Ceridian HCM Holding Inc. (NYSE:CDAY) Q4 2022 Earnings Call Transcript

Ceridian HCM Holding Inc. (NYSE:CDAY) Q4 2022 Earnings Call Transcript February 8, 2023

Matt Wells: Hello and welcome to Ceridian’s Fourth Quarter 2022 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. As a reminder, all participants are in listen-only mode and a question-and-answer session will follow the opening remarks. 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 Ceridian’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 filed with the Securities and Exchange Commission, such as the cautionary statements in our filings.

Additionally, over the course of this call, we will 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. Both our earnings press release and SEC filings are available on the Ceridian Investor Relations website. As a final note, a replay of this call will also be available on our Investor Relations website. And with that, I’d like to turn the call over to David.

David Ossip: Thank you, Matt and thank you all for joining us today for our Q4 earnings call. Today I’ll discuss our exceptional results for the quarter and fiscal year and talk to our continued strength in technology that positions us for 2023 and beyond. Leigh will give more information on our successful customer implementations and recent organizational changes that will help drive efficiency and continue to grow. Noemie will then provide insights on our Q4 performance, 2023 full year guidance and reaffirm our medium-term goal becoming a $2 billion revenue company with industry-leading cloud recurring gross margins of 80% and adjusted EBITDA, up 30% by 2025. I’ll begin with our financial results. I’m happy to report that we closed Q4 and fiscal year 2022 with strong momentum in financial performance.

For Q4, we exceeded our guidance across all metrics. On a constant currency basis, Dayforce recurring revenue grew 35% and 24% excluding float. Our adjusted EBITDA was $67.7 million or 20.1% of revenue with cloud recurring gross margins expanding by 250 basis points on an adjusted basis to 76.2%. Cash flow from operating activities were $41.8 million, a significant improvement from a year ago. Our annual Dayforce gross retention rate remains best-in-class at 97.1% and our cloud annual recurring revenue surpassed $1 billion, growing 34% year-over-year. In 2022, Ceridian demonstrated efficiency in its operations while achieving impressive revenue growth and enhancing profitability. We also saw healthy sales growth in 2022 from both new customers and add-on sales to the base.

This provides an excellent setup for 2023 as evidenced by our strong 2023 fiscal year guidance of Dayforce recurring revenue ex float growth at constant currency of 25% to 27% and adjusted EBITDA of 24% to 25%. I’m very proud of what our team has achieved and the value that we have all created for our customers. On this noteI would like to thank our employees and partners for their commitment and contributions to another successful quarter and fiscal year. It is our team, our differentiated tech and just the sheer size of the addressable global HCM market that drives my optimism, my confidence and my motivation to seize the growth opportunity ahead of us. Our brand promise of make work life better has never been more relevant. This has been evidenced in the hundreds of customer conversations that I have had throughout the year.

It is evident that every company is striving to boost efficiency and productivity by adapting to the new reality of work and our emphasis on providing tangible value through actual verifiable investment returns has resulted in numerous customer success stories and increased demand for Dayforce. Next I will discuss our product innovation that continues to set us apart in the market. First, the size of our target market continues to expand as we add new modules to the Dayforce platform and by expanding our global payroll capabilities. Today, we offer the most comprehensive HCM suite in the market that is also unique in its payroll capabilities for 57 countries. This allows us to deliver a differentiated solution to enterprise and global customers.

Another significant area of differentiation is that Dayforce is a single solution with a single database and single continuous calculation engine. This means that Dayforce offers greater efficiencies and compliance than any other solution in the market. It is our continuous calculation engine that enabled us to launch Dayforce Wallet, which lets employees get paid when they want improving their financial wellness and reducing employee turnover and cost for our customers. Over 1,450 customers, an increase of 500 year-over-year have signed up for Dayforce Wallet and 889, an increase of 462 year-over-year are live. The average registration rate is trending above 45% of eligible users and the typical Wallet user interact about 25 times a month.

Dayforce Wallet remains a key competitive differentiator with high attachment rates to new sales and frequent usage among employees. We expect Dayforce Wallet revenues of approximately $140 million in 2023 which is growing over 100% year-over-year. On the data side, intelligence is central to Dayforce and we continue to integrate AI seamlessly into the platform. Our newly released intelligent search allows managers and employees to get answers to their questions easily and quickly. Also our Dayforce People analytics features provides customers with metrics and analytics across the entire employee life cycle covering DEI, performance compensation, flyers benefits and more. We have also added intelligent automation today for recruiting making the talent acquisition process more efficient and accurate.

And we have improved our best-in-class user experience to meet changing work needs including a focus on mobile experiences. With the mobile benefits enrollment, employees can fully manage the benefits on their mobile devices. And the Experience Hub, which we released last year allows our customers to easily put their branding on the application and personalized content and communications for specific groups. And we continue to offer differentiated features at the very core of Dayforce that extend across the suite to meet the demands of the modern workplace. For example, our Dayforce skills engine, the backbone of Dayforce talent intelligence creates an open standard-based approach to skills. It is a skilled engine that allows us to match candidates to open jobs and we are using this tech to build the ideal talent marketplace.

We shared this upcoming solution at Insights. It will help customers increase the flexibility of their staffing models and adapt to the future world of work. And finally, Ceridian Tax Services has always stood out due to its competitiveness. In 2022, we modernized the architecture of our North American tax systems, and now customers can access the tax submission through the same technology as the Dayforce cloud platform. This will enhance our differentiation and drive more growth. Once more we are very proud of the progress we are making with our distinctive product line, which once again has been recognized as a leader in the 2022 Gartner Magic Quadrant for Cloud HCM Suites for 1000-plus employee enterprises, with us being the only pure-play HCM vendor named as such.

In conclusion, our product innovation, broad reach and impressive performance this past year, gives us great assurance in our ability to achieve sustained profitable growth. Now, I’ll turn the call over to Leagh. Leagh the floor is yours.

Leagh Turner: Thank you, David. Like you, I am so pleased that Ceridian continues to perform beyond expectations and even in this complex operating environment. Last year, we adjusted our business to a more balanced growth and profitability plan. We shifted our operating model to leverage our APJ resources, and this allowed us to continue investing in and growing the business and in 2022 Ceridian operated above the rule of 40, with total revenue growing by 24% in constant currency and adjusted EBITDA being 20.1%. And as David mentioned, our guide for 2023 continues to improve on the Rule of 40. On the investment side, we continue to hire meaningfully, and especially so in sales marketing and engineering, which has allowed us to drive the innovation that David spoke to, and the sales results that I am going to speak to.

And we did all of this while at the same time meaningfully globalizing our business, and the way in which we support and service our customers driving customer NPS scores up across both our support and services businesses, while also decreasing the number of support tickets logged in year by 13% and maintaining our world-class retention rates of 97.1%. We grew our partner ecosystem significantly in 2022 now with more than 170 partners globally. Today, more than 40% of our global bookings are supported by partners and 14% of our kickoffs in year were also completed by partners and that’s a trend that will continue to increase significantly in 2022 and beyond. We are seeing the effect of our partners in our pipeline as well. Our pipeline coverage is strong and the maturity of our pipeline and level of qualification is high.

In 2022, we saw triple-digit growth in our global markets, and our average overall deal size increased by 22% in 2022, signaling our growth upmarket while maintaining our leadership, in small- and medium-sized companies. Companies of all sizes, segments and parts of the globe are reaching for digital transformation, efficiency and globalization of their employee base to drive the efficiencies required to support growth. And these tailwinds are not going anywhere. In fact IDC says, that technology budgets are growing in 2023 with SaaS spend increasing by approximately 15%, year-on-year. Our growth levers will continue to prove to be the right ones at the right time. We entered the year with a seasoned and efficient sales organization. We have reps with time and territory and strong pipelines, particularly as we continue to make demonstrable strides in the large enterprise market.

Over 25% of our sales, were back to the base in fiscal year 2022, and 39% of our customers have bought our Dayforce suite. Coupled with retention rates in excess of 97%, this positions us well for durable growth over the medium term. These are proof points, that our platform strategy works. Continued innovation, and happy satisfied customers are the combination that drives profitable long-term growth. Now, let me get into some of the specifics of our Q4 customer wins and go-lives. From a customer wins perspective, a global auto parts manufacturer with 40,000 employees in North America, chose to further unify its workforce on a single HCM platform, with Dayforce. This deal was brought to us by a partner, and the business process transformation that will follow, will be done by both the partner and Ceridian, a multinational hotel and restaurant company based in the UK selected Dayforce to fuel its growth and transformation by leveraging a modern, intuitive and engaging experience for its 38,000 employees.

A US consumer goods manufacturer, with 35,000 employees globally, chose Dayforce for its Latin America and Asia Pacific operations, standardizing on a single global solution for payroll and workforce management, and driving a more efficient and lean organization. A major global airline based in Canada, with 22,000 employees focused on driving efficiency in their global payroll and WFM processes, selected Ceridian and one of our key global partners, to transform this part of the business. This deal was brought to us by that same partner. We also took live, some notable companies in the last quarter. A global professional services firm recently went live with Dayforce, streamlining payroll and taxes for 55,000 employees in the US and Canada. This customer went from signing to live, in less than nine months.

They had very sophisticated requirements and excellent teaming between both Ceridian and the customer made this possible. They also happen to be one of our partners. One of the world’s largest express transportation and shipping companies migrated to Dayforce, for a modern payroll experience for 12,000 employees. A leading global retailer, successfully migrated to Dayforce for HR payroll and workforce management for 10,000 employees in the United Kingdom; and a major American cargo and passenger airline launched Dayforce for payroll time and attendance and managed benefits for 7,400 employees. For those of you following us for some time, you will have noted that virtually all of the customers mentioned have employees in excess of 10,000. A few years ago this would have been an anomaly and now it’s the norm.

We’ve been relentlessly focused on scaling this business and this is one of the results. Speaking of scale, as we look ahead to fiscal year 2023, I’m very pleased to share the promotion of Steve Holdridge to President, Global Customer and Revenue Operations. In this new role, Steve will lead our entire global field operations. We have always known that this was the structure we intended to move toward and this is the right time to bring our sales, revenue and customer functions together to drive toward our growth goals and to continue delivering the quantifiable value that we promised through every single touch point of the customer experience. To support this new structure, we’ve also allocated additional resources to marketing in support of our brand and go-to-market efforts.

We are providers of real business transformation. And at a time when every single customer everywhere is searching for a partner to help them convert efficiency into growth, Steve is absolutely the right leader to bring these teams together and to help us meet this moment of opportunity. His track record is exemplary, both since he joined Ceridian and in his years prior to joining us. A true global transformation leader, well known in the industry and well loved inside our four walls. I would like to personally take this opportunity to congratulate Steve on behalf of all of us at Ceridian for this latest endorsement of his leadership. Before I turn it over to Noemie, I would like to thank Rocky Subramanian, who will leave our business on March 3.

Rocky was instrumental in leading our revenue organization to truly sell the value of transformation, working side-by-side with Steve to ensure that the quantifiable value we commit to in the sales process is realized when our customer goes live and again when they renew. He set us up for this next stage in our evolution and we are grateful for his numerous contributions and we wish him well. In closing, the demand environment remains healthy. Our pipeline is strong. The market opportunity is growing. Our ecosystem is expanding and succeeding and our renewal rates remain best-in-class. When customers reach for transformation and sustained efficiency, we are the answer that powers their growth, accelerates their productivity and reduces their cost.

Above all else, we have the right team, further aligned to deliver, who I would be completely remiss if I didn’t stop to think, along with our customers and our shareholders for their steadfast commitment to our brand promise and purpose, to make work life better. And with that, I will turn it over to Noemie to walk you more deeply through the quarter and the year and to review our guidance. Noemie?

Noemie Heuland: Thanks, Leagh. I’d like to provide additional color on our fourth quarter performance and full year 2023 guidance, both of which are detailed in the press release published on our Investor Relations website. As David highlighted, our fourth quarter results exceeded guidance across all revenue and profitability metrics despite persistent FX headwinds. Notably, at constant currency, Dayforce recurring revenue grew 35% and total revenue grew 23%. Our adjusted EBITDA margin of 20.1% exceeded the high end of our guidance range and operating cash flows was $41.9 million above Q4 last year, driven in part by revenue upside and operating margin improvements. I am very pleased to report that on an adjusted basis, the cloud recurring gross margin was 76.2%, an increase of 250 basis points year-over-year.

In the month of December, we also benefited from a $3 million change in estimate of sales commission amortization period. We will now amortize our deferred commissions over a 10-year period, a change of estimate from a five-year period, reflecting higher customer retention rates and length of our customer relationship. This revised estimate is also embedded in our fiscal year ’23 guidance. Turning to fiscal year ’23 guidance. I want to note that we expect about 85 basis points of FX headwinds to Dayforce recurring revenue ex float for the full year, with the primary impact being felt in the first half of the year, then moderating in the second half. The same trend will persist across total revenue, where we expect about 110 basis points of total FX headwinds.

For the full year, Dayforce recurring revenue excluding float is expected to be in the range of $936 million to $946 million, growing 26% at the midpoint at constant currency. As noted in our press release, we have modernized our tax infrastructure and now provide our North America tech solutions under the Dayforce platform. As such, this modernization effort in our tech business is expected to contribute approximately 460 basis points of Dayforce recurring ex float revenue growth in fiscal year ’23. In addition, I would like to note that our largest enterprise deals, take over 12 months to achieve full run rate total revenue. And our float revenue guidance reflects a more normalized interest environment. As the pace of rate increases moderates, we expect less upward variability as compared to fiscal year 2022.

Adjusted EBITDA is expected to be in the range of $360 million to $375 million or margins of 25% at the midpoint. Our guidance assumes a degree of float reinvestment back into the business, as well as continued scale, primarily driven by cloud recurring gross margin expansion. As it relates to operating cash flows, we expect an adjusted EBITDA conversion ratio in the mid-50s for the full year 2023. Commensurate with progress made in ’22 and as implied by our 2023 guidance, we remain committed to our medium-term goals. In closing, I’d like to echo both David and Leagh in saying that we’re very proud of the progress we made in 2022 and are eager to continue executing on our shared vision in 2023. Now, I’d like to turn the call back over to Matt to open it for Q&A.

A – Matt Wells : Hello. Our first question comes from Mark Marcon from Baird.

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Q&A Session

Mark Marcon: Hey, good afternoon and congratulations. When I was at Insights you have a number of large enterprise clients that I talked to that were very complementary. And a lot of them were global in nature. And then I noticed with the sales highlights, you’re mentioning all of the various global deals that you’ve signed. Can you talk a little bit about what you’re seeing in the global marketplace as an opportunity relative to single country opportunities. It sounds like your competitive advantages really shine with regards to the multinational deals. And obviously that would speak to bigger deals as well. What are the key drivers in terms of the growth there? Is it just the native payroll and everything being able to translate smoothly? Is it the single database? Is it the continuous calculation engine? And to what extent is Dayforce Wallet attractive internationally?

David Ossip : Thanks Mark, and great to speak with you. What I would say about this is that most organizations are now looking at how they can transform their companies to take advantage and be relevant in today’s world. On that line one of the initiatives that most organizations are looking at is how they can move to shared services on a global operating model basis. And so we’re finding that all organizations beyond a certain sites are looking at using the Dayforce technology, because it provides them with a global operating model for their people. It allows them to have payroll process in a single system. It allows them to do the analytics altogether in constant currency, and it allows them to work on areas like standardization and shared services to achieve there more strategic initiatives. And so we’re finding that’s resonating very nicely inside the market. Leagh, what would you add to that?

Leagh Turner : First of all, Mark, it’s nice to hear from you. Thank you. And I would echo what David said, and I would just refer you to our press release where we talk about global customers that are sort of beginning one country at a time. I think that that’s something we’re seeing as well. You’re right to say, David that companies are globalizing in order to achieve efficiency, but what we’re seeing in our pipeline is that many very, very large global multinationals, we refer to a global auto parts manufacturer with 40,000 employees in North America. They actually have 350,000 employees globally. We refer to a global professional services firm with 55,000 employees in the US and Canada that we brought live. They have 276,000 employees globally. So this land and expand strategy is a huge part of our go-to-market and you should expect to see more of that over time.

Mark Marcon: That’s great. And can you just mention to what extent the Dayforce Wallet capabilities are helping listen to a large European staffing company Randstad just put in place early wage access for their European clients. So I’m wondering to what extent we’re starting to see some traction outside of the US as it relates to early wage access?

David Ossip :

geo:

Mark Marcon: Terrific. Thank you.

Matt Wells: Thanks, Mark. And our next question comes from Mark Murphy of JPMorgan.

Mark Murphy: Yes. Thank you very much. And congratulations, on the very strong guidance. First of all, it’s great to see the $40 billion expected wallet revenue next year. I was curious, if that is assuming this continued registration rate of around 45% of the eligible users, or do you see potential perhaps to convert some of the holdouts and maybe what would be the — what are the hurdles to get that to happen? And then, I have a quick follow-up.

David Ossip: So Mark, it’s still early days for the actual wallet. I’m not sure, if we got the number correct, it’s 1-4 not 40 in the 2023 time frame. It’s growing well beyond 100% year-over-year. If I look at the actual volumes of loads, we’ve crossed over $1 billion, a few months ago. And if I look at the daily loads or the number of times the application is used now, we’re probably around 30,000 to 40,000 loads per day. So, it’s growing very quickly. But from a revenue percentage contribution, it comes in now, I don’t know what is it about less — about 1% I guess of the overall size of the company.

Mark Murphy: Okay. Understood. David, thank you for clarifying. I didn’t hear it phonetically on the call properly. Thank you for clarifying that. As a follow-up, how did you interpret the recent monthly non-farm payrolls data. It was a stunning number. Unemployment rate was the lowest since I think the late 1960s. And I believe leisure and hospitality, were the strongest there where you do have relatively high exposure. Is that something you view, as kind of noisy or anomalous, or do you think it’s instructive on the overall employment backdrop that you’re seeing today?

David Ossip: They didn’t really talk about the seasonality of those particular segments. And you remember that in December, you typically have the highest level of employment in hospitality and retail. Typically, you’ll see a drop-off of that, as you go through Q1 and then begins to build up again starting with Q2. So, I didn’t see — I wasn’t surprised by the numbers. And remember, we have pretty live data when it comes to employment numbers by segment, by geo as well. So it’s what we had expected.

Mark Murphy: Thank you very much,

Matt Wells: Thanks, Mark. And our next question comes from Bryan Bergin of Cowen.

Bryan Bergin: Hi, all good afternoon. Thank you. I guess, I want to start with demand. Just are you seeing any KPIs that would suggest recessionary behavior or eminent slowdown? Anything, like that? Can you comment on maybe new business momentum through January please?

David Ossip: It’s kind of a strange time. Usually on the sales cycle, sales activities after Thanksgiving, you typically see a bit of a slowdown that continues through December and into January. Last year, we didn’t see that. The Solution Advisory team was exceptionally busy, throughout the month of December, towards the very, very end. And then came right back very, very high active, sales activities in the beginning of January. So there seems to be still a very robust market for our type of system, what I will say though is I think the inspection that is going into every single deal, the amount of diligence that each and every customer is doing is definitely up several at times and the focus on quantifiable value in other words delivering a very hard IRR to the company has become very important in order to get the approvals for the projects. But on the macro side, I can’t speak to anything specifically that talks to the slowdown in the economy.

Bryan Bergin: Okay. That’s helpful. And then pivoting to margin here. So the cloud recurring ex-float gross margin solid close here, where do you expect that to land in 2023? And then just on the change in commission expense amortization. Can you just give us a sense of what the 2023 impact is from that?