Dayforce Inc (DAY) 2019 Q2 法說會逐字稿

Good afternoon.

My name is Chantal, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Ceridian HCM Holding Inc.

Second Quarter 2019 Conference Call.

(Operator Instructions) Jeremy Johnson, Vice President of Finance and Investor Relations, you may begin your conference.

Thank you, and good evening.

On the call today, we have Ceridian's CEO, David Ossip; and CFO, Arthur Gitajn.

Before we begin, allow me to provide a disclaimer regarding forward-looking statements.

This call, including the Q&A portion, may include forward-looking statements about our current and future outlook, guidance, plans, expectations and intentions, results, levels of activities, performance, goals or achievements or any other future events or developments.

These statements are based on management's reasonable assumptions and beliefs in light of information currently available to us.

Listeners are cautioned not to place undue reliance on such statements.

Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those set forth in such statements.

We refer you to our previous filings with the SEC for information regarding the significant assumptions underlying forward-looking statements and certain risks and other factors that could affect our future performance and ability to deliver on these statements.

We undertake no obligation to update or to revise any forward-looking statements made on this call except as may be required by law.

The second quarter earnings release and quarterly report on Form 10-Q, the related financial statements and the MD&A have been filed with the SEC and will be available on the SEC's EDGAR database in the U.S. and the SEDAR database in Canada as well as on the Ceridian Investor Relations website at investors.ceridian.com.

As a reminder, all figures discussed on this conference call are in U.S. dollars unless otherwise noted.

With that, I will turn the call over to David.

Thanks, Jeremy.

Good evening, everyone, and thank you for joining our second quarter earnings call.

We are pleased with the results from the second quarter of 2019.

Dayforce momentum remained strong, with Dayforce recurring revenue growing by 31% and 32% on a constant currency basis.

Total Dayforce revenue, including professional services and other, increased by 27% year-over-year and 28% on a constant currency basis.

Including Powerpay, Cloud revenue grew by 22% and 24% on a constant currency basis.

Moving on to customer count, we ended the quarter with 4,006 customers live on the Dayforce platform, a net increase of 155 customers from the first quarter of 2019 and a net increase of 698 customers since June 30, 2018.

Consistent with the first quarter, we continue to see a higher mix of larger-sized customers taken live compared to the second quarter of last year, and we expect this trend to continue as demand for our product continues to be strong in both our major and enterprise markets.

From a profitability standpoint, we are pleased that Cloud recurring services gross margin expanded 370 basis points year-over-year to 69.3%, and professional services and other gross margin improved from negative 15.6% to negative 4.3%, nearing our breakeven target.

Adjusted EBITDA was $44 million, an increase of 23% compared to last year.

And adjusted EBITDA margin was 22.4%, an increase of 230 basis points compared to last year.

Arthur will go into more detail on the financials, but I will briefly highlight the 2 areas of investment we have discussed on prior earnings calls: product development and sales and marketing.

During the second quarter, we continued our investment in product development.

Our cash investment in product development, including research and development expense and capitalized software development, was $15.6 million or 7.9% of revenue, an increase of 11% compared to the second quarter of 2018.

A portion of the spend was related to our global expansion.

As you know, we have recently launched U.K. and Australia native Dayforce payroll, and we are seeing strong demand in those countries.

We plan to start our Dayforce Ireland native payroll in August 2019 with the full product launch by the end of this year.

This will complete the Dayforce native payroll expansion into the U.K. and Ireland region.

Early next year, we anticipate a similar rollout for New Zealand native payroll to complete the ANZ region.

We also invested in sales and marketing during the second quarter, which increased by approximately $5 million to 17.8% of revenue.

This represents a continuation of our investments to grow in the enterprise segment and to grow in global territories.

Also during the quarter, we announced our selection as a successful Gate 3 supplier by the Government of Canada.

This announcement followed an exhaustive procurement process, and as a result of our selection, we have signed a contract with the Government of Canada enabling us to bid for the government's future payroll, time and HCM against 2 other vendors.

We believe that we are uniquely qualified and well positioned to replace the government's existing system, and to deliver on-time and accurate payroll to the more than 300,000 federal employees in Canada.

We will continue to keep you updated on the progress of this opportunity, which is expected to positively impact results in 2020 and future years.

Leveraging the knowledge and experience we acquired in our successful pursuit of the Government of Canada opportunity, and given the wealth of public sector opportunities in North America, we are creating a new public sector vertical inside our enterprise segment.

You may recall that we announced our verticalized approach to the enterprise segment when we reported our fourth quarter 2018 results with the creation of 4 verticals: manufacturing, health and human services, financial services, retail and hospitality.

The public sector vertical will be our fifth vertical, and we believe that Dayforce's ability to handle the most complex workforce scenarios, combined with our intuitive user interface, positions us for continued success in the public sector.

In the second quarter, we continued to see strong demand from enterprise customers, and I want to spend a few minutes highlighting some of those wins, beginning with the traction we saw in our global markets.

In the U.K., we won a deal with the second-largest coffee shop chain in the world.

They have 18,000 U.K.-based employees and a vision plan for global growth.

They were looking for a single HCM platform to replace their legacy HR and payroll system and needed a partner that can move at a fast pace to support a rapid go-live plan and provide real-time insights and greater cost control.

The company was already using Dayforce for workforce management and has seen a high level of adoption from employees, which generated 8.5 million mobile sessions per year.

Another great win was an Australian facilities management company with more than 13,000 employees across 5 continents.

This company was looking to simplify its process and improve compliance while reducing the burden on their IT team to manage disparate systems.

They chose Dayforce because they needed a full end-to-end solution that could be rolled out globally, and they will be deploying the full Dayforce platform including payroll, time, advanced workforce management, recruiting, document management, dashboards, performance, compensation management, learning and succession planning.

In North America, this quarter, we signed a deal with a 20,000-employee manufacturer of exterior building products that was a result of a recent merger of 2 smaller companies.

The smaller company with 5,000 employees was on the full Dayforce HCM suite, while the larger 15,000-employee unit was using a solution from 2 vendors for payroll and time and attendance.

They formed a cross-functional team to determine whether to move the full company to Dayforce or to the other payroll vendor.

The company chose Dayforce because of its single database and its single rule engine, which proved to be the most effective option for handling the unique needs of the 25 legal entities, each with different rules.

One of the key decision factors for the company was the relative ease with which our technology and services team can support

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continued growth from acquisitions.

In our financial service segment, we closed a deal with a prominent New York City-based financial services company with more than 14,000 employees.

The company was processing payroll for the U.S., Canada and the U.K. with an in-house legacy ERP system, and they chose Dayforce for our continuous calculation capability which gives them visibility throughout the entire payroll cycle across all countries with real-time orders previews and the highest level of payroll accuracy.

Dayforce gives them peace of mind as they navigate an increasingly complex regulatory environment.

And in our new enterprise public sector vertical, we signed a contract with a large Midwestern U.S. city.

In this case, the city's auditor had identified significant compliance and technology risks associated with the city's current antiquated system.

In the end, we beat out a modern ERP vendor which will help the city and its 10,000 employees move to Dayforce pay benefits and workforce management along with dashboards and document management.

Finally, I'm also pleased to announce that for the fifth consecutive year, Nucleus Research has named Dayforce a leader in their workforce management matrix.

I will now turn it over to Arthur to discuss our financial results and guidance with you in greater detail.

Thank you, David, and good evening, everyone.

I'm going to take a few minutes to talk about our second quarter 2019 financial results, then I'll provide guidance for the third quarter of 2019 and for the full year.

To help investors and others to assess how the underlying business is performing excluding the effect of foreign currency fluctuations, we've included a schedule of our financial results on a constant currency basis in both our Q2 earnings release and in the Management Discussion and Analysis section of our Form 10-Q filed earlier today.

In addition, we added a reconciliation of reported net income to non-GAAP adjusted net income in our Q2 earnings release.

Starting with our second quarter 2019 financial results.

Revenue from our flagship Cloud HCM platform Dayforce increased by $28.7 million or 27.1% to $144.5 million.

On a constant currency basis, Dayforce revenue increased 28%.

Revenue from Powerpay, our Cloud HR and payroll solution for the Canadian small business market, declined 1.4% to $21.2 million.

On a constant currency basis, excluding the impact of a 3.6% decline in the value of the Canadian dollar, Powerpay revenue was up 2.3%.

Cloud revenue, which includes both Dayforce and Powerpay, increased by $28.4 million or 22.3% to $155.7 million.

On a constant currency basis, Cloud revenue increased 23.7%.

Total revenue, which includes revenue from both our Cloud and Bureau solutions, increased by $17.3 million or 9.7% to $196.3 million, and on a constant currency basis, total revenue increased 10.9%.

Comparing second quarter Cloud revenue to first quarter Cloud revenue sequentially, as we've discussed in the past, there's some seasonality to our business.

This year, we benefited from approximately $5.8 million in Cloud revenue in the first quarter that did not reoccur in the second quarter.

Of this $5.8 million, $3.2 million was related to W-2 and T4 tax forms in the U.S. and Canada, about $2 million in Dayforce recurring revenue and $1 million in Powerpay recurring revenue.

In addition, we benefited from $2.6 million in float income, virtually all of which was reflected in Dayforce recurring revenue related to higher average float balances in the first quarter as a result of timing of year-end bonus processing, tax filings and higher employee counts.

Excluding the seasonality impacts from Q1 results, on a constant currency basis, second quarter Cloud revenue would have been up by $7.3 million and second quarter Dayforce recurring revenue would have been up by $4.2 million compared to the first quarter.

Our guidance for 2019 assumed a U.S. dollar to Canadian dollar exchange rate of $1.30.

The Canadian dollar weakened against the U.S. dollar during the second quarter.

And although the Canadian dollar strengthened in June and ended the quarter at $1.31, the average exchange rate for the quarter was just under $1.34.

Even with the weaker Canadian dollar, which had the effect of reducing Cloud revenue by $1.4 million, Cloud revenue came in at the high end of our $154 million to $156 million guidance range; and on a constant currency basis, Cloud revenue exceeded the high end of our guidance range by $1.1 million.

Total revenue exceeded the high end of our $191 million to $193 million guidance range by $3.3 million and by $5 million on a constant currency basis.

And adjusted EBITDA exceeded the high end of our $37 million to $39 million guidance range by $5 million, primarily due to solid revenue results.

Cloud revenue growth in the second quarter was driven by a 24.3% increase in Cloud recurring services revenue and a 15.3% increase in Cloud professional services and other revenue.

Of the $28.4 million increase in total Cloud revenue, $4.3 million or 15% was attributable to Bureau customers migrating to Dayforce.

Excluding the impact of migrations to Dayforce, revenue from Bureau solutions declined by $6.8 million or 13.2% which was in line with our expectations.

Cloud revenue accounted for 79% of our total revenue in the second quarter of 2019 compared to 71% in the second quarter of 2018.

The average float balance for our customer trust funds during the second quarter was approximately $3.39 billion, compared to $3.35 billion in the second quarter last year.

Excluding the impact of foreign currency fluctuations, the average float balance for our customer trust funds grew 2.7% year-over-year.

The average yield on our float balance was 2.41% during the second quarter of 2019, an increase of 47 basis points compared to the average yield in the second quarter of 2018.

As a result, income from invested customer trust funds was $20.3 million in the second quarter compared to $16.2 million in the second quarter last year.

The balance sheet value of customer trust funds as of June 30, 2019, was $4 billion compared to $2.6 billion as of December 31, 2018.

The increase in the June 30, 2019 balance sheet value of customer trust funds reflects the fact that the last business day of Q2 was a Friday, while the last business day of Q4 2018 was a Monday, and Friday balances are generally higher than Monday balances.

We continued to expand on gross margin during the second quarter.

While Cloud recurring services revenue grew $24.1 million and 24.3%, our cost of Cloud recurring services to support this growth increased by only $3.7 million or 10.9%, and our gross margin on Cloud recurring services increased from 65.6% in the second quarter last year to 69.3%, reflecting an increase in the proportion of Dayforce customers live for more than 2 years from 61% in the second quarter last year to 67%, and also our ability to continue to realize economies of scale in customer support and hosting costs.

Our negative gross margin on professional services and other improved from negative 15.6% in the second quarter last year to negative 4.3% due to productivity improvements in implementing new customers, reflecting the increased experience of our implementation consultants and the continued use of automation in our implementation processes.

As we discussed on previous earnings calls, we stepped up our investments in research and development and in sales and marketing in the second half last year, and our second quarter results reflect these initiatives.

Product development and management expenses increased by $1.3 million or 8.6% to $16.4 million.

Total selling, general and administrative expense was reduced by $11.6 million or 14.3% to $69.3 million, primarily due to costs in Q2 2018 related to our IPO and debt refinancing that were not incurred in Q2 2019.

Excluding IPO-related expense, share-based compensation and other expenses that are excluded from adjusted EBITDA, selling, general and administrative expense increased $7 million, reflecting increased sales and marketing expenses of $6.2 million or 23%.

We realized an operating profit of $18.7 million in the second quarter compared to an operating loss of $8.4 million in the second quarter last year.

After adjusting for IPO-related expense, share-based compensation and other items that are excluded from adjusted EBITDA, operating profit was up 37.7%.

Adjusted EBITDA increased by $8.1 million or 22.6% to $44 million, and adjusted EBITDA margin increased approximately 230 basis points from 20.1% to 22.4%.

Diluted net income per share was $0.04 in the second quarter this year compared to a diluted net loss per share of $0.58 in the second quarter last year.

And adjusted diluted net income per share was $0.12 in the second quarter this year compared to diluted net income per share of 0 in the second quarter last year, reflecting reduced interest expense primarily from the redemption of the senior notes during the second quarter last year and improved profitability.

Moving to the balance sheet.

As of June 30, 2019, we had cash and cash equivalents of $237.9 million, an increase of $20.1 million compared to December 31, 2018.

And our total debt was $667.5 million as of June 30, 2019, a reduction of $2.8 million compared to December 31, 2018.

The $20.1 million increase in cash was primarily attributable to adjusted EBITDA and proceeds from the issuance of common stock under share-based compensation plans, partially offset by capital expenditures, cash taxes, interest, annual incentive plan payments, prepaid expenses and the benefits decision support acquisition in the first quarter.

Our capital expenditures in Q2 2019 were $12.5 million compared to $8.5 million in Q2 2018.

Included in the $12.5 million in capital expenditures were $3.7 million for property and equipment and $8.8 million for software and technology, of which $7.5 million was capitalized software development, an increase of $2.3 million compared to Q2 2018.

Turning now to our outlook for the third quarter and full year fiscal 2019.

Given that second quarter total revenue exceeded the high end of our guidance range by $3.3 million and by $5 million on a constant currency basis, and that adjusted EBITDA exceeded the high end of our guidance range by $5 million, we gave a lot of thought to raising our full year guidance in consideration of second quarter results.

But while the business continues to perform well, there's a lot of uncertainty around the timing and magnitude of prospective Federal Reserve Board actions to reduce the Federal discount rate in the next 5 months.

As we've discussed before, each 100 basis point change in interest rates is estimated to have a $17 million impact on float revenue over the ensuing 12 months.

So for example, a 25 basis point reduction at the end of July, and another 25 basis point reduction in the middle of September, would result in an estimated $3 million reduction in float revenue and adjusted EBITDA relative to our assumptions when we provided full year guidance last quarter.

So given our overperformance in the second quarter, but assuming 2 Federal Reserve Board discount rate cuts of 25 basis points each in the second half, for the full year 2019, our overperformance in Q2 enables us to reaffirm the full year ranges we provided on February 6, 2019 for Cloud revenue, total revenue and adjusted EBITDA.

Specifically, on a constant currency basis, we expect Cloud revenue to be in the range of $655 million to $660 million, an increase of 24% to 24.9% on a constant currency basis; total revenue to be in the range of $810 million to $815 million, an increase of 9.4% to 10.1% on a constant currency basis; and adjusted EBITDA to be in the range of $182 million to $187 million or an increase of 13.3% to 16.4% year-over-year.

For the third quarter 2019, we expect Cloud revenue to be in the range of $162 million to $164 million, an increase of 22.8% to 24.3% on a constant currency basis.

As we discussed on the call last quarter, if you assume that Powerpay grows in the low single digits, our third quarter and full year guidance imply that Dayforce revenue will grow 29% to 31% on a constant currency basis in the second half of the year.

For the third quarter, we expect total revenue to be in the range of $195 million to $197 million, an increase of 9.3% to 10.4% on a constant currency basis; and adjusted EBITDA to be in the range of $41 million to $43 million or an increase of 12.6% to 18.1% year-over-year.

At this time, I'm going to hand back to the operator for any questions.

Thank you.

(Operator Instructions) Your first question comes from Michael Turrin with Deutsche Bank.

Dayforce recurring grew 31%.

Total Dayforce was up 28% in constant currency.

You're expecting that number to reaccelerate in the back half of the year.

Can you just walk through some of the factors giving you confidence there?

Is there anything you can add at all in terms of pipeline or visibility for more color?

Yes.

So I appreciate the question.

Hope you're well.

So if you actually did the back of the envelope math and you're assuming that our Powerpay revenue grows, say, anywhere between, say, 2% to 4% for the remainder of the year, you can basically work out that we'll end off the year pretty much close on Dayforce revenue growth around 30%.

And given that we're at 28.6% and 28% for the first 2 quarters of the year, it means that we should be seeing a number somewhere, say, between 28% and 29% in Q3, expanding above 30% in Q4.

We've also discussed beforehand that when we talk about the modeling of our revenue and the guidance we give to the market, we do a bottom-up approach by taking the accounts that we have already kicked off.

In other words, they are currently going through implementation.

We have our projected go-live dates for those accounts, and we build up a number from that.

So we have a high degree of confidence in the Dayforce growth numbers for the remainder of the year.

In other words, just to be clear, we do project, and we have put it in the press release, an acceleration of Dayforce revenue growth in the remainder of the year.

That's helpful.

And with Dayforce now set to go live in Ireland, can you remind us where we are in terms of international expansion?

We know it's still early in terms of those new markets, but how repeatable is that playbook going forward as you look to expand into additional territories?

So I'll start with the first.

We now have native capability in the U.S., Canada, the U.K., Ireland and Australia.

We will have New Zealand for the beginning of next year.

In terms of Ireland, we're about to start the go-sell of Ireland payroll, so we should begin to see accounts in the remainder of the year.

We've been very pleased with the wins that we've been having in both the U.K. and the Australian market.

In the press release, I discussed that we had won a 18,000 -- a U.K. employee customer in the hospitality -- regional hospitality arena.

And as well, we won a 13,000-employee organization in Australia.

So we're seeing great traction in both of those countries.

We believe the model is very repeatable.

As we've spoken about beforehand, it takes us about a year or so to build out the native payroll capabilities on the Dayforce platform.

We already have the native workforce management capabilities, HR capabilities and talent capabilities.

We've already localized the product in close to 30 different languages.

And so we believe we can continue expanding the payroll footprint in terms of native capability on a regular basis going forward.

Your next question comes from Mark Murphy with JPMorgan.

Congrats on the strong results in Q2.

David, I believe you started investing a bit more aggressively in sales and marketing roughly a year ago.

I'm curious, as you reflect back on those investments, where have you seen the greatest returns?

And at this point, are you emboldened to invest incrementally along those lines in the next 12 months?

So let's just look at it from a kind of a non-GAAP basis of actual expenses.

We can see that if I go to Q2 of last year, my sales and marketing expense was 15.1%.

We have increased that by 180 basis points to 16.9% year-over-year.

Again, that's on kind of a non-GAAP basis.

I would say we are very pleased with the returns that we're getting.

We measure the returns in terms of pipeline growth, which we've seen great pipeline growth for the incremental spend.

We've seen, as I've mentioned before, in terms of Q3, Q4, Q1, Q2, we've had very strong sales.

So in terms of taking the pipeline and actually translating that into sales, we've been very, very pleased.

You'll see continued investments inside the sales and marketing arena.

Now in addition to the increase in spend, we've also discussed beforehand that we've done some internal allocation changes as well where, effectively, we did take out some layers in the sales organization, did an allocation of staff into more direct sellers as opposed to support sales organization.

In the enterprise segment, we discussed before we made investments in a number of different verticals, retail and hospitality, financial services, manufacturing, health care, and more recently, we've now started to invest in the government sector as well.

Okay.

And as a follow-up, David, it appears certainly, the payroll industry is taking notice of several of your innovations.

I wanted to ask you just regarding your vision of On-Demand Pay, how many companies and prospects do you sense today that are moving forward with that activity versus perhaps some who may want to learn more about the compliance side and the overall feasibility of that equation for their business?

So we -- as you know, we don't give kind of module counts to the actual market.

We do see strong demand for the on-demand features inside the application.

In terms of innovation, we believe we are differentiated in that when an employee does a request, we do a same-day pay.

So we do not loan the employee money.

Instead, we actually pay the employee, which is quite differentiated.

And that leverages the continuous calculation engine that we have across payroll and time.

I believe that in the long term, that there is a very strong upside to the business through what we can do in terms of the On-Demand Pay and some of the other features that we're building alongside that.

Your next question comes from Raimo Lenschow with Barclays.

Quick congrats from me as well.

David, if I look at the news flow across the sector, there's more and more cases of some of your competitors having issues on the payroll side in terms of getting accurate numbers out, et cetera.

Are you seeing that in terms of pipeline build, et cetera?

And especially, I'm thinking like as you kind of -- a good few of the examples are going upmarket, is that kind of where we should kind of see you, that you're kind of being able to handle bigger and bigger accounts, and hence, you shouldn't really be kind of in that classic element -- segment that you used to be?

So I'm not sure where your question came from on the first side, as we're not seeing -- we're only seeing positive trends on the payroll side in the segments that we actually play in.

Just to remind you that we typically -- our major market segment begins at around 700 employees and goes to about 6,000 employees.

Our enterprise segment starts above 6,000 employees.

We obviously have made a little bit of a shift more towards enterprise accounts basically because we didn't have an enterprise segment before they joined us, so there's only upwards to go.

In terms of the capabilities of the actual product, we've spoken about it before.

It was designed to be global and highly scalable from the very onset.

I spoke a bit about before that we built the product to go up and down market on a single code base, which obviously gives us great leverage.

And you see that -- if you look at our R&D spend on a cash basis, we come in at about 7.9%, which I would argue, is substantially lower than any other player inside the industry.

We are still confident about the market.

And as I mentioned, we expect to see an acceleration of Dayforce revenue in the latter half of the year.

Perfect.

Yes.

Congrats.

Makes sense.

Okay.

I was talking more about the competition though, but yes.

I think we're doing quite nicely, but I can't speak to the competitors.

Your next question comes from Mark Marcon with Baird.

Congrats.

I was wondering if you could talk a little bit about the initiative with Canada and how we should think about that, both in terms of just what it ended up proving about your capabilities both in terms of time and attendance and workforce planning as well as payroll and how we should think about that government vertical because that is newer.

So let me start at the end.

We already have had success in government.

In the press release, we spoke about a 10,000-employee municipal government that we got inside the actual quarter.

In terms of the Government of Canada, let me answer from a number of different aspects.

First, we are exceptionally proud that we were a successful bidder for the replacement of the Phoenix payroll system for the Government of Canada employees.

What that means is that we have -- we are allowed to bid on what the government terms, the task assignments or the pieces of work that they are going to bid out in the future, and we expect those to start probably over the next 12 months.

What the successful bid means to the organization is, first, the government did a extensive evaluation of all of the players in the market.

The gates that we had to go through were highly technical and were very comprehensive.

They covered all aspects of our capabilities, from a compliance calculations perspective to scalability, security, accessibility, et cetera, and we came through that with flying colors.

That gives evidence to the market that we are a very viable player for the large enterprise segment, and as well, we are a very viable player for government organizations, which for us, expands our addressable market.

So we're delighted with the progress.

And for all of the employees and our partners that are listening to the call, a very big thanks to everyone who's involved.

I do believe it is something we should all be very proud of.

How should we think about the TAM of that vertical, David?

Well, I think you could basically look at it from a perspective of employment numbers in the overall North American and global market.

But obviously, it could be a significant expansion to the growth of the business.

However, I would caution you that we do not expect to see this to be material for a number of years.

Yes, it sounds like it's going to take a few years in terms of when it all gets proved out.

But it sounds like you're in a really good position on a number of modules that you're best-in-breed in.

Exactly.

But also, it opens up the possibility of us actually participating in other state and provincial payroll and time projects.

As well as I mentioned, it does give us a significant stamp of quality and proof for the large enterprise market.

And as well, I think it has validated our technology to many of the big system integrators, which we're also very pleased with.

(Operator Instructions) Your next question comes from Brad Zelnick with Crédit Suisse.

This is Bhavin on for Brad.

David, at your recent HCM Summit in New York, you kind of mentioned that you view employee engagement trends as a looking glass into where the business is going.

What have you seen this quarter that gets you excited about the future?

And then on the flip side, what makes you want to work harder to improve?

Ladies and gentlemen, this is the operator.

I apologize, there'll be a slight delay in today's conference.

Please hold and the conference will resume momentarily.

Thank you for your patience.

(technical difficulty)

This is the Ceridian team again.

We're rejoining.

Apologies, we got dropped here.

Brad Zelnick, your line is open for questions.

Sorry about that.

This is Bhavin on for Brad.

David, at your recent HCM Summit in New York, you mentioned that you view employee engagement trends as a looking glass into where the business is going.

What have you seen this quarter that gets you excited about the future?

And on the flip side, what have you seen that wants -- makes you work harder to improve?

Wow, that's quite a question.

So let me just start speaking about employee engagement.

The belief that we have at Ceridian is that if we take an employee approach first, and we make sure that we have a best environment for our employees in terms of workplace flexibility, equality and fairness, it creates the right environment that optimizes the customer experience.

And we've seen evidence about that over the last number of years that I've spoken to, that as you've seen our engagement numbers increase and become best-in-class.

We've seen a corresponding increase in our customer satisfaction scores, as measured by NPS.

And we're a perfect example of how using our product, Dayforce, to really foster employee engagement, leads to a much better client experience and true business results.

And the business results, obviously, you can look at the particular quarter in terms of Dayforce growth of 28%, up on constant currency by about 31%.

You've seen a significant improvement in EBITDA, up by about 230 basis points.

You've seen the Dayforce recurring.

Our numbers go up by 370 basis points.

And you've seen a great improvement as well in our professional services gross margin.

So we'll maintain a constant focus on employee engagement, making sure that we have a best workplace for our entire team.

Your next question comes from Chris Merwin with Goldman Sachs.

This is [Kevin] on for Chris.

David, you've talked about, in the past, about new features that are going to come online for the Powerpay business, which could potentially accelerate growth.

Moving forward, how do you think about the mix of growth coming from upselling additional modules versus new customer adds?

So a lot of it actually comes from going back to the actual base and upselling the actual modules.

We believe that the new modules could add a lift of probably low double-digit in terms of ACV growth for the Powerpay business.

So we do believe, as I've mentioned before, that we can take the Powerpay business growth rate into the high single digits and aspirationally into the very low double digits over time.

Your next question comes from Anubhav Mehla with Jefferies.

The first one, just going back to the Canadian government contract.

If you -- I know you talked about it a little bit there.

But what are kind of the next steps and the time lines and how should we think about that?

Like when does that actually translate into like a contract?

And what specifically are they looking for at this point?

Well, the -- most of this is public, and the Government of Canada has done kind of a press conference on the actual project, and they've spoken a lot about it publicly.

The government is looking for a next-generation pay and HR system to replace the Phoenix system, which has been quite challenged for the approximately 300,000 employees of the Canadian government.

The next step, our understanding, is that the government will proceed to pilot in a number of technologies for certain populations and functionality with inside the government.

And just given the change management and the data cleansing kind of exercises, we expect that, that would take probably about 1 year, 1.5 years for the government to go through that.

At which point, the government will be in a position to do awards of the contract to 1 or multiple of the 3 vendors.

Okay.

That was very helpful.

And just as a follow-up on your float balance, like, I saw that grew around 1%.

And just trying to understand basically what are the drivers and how should we think about that going forward, given that the rates are probably going down here?

Yes.

So the float balances, on a constant currency basis, are up by 3%.

Remember that you've got probably about 1/3 of the float balance or so would be in Canadian dollars.

The average float balance is somewhat of a cyclical nature in terms of high and low years, and we are in a slightly lower year as opposed to last year.

In terms of the actual yield, at the moment, we're yielding about 240 basis points, 241 basis points, on the actual float.

In the guidance numbers, we have assumed that there will be a rate reduction tomorrow in the Fed meeting.

And as well, we have also included a second rate reduction later in the year at the next Fed meeting, with inside our actual guidance numbers.

(Operator Instructions) Your next question comes from Walter Pritchard with Citi.

Arthur, I wonder if you could talk to, as it relates to float revenue and your thinking around the bottom line?

And you've made some investments in the last year, and some of the float revenue has helped offset the investments you've made, higher float revenue.

I'm wondering if as you get into a situation where float revenue is a little lower, how do you think about that moderating?

Or do you think about moderating or maintaining your levels of investments if that happens?

So first of all, I would just say float revenue is an attractive feature of our business.

It's not our core business, but it's a nice aspect of the business.

And as David mentioned, as I mentioned in the comments, we've taken down our forecast for float revenue based on the expectation that we're going to have a 25 basis point reduction in the discount rate tomorrow, and then another one in September.

And you can do the math from our 100 basis point equals $17 million.

If you take those 2, we estimate that would be an impact of about $3 million.

Because of our overperformance in Q2, we're able, as a result of the overperformance, to maintain our guidance for the year despite the reduction in the forecast for float revenue.

And then going forward, does that have much of an impact on how you think about investing?

Or is this -- I mean, obviously, interest rates are volatile.

Given there's not much you can do about it, just curious how you think about it philosophically beyond the second half.

We haven't, really, beyond the second half.

I mean I don't know how long we'll continue to be in a what's historically a low interest rate environment.

But we're continuing to grow.

We're growing profitably.

We're expanding margins, even with low interest rates.

And if you assume that there's a greater likelihood longer range that rates go up rather than down, we stand to benefit.

Your next question comes from Scott Berg with Needham.

Congrats on your good quarter.

I guess just one question from me, briefly.

David, with your success up market, do you think that -- would you, I guess, would you attribute that to more just focus on these larger customers?

Or is there something in the product innovation path, maybe over the last 12 to 24 months, that's benefiting some of those larger deals and your win rates?

There are a few pieces.

The continuous calculation capability resonates tremendously well as employee population sizes increase.

Effectively, the fact that we continue to calculate the net earnings allows the payroll people to access the pay information during the active pay period, which gives them much more time to review the data and make any necessary correction, which yields a much higher and more compliant payroll.

So we start with a strength of product.

The second piece is that with Leagh joining the organization about 10 months ago, we changed our go-to-market strategy in the enterprise segment where we started focusing on a number of specific verticals.

And for each of those different verticals, we identified and quantified the value that our product delivers with inside that particular industry.

And we trained our salespeople and developed the appropriate marketing material to convey that messaging.

And we've continued doing that in a much more disciplined approach by bringing on more senior people with very deep domain expertise.

We've done that now in each of the different verticals.

The most recent one would be inside the government sector where we brought -- where we are bringing on board the chief of staff for the Minister of Innovation in Canada who obviously has very deep domain knowledge about the workings of government organizations, and we believe that he'll be very instrumental in making sure that we convey value correctly to that particular industry.

Your next question comes from Richard Davis with Canaccord.

In terms of kind of how you think about expanding the product, how do you think about the demarcation between kind of your core expertise in HCM and kind of what's called skill development or training, e-learning and those kind of things?

Is that something that's just too far afield?

Is it something you should partner?

Is it something that over time, you should develop because well-trained employees obviously are more engaged, stick around and are more valuable?

So I'm just trying to kind of think about where that line blurs and where it doesn't blur.

So I think you're aware that starting in 2015, we started to expand the product feature set into very rich talent capabilities.

Today I believe we have probably the widest platform on the market in terms of full HCM capabilities.

We have very successful recruiting.

Our recruiting leads to employee onboarding.

We have strong performance management, compensation management.

Last year, we launched learning management.

Related to learning management would be the content delivery for the actual customers, and in time, we do see that as an area we can expand into.

And then a quick follow-up, you're one of the few HCM firms with kind of native mobile functionality.

Am I able to get some of those learning modules mobile?

I assume the answer is yes, but I just wanted to check on that.

Yes.

If you go to the Apple or the Android store, you'll see the Dayforce Learning mobile app that's now available.

We have it as a separate mobile app because of the fact that people often like to go through the content when they're in subways or areas that don't have connectivity.

So there's a local data store that we use for those particular apps.

By the way, just speaking on mobile apps, we believe we've now exceeded, I think it is -- is it -- god, I think it's over 1 billion mobile transactions on our native mobile platform over the last -- I think we passed it in the last quarter.

So these mobile apps are used constantly.

And if you look at our ratings on the Apple store, the Android store, I believe our product ratings are around 4.4, which are very, very strong as well.

There are no further questions at this time.

This concludes today's conference call.

You may now disconnect.