Dayforce Inc. — 2023 Q4

Thanks, Matt, and thank you all for joining us. Next to me, I have Steve who will review key customer go-lives and sales wins in the quarter. Joe, who will highlight platform innovation and discuss our acquisition of eloomi. And I'm delighted to welcome Jeremy back as our CFO. Jeremy will provide details to our quarterly performance and initial 2024 outlook.

Thanks, David. I am also truly excited for what lies ahead for Dayforce, our customers, our partners and our daymakers across the globe. Two weeks ago, we held our largest ever sales kickoff in Orlando, 800-plus attendees, 100 partner attendees, which was doubled last year, 10,000 hours of sales training, all focused on accelerating sales coverage and effectiveness in 2024.

Thank you, Steve. On the product front, we continue to invest in innovation that drives value through efficiency and productivity for our customers and their people. By leveraging the advancements around data and AI as well as delivering simplicity at scale, we released some key innovations in Q4 that provide quantifiable value for our customers.

Thanks, Joe. It feels good to be back. I'm proud of the way our team closed out the year. In Q4, we delivered Dayforce recurring revenue ex float growth of 29% on a constant currency basis underpinned by strong Q4 enterprise go-lives and healthy underlying customer trends. Tax modernization contributed about 440 basis points of growth as we completed the transition at the end of the year.

Thanks, Jeremy. I'd like to remind everyone 1 question and 1 follow-up, please. We have a pretty healthy audience today. Our first question comes from Kevin McVeigh with UBS.

Congrats on a good quarter. I wanted to start on a question regarding the longer sales cycles comments. I guess can you help break that down a little bit in terms of what you saw? Was this just a couple of deals that pushed maybe from Q4 to Q1, it was a significant amount of deals. You obviously called it out, so it was a little bit material, but I just wanted to try to think about the impact on both the year? And then was that the primary benefit for the January outperformance versus your plan?

Thanks, Scott, and nice to speak with you. First of all, it has no impact on our fiscal '24 guide. What we did see was a slightly more decision gains in Q4 coupled with probably fewer days with inside the actual month. Christmas vacation, as you know, started a bit early this year relative to the past. When we look at the start of the year, as you pointed out, we had a good January, it came in above our internal expectations for that particular month. And we also entered the year with almost 2x the coverage that we had at the beginning of last year. I don't believe that there is any change in the macro quarter-over-quarter. And we are obviously going into this year quite optimistic about the forecast for sales.

My follow-up is actually for Jeremy, welcome back, looking forward to working with you more here. You come into the CFO role with a unique view. Obviously, I've been with the company for an extensive period before. But how do you think about driving additional efficiencies and maybe leverage in the model versus your prior experience with the company. Is there anything that you think about doing maybe differently in the current position of CFO than maybe did before that might be interesting for investors to think about here going forward?

Yes. Thanks, Scott. It's good to talk to you again. And as I said, it's good to be back. It does kind of feel like coming home here, especially with an executive team that I'm largely familiar with, the finance team that I know the key players very well, all the Board and investors that I also know really well. So look, I think there's a number of levers that we have to continue to grow this business. I think since I've been gone, I've been very impressed with some of the big rocks that the company has moved. We've dramatically moved up into the enterprise space, and we called out some of the metrics there where we've increased our go-lives and enterprise customers 64% year-over-year. We've talked about partnerships and some of the progress we've made with global SIs there. And I'm also thinking about global expansion, and we've done some amazing things in the APJ and EMEA region.

Our next question comes from Siti Panigrahi with Mizuho.

Great. And Jeremy, welcome back. So it's good to see this 20% plus kind of growth guidance for your organic Dayforce recurring. That's probably -- you're growing faster than other payroll peers. So my question is like you have been adding so many modules since IPO, and even Joe's team relentlessly kept on adding more features there. So how big is this growth opportunity to now cross-sell these modules to your base to deliver the sustainable growth? And what's your go-to-market strategy to go after the base because most of them are displacement opportunity. So you have to displace the existing vendor.

Thanks, again. Great to speak with you. It's a very valid question. So when I look at the overall company, what I can say is that our client retention rate is probably several percentage points higher than anyone else in industry, including the ERPs. It's 97.1%. When we, though, look at our sales back to the base, as a percentage, we were quite low relative to industry. So this year, we brought on a very senior leader to head up the customer-based sales team, and we're expecting to take the sales back to the base, up by about 5%, relative to last year.

And just a follow-up. If I look at Q4 [indiscernible], that's kind of this organic Dayforce recurring revenue growth came in line with expectations. Is there anything you want to point to -- is that the employment level or any go live? Also, if you could touch upon your so many large deals was scheduled to go live. Any update on that?

Look, as you know, we guide very narrow. [ Say ] you expect as we get to the end of the year, the numbers should come within guide, which it did, which I think is a reflection of a well-managed and very predictable type of business. As Steve called out, we were very happy with the go-lives that we saw in the quarter. In fact, they came in ahead of what we had internally budgeted. It's also impressive given the fact that we now have at least half of the deals that we're implementing run by the system integrators where they're priming actual implementations. And that, I think, is a reflection on the robustness of the software that it's not only us that can implement that we're finding that our system integrated partners are able to implement and to implement predictably be on time, which I think is a very good testament. But Jeremy, anything else that you'll call out.

I think you said it nicely. The only thing I'll add is you saw us increase guidance across throughout the year in Q2, Q3. So I think we feel really good about the quarter that we had. And coming in line with guidance, I think, is on a tight metric like that speaks to the visibility that we have into the business and the accuracy of the model.

Our next question comes from Dan Jester with BMO.

Maybe a couple for Steve. First, can you maybe double-click on any of the go-to-market or partner changes that you're really excited about for 2024 and then secondly, I appreciate the update on the government of Canada process. Can you give us an update in terms of the road map for next steps as they assess Dayforce more broadly?

Yes, happy to answer both of those. Let me start with your second one first. So Government of Canada is a significant step. They put it out in a press release. They have determined that our solution is technically viable, which is a result of many multiple years of a pilot proving it at all sorts of complexity. The next step is a continued process on that. I don't want to get too far ahead of where they're at, but we're continuing to work with them to define what are the next steps in rolling that out over the next couple of years here.

And then maybe a quick one for Jeremy. On your commentary about a little bit more conservatism in the back half of the '24 guidance. Can you just elaborate on that a little bit, what's driving that conservatism? And if there's anything you'd call out from a seasonality perspective as we think about the quarters for '24.

Yes. Good to speak with you again, Dan. The comment in my scripted remarks was specifically around employment levels and employment levels moderating in the back half of the year. Visibility there is probably where we have, obviously, the least. And so we're being a little bit more conservative on expecting any upside there. As you know, I talked about this before, but we have a lot of visibility into our numbers as we head into the year, and we feel confident in our guidance.

Our next question comes from Mark Marcon with Baird.

Jeremy, great to work again with you. Looking forward to that. I'm wondering if you can talk a little bit more about one of the newer modules. The HR service delivery. Sounds like it could be really promising. Can you elaborate a little bit there in terms of which point solutions you could be going after? How big you think that TAM is? And what characteristics does the Dayforce HR delivery model have that is superior to some of the incumbents that are out there that have been doing relatively well.

Mark, good to talk to you again, and thank you for the question. HR service delivery has grown as is important to the overall HCM suite to deflect questions and provide a knowledge base so that customers can get their questions answered when they have questions around their employment when they have HR policy questions or compliance-related questions. And so it has grown. There are a handful of point solutions that have grown over the last decade in the HR space. And traditionally, it was a bolt-on.

Marco, one thing in terms of advantage, other relative to the others. The central part of our experience to employees and managers is the Dayforce Hub experience, which in itself is a content management system, which means that as organizations build their hub experiences by loading up documents, say, for example, opportunity policy to the actual platform, we can index it immediately and make it available through what we call intelligent search. And through the intelligent search, if someone were to say, "hey, can I take this amount of time if the search doesn't respond with the sufficient amount of information," we can create that service ticket for the individual. And so I do think from an integration perspective or experience perspective, the fact that we are one with the employee model, one with the actual experience gives us a leg up relative to the competitors.

The single experience is really powerful to highlight David's point to. And when you add on what we're doing with Co-Pilot, you can actually refine your question down, and you're seeing that over and over again from our customers, wanting to leverage technology to drive efficiencies and productivity in the workforce.

That's terrific. And then with regards to a couple of things that you mentioned earlier. With regards to the government of Canada, I think at one point, you mentioned rollout over the next 2 years. So are we to take -- are we to take that comment that essentially, not only are you technically viable, but there is in fact, a plan to roll you out over the next 2 years? And would you get the entire government. And then is there anything that you can tell us about the big logistics company that you've signed up and that you've started up in the U.S., any big learnings there that will position you to continue to gain some of those really large enterprises.

So a couple of things on Government in Canada. I want to be careful we don't get ahead of where we are. It was a 2- to 3-year process to go through an intense evaluation for us to be determined technically viable, which is significant. We are in the process of defining the next steps in rollout. Over the entire government, it will be more than a 2-year process on that. And the time line that is still under discussion. And there's obviously funding and other political things that need to happen for that. But we're very positive with where it's at and it's a significant next step.

Our next question comes from Raimo Lenschow with Barclays.

I have 2 quick questions and congrats from me as well. First one is on the customer addition this quarter. Obviously, you're moving up market a little bit. So there's going to be like a -- there's going to be fewer customers that you're kind of dealing with compared to the past. But then you also talked a little bit about like longer deal cycles. Can you just put it -- frame it in terms of how much of that number was kind of driven by a change in strategy versus like the market? And then I have one follow-up, please.

So Raimo, remember it's a net ad. As you know, we are focusing on the larger customers and included in the base of customers going back to about 2018 and before. We had a large number of Powerpay payroll customers using Dayforce or workforce management. And these are very small customers. And so we are seeing churn at the small end of the customers partially by design as we continue to focus upmarket.

That's really helpful. That's really good to hear. And then one follow-up from me is -- if you think about -- are there any differences that you see at the moment as your sales leaders are discussing the year with you in terms of U.S., Canada versus kind of Europe, Asia in terms of like what demand signals you're seeing there just to get a better idea in terms of how the global economies are playing out for you? And then lastly, Jeremy, I'll come back and looking forward to working with you.

No. Look, I think we have a very strong opportunity in APJ in Asia Pacific and Japan, and actually I was there last week. And when I look at our footprint in market, it is quite remarkable. And in total, we have about 1,500 customers in region of which we pay almost 2 million people in terms of regular pay slips. By the way, those 1,500 would not be included in the Dayforce counts that we have. And the customers that we have there are the best of the best. The breakfasts and the lunches and the customer meetings I had really speak about the potential that I do think we have inside that region.

Yes, I would just add one thing to that is, our growth levers remain the same, and we have the advantage of a balanced portfolio approach to how we drive our sales, right? Significant push in growth in terms of global. We are #1 in terms of that and customers recognize it. You've seen the growth in enterprise, but we still have a very healthy mid-market business and the differentiation around full suite across that. We still -- you talked about the fact that the customer base motion. You heard the stats in wallet and other things around adjacent innovation.

Our next question comes from Brad Reback with Stifel.

Great. Thanks very much. Jeremy, as you think about your guidance philosophy going forward. Can you give us a sense of how that may have differed, if at all, from previous CFOs?

Brad, good to speak with you again. The answer to the question is really no changes. The guidance philosophy I have is generally going to be consistent with the way we've guided in the past under previous CFOs.

Our next question comes from Jared Levine with Cowen.

In terms of the demand environment in 4Q and so far into 1Q, have you seen any differences based on employer size, geography, vertical or even payroll versus workforce management?

Not really. I don't think so. Look, a lot of it depends on how we basically set our priorities in terms of Steve says, balance across the different segments we play in and the geographies. We know that we still have a tremendous amount of white space just in the U.S. and Canada. And so we are still quite focused on what I call the domestic market, just amount, given the amount of growth potential we still have early here. But I can't say that I'm seeing any global market kind of stand out either positively or negatively.

Yes. We see growth across all of them. David talked about APJ. I'm with our team in Europe and we have a number of significant brands over the past couple of years that we sold that are helping us there. But no, I think just go back, we have the advantage of a balanced portfolio and the ability to grow from multiple levers and to any time adjust up or down in those levers based on what's happened in a particular economy.

Great. And then in terms of upsells and targeting an increasing mix of bookings related to upsell. Do you anticipate that to be pretty broad-based across payroll versus your other modules as you roll out more native payroll functionality. You anticipate the mix of upsells related to payroll to change over the medium term here?

I think there's really 3 key focus areas for upsell with our existing base. One, customers that we have a footprint in a particular region and moving them to global. We're finding even small mid-market companies are pulling up shared services centers. #2, customers that have time and pay with us to full suite with all the investments we've done in terms of talent, HR service delivery, there is a significant push in that. And then secondly, different divisions and distributions where we have one division in the company and cross-selling to another division as part of a larger global multinational.

Our next question comes from Steve Enders with Citi.

Okay. Great. Maybe just to start, it seems like as we think about the model moving forward and the pace of net new go-lives that maybe we should expect that level to be a little bit lower just given some of the dynamics. I guess I just want to clarify that and how you're thinking about what the pipeline looks like for go-lives going through calendar '24.

So that metric is a -- it's not a simple metric. The better number to look at would be the number of employees that we're onboarding on to the actual platform. If you look at '23 to '22, we added about 900,000 people on to the actual platform. In the net number of customers that are live, there are a lot of customers that are not included in that number because we've tried to keep the number consistent in the way we did it at time of IPO. So I think Jeremy will have to determine what we actually disclosed on a go-forward basis when it comes to that metric or employee volumes.

And if I can just add 3 things that I think have really strong metrics for us that we've talked about already, but I'll highlight them again. We had record go-lives this past year in Q4, that's on a dollar basis metric. We have maintained our world-class retention rates of 97.1%. And we had net adds for our enterprise customers up 64% year-over-year. So larger customers record go-lives and strong dollar-based retention, I think are the 3 metrics that I want to highlight here.

That's helpful. A couple of context there. And then maybe just on the partner feedback and the potential customer feedback you've heard so far on the name change to Dayforce. And I guess, what has been the commentary that you've heard so far?

One, I'm very proud of the work that our brand new team did. I'm seeing tremendous excitement both in [indiscernible] and from the simplification of the actual name change interest has been very, very positive.

Arvind, I think you're going to have to mute but if you'd like to ask a question, this is Arvind Ramani with Piper Sandler.

Yes. Wondering if you can drill down a bit into what you're expecting for migration tailwinds in 2024, David, I think you mentioned the tax modernization side, but I'm interested also in the international payroll migrations. Should we think that the tax migrations fade off somewhat while the international payroll piece perhaps starts to pick up and make up some of that difference. And then I have a quick follow-up.

So the tax migration, as you know, there was a platform change onto the Dayforce and so largely driven by accounting reasons. In terms of the APJ migration, we are now beginning to target what -- there's a product in market called Preceda particularly in the Australian marketplace. And we are actively speaking with the Preceda customer base about their journey towards Dayforce. I had a lunch with many of them just last week. We have several that have completed the journey and are highly referenceable.

Okay. Understood. And then as a follow-up, perhaps for Jeremy, it is great to have you back, of course, Arithmetically, is it correct that the float income guidance steps up slightly for 2024? And if so, mechanically, could you just remind us how that works? And are you factoring in an expectation of for some pay cuts in the spring or summer?

Mark, good to speak with you again. And thanks for the question. Yes. So float, it steps up slightly from -- in our guidance compared to where we ended the year. We ended the year at around $169 million, and our guidance was $174 million. Essentially, what you can assume there is balanced growth offset by essentially flat rates. Now keep in mind, we have baked in rate cuts throughout the year into this number. But the way we ladder our portfolios, the rate cuts won't really hit this year. They'll start to hit next year or towards the end of this year and not impact that average rate that we're seeing.

Okay. So something like a 6- to 9-month lag because of the laddering.

So maybe a little bit longer than that, but something like that.

So Mark, if you look at it last year, our yield was effectively 3.74%. And this year, we're assuming about 3.75%. So it takes a bit of time to have the rate increases go through the system. We're still climbing the yield curve when it comes to the core portfolio, that's part of the portfolio that we lever out. in Q1, the proportion between the short term and the core portfolio shifts more towards the short term. So we should see some benefit from a higher rate environment in Q1 relative to last year.

Our next question comes from Kevin Kumar with Goldman Sachs. Our next question comes from Bhavin Shah with Deutsche Bank.

Just first on Dayforce Co-Pilot. I think you talked about in your prepared remarks about the strong productivity improvements from some of the early adopters. Can you just talk about how you're thinking about monetization of the SKU? How much is based on productivity and kind of how that pipeline is faring for this offering?

Bob, good to talk to you, and thank you for the question. We see it as an add-on to our suite. And so when you look at our overall suite, whether it's core HR, our compliance modules of payroll workforce management or what we're doing in talent and analytics, we feel like Co-Pilot is, as we refer to as an AI teammate for your global workforce. It can help you in terms of efficiency, quickly, easily get your -- the questions you have answered, it's also moving into action work where it can automatically generate reports instead of having to work with IT to create reports or get the data you need out of the system. It can do it more instantly and it's a nice add-on.

Super helpful. Just one quick follow-up based on I guess, more for Jeremy, just based on kind of -- you noted in the guidance, it assumes a more moderating rate environment. Obviously, it's lighter, so the impact can be more in, I guess, '25. But how are you as a management team thinking about just the rate and pace of investments to the extent we are in a lower price environment. Does that kind of impact how you're thinking about investing into go-to-market, et cetera?

We always look at the float as a really nice piece of our business, and we'll take it when it's here. But as it goes away, it's something that we will continue to invest in the business. We'll also focus on expanding our adjusted EBITDA margins and the conversion of that into cash flow. I think maybe what I'll highlight there is we saw significant improvement in our operating cash flow and conversion from adjusted EBITDA into operating cash flow. So we ended the year at $219.5 million in operating cash flow which is a 54% conversion from our adjusted EBITDA. So we're really pleased with that, you'll continue to see us focus on profitability regardless of the rate environment.

The other thing that I'll mention is if I look at the EBITDA, which came in, as you know, the 27.1% for the full year, ex float, that was up by 340 basis points year-over-year. So while we did get benefit from the float, we did continue our focus on, as Jeremy pointed out, more efficient OpEx across the company and as well the cash conversion. We were very happy that we came in a 54% conversion of operating cash flow, EBITDA as operating cash flow. And when we look at our guide for 2024, we're looking at increasing net buy by approximately another 10% up to the high 50% range of cash flow conversion.

Thanks, everyone, for dialing in today. This concludes our call.