Dayforce Inc. — 2024 Q1

I am Jeremy Johnson our CFO, and joining me on the call today is CEO, David Ossip; Chief Product and Technology Officer, Joe Korngiebel; and our President, Steve Holdridge. [Operator Instructions] Now before I hand the call over to David, I want to remind everyone that our commentary may include forward-looking statements. These statements are subject to risks and uncertainties that could cause Dayforce's results to differ materially from historical experience or present expectations. A description of some of these risks and uncertainties can be found in the reports we file with the Securities and Exchange Commission, such as the cautionary statements in our filings.

Thanks, Jeremy, and thank you all for joining us. Next to me, I have Steve who will review customer and market highlights. Joe, who will highlight platform innovation and then we'll hand the call back to Jeremy to provide details to our first quarter performance and updated full year outlook.

Thanks, David. In Q1, we delivered balanced and consistent growth across customer acquisition, activation, expansion and retention. We had strong results for sales, kickoffs and go-lives. We ended the quarter with Dayforce recurring revenue per customer up 19% year-over-year. And we now have 6,575 customers live on the Dayforce platform.

Thank you, Steve. We had a fast and exciting start to 2024 in terms of product innovation. As you heard from David, with the launch of Dayforce Co-Pilot to our charter customers at the beginning of the year, our new generative AI teammate for the balanced workforce is empowering our customers, their employees and also our own employees here at Dayforce with new levels of productivity and efficiency.

Thanks, Joe. We started 2024 strong, underpinned by healthy top line growth and continued profitability improvements. As David said, we exceeded guidance across all key revenue and profitability metrics. We delivered Dayforce recurring revenue of $337.2 million, growing 24% and excluding float, Dayforce recurring revenue grew 23% underpinned by strong go-lives and healthy underlying customer trends.

Thanks, Jeremy. [Operator Instructions] Our first question comes from Mark Marcon with Baird. Mark?

I've got 2 questions. One, The government of Canada in their 2024 budget, they basically ended up committing $135 million Canadian to improve public service, human resources and pay systems. That's up materially relative to the CAD 52 million that they had allocated during the prior year. And so what I'm wondering is, first of all, it sounds like things are really progressing well. You had mentioned on the call that you don't anticipate seeing a major step up until 2025. I know that there's some sensitivities in terms of what you can disclose, but it sounds like things are going really well. And I'm wondering if you can give us any additional perspective in terms of what the next milestones are, what we should be monitoring? Because this is obviously a huge deal.

Mark, this is Steve Holdridge, I'll take that and anyone is welcome to jump in. Yes, as I said on the call, we view this as positive news, right? This is a statement of continued commitment. It is a budget expansion going into that. So in terms of the macro, this further cements step. Keep in mind that this is a long-term program.

Got it. And then as my follow-up, Dayforce Co-Pilot, David and Joe, you both sounded extremely excited about it. Joe, you mentioned that there's simplified pricing around it. Wondering, can you give us any sense with regards to the incremental pricing and what the early customer feedback is and how you expect that to translate to upsell to the existing client base?

Mark, good to hear your voice, and thank you for the question. Yes, Co-Pilot is a foundational really transformation in how people use a people platform to be able to get answers and make more efficient and productive decisions for their employees.

Can I sneak 1 more in? Jeremy, did you build anything in, in terms of recurring for this?

Mark, we at this point, probably not incrementally in. I think we're testing out the use cases. We're building this up with customer base and probably not incrementally at this point.

Our next question comes from Kevin McVeigh from UBS. Kevin?

Congratulations on the results. I think you referenced kind of the SI-led sales growth in the quarter was about 35%. Can you give us an update on where that is in terms of some of the transition from professional services -- on the professional services side to the SIs and how that sales distribution channel is going forward? Because it seems like part of the story that's starting to kind of scale?

Yes. And I think we've been consistent in that. Over the past few years, we've seen steady growth in that. We've also been very public that our strategy is to move to primarily an SI-led ecosystem, even broader than SIs, right, advisory partners, partners with PE. We continue to see strength on that, both with the large global systems integrators where we continue to see expansion as well as a number of regional mid-market.

It's very helpful. And then just with the uptick in flow, any change philosophically as to how we should think about just whether that gets redeployed or kind of just any impact because obviously, that seems like somewhat unexpected given where rates are, but just remind us of how we're thinking about that incremental float benefit?

Yes. Thanks, Kevin. It's obviously a nice surprise that float is going to stick around a little bit longer here. We will continue to look for opportunities to invest. There's a significant amount of growth that we can go after. We've got a bunch that we can do on the product side of things. But at the same time, we know we have margin targets and free cash flow targets that we want to hit. So you'll probably see us take a balanced approach here with the float.

Our next question comes from Raimo Lenschow from Barclays. Raimo?

Can I just double click a little bit what you're seeing out there in the economy, like in terms of interest on starting new projects? You obviously have a long list of new clients that you announced, which is really good to see. But what's the overall appetite in terms of thinking about traditional transformation in the HCM space? And how much is AI kind of talking point, you kind of open doors for that one? And then I had 1 follow-up for Jeremy.

Sure. Raimo, good to speak with you. Raimo, just check your math on your early report as well in terms of the guide. We actually pushed the full amount to the full year. Not half of it, so just a correction in your note. In terms of your question, if we look at the actual pipeline, the pipeline levels remain very healthy and robust. What we're seeing in the industry is that there is a focus on increased automation, and the way that typically translates is that we would come in and we often see a simplification of 12 systems to about 1.

Good. Perfect. And then Jeremy, you talked a little bit about that extra float revenue coming in there. Can you talk a little bit about some of the priorities that if you think about balancing it out, some of the priorities in terms of kind of maybe giving us more versus kind of investing more, like where would that be? And congrats from me as well, and I'll look into that, David.

Yes. Thanks, Raimo. I think when we talk about getting incremental float dollars that either could flow right down to the bottom line or we can choose to reinvest those funds -- there is, as I mentioned, kind of a lot of room to grow in this business. We're talking about our ability to go global.

Our next question comes from Siti Panigrahi from Mizuho.

So David, when I look at your peers' growth, it's just rating in your payroll space, but you continue to deliver 20%-plus or guide 20%-plus on your recurring -- Dayforce recurring ex float. So what gives you confidence that you will continue to deliver that kind of 20% kind of growth?

Yes. Thanks, Siti. The first thing that I'll point out is that if you look at the actual quarter, add-ons, which is adding the employer of record and the talent component was 14% of our sales. And if we look at full suite sales in the quarter, it was 50%. So when you look at Dayforce, we aren't a payroll company, we are an HCM company, which gives us a much more durable growth profile than others in the market that are more focused on the actual pay.

And a follow-up. When I look at your pipeline -- not pipeline actually the deals you closed since Q1 of 2022, large deals, in terms of enterprise, you mentioned before that go-lives should be around 2 years-or-so. How is the go-live trend right now in terms of your confidence of those companies going live with those large deals? And how is that going to help drive that growth as of this year and next year?

Well, Siti, as we've discussed before, the larger accounts give us more the durable growth profile as the implementations do stretch typically across different years. If we look at the large logistic company, as you know, a nice proportion of their population went live previously, and we are expecting additional waves to go live shortly. But again, it allows us to plan out the business very, very carefully, and you see that reflected in the very tight revenue and EBITDA guide we give to the market. It's a highly plannable business.

Our next question comes from Scott Berg with Needham. Maybe we can circle back on Scott. Next, we'll go to Steve Enders from Citi.

Okay. Great. I guess maybe just to start, I think you called out mid-market win rates improving in the quarter? Just I guess it would be helpful to get a little bit more clarity on what you view as driving that? And then maybe just a little bit more detail on what you're seeing in terms of overall demand dynamics between mid-market and enterprise today?

Yes. This is Steve. I'll take that, and anyone can jump in on that. So in the past, we've continued and you've seen some great wins up market in terms of the enterprise, and we continue to see that. What we have seen is our ability to, one, be in more deals in mid-market as we've increased the sales coverage, we've got more focus on our go-to-market and continue to increase our win rate.

Okay. Great. That's helpful. And then maybe for Jeremy, just in terms of thinking about profitability dynamics kind of through the year and 2Q has some seasonality in there. But I guess any kind of like change in investment cadence or anything else that you would kind of call out as we think about EBITDA flowing down through the year?

No, I think ultimately, we've beat in Q1. We had a really solid quarter from a profitability side of things. I think 2Q always tends to come down a little bit from a profitability side. But ultimately, we remain confident in the full year and we flowed through that beat into our updated guidance.

Our next question comes from Dan Jester with BMO.

Maybe, Jeremy, to you, you called out kind of a few things about helping us think about the seasonality into the second quarter on the Dayforce line. Can you maybe just get a little bit more explicit about what you're assuming in terms of macro for the rest of the year? Any changes relative to how you guided last quarter for the full year?

Nice to speak with you, Dan. I think ultimately, employment levels remain kind of in line with our expectations, which was essentially flat with normal seasonality. I think if you look at any seasonal impacts, we always see that typical Q1 to Q2 drop off with some of the year-end and print revenue in Q1 that doesn't happen in Q2.

Great. And then maybe going back to the Co-Pilot and the comments about simple pricing. Maybe we could just expand on that a little bit more. I think one of the things many people are thinking about is about how do you manage sort of compute costs and margins and usage for some of these tools? And so maybe can you just help us think about how you're thinking about this for your customers and what does simple really mean?

Simply put, for Dayforce Co-Pilot, what we're doing is a per employee per month cost just like we do with the rest of our products. We can rationalize all the costs on what we're doing with the innovation that's happening with large language models and the like, but we're making it simple for our customers.

Our next question comes from Alex Zukin with Wolfe.

I guess just maybe the first one. If we think about the commentary around bookings and kind of sales growth. As you now -- you're a month of the way through April, any commentary about pipeline conversion statistics or just sales growth exiting the month and how that's trending between kind of new versus selling into the base?

April was a good month, come in slightly ahead of our plan.

Perfect. And then, David, you talked a lot about how Dayforce is becoming an HCM company and how much talent is kind of critical to that notion over the next few years. If you think about just the penetration rate within your customer base today, where you've sold kind of the most impactful pieces of that HCM portfolio in addition to payroll and time, what is that opportunity? How far through that are you? And how to think about that over kind of the next kind of year plus?

We're in early stages. If you look at the average PEPM across our client base, you can still see there's quite a delta between the average PEPM price and between, I would say, our target price. If you look at the results with inside the quarter, both in terms of add-on sales back to the base and a number of full suite sales, you can see the numbers are very strong.

Our next question comes from Bhavin Shah with Deutsche Bank.

Great. I guess, Steve, one for you and kind of dovetailing on that, just on a customer base motion, you guys talked about impressive stat. Can you just elaborate on the typical customer that you're able to upsell, Who are you displacing in terms of the talent suite? And kind of what are the other big opportunities outside of talent to kind of upsell into that base?

So a couple of things. Yes. So one, I'll point out double down on what David said, is one of the things we did differently this year is that, that is a dedicated customer base motion versus an overlay motion. So we've invested in terms of the number of account executives and the focus on that. In terms of who we're displacing, it's all the usual players up and down the market, right? In the low end of the market, we're displacing the pays in UKG in the mid and upper end of the market, we're displacing the ERPs.

Super helpful. Just as a follow-up, David, to another question that Raimo asked on the macro. I know there's been some conversations with some potential digestion period for back-office software, just kind of post elevated spend as we exited COVID. When you speak to customers, do you see this at all? How would you kind of describe customer scrutiny and if it's changed at all in the past few months?

Over the last 10 years, I can't say that there's really been an easy quarter. We now have, as you know, almost 6,600 customers live on the actual platform and every single one of those was a competitive RFP situation. When I look at the actual pipeline, and I would argue that under Sam's leadership, it's now a highly qualified pipeline.

Our next question comes from Jared Levine with TD Cowen.

In terms of looking at your professional and professional services revenue and other revenue, can you discuss the mix of that currently that implementation related versus non-implementation related and how you would expect each of those to grow over the medium term?

Yes, yes. And we think of that really in kind of 2 broad categories: implementation and then what we call value-added services around that. And with an implementation over time, we expect the core implementation to continue to decrease year-over-year as our partners move into that. The one exception is obviously, we mentioned with Government of Canada and we expect our value-added services and our focus on new and emerging products and supporting the SIs to increase. But with that, we also expect to see a continued slow growth in profitability as that mix increases as well.

Yes. And Jared, maybe I'll add there. It's also inside of professional services and other gross margin. We have things like Cox and custom training revenue, and that will continue, and we still have a good opportunity to continue to grow that. And then the last thing I'll say is, as we move and continue to move into SIs, not all of that is on the SI's paper. Some of that is when we say SI-led, some of that is actually contracted on our paper, which means we've got to account for it under ASC 606 with a couple of 2 performance obligations and things like that. So I think just to clarify, I think that might be a misnomer out there.

Got it. And then Powerpay recurring ex float and Bureau recurring ex float both came in below your expectations for 1Q. Can you discuss what drove those lower-than-expected results? Is it more so of push out of revenue later in the year?

Yes. I think we had -- we set some lofty expectations, I think, for Powerpay and on that side of things that the employment levels, I think, in Canada aren't as solid as we had expected. And I still think, in general, though, we grew that business by 8% in total or 5% excluding float.

Just a quick follow-up here, if I could. What is the updated Dayforce recurring ex float guide assumed for a bureau migration contribution there?

I don't believe we've disclosed that specifically.

It's immaterial.

Yes.

Our next question comes from Mark Murphy with JPMorgan.

David, I'm wondering if you could give us your perspective on the labor market. When we look at non-farm payroll growth in the U.S. has slid from 5% a few years ago to about 1.8%, 1.9% range. Recently, I'm wondering because obviously, you're performing pretty well. How does that trend look comparatively within your installed base, do you think that might continue to grow at the low single digits for the time being? And then I have a quick follow-up.

Mark, so I would say the volumes came in slightly ahead of what we had forecasted, and we're still seeing healthy employment rates at our customers. On top of that, I would point out again that part of our durable growth profile is the fact that we have a very strong employer of record and talent capabilities inside the system and our ability to go back to the base and do the add-ons to drive that cash IRR for our client does lead to consistent growth for our business.

Okay. Understood. I wanted to ask as well, because we saw the comments on full suite bookings and add-on bookings, I think you said those trends were positive in April as well. I'm just curious, did you see a total bookings bounce back relative to some of the softness you've seen around the holiday selling season or is it still a bit of a measured buying environment out there as we've kind of seen across the broader industry?

Yes, Mark, we saw that very early on in the actual year with January coming in very strong and as I mentioned, April came in ahead of plan as well. So we're pleased with sales year-to-date.

Great. It looks like our final question will come from Kevin Kumar with Goldman Sachs.

In terms of the demand environment, have you seen any differences or trends that you would call out in the mid-market versus enterprise? Any color there would be helpful.

In the mid-market, which we call major markets and as well in our enterprise space, which goes up to 12,000, what we are seeing is the simplicity at scale, again, that on average, 12 different systems to 1 day 4 system seems to be the kind of the theme in the market what we're hearing from both prospects and customers, they ask about more automation, less integration, less manual work, less FTEs, more efficiencies seems to be quite topical at the moment.

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