Ceridian HCM Holding Inc

NYSE:DAY

Earnings Call Transcript 2022-Q2

[Erik Zimmer, Head of Corporate Development and IR]

I'm Erik Zimmer, Head of Corporate Development and Investor Relations. I am joined on the call today by our co-CEOs, David Ossip and Leagh Turner; our CFO, Noemie Heuland; and our Senior Director of Investor Relations, Matt Wells.

I will now turn it over to Matt who will run through our legal disclaimer.

[Matt Wells, Senior Director, IR]

Thanks, Eric. As a reminder, all participants are in listen-only mode. All is being recorded. The question-and-answer session will follow the opening remarks. Before I hand the call over to David, I want to remind everyone that our commentary may include forward-looking statements. These statements are subject to risks and uncertainties that could cause Ceridian's results to differ materially from historical experience or expectations. A description of some of these risks and uncertainties can be found in the reports that we filed with the Securities and Exchange Commission in addition to statements included in our current and periodic filings.

Additionally over the course of this call, we will reference non-GAAP measures to describe our performance. Please review our earnings press release and filings with the SEC for rationale behind the use of these non-GAAP measures and full reconciliation of our GAAP to non-GAAP measures. As a final note, our earnings press release and other SEC filings are available on the Ceridian Investor Relations website.

With that, I'll turn the call over to David.

[David Ossip, Co-CEO]

Hello, everyone, and thank you for joining our Q2 earnings call.

Today I'll speak briefly about our strong performance in the quarter, what we are seeing in the macro environment, and I will highlight our technology differentiation. We will then give more color on our sales momentum and outlook for the second half of the year, and will go into details on how we are driving efficiencies across the organization, and then Noemie will go into the numbers before we open up the call for questions.

Turning to performance. We had a very strong quarter and in constant currency, we exceeded the high of our guide on all of our metrics. Dayforce recurring revenue ex-float grew by 30% and 31% including float. Adjusted EBITDA came in at $61.8 million or 20.5% of revenue versus a year ago when the business was operating at 15.9%. This is a significant improvement in profitability and in scale.

A large part of our EBITDA beat came from the 230 basis point year-over-year increase in adjusted gross profit on Cloud recurring to 76.4%. On the macro side, we have not seen any slowdown in sales or any slowdown in decision making. Year-to-date sales are up significantly year-over-year and growth appears to be accelerating. We have seen continued momentum across all segments. Deals above $1 million are up 50% year-over-year. Mid-market sales are above plan. Add-on sales to the base continues to be a healthy 30%. The number of customers who have brought a suite is up to 36% and global traction continues with EMEA and APJ sales, both up year-over-year by more than 50%. In other words, we are firing on all cylinders and are quite confident on the outlook for the second half of the year.

And turning to technology, we continue to build great tech that continually expands our addressable market by extending our platform with new modules, adding capabilities at scale for large enterprises and adding global HR payroll and time features that service the needs of global organizations and those headquartered outside of North America. All of which deliver more value to our customers and drives recurring revenue, growth and profitability. And as you know, we differentiate in the market through our Dayforce technology in a number of ways.

First, we have a single solution with a single database that spans across HCM. This drives efficiencies and cost savings for our customers. Second, our continuous calculation engine also drive significant efficiencies and much better compliance for our customers. In fact, we have seen payroll processing times drop from over 20 hours to less than two hours at our customers. And we are broadly recognized as a worldwide leader for payroll, workforce management and compliance.

It is this continuous calculation engine that has allowed us to bring Dayforce Wallet to market. Dayforce Wallet allows employees to get paid when they want improving their financial wellness by avoiding costly alternatives, while significantly reducing employee turnover and cost for our customers.

Today, more than 1200 customers have signed for Dayforce Wallet, over 650 are live. Average registrations are above 40% of eligible users and the typical Wallet user uses the Wallet about 25 times per month. These trends illustrate what our customers are telling us, which is that Dayforce Wallet is a modern extension of a payroll process and is a base expectation of today's employee.

Another advantage we have relative to the ERPs is our payment and tax services capabilities. In fact, I would argue that selling payroll with our tax and money movement is like selling a bus without wheels and an engine. And on the global front, our global capabilities for HR payroll time and talent allows customers to have a single system for their global operations, which is a significant competitive differentiator for Ceridian.

And finally, our focus on driving returns for our customers has led to our success. Each time we build a module we determine which KPI we can impact with that module. That measurement needs to be quantified or convertible into a money saving. This focus on ROI has led to powerful customer case studies and reinforces our value messaging which resonates so well in today's macro environment and our results stand as proof.

I'll now turn it to Leagh to go into more details on sales productivity and how we're driving efficiencies across our business.

[Leagh Turner, Co-CEO]

Thanks, David.

As David noted, this is an organization that is firing on all cylinders and in many respects is deployed by a macro environment where our customers and prospects value productivity and profitability more than they have in some time. Our technology delivers hard dollar returns at a market-leading TCO and our sales reflect that.

After two years of significant transformation in our sales and go-to-market organization, we are clearly seeing the fruits of our labor. Sales productivity has returned to an all-time high after significant investments in getting the right people in the right roles in the right geographies with a market-leading value proposition.

The result is that we are winning at an accelerated rate in our key markets. In the North American EMEA and APJ mid markets as detailed in our shareholder letter, we are seeing tremendous momentum in full suite sales, now more than 36% of customers buying the Dayforce suite, momentum in selling back to our base now more than 30% of our sales are back to our current customer base and real speed to value realized by our own implementation organization and that of our now more than 30 SI partners worldwide.

The time we took to build a fully native, full suite offering easily deployable in record time and high quality by a global network of partners to service the mid-market is paying off in both accelerated growth and in profitability.

In the global enterprise and large enterprise space, a market where we have been investing for several years, we are again seeing the fruits of our labor. Our shareholder letter tells the story. In the second quarter alone, customers in the 10,000 to 12,000 employee range buying the full Dayforce suite are becoming commonplace. We have always said we are not limited by our technology, our platform scales and we are now selling and taking live customers with hundreds of thousands of employees.

One of the largest e-commerce logistics companies in the world chose to expand the relationship with Dayforce to support their more than 100,000 employees in the U.K. One of the largest grocers in the world with 350,000 employees will leverage Dayforce to support their profitable growth. And in the first weeks of the second half we cemented a relationship with the global customer who will move more than 700,000 of their global employees to Dayforce in a phased rollout.

In each one of these wins, we are replacing antiquated technology, disparate systems that are glued together with people and undue cost and in so doing, we are driving real ROI at market-leading TCO for our customers in a market where that's more valued than it has ever been.

Finally, a word about scale. We have been relentlessly focused on driving scale for the last many years. Again, the results stand as proof. We are now operating at 74.6% adjusted Cloud recurring gross margin and a clear path to greater efficiencies ahead as we continue to leverage our global footprint.

All of this while improving the core metrics, which our customers have come to expect from us. As an example, retention rates remain best in class while we globalize our support organization and simultaneously reduce ticket volumes by 15% year-on-year. This is, but an example of hundreds of initiatives we have in place to support our continued accelerated growth and profitability. And I would be completely remiss if I didn't stop to thank our own people and our customers who have put their trust in us when we told them that we could do what we are now in fact doing.

And with that, I'll turn it over to Noemie to take you through the numbers in more detail and to discuss guidance. Noemie.

[Noemie Heuland, CFO]

Thank you, Leagh.

I'd like to provide additional color on our second quarter performance and guidance which is detailed in this stock holder letter. In reviewing our second quarter performance, I want to reiterate that growth across Dayforce recurring revenue, cloud revenue and total revenue, face FX headwinds driven by a stronger US dollar compared to what we expected. These headwinds amounted to approximately 200 basis points of growth in the quarter.

On a constant currency basis, Dayforce recurring revenue excluding float grew 30%, cloud revenue grew 28% and total revenue grew 23%. Adjusted EBITDA margins of 20.5% exceeded our guidance range, driven by revenue upside in the quarter as well as operational efficiencies as illustrated by our adjusted Cloud recurring gross margin of 76.4%, an expansion of 230 basis points.

Turning to third quarter and fiscal year 2022 guidance. I want to note that in the second half of the year, we face FX headwinds of approximately 150 basis points to revenue growth. These FX headwinds are incremental to our previous assumptions and are detailed in our stockholder letter.

Despite these FX headwinds, we're raising and narrowing the range for our fiscal year 2022 growth expectations. Both reported and at constant currency across cloud revenue and total revenue on the healthy Q2 performance and increased float revenue.

For the full year 2022, we are adjusting our guidance for Dayforce recurring revenue ex-float to reflect second half FX headwinds. Growth is now expected to be in the range of 25% to 27%. However, we maintain our prior constant currency guidance range of 26% to 28% growth.

When attributing float revenue to Dayforce, expected growth is in the range of 27% to 29% and constant currency growth is in the range of 28% to 30% for the full year. In addition, we are raising adjusted EBITDA to reflect our float revenue guidance and flow-through of half of the profitability upside for the second quarter.

Our 2022 adjusted EBITDA guidance implies margin moderation in the second half of the year as we continue to invest across our growth initiatives. That said, at the midpoint, we now expect to achieve adjusted EBITDA margins of approximately 18% which is an increase of about 200 basis points versus our prior guidance midpoint of 16%.

As we continue to manage through an evolving macro environment, we remain committed to investing for future growth while continuing to drive scale and efficiencies across the organization.

Now, I'd like to turn the call back over to Matt to open the Q&A.

[Matt Wells, Senior Director, IR]

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

[Willo Miller, William Blair]

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

[David Ossip, Co-CEO]

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

[Willo Miller, William Blair]

Agree. And then just a quick follow-up, how does your pipeline look like now versus 90 days ago?

[David Ossip, Co-CEO]

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

[Willo Miller, William Blair]

Great, thanks.

[Matt Wells, Senior Director, IR]

Next up we have Mark Macron from Baird.

[Mark Marcon]

Hi everybody, it's Mark Marcon, my cousin Emmanuel isn't on the line. With regards to the strong quarter, can you talk a little bit more about some of the big wins that you mentioned, Leagh in particular, the large grocer who is being replaced there and then you mentioned the large employer that's got thousand employees that you signed in the first couple of weeks, when would that start going live and what were some of the key reasons why you were selected for some of those really big impressive wins?

[Leagh Turner, Co-CEO]

Yes. So first of all, I'll just take them head on. The large grocer headquartered actually in EMEA with 11,500 stores is going to leverage us for WFM advance scheduling to expand the profitability of their operations and they're going to operate in over 20 languages leveraging Dayforce. The global e-commerce and web services company that I referenced is going to use us for payroll in their U.K. operation for over 100,000 employees it actually builds on, which we're most proud of. Our pre-existing relationship, they're doubling down their relationship with Ceridian, with opportunity frankly to continue to scale that relationship globally and we replaced a major competitor, major payroll competitor.

And then with respect to the win in the first part of July, which you can imagine dramatically affected our linearity for the second half. They intend, we intend to provision their system within the next couple of weeks and we're going to begin loading data into that system this quarter with the intention to begin a phased rollout in year.

And we replaced an existing competitor. We competed with the masses in order to win and in fact did. And as I said, when we are completed there, we will have rolled out to 700,000 employees with the opportunity for expansion from payroll into full HCM over time. So those are some patterns that we are seeing in the market. Our pipeline is full of opportunities like that. What we're finding is that we're accelerating our ability to win.

[Mark Marcon]

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

[David Ossip, Co-CEO]

So I'll start on it and I'll let Noemie add some more color to the conversation. On the gross profit on recurring, a lot of it is driven by the efficiencies we're having across our support organization. Earlier in the year, we move to a model that allows users to support one another and that has led to a reduction in support tickets, year-over-year and has obviously increased the profitability of the recurring revenue.

The second piece is, as we've mentioned, as we extend the platform and we saw the add-on modules and 36% of clients today have a suite of modules they're using, we get additional revenue, but we don't really change the cost of hosting or the cost of support so that drives off the profitability of it as well. And then overall just from a process perspective, more automation, less bums and seats type of approach to the actual business has lead to that.

On a longer-term basis, we're consistent with what we said beforehand, we expect that gross profit number on recurring to go up to about 80% or so over the next, about three years.

[Mark Marcon]

Perfect, thank you.

[Matt Wells, Senior Director, IR]

Our next question comes from Jared Levine from Cowen.

[Jared Levine, Cowen]

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

[Noemie Heuland, CFO]

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

[Jared Levine, Cowen]

Okay, great . And then looking at your Dayforce recurring ex-flow constant currency guide for the year, can you help us in terms of the attribution across new logos, upsells, pricing increases in employment growth within the base?

[David Ossip, Co-CEO]

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

[Matt Wells, Senior Director, IR]

And our next question comes from Siti Panigrahi from Mizuho.

[Siti Panigrahi, Mizuho]

Hi, thanks for taking my question. David, I want to ask you, your favorite topic Dayforce Wallet, it's very impressive to see now, 40% now registration rate, looks like your employee, the referral program working. So it's been now two years, how far you can go in terms of employee registration within the base, and how do you feel about the adoption at this point and also if you see any slowdown in our macro slowdown, how do you see the, how the wallet without?

[David Ossip, Co-CEO]

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

[Siti Panigrahi, Mizuho]

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

[David Ossip, Co-CEO]

So I'm not sure if I heard the question correctly, but as I mentioned, the number of deals over a $1 million is up 50% year-over-year. We have a much more success in the large enterprise space and in Leagh highlighting some of the wins of the very large customers, ERP vendors would've been at the table in all of those. Leagh, any other parts that you could answer?

[Leagh Turner, Co-CEO]

May be, I'm just going to try and get to the root of your question Siti if I understood you correctly. Basically what you're asking is talk to me about your tax and money movement offering and like does that really help you when you're selling full suite HCM. And the answer is yes. And the reason that it helps is that in a down market, everybody is driving for a consolidation, so lowest possible total cost of ownership.

So if you can eliminate integration points or alternative providers or duplicative teams internal to your business, that's a win, which is why anything that we do that complements our full suite and allows us to be one single provider to our customer is part of the reason that we're winning full suite deals, payroll deals in a down market, I would argue more than people who don't offer what we offer.

[Siti Panigrahi, Mizuho]

Great. Thank you.

[Matt Wells, Senior Director, IR]

Your next question comes from Dan Jester of BMO.

[Dan Jester, BMO]

Great. Good afternoon everyone, thanks for taking my question. Maybe another one on the Wallet. So if I heard correctly, you've got 1200 signed customers now in the Wallet, if I look at my math, it looks like it's about 100 new customers sequentially, and that's the lowest pace in the year. So I guess I'm just wondering in terms of client signing with Dayforce, how are you seeing the momentum there and should we expect the pace of signings to pick up as we go into the back half of the year?

[David Ossip, Co-CEO]

Daniel, as I said before, the focus at the moment is working with the customers that have signed the 1200 to first go-live, 650 odd lives of this 550 more to take live, and then to work with those that all live to increase the populations that are eligible, when we just look at the number of employees that we've signed across the 1200, it's a considerable amount. And so we're focusing more on activation to get the usages.

You heard earlier, there was a reference to the referral program. We launched that last quarter which effectively is an off. In the first half, if you give your referral code to a buddy, the first time they use it, they get a bit of money, you get a bit of money, we've seen an impact in terms of registrations coming from that as well.

So our focus at the moment really is driving the eligible population mostly. But there is still runway to go in terms of the number of customers to sign up and we still are seeing above 80% attachment rate of wallet to payroll, and I know that Leagh would argue that, you know what the Wallet has now become table stakes from a modern payroll system. Any employee out there today does expect to have the ability to get paid when they want to, and we're seeing that reflected in the RFIs, RFPs, when people are asking about the features that they do expect to have in a modern payroll system.

[Dan Jester, BMO]

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

[Noemie Heuland, CFO]

So as you saw, we raised both the low end and the high-end by $20 million. So that's essentially all the float upside that we saw were flowing through the second half of the year on the full-year guidance, and then we are flowing through half of the adjusted EBITDA BEAT from Q2, which is substantial.

We continue to make investments in sales and marketing. We have our big event in November in sites in Vegas, where we have a lot of prospects and customers attending, and we continue invest in marketing and then in product innovation as we saw in the stockholder letter. So those are the main puts and takes of adjusted EBITDA for the remainder of the year.

[Dan Jester, BMO]

Got you. Thank you very much everyone.

[Matt Wells, Senior Director, IR]

Our next question comes from Robert Simmons of D.A. Davidson.

[Robert Simmons, D.A. Davidson]

Hi guys, thanks for taking the question. I was wondering on your international revenue, how much of it, excluding things that gets under, but how much whether it's in multinationals going to start up new in the US or their own domestic market and then took you international to other divisions versus companies that are natives to those countries, taking you in Australia or that sort of thing?

[David Ossip, Co-CEO]

So we're actually seeing success on both fronts. I mentioned this in my piece upfront that when we look at EMEA and APJ and that's where we sell to companies that are headquartered in either Amir or headquartered in APJ. We've seen the sales figures go up 50% year-over-year. So we are being successful at selling in the local markets against the local competitors. As well, we are seeing additional rollouts.

Our global employees from companies that are already live on Dayforce which obviously will be companies that are headquartered in North America. The one logistics company that Leagh mentioned has been a customer in North America for a few years and they've now extended their relationship to their UK population, so that's the perfect example. Leagh, anything you would add to that.

[Leagh Turner, Co-CEO]

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

[Robert Simmons, D.A. Davidson]

Awesome. Great. And then, can you talk about what impact you're seeing from higher inflation rates or high inflation rates I should say. I know that you passed on present, which is generally at renewal. But how do new deals look, and then also what you're seeing on the cost side of the equation?

[Leagh Turner, Co-CEO]

Yes, on the price increase. As you know, we have our contract terms that are lowest to increase upon renewal. We're obviously applying those and at the same time being mindful of the customer-specific situations.

And we've also increased our prices to reflect the effect on inflation, but again we're mindful and we're looking at competitive positioning of our offering and some deals, especially in the large enterprise sector. So I think we're mindful of the price increases as well as looking at what others are doing and compete efficiently, especially in the large enterprise space.

[David Ossip, Co-CEO]

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

[Matt Wells, Senior Director, IR]

Our next question comes from Kevin McVeigh of Credit Suisse.

[Kevin McVeigh, Credit Suisse]

Great, thank you so much and congratulations on the results. Hi, is there any way to think about what the revenue opportunity is, if the remaining clients for the full Dayforce suite, I think the number, it's 36% today, but if that flows across the turning price, how much revenue would be associated with that?

[David Ossip, Co-CEO]

That's such a good question. Just a few parts of breaking that down. Even across the 36% of the current suite, there's still significant upsell capabilities across them. So at the moment today, I think we have 18 different modules that are available -- 24 modules that are available, sorry, excuse me.

And so there is a lot and every year, Joe adds on average about two to three new modules which drive additional PEPM. So there is still a significant, and I think there always will be a significant opportunity in terms of going back to the base. I don't have the math to account the 30% compounded, I'll give that to Noemie to try and answer that one.

[Noemie Heuland, CFO]

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

[Leagh Turner, Co-CEO]

And the only thing I would add is that we're starting to see some of that. So you'll see in our shareholder letter, that there is a long-term healthcare provider with 11,000 employees that bought the full suite from us. It's an example of consolidation and driving down TCO, they amalgamated a bunch of point solutions and went with Dayforce, there's a global veterinary services company, 40,000 employees bought the full suite from us to manage complex scheduling requirements.

And to rollout frankly Dayforce Wallet in order to be able to drive up employee retention. And both of those, 11,000 and 40,000 employees, would have been unheard of a couple of years ago that they would have bought more than pay in time from us, but now they're buying a larger footprint and they are a really good example of what Noemie just said, which is, we expect the customers there are in the 100,000, 350,000, 700,000 range will buy more from us over time if we land with pay and time and service them well.

[Kevin McVeigh, Credit Suisse]

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

[Leagh Turner, Co-CEO]

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

[Kevin McVeigh, Credit Suisse]

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

[Leagh Turner, Co-CEO]

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

[Kevin McVeigh, Credit Suisse]

Yes.

[David Ossip, Co-CEO]

Look, it depends on the actual rollout of the client. We've seen big clients. Last year, we had a health care organization where 60,000 go live in six -- in 7.5 months. In terms of the UK logistics, company was about 100,000. I would expect that to be about a year rollout to get them live. In terms of the other logistic company that we signed early this quarter, there is a bit of seasonality into that base as well.

So we'll probably take up their base employee base, which I think is about 500,000 relatively quickly. It will peak up I suppose over the Christmas period to about 700,000 or 800,000 level, but I would expect that to be a one- to two-year project.

[Leagh Turner, Co-CEO]

Yeah, the only thing I'd say to augment that is that in the shareholder letter, this is an example of a holiday company based in the United Kingdom with 10,000 employees going live with WFM and a few other things, all within a six-month period. They need to do it for business reasons, and we can accommodate that whereas again, a couple of years ago that would not have been possible. So just as an example of what David said, we've gotten much, much faster getting customers live on time and on value and this 700,000 person customer, will do it at their own pace and what serves their own business, but we can accommodate their needs.

[Kevin McVeigh, Credit Suisse]

Congratulations again.

[Matt Wells, Senior Director, IR]

And our next question comes from Mark Murphy of JPMorgan.

[Mark Murphy, JPMorgan]

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

[David Ossip, Co-CEO]

So Mark a few major themes in this. In 2018, when you spoke about enterprise, we already meant above 10,000 employees. Nowadays, when we speak about large enterprise, we're speaking about hundreds of thousands of employees. What's allowed us to do that is really two things. The first is that Joe with the product and technology team has significantly improved the scalability of this solution.

From a payroll agent perspective, they've added the capability to horizontally scale into different containers that allow us to do these calculations very, very quickly. A lot of that, we actually had to do to support the Dayforce Wallet, which as you can imagine at any instance of the day, we are running a payroll for someone just based on consumer demand. So we've created tremendous more scalability.

Also on the product and technology side, we added some features that are required for the larger organizations to do payroll. So things like the global system of record, the ability to do a more complicated tax calculations are examples of that.

And then on the sales and marketing side, as you know, we rebuilt the sales organization about 18 months ago when Rocky joined the organization, and we went to market and we brought in a lot of exceptional sellers who are familiar, selling to the large enterprise market. And remember to the large enterprise market, you have to sell value, you have to sell software, you have to get PEPM on provisioning because you're a software provider, not a service provider, you have to know how to position value to the C-suite, and you have to be able to run through a more complex sales process.

And I would argue that Rocky has done a tremendous job in changing the way we actually go to market that has allowed us to win those accounts. So yeah, I think we should be very proud of what we've accomplished in a large enterprise market and I expect in momentum to continue and I think we are beyond the tipping point of becoming the recognized leader for compliance for the very large enterprise.

[Leagh Turner, Co-CEO]

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

[Mark Murphy, JPMorgan]

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

[Leagh Turner, Co-CEO]

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

[David Ossip, Co-CEO]

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

[Mark Murphy, JPMorgan]

Okay, excellent. Thank you.

[Matt Wells, Senior Director, IR]

Your next question comes from Alex Zukin of Wolfe.

[Alex Zukin, Wolfe]

Hi guys, thanks for taking the question. So I guess, clearly I think you've talked about increasing momentum, which is obvious given the very large customer logos you're announcing, which I think is more than at least I can remember you guys talking about on a single earnings call.

So what I'm trying to reconcile is given Leagh you talked about accelerating momentum, David, you're talking about both businesses above plan. Just help us understand and bridge, if I look at the sequential dollar increase in Dayforce recurring revenue, constant currency ex-float on a dollar basis, it's actually going up less than this time last year.

And in the contract, so I'm wondering, is there a linearity component here where some of these deals because they're larger, they're bigger logos, maybe the more complex, there is a longer time lag between the booking and the revenue recognition, but just help me understand that and then maybe couple that with why keeping the guide unchanged?

[David Ossip, Co-CEO]

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

[Alex Zukin, Wolfe]

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

[David Ossip, Co-CEO]

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

[Alex Zukin, Wolfe]

Got it. Thanks guys.

[Matt Wells, Senior Director, IR]

And our next question comes from Bhavin Shah of Deutsche Bank.

[Bhavin Shah, Deutsche Bank]

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

[Noemie Heuland, CFO]

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

[Bhavin Shah, Deutsche Bank]

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

[Leagh Turner, Co-CEO]

Yeah. The $30 million increase in our full year guidance reflects the most recent rate hikes. Remember, we also have our portfolio of investments that is laddered. So you have half of the portfolio that, where that repricing immediately applies and half of the portfolio where you will see that flow through a little bit later in time. But yes, potentially there is some additional rate hikes, you may see a little bit of upside there.

[Bhavin Shah, Deutsche Bank]

Great. I completely understand the dynamic and that's helpful, thanks again for taking my questions.

[Matt Wells, Senior Director, IR]

Our next question comes from David Unger of Wells Fargo.

[David Unger, Wells Fargo]

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

[Leagh Turner, Co-CEO]

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

[David Ossip, Co-CEO]

No, I wouldn't do. I think that's good.

[David Unger, Wells Fargo]

Okay, great, thanks and great to see full suite sale of 36% holding steady. Any internal targets you could share with us over the, let's say the intermediate term? Thank you.

[Leagh Turner, Co-CEO]

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

[David Ossip, Co-CEO]

No, I wouldn't. I would say we've always leveraged our leadership in compliance which is payroll better in time. We know that we can do that better than anyone else and we know that if we would not, and we get system of record is very likely that we will get the Talent components as well.

Again in 2018, that would've been true at the major, in the mid-market. We know also quite successful up to the enterprise space, which is about the 10,000 employee level and are no longer-term basis, we would like to get system of record as well for the large enterprise, which we do believe will allow us to also win the Talent components. And by the way, we have seen success even in large enterprise on suite sales.

[David Unger, Wells Fargo]

Thank you very much.

[Noemie Heuland, CFO]

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

[David Unger, Wells Fargo]

Thanks very much.

[Matt Wells, Senior Director, IR]

And our next question comes from Samad Samana from Jefferies.

[Samad Samana, Jefferies]

Hi, great, thanks for taking my questions. Maybe first one for you, Noemie. Just as I think about EBITDA, the company has done really well in getting the gross margins up and kind of keeping an eye on OpEx as well. So we're seeing that. I'm just curious, how should we think about adjusted EBITDA translating into free cash flow. Just how does that conversion, I know in the past, it hasn't been as well. Just -- should we start to see free cash flow in fact as well or how should we think about adjusted EBITDA converting into free cash flow?

[Noemie Heuland, CFO]

Yeah, absolutely. If you could just look at the Q2, if you look at the operating cash flow, we grew by $5 million in Q2. So, most of it is expansion and profitability. We had a bit of working capital movements in Q2 that you would expect to normalize over time. So the answer is yes, as we expand on profitability, expand our Cloud recurring gross margin, getting more efficient on our G&A ratios and the like, you expect that to flow through the free cash flow as well.

The other thing I would add is this quarter, similar to the previous quarter, we had severance payments as well as a result of our workforce action to move and leverage our APJ services center, and that will also normalize over time.

[Samad Samana, Jefferies]

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

[David Ossip, Co-CEO]

It'll be three things. In EMEA, I believe the team is doing a very good job over there and they've got a very good partnership network, which I spoke about last time that are helping influence the actual deals and the win rates. In APJ, we did a lot of restructuring of the go-to market over the course of the last year and we are beginning to see great benefits from that.

As I mentioned, APJ sales as is EMEA by the way, are both up 50% year-over-year so I'll say it's working very nicely. We are also about to launch in Germany, on the payroll side and already, we've seen significant traction in terms of taking orders. Again see German payroll solutions. So we're quite optimistic. And the 350,000 growth that Leagh spoke about is actually based out of Germany.

[Samad Samana, Jefferies]

Got you. Thanks for taking my questions. Appreciate it.

[Matt Wells, Senior Director, IR]

Your next question comes from Raimo Lenschow of Barclays.

[Raimo Lenschow, Barclays]

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

[David Ossip, Co-CEO]

Yeah, Raimo as Leagh mentioned, the growth is actually a workforce management client. The reality over there is they were an existing client with a much smaller footprint and they've now extended it globally. And I think there is actually still an upside over there of a few hundred thousand more employees that we expect to win over time as well. So it's just based on really performance of the Dayforce platform and the capabilities that we've built and able them to then run their business.

When we look at the other global deals, typically there is a domestic provider. Sometimes it's a big ERP that were coming in and actually replacing. Large enterprise is still largely a best of breed. So we get our foot in if you like with the compliance modules and then we expect over time to get the system of record followed by the Talent. We've had some success with customers like Costa, which is part of Coke. Where we are, the system of record, we've rolled out full talent capabilities to them, and that's obviously resonating very nice new markets.

[Raimo Lenschow, Barclays]

Yeah. Okay, perfect. Congratulations.

[Matt Wells, Senior Director, IR]

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

[Scott Berg, Needham]

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

[Noemie Heuland, CFO]

Absolutely, but ex-float we're also seeing a pretty significant bump in our Cloud recurring gross margin as well. But yes.

[David Ossip, Co-CEO]

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

[Matt Wells, Senior Director, IR]

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