And what I would say, I would say the Q3 performance of sales really comes down to very good execution across all aspects of the go-to market, whether it be our shift to digital marketing, where we went from this INSIGHTS -- in-presence summits to doing everything virtually. And I think some of the stats, for example, we have INSIGHTS' customer conference going on right now, and the attendance is above 10,000 people, whereas last year, we were about 2,000. So a much better reach using kind of digital platforms. I think that's worked very nicely. And also, I think our sales group has worked out how to really quantify value to our customers really well and how to engage effectively using digital platforms. And even on the product side, if you've been focusing some of the awards and accolades a few things [ faithful to others ], one top product from HR executive. And recently, we were included in the leadership quadrant in Gartner's Magic Quadrant for cloud HCM solutions for companies with more than 1,000 employees, which is really just very, very good, what's the right word, evidence that the product really is resonating very nicely with customers.
Let me ask another question to you, David, and I'm going to make sure to include Noemie on this as well. It's a 2-parter, but they're symbiotic. And the 2 parts are you've been making a push with trying to get more global SIs and SI relationships involved. I want to ask for an update on that push. And is it something that you feel can be a catalyst to the story either because of what -- these people will bring you into more deals? Or catalyst from actual bookings? And you made a pretty big change in the way that you are pricing new deals so that you are able to have those SIs. Walk through that as well and how that could be a tailwind potentially to bookings growth or sales growth in 2021.
So what I can say is we're very pleased with the progress we're making with the big SIs. We did that by really, again, investing in our organization. We brought in an individual named [indiscernible] from one of the big ERP companies where he had run the SI programs before. We announced in Q2 that we had signed several training agreements with the big SIs. By the way, an SI is a system integrator, and the typical guys would be kind of Deloitte, PwC, EY, et cetera. That's the first step, and has been going nicely where we now are helping them learn the product over the half [ to assist ] their cycle bench. And I expect in Q4, we'll start to announce the marketing agreements or go-to market agreements with some of the big SIs as well. We already are seeing some nice traction with that. Now the importance of the SI activities as we go upmarket and as we go global, in many cases, the SI runs the evaluation and the selection of the vendor. And unless you have those SI agreements, you don't get included in the process. And we know of many processes, where we just simply couldn't get in because we didn't have the SI relationship. So the belief from our perspective is that the SI relationship will effectively lift up our sales curve. In other words, bring us into much larger deals we didn't see, give us a higher close rate of those opportunities as well. And also, it allows us to extend our implementation reach, especially on a global and enterprise basis, where often you need services such as program management, change management, UAT, global resources, and these big SIs are already equipped to do that really, really nicely. Now part of that, as you mentioned, is how we actually price. Historically, we have charged our customers for the system when they have gone live. So the recurring revenue begins upon activation of the system. And we've been able to gather this, we've been in control of the implementation, running all of the aspects of the project. With the SIs, we're now moving to what's called happen-on provisioning, which means that when we stand up the system and the customer starts to get value from the system, we start charging for the recurring revenue. And so we would expect that to basically start impacting revenue, probably, I will say, again, in the second half of next year, and that's tied to a bit of the acceleration that we would expect to see in the recurring revenue growth rate.
Perfect. I'll ask a question to Noemie and then follow up with a question from the investors in the chat. Noemie, describe your experience with Ceridian so far. What made this the right company to go to? And what made this the right time to go -- to do it, given we're in a pandemic, and I can't imagine changing jobs is very easy right now.
Yes. But it was a pretty easy decision for me when I started looking at how innovative the company was. I've always been attracted by companies who innovate to solve complex business problems for the customer using technology and Ceridian was, in that regards, a great fit for me. In terms of the -- my experience so far and what I'm excited about is the whole expansion driven by a lot of the things that David talked about. If you look at the global expansion, for example, there's a lot of opportunities for us to be smart in the way we support our customers globally, in the way we scale our resources. And we already, today, provide support to our customers on a 24/7 basis across the globe. But as you think about expanding globally and moving up to the enterprise sector -- segment with customers operating in various parts of the world, you need to be -- start thinking about how you allocate resources to support those customers and what you remain central processes and what you centralize and what you deploy locally. So those are themes that are very fascinating and give us a lot of room to scale. And I have a lot of experience. I've seen that at SAP. In terms of pricing, David just mentioned the SI move, and there's a lot of ramifications for us in the way we price and in the way we -- on a contractual terms. So there's a lot of things to be done in that area that excite me a lot. And generally, the team has been fantastic. I could see now the leadership capabilities, the diversity of talents that we have, and that's something I'm very proud and excited to be part of.
Perfect. And I guess from the chat, one of the questions, and it's a question I got, David, not just for your company but for -- really for everybody's in the payroll space, which is, can you walk through why the sequential improvement in employment levels did not act as much of a tailwind for the industry, i.e. 5% to 6% sequential employment levels versus a less than 1% benefit sequentially for the payroll vendors? And you can speak both to Ceridian, but also -- you're an industry leader, so maybe just speak to the industry as a whole as well.
Alex, as I mentioned, we get paid on furloughed employees. So when you look at the 4%, 5% number that you're talking about, that to be clear, actually includes the drop in furloughed employees back to active. As we got paid always for those furloughed employees, it really means the improvement we saw was really the 4% to 3% that I spoke about. It -- that's how the math worked out. Now if you look at some of the other players in the industry, those that have really focused on the low end of the market where they are more traditional payroll vendors so they get paid on what they call controls or on payments, they may have seen a bit more, well, lift up because they don't get paid for furloughed employees like we do. Jeremy, anything that you would add to that?
I think you said it exactly right. It's -- we've disclosed a 5% impact in May -- on our earnings call in May. We also said that improved to 4% by the kind of beginning of August. And then that improved to about 3% by -- as we exited October there. So I think that's exactly right, is that we saw an improvement, but we -- if you don't get hit as hard on the way down, you're not going to get the benefit on the way back up.
Makes sense. Competitively, you talked about leaning in. You've also brought in some new executive talent, Noemie, as a good example, but as well as a new CTO as well as a new head of services. What are you seeing competitively in the market with UKG? And also, it is unique -- I don't know, David, of any other payroll vendors that have developed true GSI relationships. I know SAP has them. I know Workday has them. What does that -- how are you able to do the things that others haven't? And also, as you look at this evolving competitive landscape, particularly upmarket, increasingly, are you going to be going head-to-head against SAP and Workday? Or what does that environment and landscape look like?
Sure. So the competitive landscape has not changed. In fact, it hasn't changed since I entered this space in probably 2012. We have 2 prime competitors. One, obviously, is ADP, and the other one is the Ultimate Kronos Group, UKG. And we see those 2 companies almost in every sale that we do. We play in 2 segments. In the major market segment, we typically sell our full suite of HCM. So everything from core HR, payroll, time, workforce management, recruiting, performance, comp, engagement and et cetera. And in that particular market, we're differentiating that we have one database and one rule engine across all aspects of human capital management, and that obviously makes all workflows simpler and improves the experience for everyone. As we go upmarket, we typically play in a best-of-breed world. And best-of-breed world means that we coexist with the ERPs. So if we look at some of our larger customers, whether it be like a Kraft Heinz or a BlackRock or a UBS, an Amex, you would have the ERP doing core HR, and we will do the compliance modules where I would argue we probably are best in market. Compliance modules will be payroll benefits and time and scheduling, and then there may be other vendors in place for some of the talent modules as well. In that market, what really resonates is the fact that we have that always-on, continuous payroll engine, which means that the larger organizations have much more time to verify that the data is correct so that the quality of pay is much better. And you've seen some of our large customers really speak about that as well. In terms of the reason why there are 2 competitors only and hasn't really changed is that there is a really big, kind of, if you like, moat around this industry in that you need robust tax operations in order to operate. And there are about 15,000 different jurisdictions, and everyone is somewhat of a snowflake. And you can't be off at all because kind of remittances have to happen on time. And that really creates a lot of protection. While the low end of the market might be more competitive because it's less complex to do the multijurisdictional and the global pieces, we do all of that really, really, really well.
The -- I wanted to ask then why haven't -- when you think about the GSI relationships, I don't necessarily think of ADP and UKG having a really good -- really good ones. So why or why not?
Yes. Look, I would argue is that we are a cloud company. We started off as a cloud company. Obviously, if you look at our executive team, whether it be Leagh, our President and COO, whether -- who came from SAP; whether it be Joe, our Chief Product and Technology Officer, who joined us, obviously, from Workday; whether it be Noemie; others in the organization are really true enterprise cloud executives and as such, we run the company. And so we understand the value that SIs bring in terms of sales acceleration, implementation and capacity. What I also would say relative to the others is that we are very fortunate in that we have a robust system of almost 5,000 customers live, where we are able to take customers live predictably, with very high customer scores as measured by Net Promoter Scores. And when I compare us to the 2 competitors, I would say that they both are going through quite a lot of technology flux, and in many cases, management flux, which means that we are quite differentiated also on just the customer experience and predictability and the robustness of our software.
I know we're coming up to the end of our time, but I wouldn't be doing it justice if I didn't also ask you about wallet. And I guess what has -- how has the pandemic shifted the rate of the growth of that product or the pace at which it develops positively or negatively? And then, again, if you were to make a prognostication 3 years, 5 years, investors want to understand these transactional revenue streams, these payment revenue streams, what percentage of your revenue could these make up? And this is a question I get for a lot of the companies that I cover that have these types of elements in their model. And it's not something we're going to hold you to. But aspirationally, is this 10% of your business? Is this 50% of your business over the span of the next 3 to 5 years? Or is it more of just an adjacency that's a few percentage points?
So first of all, what the wallet is about is that people today get paid, as you know, in arrears, typically, a weekly, biweekly pay cycle. Yet they earn the money legally as they spend the hours. There's no reason why employees should be lending money to their employers at no return. Every other instance of our life, whether it be buying something on Amazon, watching something on Netflix, has become an instant world. And so there's no reason why the pay period will exist in the future. It's really an artifact of 1940's batch-based technology that has no relevance. And with the rise of the worker, there's been a demand, if you like, "Hey, I've worked. Pay me right now." We see that in the gig economy already. In terms of growth of the product, where we just launched it in the beginning of May and already, we've sold several hundred systems and the attachment rate is now about 80%, which means the industry is moving very, very, very quickly into this area. For us, what it really means is it's a better way for us to monetize the float or the money that's going through our system. If we got 100% penetration, which obviously we wouldn't, but if I look at the addressable space across our customer base, we move about $300 billion, and about half of that reaches the employee, about $150 billion. The way that the wallet works is that it's really funded through the interchange. If I look at the interchange in the U.S., it's 125 basis points. In Canada, it's about 140 basis points. After our program management fees and our cost of lending money to the employer, we net about 80 basis points of profit when the employee spends their money. So the potential over there could be quite significant to the business, not only on the top line but it really all flows down to the bottom line as almost 100% margin type of a business. In terms of adoption, I expect that the initial phase, we'll see about a 15% usage of the actual wallet across the customers. That's what industry seems to indicate. However, I believe that, that number will go up significantly as daily pay or on-demand pay becomes norm versus people waiting patiently for a 2-week pay period -- a 2-week paycheck.
Perfect. Guys and gals, thank you so much for joining. It's a pleasure as always. And looking forward to catching up in the future. And Noemie, it's a pleasure. Welcome to the team, and can't wait to work with you.
Thank you.
Thanks, Alex. It's always great to speak with you. Everyone, thank you for joining us today.
Thanks, everybody.
Thank you.
Thank you.
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