Dayforce : Second Quarter 2024 Transcript (2024)

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Corrected Transcript

31-Jul-2024

Dayforce, Inc. (DAY)

Q2 2024 Earnings Call

CORPORATE PARTICIPANTS

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OTHER PARTICIPANTS

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MANAGEMENT DISCUSSION SECTION

David Niederman

Vice President-Investor Relations, Dayforce, Inc.

Thank you for joining and welcome to the Dayforce Second Quarter 2024 Earnings Call. I'm David Niederman, Vice President-Investor Relations. As a reminder, all participants are in a listen-only mode and a question-and- answer session will follow our opening remarks.

Joining me on the call today are CEO, David Ossip; and CFO Jeremy Johnson. We also have Chief Product and Technology Officer, Joe Korngiebel; and our President, Steve Holdridge, available for Q&A. 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. Additionally, over the course of this call, we'll reference non-GAAP measures to describe our performance. Please review our earnings press release and filings with the SEC for our rationale behind the use of non-GAAP measures and for a full reconciliation of these GAAP to non-GAAP metrics. These documents, in addition to a replay of this call, will be available on the Dayforce Investor Relations website.

And with that, I'd like to turn the call over to David.

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David D. Ossip

Chairman & Chief Executive Officer, Dayforce, Inc.

Thanks, David, and thank you all for joining us. I will provide some high-level comments on our second quarter and then turn the call to Jeremy to provide more details of our financials and an updated full-year outlook.

In the second quarter, we delivered strong results. Revenue growth was healthy as Dayforce continues to exhibit strong appeal with customers to power best-in-class HCM experiences for their employees. Dayforce recurring revenue of $322 million was up 20%, including float and 21% excluding float on a constant currency basis. And total revenue of $423 million increased 16%.

Cloud recurring gross margin was 77.7%, up 100 basis points. Adjusted EBITDA was $116 million, up 18%, representing an adjusted EBITDA margin of 27.5%, up 60 basis points, and free cash flow was $72.7 million in Q2, up 36%.

Our business momentum remained strong in the second quarter with significant progress achieved across our product and operation and deal momentum continuing at an encouraging pace. While the macro backdrop remains fluid, we have been able to pivot to industries where Dayforce enjoys good traction, including manufacturing, retail and hospitality, among others. Looking out to the second-half of the year, we are encouraged by our achievements to-date in 2024. The core value proposition of the Dayforce platform of creating simplicity at scale, reducing complexity, driving financial ROI and improving employee engagement resonates very well with customers.

The HCM market is very large and is expanding. This continues to be a resilient and durable market of growth and our pipeline strength continued through the second quarter. We are optimistic this momentum will persist through the second-half as conversations with prospective customers for the full suite platform are progressing well in all segments and regions.

Turning to customers and market highlights, in Q2, we delivered balanced and consistent growth across customer acquisition, activations, expansion and retention. Our momentum sustained for sales, kickoffs and go-lives. We ended the quarter with Dayforce recurring revenue per customer up 18%. We now have 6,657 customers live on the Dayforce platform. From a sales perspective, we saw strong demand for Dayforce globally and sustained strength in both enterprise and major markets on a year-over-year basis.

Year-to-date,SI-led momentum continued with healthy year-over-year growth underscoring our success in expanding our partner ecosystem. Customers continue to see the power and capability of the Dayforce platform with full suite attach rates coming in at over 50% of new sales bookings. And sales to our customer base contributed positively to growth with add-on sales compromising more than 50% of total bookings, including add- on sales to the Canadian government and solid growth in our Talent Intelligence suite.

Dayforce remains differentiated from our peer group as the all-in-one global people platform that deliver simplicity at scale with a full HCM suite, a single application on a single database powered by AI. Our differentiation is evidenced by our strong win rates, best-in-class revenue retention and healthy sales growth.

Turning to Dayforce Wallet, we were pleased to hit the milestone in early July of $4 billion logo cumulatively. We had nearly 3,000 customers live as of June 30 and registration rates and user transactions per month remain constant. Wallet revenue is expected to more than double this year and is the fastest-growing product at

Dayforce. The payroll modernization project for the Government of Canada is progressing well. As you may have seen, the Canadian government provided an update earlier this month with information about their targets, timelines and planned investments. Dayforce is proud to play a part in this project to help the Government of Canada not only pay its workers accurately and on time but to provide a modern employee engagement and talent platform as well. Jeremy will provide some color as to the impact from this project to our financial forecast.

In addition to the Government of Canada, some other notable sales wins from across the globe in Q2 included a global agribusiness and food company with more than 20,000 employees selected Dayforce Managed Payroll and Benefits, Workforce Management, Wallet and Dayforce Industry Solutions for its 5,000 US and Canadian employees. A family of independent hospitality brands based in the UK with more than 20,000 employees selected the full Dayforce suite to be used across its employee population in the UK and Ireland. A multi-national entertainment company selected Dayforce Pay and Time for its 9,000 US and Canadian employees. And some key Q2 customer go-lives included a multi-national government consulting firm that is now live on Dayforce Payroll, HR and Time for all 39,000 employees in the US, UK, Canada, Netherlands, Germany, Singapore and Saudi Arabia. A global e-commerce company with over 7,000 employees has gone live on Dayforce Payroll and Workforce Management for its US population. A UK seller of new and used cars went live with the full Dayforce platform to its 6,000 employees and a US regional airline that flies into more than 100 cities across North America implemented the full Dayforce suite for its 5,000 employees. You can read about more notable sales wins and customer go-lives in our earnings press release.

Turning now to some updates on our platform and technology. As always, our goal is to deliver simplicity at scale and allow our customers to eliminate the complexity that often results from combining multiple legacy HCM solutions. This principle guides our innovation even as we introduce new capabilities to help our customers navigate the ever-evolving landscape of work and technology. In the second quarter, we introduced several exciting innovations. We launched Dayforce Flex Work, an on-demand marketplace that helps organizations augment their workforce by posting shifts and selecting from a pool of gig retired, seasonal and alumni workers. Flex Work manages background checks, onboarding and payroll, helping to give employers peace of mind while giving frontline workers a more flexible working experience.

We launched Dayforce Skills Engine, which uses AI to help identify skills gaps, then source and upskill talent with end-customer workforces. We launched on-the-job learning checklists on the Dayforce platform, which will allow managers to document training and observe the impact on performance. We launched Dayforce Payroll in Singapore, enabling customers operating in the region across Asia to access Dayforce industry-leading payroll capabilities.

We recently introduced the Dayforce Partner Exchange, which is a marketplace where customers can connect with fully vetted Dayforce partners and discover software and services that extend the platform with access to over 120 software and SI partners. And we remain committed to helping our customers adhere to their compliance requirements with more than 200 compliance updates released in the first-half of 2024. This pace of innovation is truly impressive and we have an extensive roadmap for future enhancements and products that we are excited to provide our customers.

Finally, due to our continued strong results, profitability improvements and cash flow generation, we announced that our board of directors has approved a $500 million share repurchase program and we announced our first ever Investor Day on November 12 in Las Vegas, alongside our Dayforce Discover conference where we plan to present a comprehensive view of our vision, strategy and multi-year financial model. We look forward to seeing many of you in-person there.

In summary, we continued our momentum in the second quarter and are confident in the growth opportunity in the second-half of the year. I'd like to thank everyone in our Dayforce community, including our customers, partners, and our team of passionate Daymakers.

I'll now pass the call to Jeremy to discuss our financial results in more detail. Jeremy, over to you.

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Jeremy R. Johnson

Chief Financial Officer & Executive Vice President, Dayforce, Inc.

Thanks, David. We were pleased with our second quarter results. Top line growth continued to perform and we experienced enhancement to margins, allowing us to drive strong adjusted EBITDA and generate cash flow improvement. Dayforce recurring revenue was $321.6 million, up 19.9%. And Dayforce recurring revenue, excluding float, was $277.7 million, up 20.1%, or up 20.5% on a constant currency basis, underpinned by strong go-lives and healthy underlying customer trends.

Total revenue was $423.3 million, up 15.7% on a GAAP basis and 16.3% on a constant currency basis. Powerpay recurring revenue was $24.6 million, growing 2.1% on a GAAP basis and 3.7% on a constant currency basis. On a GAAP basis, gross profit was $186.8 million, up 19.8%, and operating profit was $14.1 million, including $20.9 million of amortization expense related to the retired Ceridian trade name, which was not in the Q2 2023 comparison financials.

Cloud recurring gross margin was 77.7%, up 100 basis points. And excluding float, our Cloud recurring gross margin also continued to expand nicely, improving by 120 basis points. On a non-GAAP basis, adjusted Cloud recurring gross margin was 78.8%, up 70 basis points. Adjusted EBITDA was $116.3 million, up 18%, or a 27.5% margin, expanding 60 basis points and reflecting our continued improvement in gross profit margins and scale in adjusted G&A. From a cash flow perspective, operating cash flows were $99.2 million, up 21%; and free cash flow was $72.7 million, up 36%.

I'd like to formally introduce a new financial metrics that we'll begin to speak about more frequently and that's free cash flow. In our SEC filings, we have included a very simple reconciliation from operating cash flow to free cash flow, simply reducing operating cash by capital expenditures. We view free cash flow as a metric that displays cash profitability on a consistent basis when viewed over time. Expanding free cash flow margin is a target for us in the long-term, enabled by our continued growth and focus on increasing profitability and improvements in cash conversion from EBITDA.

Year-to-date, free cash flow was $53.9 million, up 48%, and we remain confident in our full-year cash flow targets of upper 50% conversion from adjusted EBITDA to operating cash flow and expect capital expenditures to remain steady on a dollar basis versus last year. As expected, eloomi revenue added approximately 200 basis points of growth to our Dayforce recurring revenue, ex-float, in the quarter. While last year's movement of the tax business represented a headwind of approximately 100 basis points to second quarter Dayforce recurring revenue, ex- float.

A few other callouts before I move on to our guidance. First, at the end of June, we performed an approximately 1% reduction in workforce, which is included in the $10.5 million in restructuring expense adjusted out of EBITDA. This reduction was planned when we entered the year and was primarily a result of optimizations and spans of control and layers of employment levels inside each of our functions. We believe these changes will set Dayforce up on a more solid foundation to continue to build our global operating model and drive efficiencies in our business.

Second, we added disclosure to our 10-Q and earnings release to provide additional color on accounts receivable. This incremental detail includes historical breakout by quarter of accounts receivable components, including trade AR, receivables from Wallet amounts outstanding and amounts due from float income and other bank interest paid in arrears. This was previously disclosed only annually but we believe it is helpful to provide investors quarterly.

And, finally, I want to provide more clarity around the financial details of the payroll modernization product - project with the Government of Canada. If you recall in April, the government announced that they had allocated CAD 135 million in their 2024-2025 budget to explore a new HR and pay solution. Included in that allocation is now formally a contract for CAD 85 million, or approximately $62 million to amend the contract with Dayforce to include additional talent capabilities, provide incremental licenses and to continue expand testing and design Dayforce to its specific needs. This contract included about a quarter of the funds for software, which we expect to begin realizing in the second quarter of 2025 and the remainder of the funds for services to be delivered by both Dayforce and our services partners, which we expect to deliver throughout 2024 and 2025. These services bookings are more of a continuation of the work we've been doing on this project and are already contemplated as part of guidance.

Now, turning to our guidance. For the full-year, we expect Dayforce recurring revenue, ex-float, of $1.163 billion to $1.168 billion, or a growth of 21% as reported, and 21% to 21.5% on a constant currency basis. Total revenue of $1.736 billion to $1.746 billion, or growth of 15% as reported, or 15% to 16% on a constant currency basis. Adjusted EBITDA of $490 million to $505 million, or 28.2% to 28.9% margin. Float revenue is now expected to be $187 million for the full-year. And for the third quarter, we expect Dayforce recurring revenue, ex-float, of $289 million to $294 million, or growth [in the range] of between 18% to 20% as reported and on a constant currency basis.

[Total revenue of $425 million to $430 million, or growth of 13% to 14% as reported and on a constant currency basis]. Adjusted EBITDA of $115 million to $125 million, or 27.1% to 29.1% margin and float revenue is expected to be $40 million for the third quarter. Our guidance implies fourth quarter Dayforce recurring revenue, excluding float, growing at approximately 23% on a constant currency basis, with fluctuating growth rates between our quarters driven primarily by the timing of go-lives and various other revenue drivers differing between this year and last year.

The USD to Canadian foreign exchange rates assumed in our guidance are $1.38 for Q3 and Q4, or an average of $1.37 for the full-year. To be clear, the weakening Canadian dollar continues to be a headwind for us, which we are accounting for in our maintained or raised guidance ranges for the full-year.

I'd like to thank you for your interest in Dayforce. We are excited to continue executing against our opportunity in the third quarter and the remainder of 2024.

With that, we can begin the Q&A portion of our call.

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David D. Ossip

Chairman & Chief Executive Officer, Dayforce, Inc.

Hey, Jeremy, thank you for that. Before I ask David to moderate the Q&A, one item possibly since you ended off on the FX, could you provide some impact as to the headwinds of FX this year and how we've incorporated that into our guidance?

Jeremy R. Johnson

Chief Financial Officer & Executive Vice President, Dayforce, Inc.

Yeah. Thanks, David. It's a good point. For total revenue, we started the year with total revenue guidance of $1.72 billion to $1.73 billion and we raised our guidance since then by $16 million to our current guidance ranges. Now, to get here, we beat our guidance in the first quarter by $4.5 million and our guidance in the second quarter by $4.3 million for a total of about $9 million, and we've also raised the rest of the year by another $7 million to get to that total $16 million.

But our original guidance contemplated $1.33 USD to Canadian FX rates, while the Canadian dollar has actually weakened to about $1.38 at the spot rate today. And because of that, we've also absorbed almost $13 million of FX headwinds versus our original guidance assumption to total revenue. So, in essence, we've increased our revenue guidance by $29 million from our original guide in February but have had to absorb $13 million in FX headwind.

Now, this happens in Dayforce recurring revenue, ex-float, as well. We started the year with guidance of $1.16 billion to $1.165 billion, and we raised our guidance by $3 million and we beat first quarter by $3 million as well. But due to the weakening Canadian dollar, we've had to absorb almost $7 million of FX headwinds. So, in essence, we've increased our Dayforce recurring revenue, ex-float guidance, by about $10 million. But have had to absorb that $7 million FX headwind.

And with regard to adjusted EBITDA, we started the year with guidance of $480 million to $495 million, and we raised our guidance by $10 million to get to our current guidance ranges. And to get here, we beat our first quarter by $4 million, our second quarter by $3 million, and we raised the rest of the year by $3 million. And our FX has had an impact on adjusted EBITDA, although it's somewhat muted due to our offsetting expenses in Canada but there has been a headwind of approximately $4 million versus our original guidance ranges. So, in essence, we've increased our adjusted EBITDA by $14 million but with a $4 million FX headwind. So, the weakening Canadian dollar, since the beginning of the year, is having an outsized impact on our results. But we continue to execute well with these headwinds.

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David D. Ossip

Chairman & Chief Executive Officer, Dayforce, Inc.

Maybe, David Niederman, do you want to go ahead and open up to the first question?

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