Dayforce, Inc.

Greetings and welcome to the Dayforce third quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce David Niedermann, Vice President of Investor Relations. Thank you. You may begin.

Thank you for joining. And welcome to the Dayforce Third Quarter 2024 Earnings Call. I'm David Niederman, Vice President, Investor Relations. As a reminder, all participants are in a listen-only mode, and a question-and-answer session will follow our opening remarks. Joining me on the call today are CEO David Ossip and CFO Jeremy Johnson. We also have Chief Strategy, Product, and Technology Officer Joe Korngabel and our President and COO Steve Holdridge available for Q&A. Before I hand the call over to David, I want to remind everyone that our commentary may include forward-looking statements. These statements are subject to risks and uncertainties that could cause day forces results to differ materially from historical experience or present expectations. A description of some of these risks and uncertainties can be found in the reports we file with the Securities and Exchange Commission, such as the cautionary statements in our filings. Additionally, over the course of this call, we'll reference non-GAAP measures to describe our performance. Please review our earnings press release and filings with the SEC for our rationale behind the use of non-GAAP measures and for a full reconciliation of these GAAP to non-GAAP metrics. These documents, in addition to a replay of this call and also a transcript, will be available on our Dayforce Investor Relations website. With that, I'd like to turn the call over to David.

Thanks, David. And thank you all for joining us. I'll provide some high-level comments on our third quarter results, and turn the call to Jeremy to provide more details of our financials, sales, wins, and customer go-lives, and an updated full-year outlook. In the third quarter, we achieved strong results as we continue to focus on healthy growth, combined with a focus on profitability metrics and cash flow generation. Therefore, recurring revenue of $333 million was up 19% with and without float, and total revenue of $440 million increased 17%. Cloud recurring gross margin was 79%, up 200 basis points, and adjusted cloud recurring gross margin was 79.9%, up 160 basis points. Adjusted EBITDA was $126 million, up 18%, and adjusted EBITDA margin of 28.7%, up 30 basis points. Year-to-date operating cash flow was $200 million, up 54%, and year-to-date free cash flow was $117 million, up 184%. We ended the third quarter with 6,730 customers live on the Dayforce platform. with the average Dayforce recurring revenue per customer up 15%. We believe we are well positioned to continue to win in the marketplace, with the Dayforce platform providing a competitive advantage. Our pace of innovation is faster than ever, and some examples from our most recent product release include the delivery of the new Dayforce Learning, a re-platforming of our eLumi acquisition into the Dayforce platform, introduction of cashless tips into our wallet product, and enhancement of our people analytics with introduction of measures, allowing organizations to set thresholds and track performance of their people with intelligent nudges. The market opportunity remains substantial. Organizations recognize that adopting a modern and best-in-class HCM system can yield significant benefits. These benefits stem from replacing as many as 12 disparate systems with the Dayforce platform. Drilling down into our sales during the quarter, we did see instances of elongated sales. There was no specific industry or segment where this was more pronounced. However, we continue to have strong confidence in our fourth quarter guidance. underscored by our go-live plans, our expanding sales motion to our existing customer base, and more full suite deals. Our Q4 pipeline remains strong, with a coverage ratio of sales opportunities to sales targets of approximately four times. We believe the pipeline's strength is a result of our key growth drivers, including the expansion of the Dayforce platform to include a broad set of HCM offerings, our move up market to target and win large customers, building the system integrated channel, which allows us to leverage our partners' implementation and sales capabilities, and finally, building the foundation to win and serve global clients. Additionally, sales to our customer base continues to be a driver of growth. with add-on sales compromising approximately 37% of total bookings in the quarter, with solid growth across our talent intelligence suite. Looking now to the fourth quarter, we are excited to host customers at our annual Dayforce Discover event in Las Vegas in a few weeks. We also will be holding an investor day alongside the customer-focused program. I'll now pass the call to Jeremy to discuss our financial results in more detail Jeremy, over to you.

Thanks, David. We were pleased with our third quarter results. Top-line revenue growth remained strong while we scaled the business and continued to expand cash flow margins. Day 4's recurring revenue was $333.2 million, up 19.2% or up 19.3% on a constant currency basis. And Dayforce recurring revenue excluding float was $292 million, up 18.9% or up 19% on a constant currency basis, underpinned by strong go-lives and healthy underlying customer trends. Total revenue was $440 million, up 16.6% on a gap basis and 16.7% on a constant currency basis. Power pay recurring revenue excluding float was $20.2 million, up 3.1% on a gap basis and 5.1% on a constant currency basis. And professional services and other revenue was $64.1 million, up 23% on a gap and on a constant currency basis. On a gap basis, gross profit was $201.3 million, up 25.4%. Operating profit was $20.8 million, including an incremental $7 million of amortization expense related to the retired Ceridian trade name and a $9 million earn-out expense related to the 2021 acquisition of DataFusion. Cloud recurring gross margin was 79%, up 200 basis points. On a non-GAAP basis, adjusted cloud recurring gross margin was 79.9%, up 160 basis points. Adjusted EBITDA was $126.1 million, up 17.6%, or a 28.7% margin. Expanding 30 basis points and reflecting our continued improvement in gross profit margins and scale in adjusted G&A. From a cash flow perspective, operating cash flows were $91.8 million, up 151%. and free cash flow was $63.4 million, up over 1,000% as we continue to focus on cash flow margins. Year-to-date operating cash flow was $200.1 million, up 54.4%, and year-to-date free cash flow was $117.3 million, up 184%. Turning to Dayforce Wallet, registration rates and user transactions per month remain consistent and wallet revenue remains on track to more than double this year. Some notable sales wins from across the globe in Q3 included a North American hospitality company that specializes in managing and developing luxury hotels and resorts selected the full day four suite to support 22,000 employees across the US, Mexico, and Canada. A major multi-brand Australian retailer selected Dayforce as its unified HCM solution to support their 12,000 employees across Australia and New Zealand. A global manufacturing and distribution leader operating in over 12 countries selected the full Dayforce suite to enhance the experience of 8,500 employees across US and Canada. And some key Q3 customer go-lives included A British multinational hotel and restaurant company with 38,000 employees went live across the UK with day force managed payroll HR workforce management and talent. A prominent US manufacturer recently went live with day force HR payroll time wallet and document management for 10,000 employees. and a UK fashion retailer with 400 stores and 10,000 employees recently implemented Dayforce HR, workforce management, payroll, and Dayforce Wallet. You can read about more notable sales wins and customer go-lives in our earnings press release. A few other call-outs before I move on to guidance. As expected, Illumi revenue added approximately 170 basis points of growth to our Dayforce recurring revenue ex-float in the third quarter, while last year's movement of the tax business represented a headwind of approximately 100 basis points of the third quarter Dayforce recurring revenue ex-float. During the quarter, we executed a receivables securitization facility to optimize cash movements related to Dayforce wallet. As part of this, we sold $30.1 million of wallet receivables to fund Dayforce wallet draws. And finally, we executed $30 million of our $500 million share repurchase plan and are pleased that we have the profitability and flexibility to return capital to our shareholders and to manage dilution from share-based compensation while maintaining investment in the business. Now, turning to guidance, for the full year, We expect Dayforce recurring revenue ex-float of 1.163 to 1.168 billion, or growth of 21% as reported and on a constant currency basis. Total revenue of 1.747 to 1.752 billion, or growth of 15 to 16% as reported, or 16% on a constant currency basis. Adjusted EBITDA of 492 to 507 million, or 28.2% to 28.9% margin. We remain confident in our full-year cash flow targets of upper 50% conversion from full-year adjusted EBITDA to operating cash flow and expect capital expenditures to remain steady on a dollar basis versus last year, which should result in free cash flow margin of between 9.5% and 10% of revenue. Float revenue is now expected to be $192 million for the full year. And for the fourth quarter, we expect Dayforce recurring revenue X float of $311 to $316 million or growth in the range of 21% to 23% as reported and on a constant currency basis. Total revenue of $452 to $457 million or growth of 13% to 14% as reported or 13% to 15% on a constant currency basis. adjusted EBITDA of $120 to $135 million, or a 26.5 to 29.5% margin, and float revenue of $37 million. The USD to CAD foreign exchange rates assumed in our guidance are 1.38 for Q4, or an average of 1.37 for the full year. And to be clear, the weakening Canadian dollar continues to be a headwind for us versus our original 2024 guidance and versus last year. We feel good about our growth trajectory, and for 2025, we're issuing initial guidance of total revenue growth, excluding float, between 14% and 15% on a constant currency basis, adjusted EBITDA margin above 31%, and free cash flow margin above 12%. As David mentioned, our investor day is scheduled for November 12th in Las Vegas. During the day, we look forward to diving into our strategy, our product differentiation, our continued durable growth, and expanding profitability and more as we lay out our path to achieving our long-term ambitions of $5 billion in revenue, $1 billion in free cash flow as a leader in the HCM space. With that, we can begin the Q&A portion of our call.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. As a reminder, we ask that you please limit yourself to one question and one follow-up question. Our first questions come from the line of Kevin McVeigh with UBS. Please proceed with your questions.

Great. Thanks so much, and congratulations on the results. Hey, I wonder if you could just Help us understand what gave the confidence to offer the initial 2025 guidance. I wanted to kind of start there and maybe a little bit of focus because it looks like the free cash flow conversion continues to kind of scale. Maybe a little bit of focus on that too.

Hey, Kevin. Nice to hear from you and thanks for your comments. As you know, our business is highly plannable and we go into the year with a high degree of certainty based on the percentage of recurring revenue. that we have. That tackled or combined with the go-live forecast we have both in Q4 and the early part of the year gives us a high degree of certainty. And as you've seen consistently relative to our guide, we come in very, very accurately. In terms of the free cash flow perspective, as you know, that's been a big focus. We have pivoted the company to make sure that we are on top of profitability and free cash flow. Jeremy, do you want to add anything on the free cash flow side?

Yeah, look, I mean, I think we're highly focused on leveraging the inherent profitability of this business, and we're confident that we can achieve both of the guidance metrics that we offered, which are adjusted EBITDA above 31% and the free cash flow above 12%. But it all comes down to focus, and it's something that I've been working on since I got here.

And just real quick, the initial buyback, any thoughts, Jeremy, on that over the balance of this year into 2025 for David?

Yeah, look, I mean, you saw us buy about 30 million shares in the quarter. As you know, the primary purpose of our share buyback is to manage dilution from stock-based compensation. You'll see us probably in market continuing to do that, but ultimately we've got a lot of capacity under that and could be opportunistic in the future should the market permit it. Thank you so much.

Thank you. Our next questions come from the line of Mark Marcotte with Baird. Please proceed with your questions.

Good morning, and let me add my congratulations. Really strong results. Wondering if you can talk a little bit about some of the major wins that you ended up having this past quarter and specifically who you ended up winning from. So when we take a look at this North American hospitality company or the Australian retailer. And then I'm wondering if you can also, a lot of investors ask about saturation. They ask about how much room there's left. What are you seeing just in terms of the pipeline and decision cycles? I know you mentioned decision cycles earlier, but wondering if you can talk about that as well.

Sure. Hi, Mark. Nice to hear from you this morning. In terms of the hospitality, it was quite a competitive process. I believe the finals were one of the other payroll-focused organizations and one of the ERPs that you typically would find in these types of deals. What's great over there, it is a 12 to 1 simplification deal where we have gone in and we were able to broaden our platform at a large enterprise deal. And as you know, we differentiate when we are focusing on organizations regardless of size that have a high percentage of frontline workers. We're finding that the value proposition of simplifying the number of components that have in their HR stack resonates very, very well in this particular macro because it often leads to a reduction in total subscription and obviously tremendous FTE and efficiency savings. In that particular deal, I would say that our compliance lead, and again, you might have seen with Gartner, for the fifth consecutive year, we're in the leadership quadrant, and they ranked us number one for compliance in that, I believe, 1,000 to 2,500 employee segment, as well as the above 2,500 employee segment. And in their case, I believe they had to move. because of continual compliance challenges that they were having in their organization. In terms of pipeline, as I mentioned, we entered the quarter with a four times coverage ratio, which means for every targeted dollar of ACV, we had $4 of pipeline, which is very healthy. In terms of the deals, we did see the length of deals extend by about 25% with inside the Q3. That could be driven by a number of items. Firstly, as we are now doing mostly 12 to one simplifications, it means that there are more people that have to sign off on each of the different selections. So no longer are we just looking at the owners of the compliance modules, but we now have to look at getting sign off from all of the HR and talent owners as well. Second, the deals, as you know, have increased. If you look at the average tables recurring, it's up 15% year over year. And as the deal sizes goes up, obviously more signals are required from a financial perspective as well. And then lastly, with the macro, I would say that organizations are being more cautious and more thorough in their selections, and that too takes more time.

Great. David, you've been through multiple cycles. Do you think as interest rates start continuing to come down across the globe and some of the election uncertainty passes, that could end up reversing a little bit and we might end up seeing some faster deal closes as the year progresses?

Mark, I would say eventually the timelines normalize. So something that gets delayed in one particular quarter eventually moves into a subsequent quarter, and eventually it normalizes. So the same deal volume comes out of the machine, if you like. In terms of the overall economy, if I look at employment numbers, they came in as expected, which is roughly about 1.5% or so. employment growth across the customer base year over year. And I would say that's in line with what we had thought and what we've seen consistently. If we look at the actual float balances, that was actually quite positive. We saw float balances go up by 12% year over year. So although the float came down, the yield rate came down slightly, you'll see that we kind of outperformed on the float to a tune of about $5 million inside the actual quarter.

That's terrific. Thank you.

Thank you. Our next question has come from the line of Samad Samad with Jefferies. Please proceed with your question.

Hi. Good morning. Thanks for taking my questions. Maybe first, Jeremy, just one for you. On the 2025 outlook, just as we think about the exit rate for day force recurring ex-float, for 2024, is that the assumption that's embedded for the 25 Dayforce recurring outlook? Or what are you assuming in that 25 guidance for Dayforce specifically? Yeah. Hey, Samad.

How you doing? Look, I want to be clear. We're not providing a breakout of kind of Dayforce recurring or PS and other or PowerPay at this point. You know, this is a full three months in advance of when we'd normally give guidance on this. I think we do have some pretty good insight into, you know, kind of the trajectory, and we're confident in our trajectory right now. And a couple of points I would call out. One is that, you know, Dayforce recurring ex-float this year is projected to grow at 21% for the full year. But keep in mind that does include a tailwind from Illumi. So just consider that as it'll kind of – that tailwind goes away. in your estimates. I think PS and other revenue can continue to show strength with some of the larger deals we're working through. And I think power pay should kind of look similar to the prior years. But at this point, you know, we've got interest rate cuts in the future. We've got foreign exchange rates. And we've got a big finish to the fourth quarter. So we're going to hold off on giving that specific day force recurring ex-float guidance at this point.

Great, appreciate that. And then David, maybe a follow up for you. You know, I'm sure you guys have talked a lot about AI was a big theme at HR tech as well. I'm curious, maybe what the early use cases that you're seeing are, is that? Is that having any impact on the nature of decision making? And I know you gave some good clarity on what's maybe leading leading to longer deal times. But is that one of the factors as companies figure out how to implement maybe that and what to think about doing with your AI features. Thank you.

Yeah, as I said, thanks for the question. On AI, we are likely the first HCM provider in market with a marketable Gen AI offering. We now offer the Dayforce Copilot, and the way that that works is any data that you upload into the hub. The hub is effectively the landing page of the application, which is a content management system. So any PDF documents, Word documents, text documents, and the like, we now index and we allow the users of the application, whether they be employees, managers, executives, to ask questions that are answered from the documents that they are in the audience of. So a typical use case could be I could upload my employee benefits book, and I could ask questions like, what is my vision copay? When are my benefits going to change? Or if I upload up my employee handbook, I could ask questions about policy and the like. We believe that that particular skew, if you like, should allow us to go back to the base and see a lift of between 5% to 7%. just from that one particular monetization of that AI feature. Of course, as you know, we have AI throughout the application. We offer things like if you are creating a job requisition, that it writes the job description. If you're in talent acquisition, we do the grading of the candidates using a proprietary ML model. If you're a candidate applying, we match you to opening job requisitions based on your particular skill set. We constantly look at the work energy of individuals, and we use that as a predictor of someone leaving the organization. And if you read the Gartner report, that is actually included in the compensation module that we have, which allows people to adjust the compensations based on the predictive leave, if you like, of the actual employees. And on the workforce management side, we are very strong from a perspective of now using machine learning algorithms to do the actual forecasting for labor and the like. I don't see AI as being a factor of the elongated sales cycles, but I do see our kind of differentiation in AI being noted, again, by groups like Gartner and others because it is touchable and real. I encourage you and others to come to Discover in a couple weeks, which is our customer conference. We'll have, as I know, I call it the Joe Show, which largely is focused on AI, and he'll be showing live some very new use cases and capabilities that we have from an AI perspective and should be very, very exciting.

Great. Thank you again.

Thank you. Our next questions come from the line of Citi Panigrahi with Mizuho Securities. Please proceed with your questions.

Thanks for taking my question. Jeremy, looking into your Q4 guidance, could you talk about the assumptions made on that day force recurring X float? Do you expect in terms of go-live pipeline, is it more front-end or back-end loaded for Q4 or any Illumi assumptions? that backed into that 7% sequential growth?

I'll take and then hand it off to Jeremy. As you know, we've given the guide of above 21% for Q4 in terms of day force recurring. That is determined based on the accounts that have already gone live. So the go-lives that we have in Q4, which we have very good clarity on, will obviously impact Q1 and beyond. That's right.

Yeah, and maybe I'll just add in there, yeah, the guidance, that 21% to kind of 23% there, as we've talked about, nothing's really changed there. We held the guidance from the previous quarter. It is a slight acceleration or re-acceleration from the Q3, but mostly that's kind of the timing of the go-live. So our business is very predictable, that visibility that we have.

Has maintained and and I think it's clear and in our guidance there Jerry, you know, maybe just a bit of clarity on the actual guidance relative. I'll say towards expectations If you look at the actual numbers, which might be helpful for everyone we beat on the total revenue side by 12 million dollars and we increase the fiscal year by eight and On the EBITDA side, we beat by five and we increased the four-year guide by one. Now, when we actually look at the numbers, the difference between the five and the one is $2 million of float, because as I pointed out, the float balances in the quarter were very positive in Q3, and that could have been tied to bonuses and the like. And the second is on the professional services and other there were some timing differences to the tune of about $2 million. And so the combination of those is the delta between the, if you like, on the adjusted EBITDA side between the B2 of 5 and the raise of 1. So $2 million of float and $2 million of professional services, which is really related to timing.

Thanks, David, for that clarification. Seems like you have good visibility there. Another thing I found, David, recently you guys launched a new brand campaign. Is that more towards to position yourself more as an HR company or could you talk about that? That was an interesting campaign.

It's very exciting. The branding around Dayforce reflects the business as it is today. The business today is focus on the Dayforce product, as opposed to if I go back to five years ago, six years ago, where we had more different types of products and a combination between cloud and between bureau. And as we are moving forward, and you'll see this as we go into 2025, there will be a final simplification of the business around Dayforce products. And with that, you should see us being able to improve the profitability of the company as we effectively focus on the higher profitability cloud revenue and less so on the Bureau end-of-life products.

Great. See you in a few weeks. Thank you.

Thank you. Our next question has come from the line of Scott Berg with Needham and Company. Please proceed with your questions.

Hi, everyone. Thanks for taking my questions. I am looking forward to the Joe show. I like the title of that. That sounds great. I have two kind of follow-ups there, David, to your last kind of answer there, and they're both on the profitability side, is if I look at the third quarter results, you beat your float revenue by $5 million. You kind of only raised the adjusted EBITDA range. It was actually 2 million for the year from your prior guidance is, I guess, are you spending some of or reinvesting some of the upside to your float, you know, that you saw in the quarter kind of either in Q3 or Q4, or is there maybe some other expenses in the business that are popping up to not see the full year adjusted EBITDA go by, you know, get raised by what you beat in the third quarter?

Yeah. Like, I mean, I think we, uh, We are at the point in the year where things are coming into really good focus, I think even greater than we had earlier in the year. Certainly, we're looking at investments that we can make this year into next year and drive some benefit through both on the revenue side and the profitability side. you certainly see us kind of pulling through some of those investments and trying to make some tough decisions here. And that's the tradeoff that we come to every fourth quarter. And I think we're, you know, I guess I'd maybe point out the fact that excluding float, our Q3 adjusted EBITDA expanded by almost 300 basis points. And, you know, throughout the year, You should see that be, you know, on a full year basis, 100 to 200 basis points is kind of what our guidance implies, both with and without float. So some pretty solid margin expansion there that obviously you see going through to the cash flow statement as well.

Yeah, that actually brings me to your fiscal 25 guidance on the adjusted side, which I think is quite positive, you know, greater than 31%, even with the expectation that floats probably a headwind into next year. Do we think about or should we think about those operational efficiencies coming from anything different than what you saw here in 24? Or is there maybe some difference in how you're, I guess, managing the business next year to drive what's, you know, theoretically in the core business more than a 200 basis point expansion in profitability?

Yeah, it's... It's a focus on efficiency and productivity. So the reality is it's not coming from anywhere different than what you've seen. You're going to see us likely continue to improve the recurring gross margins. You'll see us continue to scale some of our adjusted gross, excuse me, adjusted G&A. We're going to focus on efficiency in the sales and marketing. Obviously, this year was an investment year, and next year will be the kind of driving productivity out of those investments. So no real differences, but it's a focus, the business around productivity and, you know, margin and cash flow expansion.

Great. Congrats on the quarter. Thanks, Dave. No questions.

Thank you. Our next questions come from the line of Bob and Shaw with Deutsche Bank. Please proceed with your questions.

Great, thanks for taking my question. Just kind of focused on the add-on bookings, it kind of remains healthy, but it looks like at 37% it took down a touch from last quarter. Any sense of what the drivers of this were? Was this kind of a result of the elongation in sales cycles or any kind of changes in what competitors are doing? And how should we think about this part of the business going forward?

It's a very positive number. Remember last quarter we had the GC, the Government of Canada, included in the add-ons. And as we mentioned last quarter, the target for this year would be between 35% and 40%. So it's right where we would like it to see. When we look at full suite deals in the quarter, they were 51%. So about 46% of our customer base now have suite deals, which is that 12 to 1 simplification use of the actual product. As we go towards next year and longer, we would expect to see the client-based sales on a long-term basis, moved to more of a 50% number. But it's a very positive trend. And if I look at the year-over-year growth in terms of client-based sales, it's up just tremendously.

That's helpful there. And just one quick follow-up for Jeremy. I know you don't want to give too much on next year's kind of initial outlook, but any high-level thoughts on how we should think about float? Should kind of the yield modestly tick down given your latter portfolio or any other ways to think about it?

Yeah, it's one of the areas where I kind of want to wait another quarter before we give guidance on float. I think we should expect to see balances continue to grow as we have in the past, and there's no real difference in that. You'll see that kind of continue to increase on the average balance side of things. But the rate's going to come down with the rate cuts both in the U.S. and Canada. We just don't know how much right now. Our laddering strategy helps quite a bit. You know, for example, you saw some of the rate cuts this last quarter, and our average yield went from 4.1 to 4. So it's a pretty, you know, I think durable anyways yield. that you'll see on that one. But I just don't want to give the guidance, and we'll wait on one more quarter to see where we think the different central banks are going to go.

The one thing, just from a modeling perspective, at the moment, we would say that there's probably about a $25 to $30 million headwind in terms of float next year. And even with that, as you know, we've taken up the EBITDA forecast for next year. above the 30% that we previously had spoken about. And so we're looking at very healthy adjusted EBITDA growth and free cash flow growth, even with the headwind offload.

That makes sense. Thanks for taking my question. Thanks. Congrats again.

Thank you. Our next questions come from the line of Steve Enders with Citi. Please proceed with your questions.

Okay, great. Thanks for taking the questions this morning. I just maybe would like to stick on the 25 guide and the outlook there, and I guess it would be great to kind of hear, you know, kind of what the underlying assumptions are, kind of the thinking around what we should be expecting in terms of, you know, labor rates or, you know, deal cycles or kind of what you're accounting for in this preliminary outlook here.

Yeah. Similar to how I answered an earlier question here, the guidance is that revenue excluding float on a constant currency basis is going to grow 14% to 15%. And that's going to flow down through adjusted EBITDA at a pretty solid above 31% margin and then into cash flows. And if you think about the breakout there, I don't really want to provide that breakout between recurring and power pay and PS and other at this point. We have pretty good visibility. But, you know, we've got the largest sales quarter ahead of us. And we've also got, I think, Canadian exchange rates are probably the worst spot that I've seen them in in a few years. And we want to see what happens there. And obviously, as I just mentioned on the interest rate side of things, see where the central banks go, to provide a little bit more focus on that. But we're trying to say, look, I think we feel really confident going into next year, and that's both on the top line and on the profitability side of things. All right.

That's a couple projects there. I guess I want to ask on the partner side and some of those dynamics. I know this is my big investment and focus area, but how are you kind of feeling about how that's resonating and kind of maybe what they're bringing to the table, if there's been any change in that in the past quarter or so?

It's still very positive. If you come to Discover, you'll see the number of sponsorships that we have across the system, integrators and other partners. You'll see the attendance level by the actual partners at the conference as well. We continue to leverage the partners both from a perspective of helping us on the sales side as well as helping us on the implementation side.

Okay, perfect. Thanks for taking the questions.

Thank you. Our next questions come from the line of Brad Rebeck with Stifel. Please proceed with your questions.

Great. Thanks very much, Jeremy. Understanding that it's still early on 25, maybe just from a high level, the assumptions that have gone in to inform what you've told us today, do you assume that the elongated sales cycles continue and that employment levels are flat in those numbers? Thanks.

Yeah, we would have assumed that employment levels kind of remain where they are right now. And, you know, I think on the elongated sales cycles, We're still really confident in providing a pretty solid Q4. We've had a really good year to date. And I think, you know, the commentary on sales is really to try and give you a little bit of context into what we're seeing in the demand environment right now, which I would look at as kind of unchanged from what we've talked about in the past. I hope that helps provide a little bit of context.

It does. Thank you. And then, David, real quick, any commentary on the first month of the quarter?

On the first month of the quarter, we haven't closed it as of yet. But if I look at it, I think Sam is on target for hitting his first month of the quarter, which actually will be up quite nicely year over year on a monthly basis. Q4 always is skewed towards the December. And in fact, the last two weeks of December probably are what determines the particular quarter. It's also our largest quarter. And as I mentioned, we entered the quarter with about a four times coverage ratio. So it comes down to really execution across the actual deals.

Great. Thank you very much.

Thank you. Our next questions come from the line of Daniel Jester with BMO Capital Markets. Please proceed with your questions.

Great, thanks for taking my question. Maybe just one on the wallet, 1,290 live customers, I think that's up 20 customers sequentially, and it looks like you're in about 20% of the customer base live today. I think in the past you talked about that many, many of your customers would be potential wallet customers, but we have seen a slowdown in those go live. Any sort of updated thoughts about the wallet and its potential growth opportunity as we think about it into next year and beyond? Thanks.

This year has been a very strong year for growth of the actual wallet. As you know, last year, day four's revenue on the wallet was about $12.5 million. We'll exit this year above $30 million, and we'll probably go into next year with an ARR somewhere in the 40s. So it's been quite a successful year for wallet. We've spent obviously a lot of time this year in bringing out new features that help with the monetization and the use of the wallet. Recently we just launched savings and goals and we've seen quite nice adoption of that feature. Probably over a million dollars across the users that are using the savings and goals to put it into those particular types of accounts on the actual wallet. This year, again, a reminder, we launched AFT and IFT, which has been very, very nice. Another new feature we just released are cashless tips on the wallet. So if you are in hospitality, you have the ability now to pay your tips through the Dayforce wallet on a gross basis, which is very, very useful for restaurants. In November, we'll be releasing... The BYOC capability, which allows users of the wallet to use existing debit cards that they have, and we believe it will also help with monetization as well and should help lift the revenue as we go into next year. So it's also, you know, it's very, very exciting, I would say, in terms of the actual growth on that particular type of product.

Great. Thank you. And then just a quick one for Jeremy on 2025 cash flow. I think in the past you mentioned that there's going to be a pension settlement that you need to make, and that's embedded in the 25 numbers. Can you just remind us any sort of clarity about the sizing of that and any updates there? Thank you.

Yeah, thanks for the question. Yeah, that would be included in our guidance. The pension termination is underway, and the timing of the payments would likely be in the kind of third or fourth quarter timeframe, $20 million to $25 million. And again, that would be included in our operating cash flow and free cash flow next year.

Thank you very much.

Thank you. Our next questions come from the line of Jason Salino with KeyBank Capital Markets. Please proceed with your questions.

Hey, thanks for having me. It's good to be on. You know, Jeremy, I'm not going to ask you to break down the 2025 guide further, but, you know, on a high level, you know, by giving this framework earlier than you usually do, you know, should we be viewing it as more conservative than usual?

Thanks for the question. Look, I wouldn't call it more conservative than usual. I think I would call it just kind of less focused than we have at a February timeframe when we normally give this. So it's a You know, we just don't have that aperture, you know, that I would like to have at this point, which is why we're not giving the same exact guidance that we always would, which is day force recurring, you know, total revenue and the adjusted EBITDA. I think some of the things that we have to get focused on in our models is the difference between day force recurring and PS and other. And, you know, I think ultimately you should look at this as us feeling confident in the business, to give this guidance that's early enough in the cycle.

Jason, one of the reasons we have given guidance or preliminary guidance for 2025 is to make sure that the market understands the focus on profitability. As you would expect, as we have, I would argue we now are a scaled company, and so we will have much more focus in terms of profitability. As you know, this year, in terms of adjusted EBITDA or free cash flow, the growth, I would argue, has been quite tremendous. And as we go into 2025, we'll keep that same focus, which will be a nice lift in the adjusted EBITDA number. We had previously spoken about a 30% next year, so we've taken that up by 100 basis points at this particular point in time. And then on a free cash flow perspective, you'll see continual expansion of operating cash flow and free cash flow next year. Now, this ties to really the simplification of the overall product, of the overall company. As we've moved from a company of having several bureau type of products to now having Dayforce and PowerPay, our two cloud products, in focus, and both of those, we should be able to continue improving the gross margin on recurring We're very confident we'll hit that 80% plus on the cloud recurring gross margin. And we now are resetting that target up significantly on a go-forward basis.

Excellent. Great. Thanks for those signals. And then maybe just to follow up, David, the Forex pipeline coverage you gave, very healthy and definitely within that rule of thumb that you want to see software pipelines add. But curious how this is trended. this year over time, especially as you've expanded with the channel and the launch of the partner exchange. Thanks.

The pipeline this year is a better qualified pipeline as well. So the revenue operations under Sam's team has done a very, very good job of really building up a pipeline and qualifying so that it is very clean. What's nice in the pipeline is there's a healthy percentage of back-to-the-base opportunities over there, and that comes from the work that Joe and his team has done in terms of building out very robust HR and talent capabilities, which really allow us to go back to the base and to actually sell more. From a pricing perspective, we've also done a lot of work on packaging and simplification around that, The way that you can really think about is if we sell the compliance modules, payroll, bed, and time at, say, just to, as an example, about 1,000 employee level, you'll be expecting a price range probably around $12. When we add talent modules, we effectively more than double that. And finally, we have the managed services offering, which has proven to be also a a very good driver of growth for the client base and for net new customers. And remember, for managed services, our margins are very similar to that of cloud. And that adds another probably about $10 to $12 on top of that. As you know, from a growth perspective, it's important that we continually expand the platform. The AI components, the co-pilot, as we kind of discussed a bit earlier, is an example. The co-pilot will add about 67% of white space across the client base which obviously allows us to continue growing the revenue from the 6,700 or so live customers we have on day four.

Perfect. Thank you.

Thank you. Our next questions come from the line of Ramo Lenscha with Barclays. Please proceed with your questions.

Perfect. Thank you. Can you talk about what you're seeing in the partner channel at the moment? Like, you know, that was one of the big focus areas for you as well to engage more partners. We see now like Capgemini just cut their revenue outlook last quarter or last night. How do you see them building out and engaging with you guys? What's the progress there?

Thank you. Steve can answer. I don't know if we have a FI agreement with Capgemini. I don't think so. No.

I meant it more as an example, yeah. Sorry. Okay. Thanks.

Yeah, thanks, Ray. It's going quite nicely. In fact, recently we signed an agreement with another one of, I'll say, the top four global SIs in the world, which has taken a bit of time to actually get through the paperwork, but we finally got through that. So we continue to see strong growth across the SI channels. Again, if you come to Discover, I believe it is on the 11th to the 14th of November, The sponsorship that we have now from the SI channels and their attendance and the customers they bring to these types of events and refer to us is really healthy.

Yeah, okay, perfect. And then the thing that I think I get the most question from investors is that they're a little bit confused. Obviously, if you give guidance or talk about a quarter, you kind of think about every word because you know we are going to dissect it. So on the one hand, you have really good pipeline coverage. Macro hasn't changed, but you still started talking about elongation a little bit. But in a way, we're kind of like quite a few quarters into a macro situation, into macro not being ideal. So are we kind of over-reading into that, or how should we think about that, you talking about that for the first time?

I've always thought about the business in kind of a half-year basis. The quarters often are impacted as to when the quarter ends relative to vacations and the like. So when I look at the second half of the year, I can't say that I'm seeing any differences than what I've seen beforehand. And if I look at the first half of the year, I can't say that I've seen any differences. You see the same in terms of go-lives as well. that it really is more of a half-year basis as opposed to a three-month basis. So I wouldn't read too much into it, but as we have gone more upmarket and as we are selling a broader suite, again, 51% of the customers are buying suite deals, which means more than just pay and time and core HR, so the talent modules. These deals do take longer because of the number of people that we have to speak to, and the customers often have to look at their existing contracts with now more vendors and work out how to terminate those as they kind of move to a day force. So I wouldn't read more than that into it. In the second half of the year, we're very weighted towards December. It's when most of our customers look at buying and completing the actual contracts. This year, it will be a volume type of deal, so there's a tremendous number of opportunities that we have to get through, and we have to make sure we can actually get across all the different sales steps that you would expect that are required to finalize those agreements. Okay, perfect. Thank you. That's clear.

Thank you. Our next questions come from the line of Alex Zukin with Wolf Research. Please proceed with your questions.

Hey, guys. Thanks for squeezing me in. Maybe just to Raimo's question, is this a – the commentary about the sales cycle elongation, again, David, it sounds like that's more of an idiosyncratic issue because you're moving up market rather than a broad-based kind of comment on the general demand environment, which you're talking about isn't changing. But I guess given the narrowing of the Q4 day force guide from, I think, 21 to 21 and a half to 21, did it also push out some implementations from Q4 to Q1? Or how do we think about, like, the very specific impacts of that?

So, Alex, we kept the guide consistent for Q4. And as we mentioned last quarter, we have tremendous visibility of into the quarter out, if not a year out. In terms of go-lives, they came in on plan at the end of Q3, as you would expect. In terms of the elongation, there are a number of aspects, as I'd mentioned. One is we have gone up market and larger deals take more time. There obviously are more global deals in there as well, which are also take longer to actually finalize. We have more suite deals, which require more people to sign off inside the actual organizations. And then, as I did mention, on the macro side, we are seeing organizations be much more diligent in the actual contracting and sign-off process. So it's a combination, I would say, of all four of those. On the positive, we are seeing evidence of the deal sizes growing. As you see with the dayfalls recurring, a lift across the client base of the average size of a dayfalls recurring customer has gone up 15% year over year. I would say that the client-based sales motion that we put in place just this year is working very, very well with very healthy year over year customers. improvements. And as we mentioned in the quarter, it came in at about 37% of sales, which again is very consistent with the guide that we gave even at the beginning of the year, which again talks about the protectability of the business. In terms of 2025, what would be true to say is that in an organization, we are more focused on profitability and free cash flow. And that comes with the simplification of the business as we focus on the better revenue streams and products of the business, which are dayfalls and power pay. And as we do that, you will see a period of time where it flows very nicely to the actual bottom line. And I think the outlook that Jeremy gave is consistent with street expectations with an increase in the probability next year, which we felt was important that we get out there.

Perfect. And maybe just a clarifying question. You mentioned for next year, float would be a $25 million to $30 million headwind. I'm assuming that means it grew $25 million to $30 million this year. It would be probably flatter for next year. It's going down by $25 million or $30 million.

That's correct. If you look at last year, the yield was about 3.7%. The yield for this year will likely be about 4 to 4.1%. We have seen nice growth in terms of the balances. If I look at the balances for the particular quarter, we were up 12.4%. year over year. For next year, I would expect that the yield will be at the most equal to what we had last year, which again was about 3.7%. And if you do the math on that, that creates a headwind of about $25 million or so.

Great. Thank you, Gus. Thank you. Our final questions will come from the line of Mark Murphy with JPMorgan. Please proceed with your questions.

Thank you. Thank you for squeezing me in, as Alex said. David, just regarding the elongated sales that you experienced in Q3, and given your comments about the month of October, I guess it's the month of October through the 30th, Being up year over year, do you expect you'll be able to catch up with your fiscal year plan from a booking standpoint? And then also, to the extent that I think you're saying the elongation is tied to larger, more complex deals, which seems logical. Can you confirm that smaller, less complicated deals did not experience that type of elongation in sales cycles?

As I mentioned on the call, Mark, we didn't see any one segment stand out. Remember, we don't sell in the small business. So the majority of our deals that we sell are above 1,000 employees. And in the major markets, which goes up to 3,500 employees, we are selling mostly full suite deals, which have the 12 different components that we're replacing. To the first part of your actual question, the quarter is very dependent on the month of December, much more so than in other quarters in the year where you get more of an even linearity between the different months. Q4 is more weighted. Above 50% would always be in the month of December. If I look at it at the moment from a pipeline coverage basis, it's very healthy. whether I look at a gross coverage basis or I look at a weighted coverage basis, so that's when you tie in the probability side, we're above the ACV target. So it will come down to the month of December, but there is a lot of activity. If I look at other indicators, attendance at the summits, at the Discover customer conference, up significantly year over year. So there's a lot of activity that's going. And when I look at the work that I think Sam's doing, I think that we've seen really good productivity increases in the sales group.

And thank you for that, David. As a quick follow-up, I'm curious, how are you assessing the willingness to pay for AI-based, whether it's co-pilots or agents in the realm of HR? And the reason that I ask is the monetization seems to be moving fastest in the areas like developers with code generators, and customer service, contact centers, sales and marketing workloads. It seems to be building and monetizing well. I heard your comment about some uplift, you know, as you get into it. But I think investors are just trying to understand is the perceived value and willingness to pay on par when it comes to HR managers or payroll managers, you know, when we contrast it to some of these other areas.

Mark, I think where you've actually kind of focused are where Gen AI was first used. So the first use cases you saw coming out of really some of the development tools that Microsoft put in place. So they've been in market longer. I think you're now moving into a phase where you're seeing AI being added to other use cases across the enterprise stack. We are, I believe, first in market with the co-pilot for the Gen AI offering. And remember, we don't charge for things like the writing of the job descriptions in talent acquisition. Rather, this is a separate product that we now have on the actual price sheet. There's a separate SKU where we can go back to customers. And it is a great product, you see. In fact, you'll see me show it at Discover. And when customers see it, there's a tremendous amount of excitement. And remember, for us, we're always focused on how do we deliver value to the customer, whether it's a 12-to-1 simplification where we can reduce subscription fees and reduce FTEs around the management of the HCM stack. In the terms of co-pilot, we're reducing the number of inbound calls to the HR teams by being able to answer the questions through a gen AI conversation. And at the same time, we're delivering tremendous value to the users of the application in really lifting up their experience on how they interact and get data about the organization, about policies, about themselves, or if they're frontline managers or executives, how they get information about their teams and performance of their organization.

Thank you.

Thank you. There are no further questions at this time. I would now like to hand the call back over to David Austin for closing remarks.

Thank you very much, and thank you all for attending. We're excited to see many of you at our Investor Day at Discover, and I'm hoping that many of you do attend Discover as well. Again, the products that will be shown I think will be very, very exciting, and I'm looking forward to just a wonderful experience for everyone as we enhance the community around the Dayforce platform.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.