Dayforce, Inc.

Hello and good evening. I'd like to welcome everyone to the second quarter earnings call for Ceridian. I'm Eric Zimmer, head of corporate development and investor relations. I am joined on the call today by our co-CEOs, David Austin and Lee Turner, our CFO, Noemi Uland, and our senior director of investor relations, Matt Wells. I will now turn it over to Matt, who will run through our legal disclaimers.

Thanks Eric. As a reminder, all participants are in listen-only mode and this call is being recorded. The 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 expectations. A description of some of these risks and uncertainties can be found in the reports that we file with the Securities and Exchange Commission, in addition to statements included in our current and periodic filings. Additionally, over the course of this call, we will reference non gap measures to describe our performance. Please review our earnings press release and filings with the SEC for rationale behind the use of these non-GAAP measures and a full reconciliation of our GAAP to non-GAAP measures. As a final note, our earnings press release and other SEC filings are available on the Ceridian Investor Relations website. With that, I'll turn the call over to David.

Hello, everyone, and thank you for joining our Q2 earnings call. Today, I'll speak briefly about our strong performance in the quarter, what we are seeing in the macro environment, and I'll highlight our technology differentiation. Lee will then give more color on our sales momentum and outlook for the second half of the year. And she'll go into details on how we are driving efficiencies across the organization. And then Naomi will go into the numbers before we open up the call for questions. Turn into performance. We had a very strong quarter, and in constant currency, we exceeded the high of our guide on all of our metrics. Dayfall's recurring revenue, ex-float, grew by 30%, and 31% including float. Adjusted EBITDA came in at 61.8 million, or 20.5% of revenue, versus a year ago when the business was operating at 15.9%. This is a significant improvement in probability and in scale. A large part of our EBITDA beat came from the 230 basis point year-over-year increase in adjusted gross profit on cloud recurring to 76.4%. On the macro side, we have not seen any slowdown in sales or any slowdown in decision-making. Year-to-day sales are up significantly year-over-year and growth appears to be accelerating. We have seen continued momentum across all segments. Deals above $1 million are up 50% year-over-year. Mid-market sales are above plan. Add-on sales to the base continues to be a healthy 30%. The number of customers who have brought a suite is up to 36%. And global traction continues, with EMEA and APJ sales both up year over year by more than 50%. In other words, we are firing on all cylinders and are quite confident on the outlook for the second half of the year. And turning to technology, we continue to build great tech that continually expands our addressable market by extending our platform with new modules, adding capabilities that scale for large enterprises, and adding global HR, payroll, and time features that service the needs of global organizations and those headquartered outside of North America, all of which deliver more value to our customers and drives recurring revenue growth and profitability. And as you know, we differentiate in the market through our Dayforce technology in a number of ways. First, we have a single solution with a single database that spans across HCM. This drives efficiencies and cost savings for our customers. Second, our continuous calculation engine also drives significant efficiencies and much better compliance for our customers. In fact, we have seen payroll processing times drop from over 20 hours to less than two hours at our customers. and we are broadly recognized as a worldwide leader for payroll, workforce management, and compliance. It is this continuous calculation engine that has allowed us to bring Dayforce Wallet to market. Dayforce Wallet allows employees to get paid when they want, improving their financial wellness by avoiding costly alternatives, while significantly reducing employee turnover and cost for our customers. Today, more than 1,200 customers have signed for Dayforce Wallet, over 650 are live, average registrations are above 40% of eligible users, and the typical wallet user uses the wallet about 25 times per month. These trends illustrate what our customers are telling us, which is that Dayforce Wallet is a modern extension of a payroll process and is a base expectation of today's employee. Another advantage we have relative to the ERPs is our payment and tax services capabilities. In fact, I would argue that selling payroll without tax and money movement is like selling a bus without wheels and an engine. And on the global front, our global capabilities for HR, payroll, time, and talent allows customers to have a single system for their global operations, which is a significant competitive differentiator for Ceridian. And finally, our focus on driving returns for our customers has led to our success. Each time we build a module, we determine which KPI we can impact with that module. That measurement needs to be quantifiable and convertible into a money saving. This focus on ROI has led to powerful customer case studies and reinforces our value messaging, which resonates so well in today's macro environment. And our results stand as proof. I'll now turn it to Lee to go into more details on sales productivity and how we're driving efficiencies across our business.

Thank you, David. As David noted, this is an organization that is firing on all cylinders and in many respects is void by a macro environment where our customers and prospects value productivity and profitability more than they have in some time. Our technology delivers hard dollar returns at a market-leading TCO, and our sales reflect that. After two years of significant transformation in our sales and go-to-market organization, we are clearly seeing the fruits of our labor. Sales productivity has returned to an all time high after significant investments in getting the right people in the right roles in the right geographies with a market leading value proposition. The result is that we are winning at an accelerated rate in our key markets. In the North American EMEA and APJ mid markets, as detailed in our shareholder letter, we are seeing tremendous momentum in full suite sales. Now more than 36% of customers buying the day four suite. Momentum in selling back to our base. Now more than 30% of our sales are back to our current customer base. and real speed to value realized by our own implementation organization and that of our now more than 30 SI partners worldwide. The time we took to build a fully native, full suite offering, easily deployable in record time and high quality by a global network of partners tuned to service the mid-market is paying off in both accelerated growth and in profitability. In the global enterprise and large enterprise space, a market where we have been investing for several years, we are again seeing the fruits of our labor. Our shareholder letter tells the story. In the second quarter alone, customers in the 10,000 to 12,000 employee range buying the full day four suite are becoming commonplace. We have always said we are not limited by our technology. Our platform scales. And we are now selling and taking live customers with hundreds of thousands of employees. One of the largest e-commerce logistics companies in the world chose to expand their relationship with Dayforce to support their more than 100,000 employees in the UK. One of the largest grocers in the world with 350,000 employees will leverage Dayforce to support their profitable growth. And in the first weeks of the second half, we cemented a relationship with a global customer who will move more than 700,000 of their global employees to Dayforce in a phased rollout. In each one of these wins, we are replacing antiquated technology, disparate systems that are glued together with people and undue cost, And in so doing, we are driving real ROI at market-leading TCO for our customers in a market where that's more valued than it has ever been. Finally, a word about scale. We have been relentlessly focused on driving scale for the last many years. Again, The results stand as proof. We are now operating at 74.6% adjusted cloud recurring gross margin and a clear path to greater efficiencies ahead as we continue to leverage our global footprint. All of this while improving the core metrics which our customers have come to expect from us. As an example, retention rates remain best in class while we globalized our support organization and simultaneously reduced ticket volumes by 15% year on year. This is but an example of hundreds of initiatives we have in place to support our continued accelerated growth and profitability. And I would be completely remiss if I didn't stop to thank our own people and our customers who have put their trust in us when we told them that we could do what we are now, in fact, doing. And with that, I'll turn it over to Noemi to take you through the numbers in more detail and to discuss guidance. Noemi?

Thank you, Lee. I'd like to provide additional color on our second quarter performance and guidance, which is detailed in the stockholder letter. In reviewing our second quarter performance, I want to reiterate that growth across Dayforce recurring revenue, cloud revenue, and total revenue faced FX headwinds driven by a stronger US dollar compared to what we expected. These headwinds amounted to approximately 200 basis points of growth in the quarter. On a constant currency basis, Dayforce recurring revenue excluding float grew 30%, cloud revenue grew 28%, and total revenue grew 23%. Adjusted EBITDA margins of 20.5% exceeded our guidance range, driven by revenue upside in the quarter, as well as operational efficiencies, as illustrated by our adjusted cloud recurring gross margin of 76.4, an expansion of 230 basis points. Turning to third quarter and fiscal year 2022 guidance, I want to note that in the second half of the year, we face FX headwinds of approximately 150 basis points to revenue growth. These FX headwinds are incremental to our previous assumptions and are detailed in our stockholder letter. Despite these FX headwinds, we're raising and narrowing the range for our fiscal year 2022 growth expectations, both reported and at constant currency across cloud revenue and total revenue on a healthy Q2 performance and increased float revenue. For the full year 2022, we're adjusting our guidance for Dayforce recurring revenue X float to reflect second half FX headwinds. Growth is now expected to be in the range of 25% to 27%. However, we maintain our prior constant currency guidance range of 26% to 28% growth. When attributing float revenue to day fours, expected growth is in the range of 27 to 29%, and constant currency growth is in the range of 28 to 30% for the full year. In addition, we're raising adjusting EBITDA to reflect our float revenue guidance and flow through of half of the profitability upside for the second quarter. our 2022 adjusted EBITDA guidance implies margin moderation in the second half of the year as we continue to invest across our growth initiatives. That said, at the midpoint, we now expect to achieve adjusted EBITDA margins of approximately 18%, which is an increase of about 200 basis points versus our prior guidance midpoint of 16%. As we continue to manage through an evolving macro environment, We remain committed to investing for future growth while continuing to drive scale and efficiencies across the organization. Now, I'd like to turn the call back over to Matt to open the Q&A.

Thank you, Noemi. Thank you, everyone, for joining us. I believe our first question is going to come from Willow Miller of William Blair.

Hi, guys. Thanks for taking my questions and congrats on the quarter. So my first question is, what are you seeing in terms of employment within your customer base? Have your customers pulled back on headcount growth?

I'll take that. Thanks for the question. We haven't seen growth slow down at our customers. If I look at my headcount reports, they continue to be about 4% up over the last 90 days, which would be in line with our expectations.

Great. And then just a quick follow up. How does your pipeline look like now versus 90 days ago?

As I said before, sales have done tremendously well year to date. As Lee mentioned, we've had a very strong start to July. The pipeline looks very healthy and we believe we have adequate coverage to have a good sales year.

Great. Thanks.

Next up, we have Mark Macron from Barrett.

Hey, everybody. It's Mark Marcon. My cousin, Emmanuel, isn't on the line. With regards to the strong quarter, can you talk a little bit more about some of the big wins that you mentioned, Lee? In particular, the large grocer who's being replaced there. And then you mentioned the large employer that's got 700,000 employees. employees that you signed in the first couple of weeks? When would that start going live? And what were some of the key reasons why you were selected for some of those really big, impressive wins?

Yeah, so first of all, I'll just take them head on. The large grocer, headquartered actually in EMEA, with 11,500 stores, is going to leverage us for WFM advanced scheduling to expand the profitability of their operations. And they're going to operate in over 20 languages, leveraging Dayforce. the global e-commerce and web services company that i referenced is going to use us for payroll in their uk operation for over a hundred thousand employees it actually builds on which we're most proud of a pre-existing relationship they're double doubling down their relationship with ceridian uh with opportunity frankly to continue to scale that relationship globally and uh we replaced a major competitor a major payroll competitor And then with respect to the win in the first part of July, which you can imagine dramatically affected our linearity for the second half, we intend to provision their system within the next couple of weeks. And we're going to begin loading data into that system this quarter with the intention to begin a phased rollout in-year. And we replaced an existing competitor. We competed with the masses in order to win, and in fact did. And as I said, when we are completed there, we will have rolled out to 700,000 employees with the opportunity for expansion from payroll into full HCM over time. So those are some patterns that we are seeing in the market. Our pipeline is full of opportunities like that. And what we're finding is that we're accelerating our ability to win them.

Congratulations. That's terrific. Nomi or David, question with the gross margin improvement and the EBITDA margin improvement was really impressive. Nice to see that. Can you talk a little bit about, you know, some of the key drivers behind the improvement? And how should we think about, you know, those, the day force recurring gross margins on a go forward basis as we start looking to next year and the year beyond?

So I'll start that and I'll let Amy add some more color to the conversation. On the gross profit on recurring, a lot of it is driven by the efficiencies we're having across our support organization. Earlier in the year, we moved to a model that allows users to support one another, and that has led to a reduction in support tickets year over year, and has obviously increased the probability of the recurring revenue. The second piece is, as we've mentioned, as we extend the platform and we sell the add-on modules, and 36 percent of clients today have a suite of modules that they're using, We get additional revenue, but we don't really change the cost of hosting or the cost of support, but that drives up the profitability of it as well. And then overall, just from a process perspective, more automation, less bums and seats type of approach to the actual business has led to it. On a longer-term basis, we're consistent with what we've said beforehand. We expect that gross profit number on recurring to go up to about 80% or so over the next about three years.

Terrific. Thank you.

Our next question comes from Jared Levine from Collin.

Thank you. In terms of the sales headcount, can you update us on those staffing levels, including those additional hirings that you're expecting within the enterprise segment?

We're fully staffed in our sales organization at the moment, including the large enterprise segment.

Okay, great. And then looking at your day force recurring X flow content currency guide for the year, can you help us in terms of the attribution across new logos, upsells, pricing increases, and employment growth within the base segment?

About 30% of it is sales to the base, and largely the remainder of that would be new sales. So 17 new sales, 30% back to the base.

And our next question comes from Siti Panagrahi from Mizuho.

Hey, thanks for taking my question. David, I want to ask you your favorite topic, Day First Wallet. It's very impressive to see now 40% now registration rate. Looks like your employee, you know, the referral program working. So it's been now two years. How far you can go in terms of employee registration within the base? And how do you feel about the adoption at this point? And also, if you see any slowdown, you know, macro slowdown, how do you see the wallet with that?

So on the macro side, again, we haven't seen any impact to the business yet. If I look at the number of users of the wallet, if I look at the amount that people are spending per transaction, it hasn't changed over the course of the year. It's been largely constant. In terms of registration rates, it seems to be going up by a few percentage points every quarter, and I think that trend will continue. We've seen a number of registrations per day go up quite significantly over the last three months. And so I'm confident that we'll see more people being live and more of their registered users. The play over there still largely is working with the customers, if you like, to increase the number of employees that are eligible for the wallet.

Okay. And then a follow-up to your one comment, you said how you differentiate payroll and tax with your payroll and tax with ERP vendors. What sort of, like, how are you seeing the success in terms of competing in the enterprise segment, more selling HCM product in the enterprise segment?

So I'm not sure if I heard the question correctly, but as I mentioned, the number of deals over a million dollars is 50% year over year, so we're having much more success in the large enterprise space. And in Lee highlighting some of the wins of the very large customers, ERP vendors would have been at the table in all of those. Lee, any other parts that you could answer?

Yeah, I'm just going to try and get to the root of your question, Citi, if I understood you correctly. Basically, what you're asking is, talk to me about your tax and money movement offering. And does that really help you when you're selling full suite HCM? And the answer is yes. And the reason that it helps is that in a down market, Everybody is driving for consolidation. So lowest possible total cost of ownership. So if you can eliminate integration points or alternative providers or duplicative teams internal to your business, that's a win. which is why anything that we do that complements our full suite and allows us to be one single provider to our customer is part of the reason that we're winning full suite deals, payroll deals in a down market. I would argue more than people who don't offer what we offer.

Great. Thank you.

And our next question comes from Dan Jester of BMO.

Great. Good afternoon, everyone. Thanks for taking my question. Maybe another one on the wallet. So if I heard correctly, you've got 1,200 signed customers now on the wallet. If I look at my math, that looks like it's about 100 new customers sequentially. And that's the lowest pace in a year. So I guess I'm just wondering, in terms of clients signing with Dayforce, how are you seeing the momentum there? And should we expect the pace of signings to pick up as we go into the back half of the year?

Daniel, as I said before, the focus at the moment is working with the customers that have signed the 1200 to first go live, 650 are live, so there's 550 more to take live, and then to work with those that are live to increase the populations that are eligible. When we just look at the number of employees that we've signed across the 1,200, it's a considerable amount. And so we're focusing more now on activation to get the usages. You heard earlier there was a reference to the referral program. We launched that last quarter, which effectively is the first time, if you give your referral code to a buddy, the first time they use it, they get a bit of money, you get a bit of money. And we've seen an impact in terms of the registrations coming from that as well. So our focus at the moment really is driving the eligible population mostly. But there's still a runway to go in terms of the number of customers who sign up. And we still are seeing above 80% attachment rate of wallet to payroll. And I know that Lee would argue that, you know what, the wallet has now become table stakes from a modern payroll system. Any employee out there today does expect to have the ability to get paid when they want to, and we're seeing that reflected in the RFIs, RFPs, when people are asking about the features that they do expect to have in a modern payroll system.

Okay, great. Thank you. And then maybe for Noemi on the EBITDA margin guidance, if I caught what you said correctly, is that you didn't necessarily flow through all of the upside into the back half of the year. Are there specific investments that you'd call out that are keeping that from flowing through? Or are you just being conservative given the kind of the world that could look a little bit more uncertain in the next three to six months. I'd love just a little bit more color on the margin outlook. Thanks.

So as you saw, we raised both the low end and the high end by 20 million. So that's essentially all the float upside that we saw. We're flowing through the second half of the year. the four-year guidance. And then we're flowing through half of the adjusted EBITDA beat from Q2, which is substantial. We continue to make investments in sales and marketing. We have our big event in November, Insights in Vegas, where we have a lot of prospects and customers attending. And we continue to invest in marketing and then in product innovation, as you saw in the stock travel letter. So those are the main dates on the EBITDA for the remainder of the year.

Gotcha. Thank you very much, everyone.

Our next question comes from Robert Simmons of DA Davidson.

Hey guys, thanks for taking the question. I was wondering on your international revenue, how much of it, excluding things like Ascender, but how much is related to multinationals who kind of started off with you in the U.S. or their own domestic market and then took you international to other divisions versus companies that are native to those countries taking you in, say, Australia alone, that sort of thing?

So we're actually seeing success on both fronts. I mentioned this in my piece up front, that when we look at EMEA and APJ, and that's where we sell to companies that are headquartered in either EMEA or headquartered in APJ, we've seen the sales figures go up 50% year over year. So we are being successful at selling in the local markets against the local competitors. As well, we are seeing additional rollouts of global employees from companies that are already live on day four, which obviously would be companies that are headquartered in North America. The one logistics company that Lee mentioned has been a customer in North America for a few years, and they've now extended their relationship to their UK population, so that's a perfect example. Lee, anything you would add to that?

No, I don't think so. I think you covered it.

Awesome. Great. And then can you talk about what impact you're seeing from higher inflation rates or high inflation rates, I should say? I know that you pass on price increases generally at renewal, but how do new deals look? And then also what are you seeing on the cost side of the equation?

So on the price increase, as you know, we have contract terms that allow us to increase upon renewal. We're obviously applying those and at the same time being mindful of the customer-specific situations. And we've also increased our price list to reflect the effect of inflation. But again, we're mindful and we're looking at competitive positioning of our offering in some deals, especially in the large enterprise sector. So I think we're mindful of applying price increases as well as looking at what others are doing and compete efficiently, especially in the large enterprise space.

The one thing I would add is we're taking advantage of our global workforce to lower the actual labor cost for us as well.

Our next question comes from Kevin McVey of Credit Suisse.

Great. Thank you so much and congratulations on the results. Hey, is there any way to think about what the revenue opportunity is if the remaining clients were to adopt the full day four suite? I think the number, it's 36% today, but if that flows across the entire enterprise, how much revenue would be associated with that?

That's actually a good question. So just a few thoughts of breaking that down. Even across the 36% that have a suite, there's still significant upsell capabilities across them. So at the moment today, I think we have 18 different modules that are available, 24 modules that are available, sorry, excuse me. So there's a lot, and every year, Joe adds on average about two to three new modules which drive additional PEPM. So there's still significant, and I think there always will be a significant opportunity in terms of going back to the base. I don't have the math to work out the 30% compounded. I'll give that to Naomi to try and answer that one.

No, I think David covered it. There is significant upsell opportunity to the customers who already have the full suite by virtue of adding additional modules. And then if you look at their large enterprise wins that we're having today and that Lee talked about, we're pretty much landing with payroll and time and workforce management for the most part. And the idea here is obviously once we land those customers, they go live on payroll, we expand with additional modules. So the opportunity is humongous.

And the only thing I would add is that we're starting to see some of that. So you'll see in our shareholder letter that there's a long-term healthcare provider with 11,000 employees that bought the full suite from us. It's an example of consolidation and driving down TCOs. They amalgamated a bunch of point solutions and went with Dayforce. There's a global veterinary services company, 40,000 employees, bought the full suite from us to manage complex scheduling requirements and to roll out, frankly, Dayforce Wallet in order to be able to drive up employee retention. And both of those, 11,000 and 40,000 employees, would have been unheard of a couple of years ago that they would have bought more than pay and time from us. But now they're buying a larger footprint, and they're a really good example of what Noemi just said, which is we expect that customers that are in the 100,000, 350,000, and 700,000 range will buy more from us over time if we land with pay and time and service them well.

very helpful. And then just how long is the conversion on that 700,000 employee win? And what would that have taken three years ago? Because obviously you've had an amazing amount of efficiencies from an implementation perspective. Is there any way to just think about the time factor on the conversion of a client of that size relative to maybe three years ago?

What do you mean by conversion? What's your question specifically?

When you're cutting over the actual HCM process from the legacy provider to Ceridian.

Oh, I see. So your question is, how long will it take for us to get 700,000 employees live on our platform?

Yes. Look, it depends on the actual rollout of the client. We've seen big clients. Last year, we had a healthcare organization with 60,000 go live in 7.5 months. In terms of the UK logistics company with about 100,000, I would expect that to be about a year rollout to get them live. In terms of the other logistic company that we signed early this quarter, there's a bit of seasonality into that base as well. So we'll probably take up their base employee base, which I think is about 500,000 relatively quickly. It'll peak up, I suppose, over the Christmas period to that 700,000, 800,000 level.

uh but i would expect that to be a one two year project the only thing i would say just to augment that is that uh in the shareholder letter there's an example of a holiday company uh based in the united kingdom uh with 10 000 employees going live uh with wfm and a few other things uh all within a six month period they need to do it for business reasons and we can accommodate that whereas again a couple of years ago that would not have been possible just so just as an example of what david said You know, we've gotten much, much faster at getting customers live on time and on value, and this 700,000-person customer will do it at their own pace and what serves their own business, but we can accommodate their needs.

Congratulations again.

And our next question comes from Mark Murphy of J.P. Morgan.

Yes, thank you very much. I'll add my congrats. So you've mentioned a customer with 350,000 employees. You mentioned one with 100,000, one with 40,000, and now the one in July. Is it safe to assume that your win rates... are improving the when we look at the upper market uh segment where they have these more complex international deployments do you think that that win rate is improving because you can you can handle some of that payroll natively and then um i guess with the expansion of the partner ecosystem to to handle some of the deployments and just trying to understand if it's win rate or for some reason they're just more of a cluster of these uh coming to market at once

So, Mark, a few major themes in this. In 2018, when we spoke about enterprise, we already meant above 10,000 employees. Nowadays, when we speak about large enterprise, we're speaking about hundreds of thousands of employees. What's allowed us to do that is really two things. The first is that Joe, with the product and technology team, has significantly improved the scalability of the solution. From a payroll engine perspective, they've added the capability to horizontally scale into different containers that allow us to do these calculations very, very quickly. A lot of that we actually had to do to support the Dayforce wallet, which as you can imagine, at any instance of the day, we're running a payroll for someone just based on consumer demand. So we've created tremendous more scalability. Also on the product and technology side, we added some features that are required for the larger organizations to do payroll. So things like the global system of record, the ability to do more complicated tax calculations are examples of that. And then on the sales and marketing side, as you know, we rebuilt the sales organization about 18 months ago when Rocky joined the organization. And we went to market and we brought in a lot of exceptional sellers who are familiar selling to the large enterprise market. And remember, to sell to the large enterprise market, you have to sell value, you have to sell software, you have to get peppermint provisioning because you're a software provider, not a service provider. You have to know how to position value to the C-suite, and you have to be able to run through a more complex sales process. And I would argue that Rocky's done a tremendous job. in changing the way we actually go to market that has allowed us to win those accounts. So, yeah, I think we should be very proud of what we've accomplished in the large enterprise market. And I expect the momentum to continue. And I think we are beyond the tipping point of becoming the recognized leader for compliance for the very large enterprises.

The only thing I would add is there just hit your point on the head. There are more of these deals in our pipeline than there has ever been. Our win rates are increasing, and we believe that the competitive landscape is going to allow us to win at an increasing rate. And we have the most global solution on the market.

Okay. And thank you. That's extremely helpful. And just as a quick follow-up, the shareholder letter mentioned significant traction in the month of July. And I think we understand now it includes a mega deal. Is it fair to assume it's also a healthy volume of business in your normal or traditional customer segments as well in the month of July?

Yeah, I'm just going to say our mid-market business in all markets, not just North America, is on budget for the year, and that includes July.

In fact, I would actually even add to that. If I look at the small business performance year-to-date as well for the half year, it's also about plan. So, again, I think we're doing very well on a sales momentum basis.

Okay, excellent. Thank you.

Your next question comes from Alex Zukin of Wolf.

Hey, guys. Thanks for taking the question. So I guess clearly, you know, I think you've talked about increasing momentum, which is obvious given the very large customer logos you're announcing, which I think is more than, you know, at least I can remember you guys talking about on a single earnings call. So what I'm trying to reconcile is given, you know, Lee, you talk about accelerating momentum. David, you're talking about both businesses above plan. Just help us understand and bridge. If I look at the sequential dollar increase in day force, recurring revenue, constant currency, X float, on a dollar basis, it's actually going up less than this time last year. And in the context, I'm wondering, is there a linearity component here where some of these deals, because they're larger, they're bigger logos, maybe they're more complex, there's a longer time a lag between the booking and the revenue recognition. But just help me understand that and then maybe couple that with why keeping the guide unchanged.

Alex, it's largely the COVID sales basically moving through the income statement. And we spoke about that all the way down, I think, in Q3 and Q4 of last year, that we have to just basically see the sales impact of COVID make their way through the income statement. We're going to see most of the impact in the middle to late part of this year. And that's what you're saying. But we now have seen a reacceleration of sales.

Okay, and I guess maybe just if I look at the – is it a similar question around the go lives or the net ads? I think it's less in Q2 than it was in the last two years in Q2. Is that, again, it's just larger customers, so less but larger deal values?

It's up and down by a quarter, as you know. You have to look at it more on a half-year basis, more than anything else. If you look at it, it was 175 in Q1, 119 in Q2, 207 in Q4, but 63 in Q3 of last year. So it fluctuates quite a bit and it always has fluctuated quite a bit. I would say if I look at it just on an absolute basis, 119 to 125 or 123 to the last two years is largely constant. And yes, we have gone up market. The average size of the deal is up about 10% year over year.

Got it. Thanks, guys.

And our next question comes from Bob and Shad, Deutsche Bank.

Great, thanks for taking my question. Just following back up on on-market, I know in the past you've talked about how important the asset partnerships will be for this segment of the market. How have these relationships evolved relative to your expectations? And what are they in terms of adding to new deal wins as we think about this quarter and even going forward?

I mean they're critically important, as I cited at the top, we now have more than 30 si relationships globally. And by relationships, what I mean is we have contracted with the si the si has trained their staff, they have people on a bench being utilized in deployments globally. And that is critically important to our ability to grow, I'll call it exponentially rather than incrementally, both in the mid-market and in the large enterprise space globally. And it is also key to our ability to perform like a software company with gross margins in excess of 80%, which is what we're tracking toward.

Super helpful. Just a quick follow up on float revenue. I just want to clarify your commentary in your shareable letter talking about the assumptions here, taking into account the current rate environment. Should we take that to imply that it assumes all rate increases thus far? And if we get anything additional in September or beyond, that could drive additional upside?

Yeah, the 13 million increase in our FOIA guidance reflects the most recent rate hikes. Remember, we also have a portfolio of investments that is laddered. So you have half of the portfolio where that repricing immediately applies and half of the portfolio where you'll see that flow through a little bit later in time. But yes, potentially, if there's some additional rate hikes, you may see a little bit of upside there.

Great. Completely understand the dynamic, and that's helpful. Thanks again for taking my questions.

question comes from David Unger of Wells Fargo.

Thanks a lot for squeezing in, guys. So it's great to hear the positive commentary on international sales and me and APJ. Anything you can mention in terms of changes in pricing dynamics with those enterprise customers? Thanks.

I mean, I'll start and I'll ask David or Noemi to chime in. I guess, stay with the obvious, and I said it earlier, you know, when you're servicing 100,000 employees or 700,000 employee customer for pay and time, you can imagine what our approach is, which is we seed the customer and we go back and expand the PEPM over time. So that's our approach with these large customers and it will continue to be as we continue to grow. David, would you add anything?

I wouldn't be. I think that's good.

Okay, great. Thanks. And then, you know, great to see full suite sale, 35% holding steady. Any internal targets you could share with us over the intermediate term? Thank you.

With respect to full suite sales, is that your question? I mean, I'll give you a general answer and I'll ask Noemi and David if they want to sharpen it. I guess my general answer would be our goal is to sell full suite to the mid-market to go back and make sure that every single one of those customers owns the complete 24 SKUs that we have to offer to then plant seeds in the large enterprise, which is what we're doing, and expand just as we will have in the mid-market there over time. That's our goal. David, would you add anything?

No, I wouldn't. I would say we've always leveraged our leadership in compliance, which is payroll, bed, and time. We know that we can do that better than anyone else, and we know that if we win that and we get system of record, it's very likely that we will get the talent components as well. Again, in 2018, that would have been true at the major, in the mid-market. We now are also quite successful up to the enterprise space, which is about the 10,000 employee level. And on a longer-term basis, we would like to get system of record as well for the large enterprise, which we do believe will allow us to also win their talent components. And by the way, we have seen success even in large enterprise on sweet sales.

Thanks very much. As I noted before, 40,000 employee company, global veterinary services company bought our full suite just in this last quarter. So it's a really good example of what David just said. And the only other thing I would add to that is in a down macro environment, every customer is looking to rationalize total cost of ownership. So he who provides a suite wins.

Makes a lot of sense. Thanks very much.

And our next question comes from Samad Samana from Jefferies.

Hi, great. Thanks for taking my questions. Maybe first one for you, Amy. Just as I think about EBITDA, clearly the company has done really well in getting the gross margins up and kind of keeping an eye on OPEX as well. So we're seeing that. I'm just curious, how should we think about adjusted EBITDA translating into free cash flow? Just, you know, how does that conversion in the past? It hasn't converted quite as well. Just should we start to see free cash flow inflect as well? Or how should we think about adjusted EBITDA converting into free cash flow?

Yeah, absolutely. So just look at Q2. If you look at the operating cash flow, we grew like five million in Q2. So most of it is expansion of profitability. We had a bit of working capital movements in Q2 that you would expect to normalize over time. So the answer is yes, as we expand on profitability, expand our cloud recurring gross margin, getting more efficient on our G&A ratios and the like, you expect that to flow through pre-cash flow as well. The other thing I would add is this quarter, similar to the previous quarter, we had several statements as well as a result of our workforce action to move and leverage capital our APJ services center, and that will also normalize over time.

Great. And then, David, I know that the commentary on the pipeline sounded great. I guess I just wanted to maybe ask a follow-up. Is there, in terms of the newer geographies that you guys are still ramping in and where you have native payroll, are you seeing any changes in any particular geography or any particular geography shining that you would call out?

There are three things. In a mere... I believe the team is doing a very good job over there, and they've got a very good partnership network, which I spoke about last time, that are helping influence the actual deals and the win rates. In APJ, we did a lot of restructuring of the go-to market over the course of the last year, and we are beginning to see great benefits from that. As I mentioned, APJ sales, as is EMEA, by the way, are both up 50% year over year. So I'll say it's working very nicely. We're also about to launch in Germany on the payroll side. And already we've seen significant traction in terms of taking orders against the German payroll solution. So we're quite optimistic. And the 350,000 gross that Lee spoke about is actually based out of Germany.

Gotcha. Thanks for taking my questions. Appreciate it.

Our next question comes from Remo Lynchow of Barclays.

Thank you. Thanks for squeezing me in. David, can I stay on that subject? If you think about it, those kind of large customers are really a game changer and it doesn't happen very often that someone is breaking into the world of the SAP's, Oracle's workplace there. Can you speak to Who are you replacing there? And what's the situation in terms of setup? Was it a native software guy or was that a combination of someone doing payroll taxes somewhere else and then some software? And you basically are coming in with one solution, one suite, as you said, and are able to kind of consolidate the solution there. Can you speak to that a little bit? Thank you. And congrats from me as well.

Yeah, Rem, as Lee mentioned, the grocer is actually a workforce management client. The reality over there is they were an existing client with a much smaller footprint. and they've now extended it globally. And I think there's actually still an upside over there of a few hundred thousand more employees that we expect to win over time as well. So it's just based on really performance of the Dayfall's platform and the capabilities that we've built in able them to then run their business. When we look at the other global deals, typically there is a domestic provider. Sometimes it's a big ERP that we're coming in and actually replacing. A large enterprise is still largely a vessel breed, so we get our foot in, if you like, with the compliance modules, and then we expect over time to get the system of record followed by the talent. We've had some success with customers like Costa, which is part of Coke, where we are the system of record. We've rolled out full talent capabilities to them, and that's obviously resonating very nicely in market.

Yeah, okay, perfect. Congratulations.

And we have, I believe, our final question of the evening from Scott Berg with Needham. Hi, everyone.

Congrats on the really good bookings, and thanks for taking my questions. I guess I have two quick ones. Follow-up on the gross margin impact from someone's earlier question. In the response for the improvement in the quarter, I didn't hear about the impact of the improved float revenues. Day four's float revenues were up $3 million sequentially from Q1, so I assume that also drove some of the benefit in the subscription gross margins or the recurring gross margins. But I guess, A, correct me if I'm wrong, and then, B, you talked to that impact. Thanks.

Absolutely, but Xload, we're also seeing a pretty significant bump in our cloud recurring gross margin as well. But yes.

Sorry, Scott, you had another question? Are you still there?

Okay, everyone, thank you for joining our second quarter conference call. We look forward to connecting with you over the following weeks.