Dayforce Inc. — 2023 Q2

Good afternoon, and thank you for joining. Welcome to Ceridian Second Quarter 2023 Earnings Conference Call. I'm Matt Wells, Head of Investor Relations. And on the call today, we have our co-CEOs, David Ossip and Leagh Turner and our CFO, Noemie Heuland. [Operator Instructions]

Thank you, Matt, and thank you all for joining us today on our second quarter earnings call. Today, I'll discuss our strong second quarter results, continued commitment to innovation in the HCM space and provide an update on our raised full year outlook. Leagh will provide more information on sales wins, successful customer implementations and continued scale across our organization and Noemie will add detail to our quarterly performance and updated full year outlook.

Thank you, David. Echoing your comments, I'd like to underscore the strong momentum we are seeing throughout the entire business and the reason we're leaning into innovation across the Dayforce platform. Propelling both growth and innovation is this once-in-a-generation moment, driven by 3 intersecting opportunities that we are uniquely primed to take advantage of and which customers are reaching to us to help them through.

A multinational DAX 30 chemical and consumer goods company with 60,000 employees globally is continuing its very successful implementation with Ceridian, expanding its Dayforce deployment to 20 countries and approximately 27,000 employees to date. A leading global pet care conglomerate with 30,000 employees, launched Dayforce to its U.S. and Canadian workforces to help standardize operations and reduce turnover. And a luxury automotive manufacturer, piloted Dayforce HR and Workforce Management to a large group of their employees in Germany with plans to expand to its full German workforce of 10,000 as we move out of charter in early 2024.

Leagh, thank you. Our second quarter results are another proof point of the strengths of our business. I'm happy to report that all Q2 metrics exceeded guidance, giving us confidence to raise our outlook for the remainder of the year. Dayforce recurring revenue grew 39% at constant currency, underpinned by Dayforce recurring revenue ex float growth of 28% at constant currency. Growth here reflects stronger lives of larger customers and sustained employment volumes.

So we'll take our first question from Kevin McVeigh of Credit Suisse.

Great. And Noemie, congratulations, and thanks for your contribution at Ceridian. I wonder if we could go back to the guidance, just a really, really nice outcome, boosting the revenue and really the outsized EBITDA. Is that EBITDA -- does it reflect, David, I think you mentioned a 10% increase in productivity as a result of AI. Or is that something that would be incremental as we think about it in the back half of the year? And again, very, very strong results. Does it factor in any macro change at the margin? Or just any thoughts around that, again, a really, really nice outcome.

Kevin, thank you for that. Let me just unpack that question. First, we have flowed through the full beat into both our Dayforce recurring ex float and to the EBITDA. And to give clarity on that, we are raising the Dayforce recurring revenue ex float by $10 million, which is the combination of both the Q2 beat and the Q1 beat. So not only have we flowed the Q2 beat through, we've flowed the full half 1 beat throughout the year.

And our next question comes from Mark Marcon with Baird.

Noemie, it's been a pleasure working with you. Congratulations and best wishes for the next stages in your career.

On -- the macro side remains positive, and we remain optimistic. Regarding Q3 to Q4, there's typically some seasonality between the 2 quarters, and that would be indicative of that.

Great. And then David and Leagh, you guys are obviously investing globally across the board, and yet the margins are expanding nicely. Can you talk a little bit about what that -- how that reflects on the scalability and the profitability of the business with existing clients? Because I would imagine that, that really suggest that what you're doing with your current clients that have been in place for a while, the profitability is really increasing substantially.

Thanks, Mark. If I look at the gross margin on Dayforce recurring, which is 78.1%. It's up 174 basis points year-over-year. In terms of global, as you know, Dayforce was designed from day 1 to be global. I would say we have about a 10-year lead on any competitor from a global perspective. And I think the results reflect that we are operating at scale globally with a full global operational model. I think Leagh could add a bit more detail to that as well.

Yes. The only thing I would add, just anecdotally, is that -- when we look at Q2, the results across the portfolio were very, very even, in it every region performed exceptionally well. And you would also have noted, Mark, from our sales win commentary, both in the prepared remarks and in the press release that we're now selling very large transactions in every region in which we operate, both full suite and land and expand. And so we will continue to do that. It's the reason that our add-on sales back to the base continue to be in the 30% range. And things are working really well as it relates to our entire global footprint.

And our next question comes from Siti Panigrahi from Mizuho.

And Noemie, my best wishes as well. We are going to miss working with you.

So great questions. The best metric, I think we have in terms of momentum upmarket. If we look at the number of deals that went live in the segment above 6,000 employees, it is up 125% year-over-year. So we're seeing significant momentum upmarket and many of those are global accounts. In terms of global payroll, we have developed an extendable payroll engine that is deployable across most of Africa and across the Middle East. We already do have Dayforce customers in countries like Kenya and Mauritius and South Africa.

Okay. That's great. And then David, those large deals you signed last year, how is the go-live tracking so far?

It's tracking very well. You see that again, if we look at the metric that I just spoke about, the number of deals -- the number of customers that went live in the 6,000 and above segment, which is the largest segment that we actually track and disclose is up 125% year-over-year. And I would say sales performance in the quarter in large enterprise and enterprise were both strong.

I mean I just echo the 17%. Year-to-date deal size is up 17%, which is exceptional. And perhaps I'll say rolling 4 quarter pipeline is very strong. We're set up for a very strong back half and we're really pleased that Sam has decided to join us. He's an excellent addition. He's an exceptional technician and he's done a really good job of getting his feet in, really understanding the business. We'll make a few tiny tweaks to the go-to-market in order to get things to work even better but I would expect that we can continue to accelerate with his addition.

Our next question comes from Michael Turrin of Wells Fargo.

Great. Appreciate you taking the question. I just given the commentary on the macro continue to point to resilience, and it's maybe not the norm. I'd just love to hear if you can compare and contrast any differences you're seeing across regions or market segments. Is the resilience you're seeing, you think at all a factor of your move upmarket and some of the larger customers that you're addressing?

Michael, as Leagh pointed out, we believe that we'll have a strong second half on top of a strong first half. We saw employment levels come in above our expectations in the quarter and in the first quarter of the year. I believe what we've been saying about the macro is positive and optimistic and has been consistent over the last number of quarters.

Just -- I mean, maybe a little bit more from Leagh on the go-to-market side. The appointment of Sam sounded like something you couldn't pass up. You've got some partner relationships that are referenced that are broadening out. Can you just speak to the signals that you're seeing some of the go-to-market investments you're prioritizing and just put some more context around the moves you're making.

Yes, for sure. I mean, a little bit of digging would tell you that some of us have some past experience with Sam. And he's just -- as you said and I said, he's an exceptional addition and we just couldn't pass him up. As you know, not only does he have great, let's call it, sales and go-to-market and customer experience, but he's also excellent at analyzing and assessing how to grow a sales ecosystem.

And our next question comes from Dan Jester of BMO.

Great. David, can you just remind me about how you're thinking about the conversion of some of your past acquisitions to Dayforce and how we should be thinking about that trajectory going into next year?

Yes. It's -- if I look at the APJ side of the actual business was -- inside the quarter, we had about $21.8 million of revenue. We now have effectively classified the accounts into green, yellow and red in terms of ease of movement towards Dayforce. Alongside that as well, as you know, we look at upselling them onto the talent and the workforce management component as part of that particular journey. We're beginning to start the migrations or position of the migrations right now and will continue for a number of years.

No, I think you covered it.

Great. And then with regards to implementation and sort of the push to more partners there, it was great to see that you had a partnership with an integrator to take a customer live. Maybe just an update as to kind of how you think that, that is going to progress again over the next year. At what stage do you think partners do a big -- greater chunk of the implementations, especially as you move increasingly upmarket.

I'll grab that by saying -- first of all, great question. Thank you for it. As I said, our partner ecosystem, which started at like a standing start 3 years ago has now progressed very significantly. I would say when we look at our sales wins, I don't know, 2/3 of them have been influenced by a partner in some regard and that spans virtually every single segment in which we operate.

One thing I would add to that is if you actually look at the number of projects that were kicked off by SIs in the quarter, it grows to 35% on a global basis, which is up obviously significantly year-over-year. You'll also see that reflected if you do the breakdown of our total revenue line, you'll see that we're shifting the professional services now more towards the actual SIs. And as you go forward, you would expect less and less of our revenue -- total revenues, fee from professional services as our hope would be that we focus on becoming a scalable software company, leveraging our SI partners to do the majority of the implementation.

And our next question comes from Raimo Lenschow of Barclays.

If you look -- the highlight for me this quarter were like the wins with customers with kind of thousands of employees, which is kind of really a confirmation for the direction you are going there. What are you seeing in terms of the early-stage pipeline or the willingness of people to engage with you now like reference customer wise, you should have like a lot more. What do you see in terms of like considering the cycle and everyone is worried about what's going on in the economy versus kind of the success you're having there? Like what's the nature of the conversation there?

Raimo, thank you. But we're very focused effectively on delivering quantifiable value to the customers. And in today's environment, that does come into focus, many of the organizations that look to us are looking for HR digital transformation, IT simplification, a movement towards those shared services and globalization, effectively improving decision-making through the use of AI, generative AI and just general, very powerful analytics. And obviously, we're looking at the overall experience as we move to a more simpler system that runs obviously at scale and runs globally. And that, as Leagh pointed out, has led to a very robust pipeline, I think, very good execution within the first half of the actual year.

The only thing I guess I would add is just -- thank you, Raimo, for pointing that out. You would know a couple of years ago, we said that we were going to meaningfully push up into the enterprise and large enterprise space. And as you noted, every single customer that we listed either in prepared remarks or in the press release, are many, many thousands of employees. It's a real testament to us setting our mind to do something, saying we would do it and delivering.

Yes. And then, Leagh, one for you, like, obviously, having tiny tweaks with like Sam joining, like tweaks is always something that makes kind of people a little bit nervous as it happens like more in the middle of the year. Can you think -- is this like kind of a little bit more moving more enterprise, getting more strategic? Or how should we think about that?

Thank you. I mean I would say the following. I think that you prepare a thorough go-to-market and you launch it at the beginning of every year, together with sales SPAGs and quotas and any changes you might make to segmentation or territories. And it is very normal in the enterprise SaaS space to make minor modifications at the midyear point, which is all we're considering doing.

Our next question comes from Steve Enders of Citi.

Okay. Great. I didn't want to ask on the comment about deal sizes being up 17% versus last year. I mean, good growth there. I guess how should we be thinking about the components of that growth? Is it primarily being driven by these larger seats and moving more upmarket? Or how much is the expanded suite and more modules helping support that growth there?

It's very balanced. If I look at the average number of modules across the customer base, it's up about 4x relative to 2021. So we're obviously seeing more products being used, higher module density across our client base. But as well, if we look at the number of go-lives in the upper market segment it's up 125% per year. And for us, it's very much about having a durable growth strategy that runs for a very long period of time.

Okay. Got you. That's helpful. And then on the guide, I think last quarter, you talked about seeing upside from employee levels and that not necessarily being rolled forward, I guess, was there any change in how you're thinking about those components to the current outlook and kind of what you saw this quarter on that front?

Yes. So in substance, what we've done is we've removed the hedge that we had in Q1, you may recall we talked about the approach around employment levels, and now we feel very confident with what we've seen in Q1 and the second quarter. So we flew the entire beat of the first half through the second half.

Our next question comes from Matthew Pfau of William Blair.

Great. One question for me on the global payroll efforts. David, you mentioned that you're well ahead of competitors here. And I think clearly, some of your competitors have shown more interest in the space recently. Maybe you can discuss some of the challenges that you believe your competitors will face when trying to replicate what you have built? And how do you think your offer differs from what some of your competitors are doing?

That's a very good question. There's a lot of complexity in terms of going global. It starts with the global HR model that you need to have in place. I don't believe it is possible to take a U.S. product and retrofit it to be global. There are certain data elements that have to be tracked and not tracked on a global basis. There are elements when it comes to the actual cloud environment that you're deploying and where the data actually resides.

Our next question comes from Alex Zukin of Wolfe.

Thank you for the question, Patrick. I think there's 3 things I can tell you about the work that we've been doing with the Canadian government, which we call next gen, which they call next-gen. The first thing I would tell you is that the testing results have continued to be exceptional. And we have concluded the testing.

Our next question comes from Robert Simmons from D.A. Davidson.

So we've seen some consolidation in the partner ecosystem with larger partners buying some kind of regionals. Can you talk about what you're seeing there, would we -- more of that to happen and kind of the puts and takes of that dynamic?

Yes. So it's very encouraging. As you know, you saw PwC purchase People Force in the U.K. People Force was a Dayforce consulting organization. And I would expect that PwC purchased People Force to handle the demand that they're seeing for our product. Likewise, in Australia, you saw -- I think it was the Deloitte purchase Enforce Consulting also Enforce is specifically Dayforce implementations in APJ and again, I would take it as a sign of very strong demand and the big SIs building out their practices.

Got it. That makes sense. And then can you update us on the Ideal Talent Marketplace? Are you still on track to launch that this year? And then any kind of learnings you've learned so far from work you've done on it to date?

We remain on track. We will be showing more of it at INSIGHTS. We would expect to go live with the first charter customers this year.

Our next question comes from Bhavin Shah from Deutsche Bank.

I think part of it is what Leagh actually spoke about, was the change in go-to-market and segmentation of the actual sales force, having a dedicated overlay team going back to the base. We're quite meticulous about this. We map out the white space across all of our actual customers. We determine the right time that we can actually approach them. As we look towards a long-term and durable growth strategy, we do believe that sales back to the base has to be a big part of our success as it has been with other scaled software companies. Leagh, anything you would add?

I guess the only thing I would add is that our retention rates continue to hold, which means that our customers are very happy with the level of service that they receive from us and the value that they receive. And as a result, happy customers buy more software.

Our next question comes from Jackson Ader from MoffettNathanson.

Great. I was just curious, when you look at some of these large deals heading through the pipeline or I should say, large go-lives coming at the end of the year. Can you give us a sense of what markers you either can or can't already see that say, yes, we feel really good about these or we might be able to tell in a few months' time, this isn't really a good sign. What are some of the things that you tend to look for as you head into those go-lives that mean that they are indeed going to hit in the fourth quarter.

This is not a business run on luck and chance. We have a weekly meeting, a service forecast call where we go through every account that is currently under implementation. For each account, we assign a risk of them actually pushing, any account that has a risk of pushing of more than 30%, we go into actual detail. When we actually look at the actual forecast, which we do on a quarter-over-quarter basis, we have a forecasted amount that we hold the sales group account -- sorry, the services group accountable for and has run very well. I mean we have Steve here as well. Steve anything that you would add from a color perspective?

All I would add is we actually have very good visibility. We have a very good understanding of what we expect to happen, and we have the ability, and we've shown the ability to accurately predict that. So in terms of our view for the second half of the year. I think it's based on a pretty solid foundation and experience, so we feel confident in it.

Okay. All right. Great. And then, Leagh, on the full suite penetration, so if half of the kind of new wins in this year are full suite customer base, like 40% or so. What kind of timeline do you try and build toward after maybe an initial deal that doesn't go full suite that you end up kind of building toward a road map to getting them to full suite customers.

Thank you. Great question. What I would say is done right, and we try and do this more and more consistently. We position a full suite right upfront. So we assess the full end-to-end white space in our customer, and therefore, the maximum value that we could contribute and if a customer decides to begin with a SKU or 2, they do it knowing what the total available white space and total available value is, which means that we have an opportunity to go back almost right away to begin talking about expanding the value, particularly so as we take those modules live, we prove that we're doing it on time and on value. You can imagine that customers are quite receptive to expanding their relationship.

That concludes our conference call for the night. Thank you, everybody, for joining us. We'll catch up with you over the quarter.