Ceridian HCM Holding Inc. (CDAY) Q3 2023 Earnings Call Transcript

Ceridian HCM Holding Inc. (NYSE:CDAY) Q3 2023 Earnings Conference Call November 1, 2023 5:00 PM ET

Company Participants

Matt Wells – Head, Investor Relations

David Ossip – Co-Chief Executive Officer

Noemie Heuland – Chief Financial Officer

Joe Korngiebel – Chief Product and Technology Officer

Steve Holdridge – President, Customer and Revenue Operations

Conference Call Participants

Mark Marcon – Baird

Siti Panigrahi – Mizuho

Scott Berg – Needham

Steve Enders – Citi

Samad Samana – Jefferies

Bhavin Shah – Deutsche Bank

Mark Murphy – JPMorgan

Dan Jester – BMO

Kevin Kumar – Goldman Sachs

Alex Zukin – Wolfe

Matt Pfau – William Blair

Robert Simmons – D.A. Davidson

Matt Wells

Good morning and thank you for joining. Welcome to Ceridian’s Third Quarter 2023 Earnings Conference Call. I am Matt Wells, Head of Investor Relations. And on the call today, we have our Co-CEO, David Ossip; our CFO, Noemie Heuland; our Chief Product and Technology Officer, Joe Korngiebel; and our President of Customer and Revenue Operations, Steve Holdridge. [Operator Instructions]

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 expectations. A description of some of these risks and uncertainties can be found in the reports we filed with the Securities and Exchange Commission such as the cautionary statements in our filings.

Additionally, over the course of this call, we’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 a full reconciliation of these GAAP to non-GAAP metrics. These documents, in addition or 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.

David Ossip

Thank you and thank you all for joining us today. Today, I will discuss our strong third quarter results highlight our commitment to continually innovate on the Dayforce platform and provide an update on our raised 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 Noemie will add detail to our quarterly performance and updated full year outlook.

In the third quarter, I am pleased to report that we again exceeded guidance across all revenue and profitability metrics. Dayforce 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 shared the news that Leagh will be leaving Ceridian on 10 November to become CEO of Cooper Software. If you recall, 5 years ago, I brought Leagh 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 will 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 Leagh personally, although bitter sweet, I am delighted and proud of her development as a highly regarded leader in the cloud domain. She now has the 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, Leagh, 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 Dayforce 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 Dayforce 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 beach in Q3 and an incremental raise into Q4 and the full year. Noemie 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 Ceridian 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 am 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.

Steve Holdridge

Thank you, David. First of all, I continue to be impressed by the momentum of our sales team, now led by Sam Alkharrat 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 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%, where 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 have attached the full suite to nearly 50% of new sales. This is validation of both our sales and products strategy.

We are 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 5 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 on the 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, we have 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 U.S. 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 in SI partner-led RINs across all regions and segments and look no further than the enhanced presence of our partners at our INSIGHTS conference 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 macros well and delivered 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, where we’ll now hear from our Chief Product and Technology Officer, Joe Korngiebel. Joe, over to you.

Joe Korngiebel

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 innovation, greater intelligence, stronger compliance, better experiences and a more open and connected Dayforce platform. We have been delivering on these themes and announce the following. First, Dayforce Co-Pilot. 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 open AI, 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 in a major enhancement to our already industry-leading global payroll product. It removes the need for a lot of manual identification of data airs 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 to 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 Co-Pilot 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 at scale is what is differentiating us and driving us in the market.

With that, let me hand over to Noemie to close this out.

Noemie Heuland

Thank you, Joe. I’m happy to report that all key 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 rate. When we issued our fiscal year ‘25 financial targets, we said our margin profile would expand as a byproduct of the revenue mix shift 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 disciplined and 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 million to $2 million incremental headwind across Dayforce recurring and total revenue. Of note, after accounting for this incremental FX headwind, we’re still raising our fiscal year outlook for Dayforce recurring revenue ex float above our third quarter beat.

In the fourth quarter, Dayforce 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 Dayforce 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 in go-live quarter, is driving quarter-over-quarter seasonality in Q4 adjusted EBITDA expected to be in the range of $97 million 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 Dayforce. We do not anticipate investments in the Dayforce brand to affect our path to fiscal year ‘25 margin targets. And we plan to amortize the Ceridian tree name over a 2-year period effective August 2 of this year. This amounts to a non-cash operating expense of approximately $21 million per quarter in G&A or $14 million for 2 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.

Question-and-Answer Session

A – Matt Wells

Thanks, Noemie. Our first question will come from Mark Marcon from Baird.

Mark Marcon

Good morning. And thanks for taking my questions. Can you hear me?

David Ossip

Yes, Mark. Good to hear from you.

Mark Marcon

Great, thanks, David. Hey, congratulations to you and the entire team on the very strong quarter. I have two questions. The first one, it was really nice to see the upside from a revenue perspective, but even more upside with regards to the margins. And I’m wondering if you can give us a little bit more deconstruction with regards to the source of the margin upside. 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 Leagh’s departure, I’m wondering if you can talk a little bit. I mean, congratulations to Leagh 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 Leagh’s departure on some of those big enterprise sales?

David Ossip

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 Dayforce recurring revenue. And as Noemie 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 a 30% margins in the near-term.

Regarding Leagh, what I’ll say about this is Leagh joined the organization 5 years ago to bring really process and structure to the organization 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 what I call profession 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.

Mark Marcon

Great. Thank you very much.

Matt Wells

Our next question comes from Siti Panigrahi with Mizuho.

Siti Panigrahi

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 go live of those large deals?

David Ossip

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.

Siti Panigrahi

Anything on the go live?

David Ossip

On the go-to 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. What also with the actual go-lives, 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.

Siti Panigrahi

And one follow-up, David. 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 in here, what are the different growth drivers you’re thinking in midterm? And is this the typical question is it a 20% grower. So any comment on that would be helpful.

David Ossip

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 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 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 is 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 cycle quite some time where there is even more land to actually capture. So in terms of durable growth, I think we will be consistent in terms of our performance, and we will keep focusing on our five growth levers that again, we’ve been very consistent since 2018.

Siti Panigrahi

Thanks, for the color, David.

Matt Wells

Our next question comes from Scott Berg of Needham.

Scott Berg

Hi, everyone. Nice results during the third quarter. Thanks for taking my questions. I want to start on the company’s involvement in its partner ecosystem. I think one of the things that’s come up really positively in my recent round of checks is outside of just bringing them more implementations, your engagement with them is, I guess, increased nicely over the last year, and I think they are 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?

David Ossip

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. 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 profitability 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, 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 particularly 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 1 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?

Steve Holdridge

Yes. 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 can 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 and product and their contribution of the road map. So I think if you talk to our partners, they will say that the program and the experience they have had with us surpasses what they have had with the other players in the industry.

Scott Berg

Understood, thank you. Very helpful. And then 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 normalizing the 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 in the next couple, 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.

David Ossip

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 are 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 are the leader in that regard. Steve, what would you add to that?

Steve Holdridge

Yes, 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 is white space for us to have increased the percentage of add-on sales to the customers.

Matt Wells

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

Steve Enders

Okay. Great. Thanks for taking the questions here. I guess, so I was wondering if we could maybe get an update on the Canadian government opportunity? And if there is a – I guess, any changes there from the last earnings call update.

David Ossip

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?

Steve Holdridge

Yes. 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.

Steve Enders

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

David Ossip

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

Joe Korngiebel

Thank you for the question. Without a 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 is 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 looking to them what’s going to make a meaningful difference in help with the efficiency and productivity of their people staff and things like are 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’s the co-pilot capabilities on our report writer and analytics, 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.

Steve Enders

Okay, perfect. Thanks for taking the questions.

Matt Wells

Our next question comes from Samad Samana with Jefferies.

Samad Samana

Hi, good morning. Thanks for taking my questions. Congrats to the strong results and Leagh, congrats on the new opportunity. It sounds incredible. David, no one knows the HR payroll industry as well as your just for a few people like you. Wanted another company in the ecosystem last night noted that increased automation and improving the payroll rides is creating a significant revenue headwind for them as they improve the payroll process. I think one of the big questions we’ve got 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 fixed payroll errors or whether it’s filing in their own categories? And does Ceridian 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 would be very helpful for everybody listening with somebody like you that’s payroll industry stalwart to illuminate us on that?

David Ossip

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 are doing in 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 charge in inside. I didn’t fully understand the other competitors or other players a dialogue in terms of automation I think when they talk about automation, they are talking about employees being able to view their pay slips 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 processes 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 depots and 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’d say, sensitivity to batch-based process and processes impacting our revenue. That would be crazy.

Samad Samana

Great. I really appreciate that. I think that was an important topic to address for a lot of investors that are keenly focused on that. And I want to shift back to Ceridian and your key strategic initiatives. I’m curious maybe 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 any puts or takes that have maybe changed the trajectory for better or for worse, especially as we think about maybe what’s going on in the broader macro environment? And thanks again, David.

David Ossip

Yes. The one is on track, will hit the ARR number that we spoke about previously. If I look at registration rates are now above 55%. We’ve also seen the percentage of eligible people kind of go up quite nicely as well. We’re about to release some new capability on the Wallet and 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 that our employees that are not eligible for on-demand pay. So again, a very good program executing as planned.

Samad Samana

Great, thanks. Congrats on the strong quarter.

Matt Wells

Our next question comes from Bhavin Shah with Deutsche Bank.

Bhavin Shah

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?

David Ossip

So, one, I think it will increase our win rate as we actually go forward. There maybe a possibility for us to actually increase the platform fees. So, we are 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 copilots that Joe showed at INSIGHTS. Joe, anything that you want to add?

Joe Korngiebel

Yes. In general, Co-Pilot 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 so 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 are doing where you can ask a simple question in natural language, get that answer. It will 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 type of efficiencies we see as a powerful way to enhance your employees, and we are 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 will 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.

Steve Holdridge

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 have seen come out of generative AI 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.

Bhavin Shah

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 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?

David Ossip

Well, the drivers of that, obviously, is the widening of the actual product suite and the back at 50% of the customers I will take in the actual full suite. In terms of packaging and bundling for next year, we are still going through that exercise at the moment. Joe, anything that you would add in terms of Autonomous Payroll and ability to charge for it?

Joe Korngiebel

Yes. I think an important point on the previous question that was asked as well is we are delivering and really transforming payroll. We are delivering modern payroll. And both Autonomous Payroll and what we are doing with wallet are the key components of that. And while we are finalizing the package 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 and wallet is a great example. We have a new really revenue driver in 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 are doing with wallet and what we are doing with core global growth is what companies need for modern payroll, and we are leading the charge with really and disrupting ourselves in many ways by providing this next generation of payroll to really help companies and the changing workforce and the changing nature of business.

Bhavin Shah

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

Matt Wells

Okay. Great. Mark Murphy with JPMorgan.

Mark Murphy

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

David Ossip

Yes. Thanks Mark. I am going to ask Joe to speak about the hyperscale payroll project that we have been doing over the last probably about 18 months. But at a high level, it’s going very well. Joe, do you want to just talk a little bit about hyperscale containers versus servers?

Joe Korngiebel

Yes, for us, to grow up market and to really push was one of the big reasons that I came here 3 years ago, and we have 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, the world has limits and has shortcomings. And so as we have gone live, we have taken our payroll capabilities, and I mentioned continuous pay, we are doing that as a payroll engine that can run horizontally. And so we can just – with our partnership with Microsoft and what we are 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 are 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 user experience to do proper hyperscale, you need to change user experience as well. And over the last several years, we have been working on a complete new user experience that we are driving in to help customers with the scale and the user experience side as well. So, both of those factors, both the horizontal scale as well as the overall user experience have been in the works have been rolled out for the last several years, and now we are seeing it light up with these large-scale customers are going well.

Mark Murphy

Yes. 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 – you did comment on the pipeline, but could you comment on the business confidence you are seeing out there. For instance, our 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 into spending mood?

David Ossip

Mark, we have always taken the approach of a very strong return on investment to our customers. And today, when you are talking about a 5% Fed rate and money is no longer free, the time to return is very important. We have 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 were not any 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 is 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 system simplification ties into the very strong ROI. In terms of pipeline, as I mentioned, 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 have said earlier, we are very focused, as you know, on the 2025 target of the $2 billion, 88% gross margin, 30% adjusted EBITDA and I think we will deliver on that.

Mark Murphy

Thank you very much. Congrats again.

Matt Wells

Our next question comes from Dan Jester of BMO.

Dan Jester

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 have expanded maybe some of those trials? Thank you.

David Ossip

Yes. So, look, as Steve had mentioned, we are 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 an initial purchase so that they can get that very strong ROI and the 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% efficiencies through the use of generative AI. We have spoken about the tool that we have actually built at INSIGHTS. We actually showed through the intelligence search and the Co-Pilots, we are now able for administration of users to ask questions, how do I do this, or what does this mean with inside the system. And the Co-Pilot 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?

Steve Holdridge

No, I guess and in fact, I think we are ahead of the industry in terms of that. We are seeing real results on that. And to David’s point, we are seeing the benefit of both reduced inbound, but we are also seeing a better customer experience and an increase in our EPS 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 is not only helping customers respond, but proactively providing customers guidance to things before they ask a question.

Dan Jester

Great. Thank you.

Matt Wells

Our next question comes from Kevin Kumar with Goldman Sachs.

Kevin Kumar

Hi. Thanks for taking the question. It’s great to see the progress in EBITDA margin, which has grown nicely this year. But 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?

Noemie Heuland

Yes. And we have talked about the drivers for enhanced profitability, which I think is one of the primary driver going forward. You will 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 Dayforce, you will see corresponding expansion of profitability that will translate into cash flow generation as well. Specifically for Q3, we had a little bit of favorability in AR, which is driven by billings, very much back-end loaded in the second half of September. We have collected those billings, but that’s primarily the difference between the 50% that we have guided on average and the number that you see for Q3, but we remain committed for the conversions we have outlined for the remainder of the year.

Kevin Kumar

Thanks. That’s helpful. And then maybe just one on Dayforce Wallet, I 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 U.S. Thank you.

David Ossip

Sure. So, international markets, I am assuming that you view Canada as part of North America, so I will talk about the UK. The UK, we have a slightly different model. It’s a cabin model because there isn’t the interchange in the UK market. We have seen good adoption across the customers in terms of the actual – in terms of the wallet there are no the real surprises or, I would say, differentiating patterns with North America.

Kevin Kumar

Thank you.

Matt Wells

Our next question comes from Alex Zukin with Wolfe.

Alex Zukin

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

David Ossip

Yes. 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 are seeing more full suite deals. And the work that I think Joe has been doing over the last 3 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 and I was in the product are just absolutely beautiful. And so when we actually go out, can 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 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 have noticed that as well.

Alex Zukin

Perfect. And then, David, I guess, to the construct of some of these very large logos that you have 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 thousand plus employees. But un are not landing all of those employees right away, and you are 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 notion within those larger customers, specifically, like 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?

David Ossip

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 have actually seen, I would say, over the last year, maybe 2 years, is a number of these 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 a pair on the time side, there is a very high usage of the hobby 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 or the very large enterprise side. So, there is a lot of white space for us in market, a lot of land grab to be had, whether it would 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.

Joe Korngiebel

And one other thing I would add to your point is on some of those large logos that we expanded, you are correct. That’s a multiyear 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 2-year and 3-year revenue streams as those phases come live, and we have shown our ability to execute against that.

Alex Zukin

Perfect. Congrats guys.

Matt Wells

Our next question comes from Raimo Lenschow with Barclays. Hey Raimo, we will circle back. Our next question comes from Matt Pfau with William Blair.

Matt Pfau

Hi. 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.

David Ossip

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 are getting more of the wins in what we call the major markets. And the Enterprise segment, it’s not just a large enterprises that have global footprint. I think the work that Joe has been doing in terms of the net payroll engines, the global payroll interfaces really does differentiate us quite significantly from the people in the marketplace.

Matt Pfau

Great. Thank you.

Matt Wells

So, our next question will come from Michael, Wells Fargo. Okay. Raimo, we will circle back to you here, otherwise, Robert Simmons with D.A. Davidson.

Robert Simmons

Thank you. Do you hear me?

David Ossip

Yes.

Robert Simmons

Great. Thanks for taking my question. I was wondering first, could you update us on the ideal marketplace. So, it’s a pretty differentiated idea really you have to go in there, but so I am wondering kind of how the progress is coming along.

David Ossip

Yes. 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 year, I think we will probably have three customers using the actual product which would be kind of the completion, if you like, of the charter pays. 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 coming along.

Robert Simmons

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

David Ossip

Yes. I think we are progressing very nicely. We believe that we should have a candidate announced by the time or by the start of the year.

Matt Wells

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