Dayforce Inc (DAY) 2022 Q1 法說會逐字稿

Good evening, everyone. My name is Matt Wells and I'm the Senior Director of Investor Relations at Ceridian. I would like to welcome everyone to the Ceridian First Quarter 2020 Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded. Joining me on the call today, we have Co-CEOs, David Ossip and Leagh Turner; CFO, Noemie Heuland; and EVP of CorpDev and Investor Relations, Eric Zimmer.

Before I hand the call over to David, I'd like to remind everyone that our remarks may include forward-looking statements and projections. These forward-looking statements are based on management's reasonable assumptions and current beliefs. There are a number of factors that could cause Ceridian's results to differ materially from our expectations. You can learn more about these risks in the press release and shareholder letter we issued earlier this afternoon on our website and in our SEC filings. Ceridian undertakes no obligation to revise any forward-looking statements made on this call, except as required by law.

With that, I'll turn the call over to David.

Thanks, Matt, and good evening, everyone. Thank you for joining in the call today. Before we go into Q&A, I want to spend a few minutes highlighting the quarter. We had a strong start to the year, executing well across sales, implementation, customer support and product, and technology. Dayforce recurring revenue, excluding float, grew by 31% year-over-year, exceeding the high end of our guidance range. Total revenue grew by 25.1%, and adjusted gross margin on recurring increased by 220 basis points to 75.5%. Adjusted EBITDA margin exceeded the high end of our guide by 347 basis points.

On the customer side, we added 175 customers and now have 5,609 customers live on Dayforce. At the same time, the average recurring revenue per Dayforce customer grew by 10%. And on new sales, we saw over 35% of customers acquiring a full suite.

Dayforce Wallet continues to do well. We now have sold over 1,100 customers on the Dayforce Wallet, of which 530 are live. Registration rates have increased to 36% across the eligible employees. Float balances also increased by 17% year-over-year. So overall, a very strong quarter.

On the macro environment, our business remains resilient, and we continue to benefit from healthy employee indicators and rising interest rates. And as such, we are raising our fiscal year 2022 guidance for revenue and profitability, as detailed in our shareholder letter.

With that, I'd like to turn the call over to Matt, who will guide us through the Q&A.

(Operator Instructions)

First question from Siti Panigrahi from Mizuho.

Just wanted to dig into the Wallet. So it's almost like 2 years, maybe first year was the trying period, trial period and now full year. So it's good to see the momentum and even registration, 36%. Just wondering what's -- how is it trending compared to your expectation so far? And also, what sort of feedback you're getting on the new products like cash back and rewards you've introduced? And what should we expect in the remaining -- remainder of 2022?

Siti, to answer your question, it's tracking well against our expectations. Also of note is that 89% of our new U.S. customers are attaching Wallet, which is obviously an increase that we've seen year-over-year. We've seen good reception from the cash back partnership that we have with DOSH. Also within the quarter, we added support for minor employees, which allows us, obviously, to deliver the solution better to hospitality and retail.

Okay. And just a quick follow-up to EBITDA margin, seems to be pretty good this quarter. Is there any kind of onetime thing? Or how should we think about the remainder of the quarter given how some of your realigning workforces?

No. Siti, I'll start by just saying that we've raised guidance for the year. We've raised both the low end and the top end by $10 million. I'll ask Noemie to add a bit more color to that.

Yes, sure. So for Q1, Siti, we had a couple of things. We've increased our cloud recurring gross margin that actually exceeded our expectations. Last quarter, as you remember, we've discussed that we took some actions to rebalance some of our workforce into our shared services center in APJ. We've executed that very well. We've gained efficiencies on cloud recurring gross margin, and that will continue throughout the year. That's very important because that also helps us scale in the long term.

We had also taken a little bit of an upside on Bureau. We had a better volume than expected in our tax and payroll in North America. So that flew also directly to the bottom line. And we had a little bit of float upside as well. So those are the main things that happened in Q1.

Of note, we also continue to make some investments in our product and technology as well in Q1, and we'll continue to do so in the second half of the year in Q2 as well.

Next up, we have Jared Levine from Cowen.

Can you discuss how 1Q bookings performance came in versus your internal expectations, including contributions by employer size segment and geography as well?

Leagh, do you want to take that one?

Sure. I mean, here's what I'll say. Q1 was an excellent bookings quarter, really solid result, and really robust customer demand. Solid growth in the North American mid-market, an excellent quarter in EMEA and a really good out-of-the-gate performance in APJ. As David said, more than 35% of our sales in the first quarter were full suite. And we are seeing continued innovation on the platform and therefore, ability to go back into the base and continue to sell. And we're seeing that our retention rates and Net Promoter Scores remain very, very high, which makes for a very warm base to be able to sell back into.

The pipeline for the full year, rolling 2 quarter and rolling 4 quarter, is very strong, and our win rates have gone up pretty demonstrably year-over-year as a result of a number of things, one of which is our consistently building SI ecosystem and the referred pipeline that we're seeing from that ecosystem, which is well known by the SIs and, therefore, drives greater win rate. So a really solid bookings quarter overall.

Okay. Great. And then in terms of sales force productivity, is that trending higher? So is it basically improving sales force productivity as well as a healthy demand environment? It sounds like kind of no impact from any macro concerns, whether that be Russia, Ukraine or inflation, but just be great to hear your color there.

None at all. The sales force executed well across geo and across the segment.

Next up, we have Matthew Pfau from William Blair.

Great. Nice results, guys. I wanted to ask on the full suite attach that you're seeing. How does that 35% compare to what you've seen historically? And are there any major differences in attach by client size?

We've seen the attach rate go up quarter-over-quarter for quite some time now. So it's significantly higher than where it was, say, a year ago or 2 years ago. And we will continue to see that do well. We're doing particularly well in our majors market, which goes up to about 3,500 employees. And I would say, when I look at us competitively now on the talent side, we are very strong relative to both the ERPs and more of the pure-play players.

Got it. And so a follow-up on the talent intelligence suite and some of the functionality you released, is that a major discussion point in some of the full service wins that you're seeing there? And is that a big differentiation point relative to some of your competition?

Again, as you know, we differentiate by having a single database, a single application, one user experience within the system. And so when we actually compete, we are differentiated, I think, from all in terms of our end-to-end capability across core HR, talent and payroll.

Next up, we have Kevin McVeigh from Credit Suisse.

Sorry about that. Congratulations on the results. Can you give us a sense of where you beat expectations in the cloud recurring gross margin in the first quarter and really nice leverage coming through the model for the full year, but just relative to expectations in the first quarter?

Yes. Look, we performed very well. What we're finding is that the robustness of the technology, which is reflected in the very high customer retention rate as well as our Net Promoter Scores, has led to a decrease in inbound core volumes and so lower costs. We're also seeing more efficiencies across implementation and obviously, the parts of hosting and customer support.

The only other thing I would add is we've spent the last 8 years building customer communities where customers can self-solve issues that may come in -- may have previously come into our support center. And so as a result, we have a really sustainable way of solving customer needs that's been built by a really good team.

Great. And then just a quick follow-up. Of the 1,100 customers that are signed on the Dayforce Wallet, I think in the shareholder letter, you said 530 were live. The incremental 570, how should we think about the sequencing of that in terms of them going live?

It's -- there's very real magic to the sequencing of the actual customers. As you know, we typically try to take our payroll customers live on a quarter end in the U.S. And in Canada, it will be more monthly or will be more monthly in EMEA and APJ. When it comes to Wallet, it really comes down to how quickly the customers want to move. Most customers start off with a smaller group of employees, which they tested out, roll it out and once they get comfortable they then extend it to the full population.

Next up, we have Mark Marcon from Baird.

Congratulations on the quarter. Wanted to delve more deeply in terms of the bookings that you highlighted in the shareholder letter. I was particularly impressed by the government of Canada. It looks like that is progressing well. Wondering if you can give some color there as well with regards to the magnitude of the international wins that you're getting. It looks like you're making really nice progress from that perspective. Wondering if you can comment about what the competitive environment is like there? Who the takeaways are from? And what the scope of the services are that the international clients are taking on? And then I've got a follow-up.

I'll start directionally, and I'm sure Leagh will add a lot more color. The government of Canada is a project appears to be progressing very well. The contract value was increased by CAD 21 million inside the quarter. So I think that's a good reflection of the progress that we're making over there.

On the global side, I think I'd be amissed if I didn't talk about the expansion we've had across native payroll. Within the quarter, we started releasing Singapore major payroll, which is now in a pilot with a few charter customers. And as well with Project Unify, which is the Excelity and the Ascender pay engines. We are now supporting countries in Indonesia, the Philippines, Thailand, Malaysia, South Korea, Taiwan and Hong Kong. So we've made just tremendous progress on the global side.

Two data points on the global side. One, our products are very competitive to the players inside those geographies. So we are not only selling to North American companies that have populations in the EMEA, APJ, LatAm, Brazil and Caribbean marketplaces, but we actually compete head on with the local players. And because of the investments we have made in core HR and talent and workforce management, our product, obviously, is very, very competitive inside the market.

In terms of percentage of ACV, Global is now becoming quite considerable. I believe that the -- of the ACV numbers, the sales number within the quarter, about 20% of it was outside of North America.

Now Leagh, do you want to add any color to either global or to [GOC]?

Yes, I think the only thing I would add is the way that we think about global is as we expand, there's an opportunity to do 2 things, Mark. We can sell locally. So to customers that only have an employee base in the locale that we're servicing, or we can sell to global multinationals with lots of different geographies. So our global expansion allows us to unlock TAM in both of those indices simultaneously. And you can see that in our shareholder letter.

So what I would say is in the shareholder letter, we call out the longest-standing retailer based in EMEA, with 10,000 employees, they bought the full suite. They're EMEA-based largely, and they're going to roll it out to their entire population. A global online gaming company in the U.K. with operations across 10 countries and 7,000 employees can also be serviced by us. When you shift to some of the larger references that we noticed -- that we noted, excuse me, in the shareholder letter, the second largest global consultancy in the world chose Ceridian to deploy to their North American population of 52,000, but with opportunity to expand globally.

And then as we referenced under our customer section, the world's largest leading global business information company chose us to service their North American population first, which went live in less than a year, and they're now rolling us out to 16 countries over the course of the next 14 months. So we have an opportunity to do those 2 things as we grow globally, which is a really important marker to our success.

That's fantastic. And I had a question for Noemie. Can you talk a little bit about the impact in terms of rising rates? What did you already bake into the guidance? And what could potentially be a further addition as we think about the Fed's discussions this afternoon in terms of rolling out short-term rate hikes?

So we've raised our guidance, as you saw in cloud revenue and total revenue to account for the near-term rate environment. So we've accounted for the recent hikes that we saw, including today. And we also have to take into account our laddered portfolio. So remember, there's a -- we have half of our portfolio that's invested in liquidity and the other half is invested in longer-term instruments. So there's not -- there's a little bit more timing until all those interest rates benefit [more floats], but we reflected what we believe is still years of that interest rate environment.

Next up, we Robert Simmons from D.A. Davidson.

First, I was wondering what impact are you seeing from higher inflation rates? Are you able to pass some of that -- in terms of price increases to customers presumably at renewals?

Yes. Majority of our contracts, we have CPI arises inside. So we benefit over time from an increased inflation.

The sound quality is a little off. I think maybe there's something wrong with your microphone or speakers, something like that. I kind of half-hearing you at times.

But second question, the severance charges in the quarter were pretty high. I guess can you talk about kind of what kind of changes you're making? And do you think you've got things pretty much set at this point?

Yes. So let me take that, and maybe you can add some color. So first of all, as we've discussed before, now we expected we had rebalanced our workforce, especially in the support and operations into our shared services center in APJ. We've expanded our support center in Manila. We've done that quite successfully. We had very good hiring trends over there. So that has helped us be more efficient and gain scale in the cloud recurring gross margin, as we've mentioned.

We've also done typically what we do at the beginning of the year. We've also performance managed and look at our existing sales force as well as resources in the product technology group and looked at performance management typical -- as you would expect us to do every beginning of the year. So that's the other part of it.

Next up, we have Pinjalim Bora from JPMorgan.

Congrats on the quarter, I'm just sitting in for Mark here. David, I have a question on Wallet. How far along are you with respect to the original vision of the product? Because I remember it was a pretty grand vision with respect to the Dayforce identity where employees will be able to carry the Wallet across different organizations. Help us understand where are you in that journey?

And maybe just the unit economics that you're realizing on Wallet at this point.

Yes. So we're very happy with the traction we're getting with Wallet and the Wallet capabilities. I also would say that the Wallet is a very robust system. In other words, we've moved a lot of money very reliably over the last about 18 months to 2 years. In terms of the full vision, we are actively now building that. And I would expect it to come to market late next year.

Later this year? And we'd expect more revenue...

Late next year, sorry.

Late next year. Okay. Got it. And the second question about sales hiring. Help us understand where are you with respect to sales capacity for this year given the tighter labor market?

I would say the sales organization is near capacity now. So we spent a huge amount of time in Q1 doing what every organization does in Q1, which is setting their go-to-market, making the changes that we believe were required in order to unlock the year. And we went on, not only -- to Noemie's point, we performance managed the sales team appropriately, which one should do every year in a healthy sales organization, and we hired the backfill appropriately and of higher quality, in our belief. And so as a result, have a really great go-to-market setup for the full year.

Next up, we have Bhavin Shah, Deutsche Bank. Bhavin?

Okay. We'll circle back. Next up, we have Dan Jester from BMO.

Just conceptually, how should we be thinking about in a higher interest rate environment and how you fund the Wallet? And any sort of puts and takes we should be thinking about from that perspective?

In terms of the actual Wallet, as the interest rates go up, the basis points do go up as well. But if you take it at a 25 basis points, that amounts to probably about, I don't know, 7 basis points, the amount of time that's outstanding. So if it goes up by 1% it would be 28 basis points type of thing.

Okay. And then with regards to the international commentary, sounds very positive. I didn't catch how much of that was net new versus conversions from some of the acquisitions made over the years. Can you just dive into that, please?

They were net new.

Did you hear that? I don't know if we're a little choppy on this end. David said, they were all net new.

Okay. Great.

So next up, we have Josh Reilly from Needham.

Maybe one on the macro here. When you're looking at the business outside the United States, we know that the U.S. has been pretty resilient here since the Ukraine war started. But have you seen any divergence in customer confidence outside the U.S. since the war has started specifically?

We have very little exposure to Russia and Ukraine. I was in London probably about 4 weeks ago, and I didn't see any impact from the war, as strange as that might be. So we continue to do very well in EMEA, and in the U.K. and Ireland.

Got it. That's helpful. And then you mentioned in the shareholder letter that the Dayforce card continues to be used in average of 23x per month by customers were relevant...

25x.

Oh, is it 25? Okay. Sorry, I thought that was 23. Curious, is the mix and/or size of these transactions changing now that the economy is reopening?

No, I haven't looked at that in particular. It still seems to be the same largely grocery, fast food, restaurants, gas and convenience, followed by ATM withdrawals. The average withdrawal typically is about $30.

Next up, we have Raimo Lenschow from Barclays.

I'm going with the Black Tuesday as well. David, I wanted to ask about the Wallet in terms of it offering a differentiation factor for you in sales pitches. How is that playing out? And what do you also expect from the industry there in terms of trying to come up with copycat products to kind of say, oh, we have that as well. Can you speak to that, please?

Yes. Look, Raimo, it's very strong. As I mentioned, in the U.S., we're seeing an 89% attachment rate for Wallet to new sales, which talks about, obviously, the perceived strength of the product and the value that it brings to the employees of our customers. We have seen the other players in markets bringing kind of bolted-on solutions into the marketplace.

The major difference is with us, there's no reconciliation that's required, and there is no loan made to the employee. So in all of the other solutions, the card vendor effectively gives a loan to the employee for the number of days outstanding. We don't do that. We do a true payroll where we do the remittances at the federal and the state level the very next day. So it's a truly compliant type of solution.

The other difference is we do not charge any direct fees to the employees of our customers. We don't believe in doing that. We think that would be morally wrong, whereas the other solutions do require membership fees or fees to use the actual Wallet.

Okay. And then if I may, one follow-up. As you start winning more upmarket, you have bigger accounts. What do you see in terms of customer interest, customer appetite to kind of revisit their HR systems? Going back to that whole theme of back office and realizing like, oh, my front office systems look really good, but my back office is very dated. You have more success upmarket now. What do you see in terms of customer conversations there? And congrats from me as well.

Raimo, I would start off by saying with the government of Canada, what we are piloting and testing is core HR, talent, payroll and workforce management. And as you know, if that goes forward, that's for well over 100,000 people.

In the major market in the enterprise space, we have a very, very healthy attachment rate and upsell rate to the customers where we do, do the core HR as well as the talent modules. In EMEA, we typically start off with core HR and talent because, as you know, those are more demanded than probably payroll in that particular market. And probably the same across APJ.

We now are getting traction in our Gartner positioning means that we are being considered for the back office pieces as you would say, the core HR, but as well as some of the talent components.

(Operator Instructions) There are no further questions. Thank you all for joining us on the call, and we look forward to speaking with you in the future.

Thank you, everyone.

Thank you.

Thank you.