Dayforce, Inc.

Good morning, and thank you for joining. Welcome to Ceridian's third quarter 2023 earnings conference call. I'm Matt Wells, head of investor relations. And on the call today, we have our co-CEO, David Ossip, our CFO, Noemi Hewlin, and our chief product and technology officer, Joe Korngabel, and our president of customer and revenue operations, Steve Holgerd. As a reminder, all participants are in a listen only mode and a question and answer session will follow opening remarks. Now, before I hand the call over to David, I want to remind everyone that our commentary may include forward-looking statements. These statements are subject to risks and uncertainties that could cause Ceridian's results to differ materially from historical experience or present expectation. 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 these non-GAAP measures and for full reconciliation of these GAAP to non-GAAP metrics. These documents, in addition to a replay of this call, will be available on the Ceridian Investor Relations website. And with that, David, I'd like to turn the call over to you.

Thank you. And thank you all for joining us today. Today, I'll discuss our strong third quarter results, highlight our commitment to continually innovate on the Dayforce platform, and provide an update on our RAISE full year outlook. Steve will provide more information on sales wins and successful customer implementations. Joe will highlight key announcements out of Insights, especially our gender of AI co-pilots, autonomous payroll, service desk delivery, and other items that we discussed at our Insights conference. And Noemi will add detail to our quarterly performance and updated full-year outlook. In the third quarter, I'm pleased to report that we again exceeded guidance across all revenue and profitability metrics. Day-force recurring revenue grew by 35% year over year at constant currency, and we are pushing the full beat and incrementally raising our revenue and profitability guidance for Q4 and for the full year. Before I go into the financial details, it's with mixed emotions that I share the news that Lee will be leaving Ceridian on November the 10th to become CEO of Cooper Software. If you recall, five years ago, I brought Lee on board to bring structure and to build processes to scale and deliver durable growth. During our time together, we have delivered and the results speak for themselves. Our revenues have doubled and will surpass $1.5 billion by the end of this year. Our customer base has grown as well to over 6,300 live customers, including some of the biggest organizations in the world. And adjusted cloud gross margins have expanded meaningfully from 67% to over 78% today. And in terms of scale and structure, we now have an exceptional leadership team, including Steve and Joe, whom you'll hear from today. I and this best-in-class team are committed to the continued success of our people, customers, and business. Therefore, I'd like to express my gratitude to Lee personally. Although bittersweet, I'm delighted and proud of her development as a highly regarded leader in the cloud domain. She now has a chance to take the reins at Cooper and her appointment is truly well deserved. They are fortunate to have her at the helm. So from all of us, Lee, congratulations and thank you. Now let's turn to our financial results. In the third quarter, on a constant currency basis, Dayforce recurring revenue grew 35%. and day-force recurring revenue ex-float grew 29% year-over-year at constant currency. Adjusted cloud recurring gross margins of 78.3% expanded by approximately 350 basis points year-over-year. Adjusted EBITDA was 107.2 million or 28.4% of revenue and expanded 827 basis points year over year. This margin expansion reflects revenue upside, a greater share of recurring revenue in the business, and continued scale across the Dayfall's platform. And as I mentioned earlier, based on our Q3 performance, and increased visibility, we are raising and narrowing the range of our growth and profitability outlook for 2023. This reflects the full flow through of the beat in Q3 and an incremental raise into Q4 and the full year. Naomi will dig into the guidance details shortly. Other highlights of the quarter included another record break in insights, where we had a record number of attendees, including customers, prospects, and partners. And we showcased meaningful product innovation across the Dayforce platform, which Joe will discuss in a few minutes. Notably, we announced that Cerulean is becoming Dayforce. This decision reflects who we are today, an enterprise-grade, full-suite human capital management company. This will unify our industry-leading platform with our brand and further advance our shared ambition of making work-life better. And just last week, Gartner named Dayforce for the fourth straight year a leader in their Gartner Magic Quadrant, for cloud HCM suites for 1,000 plus employee enterprises. This recognition validates Dayforce as a continued leader in cloud HCM and shines a light on the positive experience millions of Dayforce users engage in daily. I'm so proud of this achievement. As the results show, we have momentum. We are well positioned to execute in the current macro environment and deliver durable and profitable growth. And with that, let me ask Steve to speak to the customer and market highlights. Steve, over to you.

Thank you, David. First of all, I continue to be impressed by the momentum of our sales team, now led by Sam Alperet as our Chief Revenue Officer. Sam has fully settled into the role and is driving best-in-class demand and sales execution across the go-to-market organization. We now have the largest and most qualified pipeline in our history, a byproduct of this focus across sales, marketing, partners, and our highly referenceable customers. Year-to-date, we've brought live 353 net new Dayforce customers. This number reflects a cohort of large deals going live in Q3 and is consistent with our strategy of shifting up market. For context, net go-lives of Dayforce customers in our enterprise segment are up 75% year-to-date. And notably, gross revenue retention remains in line with historical trends in the range of 97%. We're over 30% of annual contract values from add-on sales, consistent with our focus for some time now to sell value back to the expanding base. And year-to-date, we've attached the full suite to nearly 50% of new sales. This is validation of both our sales and product strategy. We're seeing continued adoption of our talent solution, while the Dayforce Hub experience also resonates with customers. This means 40% of our customer base is now full suite, showing we continue to help customers understand and adopt the full value that Dayforce can bring as organizations transform to the new world of work. Dayforce Wallet also continues to see healthy adoption across our new and existing customer base. We are attaching the solution to approximately 80% of new sales. We now have 1,765 customers sold and over 1,065 customers live on Wallet. And notably, we crossed 2 billion in total customer loads in Q3, with customer year-to-date loads on the card well over 1 billion. Moving now to a sample of key wins and go-lives from around the globe. In Q3, new customer wins included. One of the largest supermarket chains in Canada selected Dayforce to support 125,000 employees across 1,500 retail locations. A global European bank with 83,000 employees upgraded its payroll technology by extending its use of Dayforce to India, which will bring in an additional 20,000 employees onto the platform. A Lithuanian group of supermarket retail chains with 38,000 employees across five countries chose Dayforce for core HR and workforce management in Lithuania and Latvia. And some of the organizations that went live on Dayforce in Q3, a leading global customer service organization with 82,000 employees in 45 countries expanded its current Ceridian partnership by adding employees in Kenya onto Dayforce for core HR. time and attendance, recruiting, onboarding, and self-service. A global analytics professional services company with 35,000 employees in 40 countries recently went live with Dayforce HR and payroll for 17,000 employees in the U.S. A chemical and ingredients distribution company with 17,500 employees across 72 countries launched Dayforce in the US and Canada, allowing it to streamline 26 different pay cycles across 12 separate systems into a single platform for this region. And when we talk about wins and go lives, we must also spotlight the role of our partners this quarter, who, as you know, are an important part of our growth strategy. We continue to see our partner network expanding and thriving, including 250% plus year-over-year growth and SI partner-led RENs across all regions and segments. And look no further than the enhanced presence of our partners at our Insights Conference this to showcase how we continue to leverage and expand the breadth and depth of our ecosystem for the betterment of our community. This quarter demonstrated Ceridian's ability to ride the macro swells and deliver value to customers. As a company, we are leaning into our ability to serve customers as the go-to partner for HR transformations around the world, growing durably, profitably, and sustainably. And we are seeing our focus on quantifiable value with Dayforce as the global people platform translate into results across all areas of our business. And I know it's the same on the product front. Well, we'll now hear from our Chief Product and Technology Officer, Joe Korngabel. Joe, over to you.

Thank you very much, Steve. Yes, on our product and innovation front, we recently shared some key announcements around our industry-leading Dayforce HCM suite at our annual customer conference, Insights. These announcements focused on four areas of planned innovations. greater intelligence, stronger compliance, better experiences, and a more open and connected Dayforce platform. We have been delivering on these themes and announced the following. First, Dayforce Copilot. Yes, a generative AI assistant that transforms work by automating repetitive tasks and dramatically enhancing Dayforce. by helping employees get work done faster and also enabling them to drive better decisions into their business with real-time data-informed insights. You see, through our partnership with Microsoft and their connection to OpenAI, we're able to deliver this to our customers in early access today. That's right, we're delivering on the promise of AI with our customers and what it can do to drive efficiency and productivity today. And we will release more and more capabilities over the coming year. Next, we announced Dayforce Autonomous Payroll. This is a major enhancement to our already industry-leading global payroll product. It removes the need for a lot of manual identification of data errors and anomalies that payroll administrators suffer with. It offers these administrators the ability to run payroll completely instantaneously. You see, it leverages our continuous calculation engine. This allows autonomous payroll to run simulations on payroll constantly during the pay cycle. This gives advanced notice to those payroll administrators on potential issues that may arise and really leverages that power of data anomaly connection and AI to cut through the complexities that face their business. This is enabling our customers to be efficient and more productive in entirely new ways. We're excited to introduce this to our customers with availability in the first half of 2024. Finally, I want to talk about Dayforce Exchange. This is a key area of innovation across our entire ecosystem. It ties together our customers, our users, our partners, together with all of our Dayforce experts. You see, this exchange is a one-stop shop for organizations to access a rich library of content, solutions, and integrations. This leverages our entire ecosystem to help make Dayforce better for our customers. We will again be delivering this in the first half of 2024. All of this momentum, including our placement as a leader in the Gartner Magic Quadrant that David just spoke about, reflects our ability to go where customers need us in this time of efficiency and productivity. It allows for Dayforce to be the engine behind their change. It also highlights our ability to be nimble and agile in the face of what's going on with technology and workforce changes. Our announcements of Dayforce Copilot and the ability to interact with our customers and innovate together highlights this agility and nimbleness. Dayforce is continually becoming a trusted partner for our customer that can help in this world of change. And for us, staying focused on delivering quantifiable value for our customers by providing simplicity for their people operations and scale is what is differentiating us and driving us in the market. With that, let me hand over to Noemi to close us out.

Thank you, Joe. I'm happy to report that all Q3 metrics exceeded guidance and we are raising Dayforce recurring revenue ex-float. total revenue, float revenue, and adjusted EBITDA to reflect the full beat and an incremental raise. When we issued our Fiscal Year 25 financial targets, we said our margin profile would expand as a byproduct of the revenue mix shifts towards recurring, especially cloud recurring, and the scale of cloud gross margin through delivery of efficiencies and product automation. I am happy to report we continue to deliver on that promise, with the share of cloud recurring on our total revenue being 80% in Q3, up from 73% last year, in addition to adjusted cloud recurring gross margin expansion of 350 basis points over the same period. The scale of our cloud business, coupled with discipline in spend across the organization, drove significant profitability expansion in the third quarter, as evidenced by the adjusted EBITDA beat. Year-to-date operating cash flows of 130 million are up 43% year-on-year. And this increase in cash flow is primarily driven by continued scale in the business. While there was exacerbated seasonality impacting Q3 cash flow, we continue to expect approximately 50% conversion of adjusted EBITDA into operating cash flow in fiscal year 23. Turning to Q4 and fiscal year 23 guidance, We're adjusting our Canadian dollar outlook in Q4, resulting in a $1 to $2 million incremental headwind across day-force recurring and total revenue. Of note, after accounting for this incremental FX headwind, we're still raising our feasibility outlook for day-force recurring revenue ex-float above our third quarter beat. In the fourth quarter, day-force recurring revenue ex-float is expected to grow in the range of 29-30% at constant currency reflecting another strong quarter of go-lives, durable customer base, and typical seasonality of employee volumes at the end of the year. Float revenue guidance of $39 million reflects a relatively stable yield and average balances as compared to Q3, incrementally impacted for a weaker Canadian dollar. Total revenue in Q4 is expected to grow 18% to 19% at constant currency, reflecting strengths in day-force recurring revenue. As we continue to build our partner and SI ecosystem, we expect our professional services revenue to moderate accordingly. The knock-on effect is a greater share of recurring revenue helping drive margin expansion as we've seen throughout the year. As such, we expect full year 23 adjusted EBITDA margin to expand to 27%, up from 20.1% in fiscal year 22. Timing of spend, with Q4 being typically our largest sales and go-life quarter, is driving quarter-over-quarter seasonality in Q4-adjusted EBITDA, expected to be in the range of $97 to $99 million, reflecting the trends I previously highlighted. Now, a couple of words on the brand and its financial applications. As David mentioned earlier, Ceridian is becoming day-force. We do not anticipate investments in the day force brand to affect our path to fiscal year 25 margin targets. And we plan to amortize the Syrian trade name over a two-year period, effective August 2nd this year. This amounts to a non-cash operating expense of approximately $21 million per quarter in GNA or $14 million for two months in the third quarter. With clear visibility into our 2025 targets of $2 billion in revenue and 30% adjusted EBITDA margins, we'll continue to execute as we head into next year with more granular details around 2024 guidance when we report in February. With that, Matt, I'll turn the call over to you for Q&A.

Thanks, Noemi. Our first question will come from Mark Marcon from Barron.

Good morning and thanks for taking my question. Can you hear me? Yeah, Mark. Good to hear from you. Great. Thanks, David. Hey, congratulations to you and the entire team on the very strong quarter. I have two questions. The first one, you know, is really nice to see, you know, the upside from a revenue perspective. But even, you know, more upside with regards to the margins. And I'm wondering, you know, if you can give us a little bit more deconstruction with regards to the source of the margin upside. You know, we basically ended up having a 2% beat on the top line and almost 20% beat in terms of adjusted EBITDA. And so I'm wondering, are there any things that are unusual, anything that we should think of with regards to the future? That's the first question. And then the second question, David, relates to Lee's departure. I'm wondering if you can talk a little bit. I mean, congratulations to Lee. Obviously, becoming CEO of Coupa is a desirable position. But I'm wondering, you've had so much success in terms of selling to larger enterprises on a global basis that takes a big team effort. How should we think about the sales cadence and the impact of Lee's departure on some of those big enterprise sales?

Great. Well, Mark, thanks for those two questions. So on the first, what you largely are seeing is a shift of the revenue mix. more towards the high margin recurring revenue. And if you look at the total results, you'll see we vastly outperformed on the day of false recurring revenue. And as Naomi pointed out, we're moderating the implementation side as we shift more and more implementations to our system integrator partners. That obviously drives a much stronger overall margin on the business. And you see that reflected in the considerable beat in the adjusted EBITDA margin. On a go-forward basis, I would expect that to continue. And as you know, we've given guidance to exceed 30% margins in the near term. Regarding Lee, what I'll say about this is Lee joined the organization five years ago to bring really process and structure to the organization and And she definitely delivered on that. We now have, I would argue, the best team in the industry. In terms of sales, Sam is fully up to speed. Steve mentioned that in his actual talk. We also have really the entire team really fast. what I call proficient expert in terms of the enterprise and into the large enterprise market. I'm obviously very, very confident and I'm obviously personally very committed to the business. Great. Thank you very much.

Our next question comes from Sidi Panegrahi with Mizuho.

Thanks for taking my question. Congratulations on a good quarter and also guidance. David, I want to ask you in terms of demand environment, what are you seeing at this point and how is the pipeline looking for mostly your enterprise deals? It was very impressive last two quarters. So any color on that and also the goal life of those large deals?

The pipeline this year has grown quarter over quarter. We go into Q4 and I expect it will go into fiscal 24 with a record pipeline.

Anything on the go-live?

On the go-live side, it's tracking, I would say, according to plan. You see that reflected in the guidance and obviously the raise of the actual guidance. Also with the actual go-live, you're actually seeing a shift to larger accounts going live, which I think we communicated earlier in the year. So a slight mix, if you look at the overall customer base, obviously towards the larger scale customers.

And one follow up, David, I know even lately we have started getting questions from investors about the growth opportunity for payroll sector. So how do you see about, I know you don't guide for next year, but when you look next year and beyond, what are the different growth drivers you're thinking in midterm? And is it, you know, the paper question is, is it 20% grower? So any comment on that would be helpful.

Look, we've given near-term guidance towards the $2 billion mark by 2025. We've also spoken about the 30% EBITDA, adjusted EBITDA, and the 80% gross margins. We believe we're on track and will be consistent with that. I think we've been very good in giving near-term guidance to the actual marketplace. If I look towards next year, I'd expect us to be in the rule of, say, 45 or so. And so you can kind of do the math to do the actual components on that. In terms of the payroll sector, I actually haven't seen a change in the payroll sector. I think it actually is still very healthy. I think there's a lot of land for us to grab as we go forward. I'd also like to point out that we are a human capital management company. And we now have well over 20 different modules that are available to our customer base. And as well, we've invested on the global side for quite some time where there's even more land to actually capture. So in terms of durable growth, I think we'll be consistent in terms of our performance and we'll keep focusing on our five growth levers that, again, we've been very consistent since 2018.

Thanks for the color, David. Our next question is from Scott Berg of Needham.

Hi, everyone. Nice results here in the third quarter. Thanks for taking my questions. I have two. I want to start on the company's And involvement in its partner ecosystem. I think one of the things that's come up really positively in my recent round of checks is, you know, outside of just bringing them more implementations, your engagement with them has, I guess, increased nicely over the last year. And I think they're more helpful in some of your deal opportunities. Can you help talk about kind of maybe what's really gone right in your engagement with partners or what's improved over the last couple of years in particular? And how should we think about those opportunities as you go forward?

So thanks, Scott. What I would say about that is I think we have had a high degree of integrity in the conversations with our system integration partners. As you know, we've been developing in the SI channel for several years now. When we actually look at the number of deals kicked off within the quarter, I believe, Steve, we're over 50% now. And when we actually go to market, we're positioning the SIs first in terms of doing the actual implementation and To Mark's question earlier, one of the reasons that you're now seeing us increase on the EBITDA side is as the revenue shifts more towards the recurring revenue as opposed to the services side, you get into a higher probability revenue stream. And remember, we are a cloud software company, not a cloud services company, which is, I think, very important to note. In terms of the SIs, yes, we're very proud. If I look at Insights and many of the people on the call here did attend Insights, we had a record number of partners attending and very engaged. And if you went to the Expo Hall, you could see that their particular exhibits were very, very busy with our customers and with our prospects, which bodes very well. We're seeing them influence the actual deals in a very positive way. And we obviously are seeing some positive impact in terms of pipeline as well. And in terms of our global aspirations, it's very, very important that we have the global reach of our SI partners, which are both the tier one partners who have global, if you like, employees, but also the local regional partners is also very helpful to our business. Steve, anything you would add?

Yeah, I think the one thing Scott and David hit on it is our design of the program was collaborative out of the gate, we have the opportunity that we didn't have such a large dependency on that services revenue that we don't compete but we collaborate and in fact, In addition to recommending deals, we are putting together go-to-market strategies with our partners where we support them. Secondly, a significant investment in enablement of our partners, both in terms of sales enablement and enablement in product and their contribution of the roadmap. So I think it's, if you talk to our partners, they will say that the programming experience they've had with us surpasses what they've had with the other players in the industry.

Understood. Thank you. Very helpful. And then, you know, from a follow-up perspective, the largest survey in the HCM space recently had kind of talked about some slowing spend around additional module adoption, just in the space as a whole. And it's really more reflective of trends normalizing to pre-pandemic levels after seeing maybe a bolus last couple of years. You're getting 50% of your new customers to attach the full suite today. which is obviously an impressive number. But how do we think about kind of in the pipelines going forward, what you're seeing maybe the next couple of three, four quarters? Do you expect attach rates or cross-sell opportunity to be kind of in line with recent trends? Or are you seeing also a change that might be representative of what the survey highlighted? Thank you.

So, Scott, we're actually leaning into add-on sales towards the customer base as we go into next year. And remember, we're certainly in place a structure for the business, not just to hit the 2 billion number, but really we're now beginning to target the planning and the structure we need in place to hit the $4 billion mark later on. And obviously add-on sales and expansion of the actual platform has to be a big part of that. The modules that we see being purchased are those that you would expect, which are more of the critical types of modules. So very high attachment rates around things like recruiting, Obviously the compliance modules are always in high demand and we're the leader in that regard. Steve, what would you add to that?

Yeah, I would agree. And in fact, in our go-to-market next year with our sales plan, we are doubling down on attachment. We are putting specific motions around our talent suite. We are putting specific motions around other areas. And in fact, we think that there's white space for us to increase the percentage of add-on sales to the customers.

Our next question comes from Mark Murphy with JP Morgan. Mark, we can circle back later. Steve Enders with Citi.

Okay, great. Thanks for taking the question here.

I guess I was wondering if we could maybe get an update on the Canadian government opportunity and if there's, I guess, any changes there from the last earnings call update.

Thanks, Steve. We're progressing quite nicely with the Canadian government. The results have all been very positive. We're now in the waiting cycle for them to go through their internal procurement processes. Steve, what would you add?

Yeah, no, we continue to be very engaged with them. We're in the planning of what a rollout would look like, and we continue to be very bullish on the opportunity. Obviously, we're dealing with government and decision cycles that move at a certain pace, but everything continues to be positive.

Okay, great. Thanks for the update there. And then maybe coming off of your conference and all the AI announcements that you made there and other product announcements, I guess, what's the feedback been from customers and prospects about how they're thinking about AI adoption and the core use cases that they're targeting for it?

So I'll start and I'll hand it off to Joe. There's just a tremendous amount of excitement. What I can say about Insights and the products that we showed is that they're real and that we are doing delivery of generative AI with Insights, the product, and it's really pervasive across the entire platform. So in terms of lead-in, I think we're way ahead of anyone else in the actual industry.

Joe? Thank you for the question. Without question, we look at our brand promise, make work life better. And what we're doing With AI in general, but specifically with generative AI, it's starting to do that. What we highlighted at our user conference was the ability for your administrators to create reports instantly. In a lot of enterprises, there's only a few people that can write reports to get the data out of your systems. And those reports come every other Friday because of backlogs in IT. What we're starting to do with our customers is listen to them. What's going to make meaningful difference and help with the efficiency and productivity? of their people staff and things like our automatically generating reports and being able to give instant access to data. It's providing value. So the reception we heard from our customers at Insight was one of really collaboration and promise to help them in this time of efficiency and productivity. And so whether it is the copilot capabilities on our report writer and analytics capabilities, whether it's what we're doing with autonomous pay and taking out some of the inefficiencies that happen in some of the people processes and people operations. So it was incredibly warming to connect with our customers. And most importantly, like David said, we have an advantage with some of the technology choices that we've made in our architecture, which is a single data platform that's allowing our customers to really invent and co-create with us today. And so we're starting to really listen and give that feedback today. So quite promising. And I'm incredibly bullish about the transformation that's happening in our industry in this area.

Okay, perfect. Thanks for taking the questions. Our next question comes from Samad Samana with Jefferies.

Hi, good morning. Thanks for taking my questions. Great to see the strong results and Lee, congrats on the new opportunity. It sounds incredible. David, no one knows the HR apparel industry as well as you or just very few people that do. Another company in the ecosystem last night noted that increased automation and improving the payroll runs is creating a significant revenue headwind for them as they improve the payroll process i think one of the big questions we've gotten from investors for ceridian and every other company frankly in the industry is is there a significant amount of fee revenue or subscription revenue that's generated by having to either rerun payrolls or fix payroll errors or whether it's filing in the wrong categories and does reading have a revenue stream that's associated with that? And maybe just how should we think about automation and the impact on a revenue stream like that? I think it'd be very helpful for everybody listening with somebody like you that's a payroll industry stalwart to illuminate us on that.

So let me just begin by saying this. We're a cloud human capital management company, and we don't charge on batch processing. And I suppose for the kind of batch-based payroll companies or the legacy types of companies that used to charge on the payroll run process, which I guess is what they're doing, payroll controls or something like that, it's a very archaic way of actually charging. It isn't how I would think of any cloud company actually charging inside. I didn't fully understand the other competitors or other players' dialogues In terms of automation, I think when they talk about automation, they're talking about employees being able to view their payslips online, which I would think would be a base capability of a payroll system. And I can't see how that should impact the revenue of a company. In terms of us, we're going the other direction. We're beginning to use now generative AI and autonomous payroll, whereby we can make The payroll process is even more efficient. The entire continuous calculation engine was all designed around delivering efficiencies, 80 to 90% of time reduction across the payroll team. And we've been very successful since the start of Daples in focusing on that. When we talk about innovation, we talk about making work life better for people. We talk about expanding the product across the full human capital management. We're talking about real innovation. into it. So no, we do not have any, as I've said, sensitivity to batch-based processing processes impacting our revenue. That would be crazy. Great.

Great. I really appreciate that. I think that was just an important topic to address for a lot of investors that are keenly focused on that. And I want to shift the focus back to Ceridian and your key strategic initiatives. um i'm curious maybe on on the wallet side of it i know that you guys get some updated metrics but how should we think about the traction towards the company's targets that you've previously talked about there and and any puts or takes that have maybe changed the trajectory uh for better or for worse especially as we think about maybe uh what's going on in the broader macro environment and thanks again david

Yeah, the wallet's on track. We'll hit the ARR number that we had spoke about previously. If I look at registration rates, they're now about 55%. We've also seen the percentage of eligible POP people kind of go up quite nicely as well. We're about to kind of release some new capability on the wallet around instant transfer and peer-to-peer transfers that will come out probably in Q1. of next year. If you look at the app store, you'll see the rating on the round the wallet is exceptionally high. Steve spoke a bit about the actual amount of money that's moving through the wallet, which is very helpful. We've also got the ability now to do direct deposit for customers or employees that are not eligible for on-demand pay. So again, a very good program execution as planned.

Great.

Thanks. Congrats on a strong quarter.

Our next question comes from Bob and Shah with Deutsche Bank.

Great. Thanks for taking my questions. I guess, David, first, just on autonomous payroll or some of your generative AI announcements, can you just maybe elaborate a little bit on how you're thinking about monetization of both these services?

So one, I think it will increase our win rate as we actually go forward. There may be a possibility for us to actually increase the platform fees. So we're going through the sensitivity analysis of that right now. We do believe that we will have a lead in the industry when it comes to generative AI and the co-pilots that Joe showed at Insights. Joe, anything that you would add?

Yeah, in general, Copilot itself will be an additional product in our overall product suite. And so you can really enhance the productivity and the effectiveness of your employee by giving the ability to make tasks complete faster. We demonstrated examples of being able to automatically send notifications to employees and managers when they need to close the end of a quarter or end of a pay run. We demonstrated what we can do to have questions answered simply to not backlog your people operations department with a bunch of the same questions being asked over and over again with what we're doing, where you can ask a simple question in natural language, get that answer. It'll self-learn from itself. And so then the next question that comes in gets answered instantly and quickly instead of having to answer the same question multiple times. So these types of efficiencies we see as a powerful way to enhance your employees. And we're looking to monetize that by saying, Yes, you can have our core suite and you can add on top of it our co-pilot as a SKU and provide even more efficiency and productivity. So you'll start to see that as new SKUs showing up in our overall product suite as another important vector in terms of what we can grow from a revenue standpoint.

Super helpful. And this is Steve. Just to add on that, from a go-to-market, it's very simple. We believe the business case and value of what we've seen come out of Generative AI is will easily command a premium price in the market and companies will flock to it because of the savings and efficiencies they will get out of it.

Very helpful. Just clarifying, will autonomous payroll be a separate SKU? Will that be included for all kind of Dayforce customers? And my second question is just in terms of just Dayforce recurring per customer. Saw a pretty nice uptick this quarter with accelerating growth from the last few quarters. Can you just talk about the drivers of that?

Well, the drivers of that obviously is the widening of the actual product suite and the fact that 50% of the customers are taking the actual full suite. In terms of packaging and bundling for next year, we're still going through that exercise at the moment. Joe, anything that you would add in terms of autonomous payroll and the ability to charge for it?

Yeah, I think an important point on the previous question that was asked as well is is we're delivering and really transforming payroll. We're delivering modern payroll. And both autonomous payroll and what we're doing with Wallet are key components of that. And while we're finalizing the packaging, you can see our offering very different than what the competitive landscape is, where people are still clinging to printed checks and things. We have a new revenue driver in Wallet as a great example. We have a new really revenue driver and global payroll growth and being able to be a global payroll provider to pay your people no matter where they are in the world in this new boundless workforce. And so we really take autonomous payroll, what we're doing with Wallet and what we're doing with core global growth as what companies need for modern payroll. And we're leading the charge with really and disrupting ourselves in many ways by providing this next generation of payroll to really help companies in the changing workforce and the changing nature of business.

Thanks for taking my questions and congrats on the strong quarter.

Okay, great. Mark Murphy with JP Morgan.

Thank you so much and congratulations on a very differentiated performance. David, you're currently onboarding, I believe, some of the largest customers that you've ever landed in terms of seat counts. Can you comment on how the system scalability changes? is performing under that pretty heavy transactional load. Just how you feel about that massive onboarding process here into Q4 and beyond.

Yeah, thanks, Mark. I'm going to ask Jody to speak about the hyperscale payroll project that we've been doing over the last probably about 18 months. But the high level is going very well. Jody, do you want to just talk a little about hyperscale and containers versus servers?

Yeah, for us to grow up market and to really push was one of the big reasons that I came here three years ago. We've been really fundamentally changing our architecture. One, we started with data. Data is essential in terms of getting it right and having a single architecture to that. The second is horizontal scale. Just moving in a vertical scale world has limits and has shortcomings. And so as we've gone live, we've taken our payroll capabilities and I mentioned continuous pay. We're doing that as a payroll engine that can run horizontally. And so we can just with our partnership with Microsoft and what we're doing with the Azure cloud, we can just spin up new containers and be able to run larger and larger customers. And that's being paid off by exactly what you said, Mark, new customers going live. We're running them into what we refer to as our payroll engine as a service, running it horizontally at scale. And then scale also equals a complete change in your user experience to do a proper hyperscale, you need to change the user experience as well. And over the last several years, we've been working on a completely new user experience that we're driving in to help customers with the scale and the user experience side as well. So both those factors, both the horizontal scale as well as the overall user experience have been in the works and been rolled out for the last several years. And now we're seeing it light up with these large scale customers that are going live.

Yeah, thank you, Joe. That's very helpful. I appreciate that. David, I wanted to ask as a quick follow-up, just given Q4 is your largest quarter for sales and bookings activity, it sounds like that's been progressing very well. Can you comment on the, you did comment on the pipeline, but could you comment on the business confidence you're seeing out there? For instance, are inflation and higher cost of capital affecting the psychology out there among prospects or the new bookings patterns at all? Or Are you seeing ongoing health in the spending mood?

Mark, we've always taken the approach of a very strong return of investment to our customers. And today, when you're talking about a 5% Fed rate and money is no longer free, the time to return is very important. We've always led the industry in terms of how quickly we can deliver a return to our customers. It's making us much more competitive against the ERPs, where not only are we very strong on the ROI side, but the customers, by the time they go live, which as you know, is quite quick with us, are fully proficient with the actual system right away, which allows them to get a stronger return. The second part about it as well, as we broaden our platform, there's a considerable saving to new customers to buy additional modules at the time of purchase because they don't have to pay for another database, another hosting environment, and the integration that goes between systems. So the systems simplification piece ties into the very strong ROI. In terms of pipeline, as I mentioned, it's at a record level. But I also have to point out that SAM is up to speed and really is tremendous. And so that gives us a lot of confidence in the remainder of the year. And as I said earlier, we're very focused, as you know, on the 2025 target of the $2 billion, 80% gross margin, 30% adjusted EBITDA. And I think we'll deliver on that.

Thank you very much. Congrats again.

Our next question comes from Dan Jester of BMO.

Great. Thanks for taking my question. Maybe just two ones. So first on the full suite purchases, great to see the continued momentum there. I think my understanding is that full suite doesn't necessarily mean everything that Ceridian makes. And so if you look historically, has the propensity of the full suite buyers to come back to you and buy additional modules over time, like analytics and the like, is that higher than the customers that maybe only buy one or two things out of the start. And then my second question, David, you gave some updates earlier this year about using generative AI within the organization to drive efficiencies and margin. Any update in the learnings as you've expanded maybe some of those trials? Thank you.

Yeah, so look, as Steve had mentioned, we're doubling down in terms of add-on sales next year in terms of the actual sales force. So we do believe that there is a great opportunity for us to widen the use of the actual product with our customers. Part of our pricing strategy is actually focusing on the right modules for the customer at the time of initial purchase so that they can get that very strong ROI and that quickness of ROI which allows us to go back to them after the fact with the next set of, if you like, products. Again, it allows us to price optimize quite nicely from that regard. In terms of the use of generative AI with inside our internal operations and as well across our customers. It's very similar in terms of thinking. When we look at the customer support side, we believe that we should be able to drive 10% efficiency through the use of generative AI. We've spoken about the tool that we've actually built. At Insights, we actually showed that through the intelligence search and the copilot, we're now able for administration of users to ask questions. How do I do this or how do what? What does this mean with inside the system? And the copilot is able to actually help the user through the administration of the actual product. That's a form of self-service which allows them to get quicker responses, but also reduce the inbound calls to our support team, driving that efficiency. Steve, anything you would add on that?

No, I guess, in fact, I think we're ahead of the industry in terms of that. We're seeing real results on that. And to David's point, we're seeing the benefit of both reduced inbound, but we're also seeing a better customer experience and an increase in our NPS based on that because customers can get to their answers quicker. And you will see us as we lean into that, turning that into a more proactive outreach that's not only helping customers respond, but proactively providing customers guidance to things before they ask the question.

Great. Thank you. Our next question comes from Kevin Kumar with Goldman Sachs.

Hi, thanks for taking the question. It's great to see the progress in EBITDA margin, which has grown nicely this year, but I'm curious on cash flow margin, which has expanded a bit slower. So can you give a bit of color on how you think about the levers that can help drive better EBITDA conversion into cash flow over time?

Yeah, and we've talked about the drivers for enhanced profitability, which I think is one of the primary drivers going forward. You'll see us also continuing to shift the revenue from lower margin into recurring and within recurring into cloud recurring. So as we migrate the customers over from legacy platforms into day four, you'll see corresponding expansion of profitability that will translate into cash flow generation as well. Specifically for Q3, we had a little bit of unfavorability in AR, which is driven by billings very much back-end loaded in the second half of September. We've collected those billings, but that's primarily the difference between the 50% that we guided on average and the number that you see for Q3, but we remain committed for the conversion we've outlined for the remainder of the year.

Thanks, that's helpful. And then maybe just one on Dayforce Wallet. Wanted to ask about the traction in the European market. I think it's been out for over a year now. And so just kind of curious on overall reception with clients in international markets relative to the US. Thank you.

Sure. So international markets, you know, I'm assuming that you view Canada as part of North America. So I'll talk about the UK. The UK, we have a slightly different model. It's a PEPM model. because there isn't the interchange in the UK market. We've seen good adoption across the customers in terms of the actual, in terms of the wallet. There are no real surprises or I'd say differentiating patterns with North America.

Thank you. Our next question comes from Alex Zukin with Wolfe.

Hey, guys, thanks for taking the question. Congrats on another solid quarter. I guess I wanted to ask, too, my first one is around how well it seems like you've been executing and performing actually in the mid market. Our checks suggested that you're seeing some pretty interesting tick ups in win rates. So maybe just any changes to the competitive landscape there, any plays that you're doing that are that are working or anything that's changed their head to head versus the competitors?

Yeah, look, the mid-market for us, remember, is probably enterprise for almost every other player outside there. We find that in what we call the major market and the enterprise segment, we're seeing more full suite deals. And the work that I think Joe's been doing over the last three years in terms of really lifting up the user experience, working on the actual data and the AI side, and really broadening in deeply in the talent offerings that we have. some of the experiences that Joe now has in the product are just absolutely beautiful. And so when we actually go out and we show the actual demonstrations, it just shows very well. And then on the other side of it, we have so many case studies now of very strong returns of investments across our customer base. And the last factor would be the system integrators that we discussed earlier on. We have really taken an approach that SI-prime-first integrators to market. And obviously we can do that because the product is robust and third parties can administer the product as well as our own internal services, which I think is also just a very, very good factor. But yes, we've noticed that as well.

Perfect. And then. David, I guess to the construct of some of these very large logos that you've been announcing, even as late last year and even this last couple of quarters, if you look at your press releases, there are multiple logos that have tens of thousands and sometimes even hundreds of thousands plus employees. But you're not landing all of those employees right away, and you're not landing the entire suite in those logos right away. So I guess the question I wanted to get – a better idea for is, as I look at the opportunity for Ceridian's expansion motion within those larger customers specifically, if you look at the construction of your growth for maybe next year or 2025, how much is going to come from net new versus expand within existing customers?

So remember, we have five growth factors. One, acquire new customers, new logos. Two, expand the number of modules that are used by each of the actual clients, three, the enterprise, four, go global, and five would be the wallet types of products. One change that we've actually seen, I would say, over the last year, maybe two years, is a number of those very large logos are actually buying multiple modules from us, not just payroll and time. So if I look towards the large grocery chain, That really was kind of a takeaway from an ERP and a takeaway from one of our competitors at the same time, where it is more than just the pair on the time side. There's a very high usage of the hub experience, the analytics side. And I do think there is a strong potential to expand that footprint. If I look at one of the very large that we did out of the UK, that was actually a full suite HCM deal for the very large enterprise side. So there's a lot of white space for us in market, a lot of land graph to be had, whether it be in the major space, large enterprise, global, expanding the actual product side. And it ties down to that general theme of durable growth for the business.

And one other thing I'd add to your point is some of those large logos that we expand, you are correct. That's a multi-year rollout for them. And that's another reason that gives us confidence in our long-term view, because we have very clear line of sight, not only to current year, but two- and three-year revenue streams as those phases come live. And we've shown our ability to execute against that. Perfect. Congrats, guys.

Our next question comes from Raymond Lynchow with Barclays. Hey, Ramo, we'll circle back. Our next question comes from Matt Fow with William Blair.

Great. Just wanted to ask on global payroll adoption and any metrics you can give in terms of how that's impacting interest or demand for Ceridian. And then also, I know you were testing a new payroll engine in the Middle East, just wondering how that deployment model was progressing.

So in terms of global, it is a very strong differentiator that we have in the marketplace. It's one of the reasons that we're getting more of the wins in what we call the major markets and the enterprise segment. It's not just the large enterprises that have global footprint. I think the work that Joe's been doing in terms of the native payroll engines, the global payroll interfaces really does differentiate us quite significantly from the people in the marketplace.

Great. Thank you. So our next question will come from Michael Wells Fargo. Okay. Ramo, we'll circle back to you here. Otherwise, Robert Simmons of DA Davidson. Hey, can you hear me?

Yes. Great. Thanks for taking the question. I was wondering first, could you update us on the Ideal Talent Marketplace? So it's a pretty differentiated idea really you have to go in there, but so I was wondering kind of how the progress is coming along.

Yeah, it's going really nicely. For those of you who came to Insights, we actually had that on the main stage. We also did a number of breakouts around it. We have the first customers now actually going live on the Ideal Talent Marketplace. By end of the year, I think we'll probably have three customers using the actual product, which would be kind of the completion, if you like, of the charter phase. And then going into next year, we will start building out the go-to market properly. And I would expect by the end of the year, it should be humming along.

Got it. Great. And then any updates you can give us on the CFO search? How close are you to finding somebody and what would be your ideal candidates?

Yeah, I think we're progressing very nicely. We believe that we should have a candidate announced by the time or by the start of the year.

Thank you, Robert. And thank you, everyone, for joining us today. This concludes our third quarter earnings call.