Dayforce, Inc. (DAY) Earnings Call Transcript
June 2, 2021
Earnings Call Speaker Segments
All right. Good morning. Welcome to Cowen's 49th Annual TMT Conference. I'm Bryan Bergin, Cowen's services and software analyst. And we're very pleased to have Ceridian here, a leading HCM software provider. From senior management, we have Ceridian's CEO, David Ossip; and CFO, Noemie Heuland. Thanks, guys, for joining us this morning.
It's a pleasure to be here today, Bryan.
Thanks.
For the participants, you can submit any questions you may have through the webcasting platform, and we'll work those into the conversation.
And with that, we're going to get right into it. And to start, I wanted to begin with demand level set. And David, as the U.S. continues to reopen, can you talk about the primary themes that you see driving client demand today? And as things start looking more normal, has COVID caused lasting impacts to any of the HCM buying behavior that you're noticing?
So well, I would say, as I said in the Q1 call, that we have seen buying behavior and demand return to, what I would say, more regular and pre-COVID types of level. We had a very good Q1, I think everyone knows, in terms of sales. And that was reflected not only in terms of deals closed, but in terms of pipeline activity as well. Digital summits continue to draw record attendance. We saw great close rates from those attending the digital summits into actually accounts as well. Momentum seems to be continuing into Q2. When I look at the actual process, there are some anomalies. For example, in the Q1, I spoke about a U.K. deal, multimillion dollar deal, that was brought to us by a big SI that closed within 8 weeks. And obviously, there was pent-up demand at that particular client, and then they got through the budget decisioning processes. What's driving the demand? One, there's the pent-up. People had projects that were obviously delayed because of COVID, and they're now getting back to work. Two, you have a lot of compliance issues still in market, where people have not been paid correctly at their organizations. The U.S., we're seeing DOL audits. And so companies are moving very quickly to move to a much more compliant. Third, on the talent acquisition side, employee onboarding side, employee communications side, there is a very strong need. Companies, as you know, are hiring very rapidly again. And so having a very effective recruiting platform and then having a way of onboarding the people in a way that really engages right from the very beginning and makes the whole process efficient is very valuable. And when I do reach outs to CEOs, which I do about 20 or 30 per week, the theme about how do you maintain that culture when people have been at home for over a year, and it's most likely that we will move into a flexible workplace environment. And so products like our Dayforce Hub are seeing quite a lot of interests.
Okay. Just playing into the investments that you've made into the platform, which is good to hear. Are you seeing any differences in demand trend based on just employer size or geo?
We've obviously trended. So if you look at the actual numbers and you have the Dayforce recurring ex [ rate ] year-over-year, it's up about 22%. And that is, I think, because some of the initiatives we put in place a couple of years ago, the move into the larger market, the enterprise space, has been going quite nicely. I think we've made a big investment in terms of global, both in build out of native technologies and the acquisitions of Ascender and Excelity. And so we've obviously had much more success on the global basis. And lastly, if I look at the geos, where we've been around the longest, obviously speaking, outside of the U.S. and Canada, so the U.K. and ANZ, we are seeing a lot of great traction.
Okay. And just circling back on the bookings. So it does seem like the willingness of clients to sign improved pretty notably. You had more optimism certainly in 1Q than 4Q. Can you just talk about your expectations in sustaining that new logo addition trajectory as you move through 2021? And ultimately, how does that translate into Dayforce growth for you?
Sure. No. We obviously are still optimistic about the demand side, and that obviously leads to the closing of sales. So I would expect that to continue through this year. In terms of the adds of the logos, we had some great wins that we highlighted in the shareholder letter. And I would expect it would have some nice stories to talk about in Q2 as well. So a great trend over there.
Okay. Anything -- any context around lead gen? Demos? Any leading KPIs that you're most excited about?
Well, if I look at the attendance that we've had at the HCM summits, whether it be in Q4 or Q1, the attendance has been very high. Each time we do a summit is a record attendance at the actual summits. As we move more into 2021, we'll start to do hybrids, so some in-person in addition to the digital ones. And I think the U.S. market is now kind of open to that.
Okay. INSIGHTS, is that going to be a virtual format this year? Or are you going back to in-person?
We haven't decided, frankly, but there will be a big virtual component that might be augmented with smaller INSIGHTS, in-person INSIGHTS.
Okay. On to retention. So can you kind of -- can you just talk about how gross retention rates have trended? And split out Dayforce versus Powerpay in that. And how do the pandemic impact those metrics relative to your historical levels?
We don't report them separately. We report on a cloud basis. And as you know, the growth retention rate was largely consistent. In fact, it's been largely consistent since time of IPO. In terms of the net retention rate, it also held steady at about 106%. Obviously, what's remarkable over there is that we had a headwind of about 5%. And so the fact that the net retention rate held steady, it's just reflective of the fact that we've been very successful on selling the add-on modules to our existing client base. And I think, as you know, we called out in Q1 that 28% of the sales in the quarter were sales to existing clients.
It was a nice uptick, the increased attach that you had noted there. Okay. The -- let's talk about the global strategy. So can you just bring us up to speed on the global expansion strategy? Where you stand today?
Sure. So global strategy, as you know, when we looked at the market back in about 2010, 2011, we noted that about half of the addressable market size is outside of the U.S. and Canada, about a $20 billion space outside of the U.S. and Canada. So we built the platform to be global from the very beginning, which means we have things like language localization, support over 20 different languages in the products. We built the rule engine and the tax engine so we can move into new geographies. And in fact, the first release of Dayforce to both the U.S. and Canada. And then shortly after that, we moved into the U.K. and then into Ireland, Australia and New Zealand. We've launched in Mauritius already. We'll have Germany up and running for 2022. And then in the APJ region, we did 2 -- 2 or 3 acquisitions really to really acquire customers that we can later migrate onto the Dayforce platform and at the same time upsell them to the human capital management talent modules that we have. In terms of APJ, we've been building out a Dayforce payroll factory for Asia, and we've been using some of the resources from the Excelity team, and that's to be up and running in the second half of this year. And that should probably give us between 15 and 20 additional geos that we can support natively through the Dayforce platform. In terms of Europe or EMEA, once we have Europe up -- sorry, Germany up and running, we'll expand around the DAC countries to move very quickly to get a very strong footprint in that particular region.
Okay. And as you expand here globally with native payroll, how should we think about the global expansion efforts, the opportunity of expanding internationally to satisfy multinational clients versus the in-country opportunities that require native solutions? So I'm curious on how you cut that market, whether this is being run concurrently with your larger client push. Or it's also about some of the in-country medium-sized targets you may have as well?
So Bryan, I'd say that's really a very insightful question because, this year, we made the pivot from being a North American company operating globally to a true global company with very strong regional presence. The difference is that when you're a North American company operating globally, you usually are selling to companies that are headquartered over here that have operations globally. Whereas when you make the pivot, you start to also sell directly to the companies that are headquartered in those particular jurisdictions. And to do that, you have to obviously have the management in place, which I think we have. You also have to have a global operating model that works very nicely and supports both of those 2 initiatives. In other words, selling to the headquartered companies regardless of where they are located and selling to companies that are very strong on a regional basis.
Okay. So you have the opportunity to go after it all and effectively with the strategy that you're...
Well, I think it completes the global. I don't think you can say that you're a global organization or you have a global product unless you have that strong regional operating model, right? You need to have local sales. You have to have people who are familiar with the requirements for each of the jurisdictional markets. You have to have product and technology in those particular markets and very strong delivery. And all of that has to be supported by a very strong SI, system integrators, inside the local markets.
Okay. And you've -- you highlighted APJ, certainly, as an area that you've been pursuing aggressively recently. You've chosen both acquisition and organic development. Can you give insight on how you're determining which regions and countries to expand into and then how you're determining whether the right decision is to build versus buy?
Sure. So when we look at our customer base and you look at the actual demand, it really highlights where the greatest opportunity lies for us. And so we use that as really a compass to determine where to go next. In terms of the buy versus build, I don't see them as separate. In fact, what we really are doing is replicating what Dayforce did with Ceridian in North America. And if you recall, we found an organization, Ceridian, that had a customer base and it also had people who understood what was required to build, especially around the compliance modules. And then using the Dayforce technology, we were able to build a differentiated product with that continuous calc engine and a single database design that met the requirements of the market that were vetted by the people who had all the knowledge and also tested on the client data. And that allowed us, over a period of time, about 5 years, to migrate a lot of the revenue from the [ euro ] basis onto the Dayforce side, while at the same time, lifting up the revenue by about 22%. When we go into countries like in the APJ region and we look at, for example, Ascender. Ascender has 1,200 customers that are primarily payroll-only. And so over a period of time, as we build out the native of engines -- and as you know, we already have that for Australia and New Zealand. And as I said, we'll have it for most of APJ in the second half of this year as well, we can start targeting those customers for migration. And as we migrate them, we can go back and sell OHR and sell workforce management, talent acquisition, performance compensation and learning management and the like. And that gives us the ability to get a lot of continual growth from those types of acquisitions, but at the same time, being consistent with a native strategy to have a consistent global experience for all employees regardless of where they work or live.
Okay. And when you go after it from an organic approach, how much time and money are you finding it takes you to roll out payroll functionality?
So as I mentioned, we built the product to be expanded globally. So the build for the local market is probably a 6- to 18-month build. Mostly of that is really discovery if we're doing it natively. The other part that has to be done if you're starting from ground zero is you have to build up the operations, the market presence, the partner network and the like. And you have to find people who are knowledgeable about the domain so they can build and implement and support the customers in the region. And that's where the buy becomes very attractive because you can buy these organizations typically at a very reasonable revenue multiple. And you're also getting these people who really understand the local market. There's only brand awareness for it too. And when you take a North American platform into another jurisdiction, you have a significant advantage because the U.S. market is so large, which means that, from an R&D spend perspective, you can afford to build out a great platform with the most modern technologies. And for each of the modules that you're building, you can be very complete and very, very deep. In contrast, if you're selling in just one particular local market, the market size is going to be smaller. And so your R&D spend is going to be much less, which is going to constrain what you can build. So having that North American finance, if you like, platform gives you a tremendous local market -- local advantage when you go in. In fact, I had a call with a CEO yesterday in one of the APJ countries. And he said on the actual scorecard, we came out completely ahead of everyone else because he's comparing us mostly to either the big ERPs or he's comparing us to the local players. And in both of those cases, we obviously are very strong.
Okay. Why do you find that others have struggled so much trying to expand internationally? Is it how the programs are written within their product fleet?
Well, I think you have to look at when the product was built. And so most -- they're 2 different trends. You have the U.S. players that built out U.S.-only platforms, and then they made efforts to localize them or to expand them on a global basis. And you can't do that. You have to design the product to be global from the onset. There's things like how do you do FX, how do you language localization, is it just labels, do you data localization, how do you handle culture, how do you build the employee record so that it's not North American-centric with the certain data elements that you require that have to be first-class data citizens based on various types of jurisdictions. So taking a North American build product and trying to take that globally is not going to be successful. The other way that was built, it was built really as on-prem systems. So if you look at some of the ERPs that have global presence, it's really a lot of on-prem systems that have been customized for the local market that are no longer upgradable into the actual cloud. So you don't have an easy transition from an on-prem system to a global cloud. And what customers really want on a global basis is they want to have a single view or a single experience of the employees. For example, if I look at our product and technology team, Joe has individuals who are in the U.S., Canada, Mauritius, India, right across APJ, Australia, New Zealand, Scotland. When he's doing his projects, he can't do it on an average per FTE basis. Because if I'm hiring Mauritius, I probably can hire 3, 4 people or someone in San Francisco. So you have to have the ability to do your budgeting and look at the data from a global basis in either constant currency or, if you wanted to just from fairness and market perspective, in local currency as well.
Okay. And as we think about the growth potential of international, so non-U.S., non-Canada revenue stood at around 5% of last year's revenue base. How should we think about -- how are you thinking about the potential scale of that international mix over the next several years?
Well, obviously, it's going to become a larger percentage with time. But I would point out that if I just look at the U.S. and Canadian marketplace, we still only have about a 3%, 4% market share. So there's still tons and tons of growth for us in the U.S. and Canada, and that's obviously augmented by what we can do on a global basis.
Okay. Fair. Let's shift over to the wallet. So you have 450-plus clients signed up as of 1Q. You mentioned an 80% attach rate on new sales, registration rates over 20; with some of your longer tenured clients, you mentioned, I think, of above 30. So quite impressive traction here in a short period of time. What's most exciting for you around wallet adoption? And how are you thinking about the potential upside for registration and usage rates?
So let me start with the registration and usage rates first. We believe that the registration rates over time will probably exceed 40%, probably approach 50% with time. That space, looking at some of the other wallet products that have been rolled out in market -- there's a Walmart study where if you look at the registration rates year-over-year, they almost doubled. So we're very optimistic and confident the registration rates will continue. If we look at the data, as you pointed out, companies that have been using the wallet longer seemed to be at higher registration rates, and the registration rate seems to be going up by a couple of percentage for the quarter. In terms of the wallet, when we look at how people are paid today, people are paid on this batch-based pay cycle basis, which really came from 1940s, 1950s batch-based mainframe tech. And if you look at the solution today or the problems of today, there's no reason why people shouldn't be paid as they work. There's no reason why you shouldn't be able to screen payroll to people based on the hours or the prorated hours for salaried people that they've worked. The money is owed to them. From an accounting perspective in the U.S. and Canada, we do it on an accrual basis. As you work, you actually are charged the 8 hours. We built Dayforce to do that. So we built this continuous calc engine that allows us at any time to see what someone is owed, net of all the taxes and deductions. And we made the changes in the Dayforce platform and in the Ceridian tax services organization so that each time you move the money into Dayforce Wallet, we process a true payroll for that individual. We generate an earnings slip that is legally compliant, regardless of state or province in Canada. We do the remittances the very, very next day. The benefit for organizations has been quite significant. So as you know, we run the business in what we call quantifiable value, which means before we build a module, we identify the KPIs that we are going to impact and we make sure that those KPIs can be measurable and converted into a money saving. For the wallet, we said we believe that we will see better employee retention rates across our customers. And once we had 150 customers live, we went back and we did a study what was the turnover rate of employees who have the wallet versus those that didn't. And we found voluntary attrition rates dropped by 42%. So very, very strong. From the employees' perspective, the benefit is you get much better financial flexibility. That means you're able to pay off your credit card bills quicker. You don't have to go to payday loans. And about 20% to 30% of the population uses payday loans, which have annualized interest rates of about 400%. So you allow them to get access to the money in a fluid way. And it matches every other area we have in our daily lives, whether it is watching TV, like we stream on Netflix. If we buy, we buy of Amazon, it has to be same day or next day delivery. But we're used to the whole concept of now. And streaming of payroll meets that really, really well. So I think if I go out 3, 4 years, we'll see a massive shift in market from customers paying people on this pay cycle basis to the streaming of pay. What gives us a big advantage is the way that we solved it relative to the others. So there are other wallets in market. But all of these other wallets are add-ons to the payroll system, which means, from a payroll perspective, you have to do a pretty difficult reconciliation at the end of each pay period, whereas in Dayforce, there isn't a reconciliation. It's one system. Two, these other wallets typically charge a usage fee to either the employer or the organization, whereas with the Dayforce system, we're able to fund it through the interchange. And third, from a funding perspective, we don't have the employer change how they fund payroll, instead we act as a commercial lender to the organization during the few days that is outstanding. And the way that the numbers work is that we are able to make about 80 basis points of the spend that the employee is due of the wallet.
Okay. A nice quantifiable benefit to Ceridian as well there. The -- as far as adoption goes and the clients that are attaching this, are you seeing a certain client profile that's attaching more frequently than others?
We're seeing -- if I look at the over 450 customers that have signed up for the wallet, we're seeing really across the industry. So we have financial services, professional services, a lot of health care, especially extending health care. And then obviously, the peaks would be in retail and in manufacturing, where people probably need the continual flow of the money a bit more. But even for a salaried individual who's quite financially astute, knowing that they can take some money as they work the days and invest that money to get a return or to use that money, so they can pay off their credit card bill in entirety, so they're not charged with 22% on the full outstanding balance from the previous month, makes a tremendous amount of sense. When we look at the typical profile, the most common profile we have for the wallet is a late 30, early 40s working mom.
Okay. And now it begins with on-demand pay, but the road map is certainly active for the wallet. Can you talk about what you're doing next with streaming wages and the financial wellness features that -- you touched on it a little bit in the past, but what's the comp?
So there are a few, I'll call them, general themes that we're doing on wallet. The first has to do with completing the pay card capability, which will allow the wallet to be used more for direct deposits and also allow the wallet to be used by minor employees and also allow companies to push money very easily to employees when they need it. The second area of the wallet has to do with building out a full and what I'll call competitive wallet in market. And so when you look towards H2, you'll see some programs coming out like rewards, referral benefits. If I refer it to Noemie, I might get $10. We'll be moving into more advanced transfers or things like bill pay, OCT, which are instant transfers, peer-to-peer transfers and the like. Various types of financial wellness offerings will be coming into the wallet as well. And then the last area that we are beginning to build now and will probably be rolled out in 2022 has to do with the entire concept of allowing people to go anywhere and to work at an organization without being onboarded at that workplace. So if you have the Dayforce Wallet, we know who you are. So we have that through your KYC. We know that you have the right to work based on your current employment. And if we add things like certifications and skills, we have quite a complete profile for you. When you pair that with the native Dayforce capability, which means that I can go to any location tied to geo coordinates, clock on and clock off,and we have all the local jurisdictional policy setup. So we know what the minimum wage is at the city level. We know what the overtime rules are, whether it is a state or whether it be federal or provincial. We can do the full calculation for the person such that the individual can get paid when they leave at the end of the day. And so you'll be starting to move much more into that. And you can really think of Dayforce becoming really a settlement engine for the gig worker. And the gig worker, by the way, is changing. It's not just people who only work gig jobs, but there are a lot of individuals that have a primary workplace and they now need to augment their primary workplace earnings with additional jobs. And so it fits very, very nicely into that. And as part of that settlement engine, you obviously get the payment. The organization is assured that all the various taxes and deductions and the remittances are being made on time. And then at the end of the year, we have the ability to generate the tax forms, whether it be the W-2s in the U.S., the T4s in Canada, the 1099s and et cetera, but we can handle all of the compliance makers -- forms and reports available for the actual employees.
As you add all this functionality, does your revenue model change? Or are other opportunities for revenue pop up then?
Well, Bryan, we've always had 5 areas of approach, and we've spoken about them. We started at the very beginning, we're applying new logos, 500 to 600 per year. We continually extend the base, and I spoke a bit about that with some of the new modules like the Dayforce Hub. So we -- and that allows us to go back to the base and drive additional revenue, which -- the 28% attachment rate. Third is we've been moving up market, started about 3 years ago. And I spoke about the fact that if I look at the Dayforce recurring ex float, it's up 22% year-over-year. You had a lot of very good questions around global, moving that 5% of total revenue upwards over time, the success we've been having in UKI, ANZ, et cetera. And then the last one is that we move into adjacent markets, Dayforce Wallet. And the purpose of that is how can we drive more recurring revenue from the employees that we pay through our system? And if I look at the Dayforce Wallet in a very simple fashion, the amount of revenue that we can get through the interchange and other types of financial fees from an active wallet holder is equal to the recurring revenue that we can get from the Dayforce platform, just different ways that we can drive more recurring revenue in the long term. One other area we didn't really speak about, and I know time is short, is about the SI channels. And that, I think, is a very big driver as well for the future. We spent the last about 2 years getting the SIs properly trained to the head resources. We're now going through that validation phase where we have a number of instances with the SIs of priming, the Dayforce implementations, especially on global deployments. And once we have those validation points moving to the go-to-market piece, and at that point, I would expect the rate of revenue growth to get lifted up for the same point in time. So I think that could be quite a significant base to revenue growth as well in the future.
How many partners are you trying to work with here? And how many are full -- or, I guess, to the point of making active sales for you?
We have over 15 active partners at the moment.
Okay. And then last question for you here. So this is clearly an investment here. Longer term, can you just talk about margin expansion levers?
If I look at just Q1 alone, we're up 120 basis points year-over-year ex float. And you've seen us constantly do that. And we haven't changed. We expect our gross profit on recurring margins exceed 75%. Over time, I would expect to see the EBITDA go up above 30% as well. Obviously, we're still dealing with 2 headwinds at the moment. Our float headwinds currently are about $9 million per quarter. Employment headwinds are still about $7.5 million per quarter. So if you add it together, between $16 million and $17 million of EBITDA. There are still headwinds, and I think over the next couple of years will go away and it will move directly to the bottom line.
Okay. Great. David, Noemie, thank you very much for the time today. Great content and great color. Appreciate it. For everybody who joined us, thank you. Everybody, have a great conference and a great day.
Thanks, everyone. Appreciate it. Bye-bye.
Read the full transcript via the API
You're viewing the first half of this call. Get the complete Dayforce, Inc. transcript - plus 251,000+ transcripts from 12,000+ companies, speaker segments and full-text search - through the EarningsAPI REST API or hosted MCP server.
Get an API key View API docs →For developers and AI pipelines
Programmatic access to Dayforce, Inc. earnings transcripts and 251,000+ others is available through the
EarningsAPI REST API and the hosted MCP server.
Quarterly plans from $105 - full transcripts, speaker segments, full-text search,
and the /api/v1/transcripts/recent polling endpoint for ETL pipelines.