Dayforce, Inc. (DAY) Earnings Call Transcript

Okay. Good morning, everybody. I'm Chris Merwin, I cover Ceridian here at Goldman Sachs. And very pleased to be joined by David Ossip, CEO of Ceridian; and Noemie Heuland, CFO of Ceridian. Thank you both so much for being here. We appreciate it.

Thank you, Chris.

Thanks for having us.

Of course. So you reported Q4 earnings just a couple of days ago. And for those that might have missed it, can you just talk a little bit about what you saw from a bookings' perspective and more specifically, how you've seen the trajectory of those bookings trends from the beginning of the pandemic to where we are today?

Sure. So Chris, if I just look at the highlights of the actual quarter, just a few things first. Dayforce recurring revenue came in above guidance at about 19.3%. And that was after we had additional headwinds from employment levels. We had projected, as you know, about a $2 million recovery and we saw only about $500,000 of that come in. So we're very happy with, obviously, the Dayforce recurring revenue numbers. The second great win, I think, was that the gross profit on recurring went up really nicely by 210 basis points or 380 basis points ex float. And again, that really is the profitability target that we are most focused on because we know that as we keep increasing that, and we'll see additional increases in 2021, it leads to long-term profitability of the actual company. In terms of guidance for the Street, we've indicated that we expect that by the second half of this year, we'll be above the 25% growth rate and approaching what were historically the growth rates for Dayforce, which is probably around 30% in the longer term. From a customer acquisition perspective, or customers going live, we now have almost 5,000 customers live on the Dayforce platform in Q4 alone. We onboarded 202 customers. And if you look at the average size of the customers on a 12-month basis, it went up by about 9%. And if you look at the incremental add, that's 13%. And remember that's still with a 4%, 5% employment headwind in terms of slightly lower numbers per customer based on just what's going on with COVID. We spoke a little bit about the Wallet. We now have 122 customers live on the Wallet. Almost 400 of -- customers have signed up. And so we're very, very encouraged with what we're seeing. We're seeing about an 80% attachment rate for new customers in signing to go on with the actual Wallet. I saw a bunch of build-out in terms of functionality and features. And we're pretty confident that we'll continue to see more and more customers use the Wallet. On the Wallet, we actually spoke about some of the benefits that we're delivering to our customers through that. Again, remember, as we build modules, we identify the KPIs that we can impact at the customer and how our movement in that KPI translates into a dollar saving for the customer. In terms of the Wallet, when we look at employees who have registered for the wallet at a company versus those who haven't, we've seen a reduction in voluntary turnover by about 42%. And that 42% is a very big number when you actually do the savings. In terms of replacement of workers, probably several times more savings than what the customers pay us for the Dayforce products. We're very, very happy with that. And then finally, we also announced that we've signed an agreement to purchase Ascender in the APJ region, really a strategic acquisition for us. We will pick up 1,200 customers who are using primarily payroll. So just a great cross-sell opportunity for us. When we combine it with the Excelity asset, that will give us effectively 1,500 customers in region or about 2.5 million people that will be paying. And that really creates really a dominant position for us in the APJ region. And the APJ region is about 25% of the global TAM. And it also is the region that is growing the quickest from an HCM technology perspective. And in addition to those points, the Ascender group also have a great ecosystem of partners, both software and SI partners that we obviously pick up as well, and they have a tremendous team. And that tremendous team will allow us really to start transitioning to more of this regional operating model on a global basis as opposed to a North American company operating global. So we're very, very excited. In terms of sales, our pipeline still remains very, very strong. In Q4, we did see a handful of large deals closed in very early January as opposed to in the last few days of the month. Largely, that was us just not pushing the customer to get the final signature on contract, just given the year that people had gone through and us being a little bit more reasonable in our asking about the same here. We're not going to bother the person on vacation. We'll wait until the first few days of January.

That's a great overview. And so as it relates to that pipeline, you've talked about an acceleration in Dayforce growth in the second half of the year, above mid-20s. So what are you seeing from a pipeline perspective that gives you obviously that conviction that the business is going to get back where it's been growing historically and even better than that potentially in the years ahead?

Chris, remember, we go into each year with a very high visibility into our revenue. So when we actually do our forecast, and a lot of it is actually based -- most of it is based on just what we have in work in process in terms of implementation, and that allows us to model out the growth rate, if you like, for the next few quarters. In terms of pipeline, very large. If I look at the coverage of pipeline to our sales targets in the year, they're at very high levels. We've seen a lot of activity. If we go back, as well, to our INSIGHTS Conference, which was virtual this year, we had many more people attend the INSIGHTS Conference virtually than we typically have had in the past, which obviously added a lot to [ topple ] pipeline, and that gives us a lot of confidence for future growth.

Great. And then as it relates to employment trends, I know that came in a little bit below what you were expecting. Can you talk a bit about what you're anticipating for employment trends as we move through the year?

Yes. We're being quite conservative in terms of recovery of employment. So if I look -- for example, particularly, if I look at Q4 alone, we had about a $9.5 million impact to cloud recurring that was split between about $6.5 million on the -- sorry, $7.5 million on Dayforce.

Yes, $7.5 million.

And $2 million on the Powerpay side. In Q1, we expect the headwind to be $6.5 million on Dayforce and about $3 million on the Powerpay side. So you can see that our assumptions are [ there are candidates ] lagging behind in terms of recovery relative to the U.S. We've been really conservative taking that sort of assumptions for the remainder of the year. So a slight recovery in the second half, but we're basically assuming constant employment levels in Q1 and Q2. And if employment levels do come back, obviously, that will be a tailwind.

Great. So if we take a step back from the quarter. Obviously, we've had this seismic shift towards remote work. And can you talk a bit about how Dayforce as a platform is positioned for that? I mean to the extent that, going forward, companies have a higher percentage of distributed workers, what sort of solutions is Dayforce offering to the modern company that is operating much more remote than before?

There are a few pieces. First, from our self-service capabilities, we really have great penetration of our mobile apps and of our web apps, which allow almost all of the typical HCM processes to be done remotely and online. And remember, any company that was handling paper prior to the pandemic, those processes have to have shifted online, so really a movement to digital platforms like us. Typical examples would be, say, like candidate onboarding, if you hire a new person, having a completely seamless digital experience for everything from having sign-ups on policies, learning management, learning the actual -- getting acquainted to the culture remotely. The Dayforce Hub, which is a new module that we released as well, it's all about communications and a personalized experience based on the type of person, the location of the actual person. We added some capabilities, particular to the pandemic, like the COVID tracker, which allows organizations to track who's actually tested, who has been positive, who has been negative, adding capability around vaccinations as well. From a processing perspective, the fact that Dayforce was built from the onset to be native in the cloud has just really helped a lot of companies who had servers in their premises. We don't have to send people in to operate those systems. Moving to a cloud system alleviates that. And then finally, as you know, with people working from home, there's also been that shift to much more of a global workforce as well. And the Dayforce technology was built from the onset to be global and so we're able to handle employees who may not be in one country also.

Great. So wanted to talk a bit about the Wallet. You mentioned that at the onset, 122 live customers, 400 signed up, 80% attached to new sales, all very impressive and certainly faster than I think most people had anticipated. As the world shifts more to daily pay, I mean, there's some other ways of doing this that we're seeing competitively. I think PayPal is offering ways for their workers to get paid on a daily basis through a partnership. You're giving workers liquidity through a card that they can purchase things. So can you talk a bit about your approach to giving workers daily liquidity? How much different than some of the competition? And why you think it's going to be the preferred way in the future?

Yes. Look, like with most things, we started by looking at the workflow that people have for being paid. And if we think about how most people get paid today, it's in a traditional pay period construct, which means that I work typically 14 days and then I get paid about 17 or 18 days after the onset of the payday -- of the first pay date. Nowhere in our life today do we actually wait for more than 2 weeks for anything, right? If I go purchase something on Amazon, I'm going to go Prime, I want same-day or next-day delivery. If I'm watching something, for example, on TV, I'm going to look for a TV series where I can watch seasons 1 to 8 in one shot. I'm no longer going to say, "Hey, I'm waiting Wednesday to see the next episode" type thing. The same should really be true for how people are paid. The way that the pay period is set today really comes from probably 1940s or 1950s technology where there was limitation on how frequently you could process. When we built Dayforce, we noticed that there was that separation between pay and time, which meant from the payroll administrator's perspective that they couldn't get access to the data until after the pay period. So the first thing we did is we solved it for the payroll administrators by having that continuous calc engine, which meant that they could start quality assurance and all of their busywork at the beginning of the pay period as opposed to after the end of the pay period, led to obviously a higher quality of pay, and that's been very, very successful for us. As I mentioned, we've had almost 5,000 live customers on the platform. We're now doing the same for the employee. So the continuous calculation engine allows the employee to see how much they have earned, net of all taxes and deductions, at any time in the period. They can then go on and say, "I would like to add that money to my Dayforce Wallet." And when they do that, we create a legally compliant payslip. And we do the remittances at the federal and at the state level the next day. So it's not a payday loan, it's a true payroll. We don't charge the employee for use of the Wallet, and we don't charge them to load money onto the Wallet or take money out of the Wallet. So from an employee's perspective, there are no direct fees whatsoever. From the organization's perspective, we act as a commercial lender to the organization, which means that they don't have to change how they fund their payroll. They still fund their payroll as per usual on the normal pay cycle basis. Also, there's no reconciliation required by the payroll administrators. So the closeout of payroll is very, very simple. All of the adds for Dayforce Wallet are included in that particular process. That means that it's a very nicely designed solution with no additional fees for either the employer or the employee. When we contrast that to what's in market, we're the only ones in market who have this continuous pay calculation engine. All of the other vendors have still separation between their payroll systems and their time systems, which means that you can't calculate the net earnings. Instead, you have to do an approximation of what that person is going to earn in the period, only allow them to take out a percentage of that. And each time they do that is, it's actually a payday loan. Also, most of the competing products charge the employee or the employer for use of the Wallet. They charge per active card user. And they charge each time you add money or withdraw money out of the actual system. So from our perspective, there's a tremendous financial benefit to the employee. Where that benefit comes from -- so if you look at the statistics, about 80% of all individuals live paycheck to paycheck. A typical case would be, say, you get your credit card bill between pay periods. You would like to pay it off completely, but you don't have enough money because you are still waiting for your next paycheck. With our solution, you have access to your earnings during that period, so you can pay it off completely as opposed to percentage. And if you pay only a percentage, the credit card company will charge you about 22% also on the full outstanding balance. And so people avoid those sorts of charges or going to payday loan outlets and the like. And as I've mentioned, we've already seen benefit to the employer in terms of a lower voluntary turnover. We're also seeing it as a strong way of attracting people into organizations. So for customers who are using the Wallet today, we're seeing that it takes about 10% less time to find someone to fill a vacant position. And when they make an offer to an individual, they're seeing about a 5% higher close rate in that. So very strong evidence in addition to, as I mentioned, that 42% reduction in voluntary turnover.

Super helpful. And in terms of some of the earlier adopters of this and the bigger users of it, I mean, I imagine it lends itself very well to industries where you have hourly paid workers, gig economy workers. Can you talk a bit about where you've seen the strongest usage from customers that were early adopters of Wallet?

Yes. So the industries where we have the highest penetration are manufacturing, retail and health care. However, we also are seeing penetration across industries such as like financial services or professional services. A piece of the functionality that we are still building, and we should have it ready to go quite shortly, is the PayCard capabilities. And once we have that, it becomes a very viable alternative for direct deposits. Instead of putting your banking account in for direct deposit, you put your Dayforce Wallet in. And as you earn the money on a daily basis, the money flows directly into your Wallet. Obviously, we're still extending the capabilities of the Wallet. Eventually, we'll have things like interest-bearing accounts, other types of banking types of products in there as well. So it becomes a very viable alternative. And again, for us, differing us to the other wallets, it becomes very natural in terms of flow. In other words, if you put it into the Dayforce Wallet, there's nothing you will have to do from a perspective of adding your funds to your wallet. It's just, "Hey, I worked a few hours, I worked today. Whether I'm hourly or salaried, I can see what I have net of everything, and it's available for me to spend immediately. And if I leave it on to the actual card, I'm going to get a return on it."

Got it. I think in the past, you've talked at a high level about how this monetizes, right, with the payroll being processed, the amounts being spent on the card, the percentage fee you would take from that. Can you maybe give us a refresher just on how you monetize it? Anything you could share about the funds running through Wallet today and when we start to see this fold meaningfully into your model?

At a very high level, we're seeing that the ARPU from an active cardholder is almost equivalent to the recurring revenue we get from the use of the Dayforce application. So already, we can see that the financial model works quite nicely. The way it works is, if I look at the U.S., it's about 120 basis points of interchange. After our program management fee, we get about 75%. And as I mentioned, we act as a commercial lender to the customer during the period that the employee adds money to the card and the end of the pay cycle. Our cost of borrowing is effectively LIBOR plus about 250. And when you spread it over, say, an average of 7 days kind of length of borrowing, the absolute cost from a BPS basis is probably 6 to 8 basis points. So after all of that, we net about 80 basis points from each dollar that is spent through the Wallet.

So switching gears a bit. I wanted to talk about automation in payrolls. You've done a lot. You've sort of identified issues. You've created workflows around them to create efficiency. Can you talk a bit about some of those other areas where you see opportunities through AI, robotics, et cetera, to create more efficiency, to automate more workflows in HR and payroll more broadly?

Yes. Look, at a high level, our focus really, in terms of AI and ML tech at the moment, would be to automate the payroll process. They are no longer having to have all of these manual checks in place. We can really leverage AI and ML to do much of those check-ins and even much of those corrections. Or if customers don't want to do it automatically, present the list of changes and edits that should be made based on history and kind of inference from the past to make these processes a) much more accurate, much more compliant and much more simplistic for people to actually use. In terms of our ML and AI strategy, as you know, we brought on Joe Korngiebel into the organization a few months ago to head up product and technology. He came from one of the large ERP vendors where he was CTO. A lot of his focus over there was around data MLAI, and so you can see the kind of a focus. If you were to ask us, our belief is that if we look at HCM technology, you can see a shift from really transactional types of processes where you're delivering the ROI really about efficiency and workflow changes to one where the value is going to come from what's inside the data. And payroll data is very, very rich, right? We have a lot of information about the person. We know exactly what type of earnings they were getting, the frequency of earnings. And from that, we can actually do a lot on the ML and AI side.