Dayforce, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Dayforce, Inc. is a global human capital management (HCM) software company, offering solutions across core HR, payroll, talent management, workforce management, and benefits, all integrated in their cloud-based platform.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Dayforce, Inc. (DAY), formerly Ceridian HCM Holding Inc., provides human capital management (HCM) software and services. Their core offering, the Dayforce platform, is a cloud-based solution designed to help organizations manage the entire employee lifecycle, including:

  • Core HR: Manages basic HR functions such as personnel files, organization charts, and workflows.
  • Payroll: Automates payroll processing, ensuring accurate and timely payments.
  • Talent Management: Covers recruiting, onboarding, and employee development.
  • Workforce Management: Handles scheduling, time tracking, and labor management.
  • Benefits: Manages employee benefits programs and related administration.

DAY’s revenue primarily comes from recurring cloud-based software subscriptions, with a smaller portion from professional services and other implementation-related services. Their main customers are small to medium-sized businesses.

The HCM market is undergoing significant change, driven by several factors:

  • Cloud Migration: Companies are increasingly moving away from on-premise software to cloud-based platforms for flexibility, scalability, and lower upfront costs.
  • Increased Complexity: Companies face increasing complexity and higher costs in managing the rapidly changing landscape of payroll and regulatory compliance.
  • Integration: Customers prefer integrated platforms that are easier to operate and create less friction with end users.
  • Growing Importance of HR Data: Companies are increasingly seeing the power in data related to the workforce.
  • AI and Machine Learning: Companies are using automation technologies to boost efficiency and drive insights in their HR operations, in addition to improving workforce experience.

Competitive Landscape

The HCM industry is highly competitive, with established players such as Workday, Oracle, and SAP vying for market share, alongside other smaller players. The competitive landscape can be understood by noting the variety of their product offerings:

  • Established players like SAP and Oracle have an array of products from various areas that are consolidated on to their platform.
  • Workday focuses on cloud-based HR, and is primarily focused on large sized companies.
  • Competitors like Paylocity cater to small- and mid-sized companies in North America.
  • Startups and smaller companies may have specific niche capabilities such as niche-based payroll or benefits offerings. DAY is competing within this space with an integrated product which also integrates with other human capital areas.

Dayforce’s main strength is its ability to offer its entire HR suite on a single platform, where as competition are using a patchwork of tools.

Financials

The company has recently gone through a large overhaul of their financial reporting as they have changed from generally accepted accounting principles to IFRS, therefore, all historical figures have been restated and should be interpreted as such. Let’s dive into the latest information:

Revenue
  • Dayforce’s total revenue for the 9-months ended September 30th, 2023 was $1.14 billion up 22.4% yoy.
  • For the three months ended September 30th, 2023, total revenue was $370.9 million, up 19.6% yoy.
  • Recurring cloud revenue represents the majority of sales, and grew 23.9% and 26.7% in the three and nine months periods, respectively.
  • They have also seen impressive growth in the “powerpay” product.
  • For the last 10 years, the company has grown its revenue at an average annual rate of more than 20%, mostly by adding new clients.
  • In the third quarter of 2023, they added 1350 new customers.

Their recurring revenue is now above $1.4 billion annualized.

Margins
  • Gross margin was 77.0% for the three months ended September 30th, 2023, compared to 77.7% for the same period last year.
  • Cloud margins remain very strong at roughly 79%.
  • Operating income in Q3 2023 was $76.8 million or 20.7% of revenues
  • For the nine months ended September 30, 2023, it was $177.5 million or 15.6% of revenues.

These margins appear very strong compared to any average company, this is primarily because the business is run on software and thus does not require high capital expenditure.

Profitability
  • For the 3 months ending Sep 30th, 2023, diluted EPS was $(0.02), and for the 9 months ending the same date, it was also $(0.02).
  • For 2023, they expect Adjusted EBITDA Margin to be around 28% and they expect to remain profitable for the foreseeable future.
  • Historically, they have struggled with profitability due to very high spending on research and development, as well as sales and marketing.
Balance Sheet
  • DAY has an incredibly strong balance sheet. With cash and equivalents making up more than 50% of total assets. They have low short-term debt and relatively high shareholders’ equity.
  • As of December 31, 2022, the company’s cash and cash equivalents totaled $3.81 billion.
  • Total liabilities were $5.64 billion with long-term debt making up $1.24 billion.
  • Total shareholders’ equity was $2.19 billion.
  • As of September 30, 2023, the company’s cash and equivalents totaled $4.96 billion, total liabilities were $6.05 billion and total shareholders’ equity was $2.88 billion.

Recent Developments and Issues

  • In February 2024, they changed their name from Ceridian HCM Holdings Inc to Dayforce, Inc.
  • In their latest earnings call, they mentioned they are expanding to new markets, mostly internationally.
  • They have said they are looking to bring a unified solution that provides all aspects of human capital management.
  • There have been no major controversy that has plagued the company recently.

Moat Analysis

Based on our analysis, we will give the company a 2/5 moat rating. Here’s why:

  • Intangible Assets: Dayforce benefits from a strong platform that offers all the functionalities that its customers need in one place and the strength of its brand within the human capital management (HCM) space. These help them retain and grow their customers, as well as helping them attract new customers due to the positive brand image. While it is a positive, it is not impossible to replicate, especially for the biggest players in the industry, therefore, cannot provide a very strong sustainable competitive advantage.
  • Switching Costs: DAY offers services that tie into many parts of the customers’ business, therefore, a high switching cost exists, but in general, that does not prevent new companies from attracting clients, especially at small sizes. The stickiness may not be high for a company with a few employees, but it becomes harder for a company with hundreds of employees.
  • Network Economics: Their system connects companies with their employees, so there is a slight benefit from network economics, but it is not strong or large enough to have a major impact.
  • Cost Advantages: Cost advantages do not play much of a role, except their strong scale helps reduce costs, but there is no evidence to suggest that it gives them a sustainable advantage.

The biggest reason the company was given such a low moat rating is that although their solution is a good one, its benefits may not necessarily have the power to fend off competitors as competitors could potentially replicate its product offering if they desire.

Risks to Moat and Business

  • Competitor Replication: Competitors could successfully replicate Dayforce’s offerings, undermining the company’s competitive advantage.
  • Technological Disruption: The HCM market is rapidly changing, and an innovation in AI or other software could render their solutions obsolete, resulting in loss of market share.
  • High Level of Competition: Existing large players could engage in a price war or product improvements to harm the company’s profitability.
  • Acquisition Challenges: Their main strategy is to grow through acquisitions, and failure to successfully integrate those can impede their growth and have a negative effect on their financials.
  • Cybersecurity Risk: Since the company’s offerings are primarily based in cloud based software and deals with sensitive personal data, they are very vulnerable to cybersecurity breaches that can harm both the image and financials of the company.
  • Regulatory Risk: The company provides solutions across various jurisdictions and compliance with laws, regulations, and accounting practices may become an important barrier to entry for new competition, or to disrupt the company’s business model.
  • Macroeconomic Factors: Any downturn in the economy, changes in interest rates, inflation, changes in tax laws and other macroeconomic events might have negative effects on the performance and financials of the company.

The biggest risk to their moat is a larger tech company, that has enough resources and know-how, deciding to copy and directly compete with them.

Understandability Rating: 2 / 5

Their business model and value drivers are relatively straightforward (cloud-based services, a diverse set of offerings, large customers) but it also involves navigating complex tax law, different financial regulations, cybersecurity risk etc, which makes understanding the business operations beyond the surface more difficult.

Balance Sheet Health Rating: 3 / 5

Their balance sheet has strong positive cash balance, and low short term debt. This is counteracted by low share holders equity and negative owners’ earnings. Given that, the balance sheet health is considered ok, but not great.