Ceridian HCM Holding Inc

NYSE:DAY

Earnings Call Analysis

Dayforce reports strong growth, expanding margins and customer base in Q3.

In the third quarter, Dayforce achieved impressive results with recurring revenue of $333 million, a 19% increase, and total revenue of $440 million, up 17%. The cloud recurring gross margin rose to 79%. Adjusted EBITDA was $126 million, reflecting an 18% rise. The company ended the quarter with a robust customer base of 6,730 and a 15% increase in recurring revenue per customer. For 2024, Dayforce anticipates recurring revenue between $1.163 billion and $1.168 billion, translating to 21% growth. Looking ahead, guidance for Q4 suggests a similar growth rate of 21% to 23% in recurring revenue, reaffirming their strong market position.

Strong Third Quarter Performance

In Q3, Dayforce reported impressive results, showcasing a recurring revenue of $333 million, which was a 19% increase, and total revenue hitting $440 million, representing a 17% uplift. This growth is underscored by a solid cloud recurring gross margin of 79%, improved by 200 basis points from the previous year. Adjusted EBITDA rose to $126 million, demonstrating an 18% increase, leading to an adjusted EBITDA margin of 28.7%.

Cash Flow and Customer Growth

Year-to-date operating cash flow reached $200 million, a 54% increase, while free cash flow surged by 184% to $117 million. Notably, the company has 6,730 customers actively using the Dayforce platform, with a 15% rise in average recurring revenue per customer. This signals a deepening relationship and increased revenue generation potential from existing customers.

Strategic Developments and Product Innovation

Dayforce highlighted recent innovations, including the launch of Dayforce Learning and enhancements to their people analytics. They aim to simplify operations by replacing multiple systems with their platform, addressing a significant market opportunity. This approach positions Dayforce as a key player in Human Capital Management (HCM), where organizations are increasingly recognizing the benefits of integrated solutions.

Sales Pipeline and Market Dynamics

Despite an elongated sales cycle across numerous segments due to the complexity of transactions, the company maintains a robust sales pipeline, boasting a coverage ratio of 4x sales opportunities to targets. Add-on sales constituted 37% of total bookings in Q3, demonstrating ongoing interest from existing customers in expanding their use of Dayforce’s services.

Q4 Guidance and Projections

Looking ahead, Dayforce anticipates a fourth quarter with Dayforce recurring revenue between $311 million and $316 million, which translates to a growth rate of 21% to 23%. The total expected revenue for Q4 ranges from $452 million to $457 million, with an estimated adjusted EBITDA of $120 million to $135 million. For the full year, recurring revenue is projected at approximately $1.163 billion to $1.168 billion, reflecting a growth of 21%.

Long-Term Outlook and Confidence

Dayforce has set an ambitious target for 2025, projecting a total revenue growth excluding float of 14% to 15% on a constant currency basis, with an adjusted EBITDA margin exceeding 31%. The focus on profitability and cash flow remains a priority, aiming for a free cash flow margin above 12% and sustained improvements across operational efficiencies. Their long-term vision envisions reaching $5 billion in revenue and $1 billion in free cash flow, establishing Dayforce as a leader in the HCM sector.

Concluding Remarks

In conclusion, Dayforce's robust Q3 results, strategic innovations, and confident guidance for Q4 and 2025 demonstrate a solid growth trajectory. Their commitment to enhancing the customer experience while navigating market dynamics positions them well for future success. Investors can feel optimistic about the ongoing improvements in revenue generation, profitability, and operational efficiency.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to the Dayforce Third Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce David Niederman, Vice President of Investor Relations. Thank you. You may begin.

[David Niederman, executive]

Thank you for joining, and welcome to the Dayforce Third Quarter 2024 Earnings Call. I'm David Niederman, Vice President, Investor Relations. [Operator Instructions] Joining me on the call today are CEO, David Ossip; and CFO, Jeremy Johnson. We also have Chief Strategy, Product and Technology Officer, Joe Korngiebel; and our President and COO, Steve Holdridge available for Q&A.

Before I hand the call over to David, I want to remind everyone that our commentary may include forward-looking statements. These statements are subject to risks and uncertainties that could cause Dayforce'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 file with the Securities and Exchange Commission, such as the cautionary statements in our filings.

Additionally, over the course of this call, we'll reference non-GAAP measures to describe our performance. Please review our earnings press release and filings with the SEC for our rationale behind the use of non-GAAP measures and for a full reconciliation of these GAAP to non-GAAP metrics. These documents, in addition to a replay of this call and also a transcript, will be available on our Dayforce Investor Relations website.

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

[David Ossip, executive]

Thanks, David, and thank you all for joining us. I'll provide some high-level comments on our third quarter results and turn the call to Jeremy to provide more details of our financials sales wins and customer go-lives, and an updated full year outlook.

In the third quarter, we achieved strong results as we continue to focus on healthy growth combined with a focus on profitability metrics and cash flow generation. Dayforce recurring revenue of $333 million was up 19% with and without floats, and total revenue of $440 million increased 17%. Cloud recurring gross margin was 79%, up 200 basis points, and adjusted cloud recurring gross margin was 79.9%, up 160 basis points.

Adjusted EBITDA was $126 million, up 18%, and adjusted EBITDA margin of 28.7%, up 30 basis points. Year-to-date operating cash flow was $200 million, up 54%. And year to date, free cash flow was $117 million, up 184%. We ended the third quarter with 6,730 customers live on the Dayforce platform, with the average Dayforce recurring revenue per customer up 15%.

We believe we are well positioned to continue to win in the marketplace with the Dayforce platform providing a competitive advantage. Our pace of innovation is faster than ever, and some examples from those recent product release include the delivery of the new Dayforce Learning, a replatforming of our eloomi acquisition into the Dayforce platform, introduction of cashless tips into our wallet product, and the enhancement of our people analytics with the introduction of measures, allowing organizations to set thresholds and track performance of their people with intelligent nudges.

The market opportunity remains substantial. Organizations recognize that are adopting a modern and best-in-class HCM system can yield significant benefits. These benefits stem from replacing as many as 12 disparate systems with the Dayforce platform.

Turning down into our sales during the quarter, we did see instances of elongated sales. There was no specific industry or segment where this was more pronounced. However, we continue to have strong confidence in our fourth quarter guidance, underscored by our their go-live plans, our expanding sales motion to our customer base and more full suite deals.

Our Q4 pipeline remains strong, with a coverage ratio of sales opportunities to sales target of approximately 4x. We believe the pipeline strength is a result of our key growth drivers, including the expansion of the Dayforce platform to include a broad set of HCM offerings; our move up-market to target and win large customers; building the system integrated channel, which allows us to leverage our partners' implementation and sales capabilities; and finally, building the condition to win and serve global clients.

Additionally, sales to our customer base continues to be a driver of growth with add-on sales compromising approximately [ 37% ] of total bookings in the quarter, with solid growth across our talent intelligence suite. Looking now to the fourth quarter, we are excited to host customers at our annual Dayforce Discover in Las Vegas in a few weeks. We also will be holding an Investor Day alongside the customer focus program.

I'll now pass the call to Jeremy to discuss our financial results in more detail. Jeremy, over to you.

[Jeremy Johnson, executive]

Thanks, David. We were pleased with our third quarter results. Top line revenue growth remains strong, while we scaled the business and continued to expand cash flow margins. Dayforce recurring revenue was $333.2 million, up 19.2% or up 19.3% on a constant currency basis. And Dayforce recurring revenue excluding float was $292 million, up 18.9% or up 19% on a constant currency basis, underpinned by strong go-lives and healthy underlying customer trends.

Total revenue was $440 million, up 16.6% on a GAAP basis and 16.7% on a constant currency basis. Powerpay recurring revenue excluding float was $20.2 million, up 3.1% on a GAAP basis and 5.1% on a constant currency basis. And professional services and other revenue was $64.1 million, up 23% on a GAAP and on a constant currency basis.

On a GAAP basis, gross profit was $201.3 million, up 25.4%. Operating profit was $20.8 million, including an incremental $7 million of amortization expense related to the retired Ceridian trade name, and a $9 million earn-out expense related to the 2021 acquisition of Data Fusion. Cloud recurring gross margin was 79%, up 200 basis points.

On a non-GAAP basis, adjusted cloud recurring gross margin was 9.9%, up 160 basis points. Adjusted EBITDA was $126.1 million, up $17.6 or a 28.7% margin, expanding 30 basis points and reflecting our continued improvement in gross profit margins and scale in adjusted G&A.

From a cash flow perspective, operating cash flows were $91.8 million, up [ 151% ], and free cash flow was $63.4 million, up over 1,000% as we continue to focus on cash flow margins. Year-to-date operating cash flow was $200.1 million, up 54.4%. And year-to-date free cash flow was $117.3 million, up 184%.

Turning to Dayforce Wallet. Registration rates and user transactions per month remain consistent and wallet revenue remains on track to more than double this year. Some notable sales wins across the globe in Q3 included a North American hospitality company that specializes in managing and developing luxury hotels and resorts selected the full Dayforce suite to support 22,000 employees across the U.S., Mexico and Canada; a major multibrand Australian retailer selected Dayforce as its unified HCM solution to support their 12,000 employees across Australia and New Zealand; a global manufacturing and distribution leader operating in over 12 countries selected the full Dayforce suite to enhance the experience of 8,500 employees across U.S. and Canada.

And some key Q3 customer go-lives included a British multinational hotel and restaurant company, with 38,000 employees went live across the U.K. with Dayforce Managed Payroll, HR, Workforce Management and Talent. A prominent U.S. manufacturer recently went live with Dayforce HR, Payroll, Time, Wallet and Document Management for its 10,000 employees. And a U.K. fashion retailer with 400 stores and 10,000 employees recently implemented Dayforce HR, Workforce Management, Payroll and Dayforce Wallet. You can read about more notable sales wins and customer go-lives in our earnings press release.

A few other call-outs before I move on to guidance. As expected, eloomi revenue added approximately 170 basis points of growth to our Dayforce recurring revenue ex float in the third quarter, while last year's movement of the tax business represented a headwind of approximately 100 basis points to the third quarter to Dayforce recurring revenue ex flow.

During the quarter, we executed a receivables securitization facility to optimize cash movements related to Dayforce Wallet. As part of this, we sold $30.1 million of Wallet receivables to fund Dayforce Wallet draws. And finally, we executed $30 million of our $500 million share repurchase plan, and are pleased that we have the profitability and flexibility to return capital to our shareholders and to manage dilution from share-based compensation, while maintaining investment in the business.

Now turning to guidance. For the full year, we expect Dayforce recurring revenue ex float of $1.163 billion to $1.168 billion, or growth of 21% as reported and on a constant currency basis. Total revenue of $1.747 billion to $1.752 billion or growth of 15% to 16% as reported or 16% on a constant currency basis. Adjusted EBITDA of $42 to $507 million or 28.2% to 28.9% margin. We remain confident in our full year cash flow target of [ over 50% ] conversion from full year adjusted EBITDA to operating cash flow and expect capital expenditures to remain steady on a dollar basis versus last year, which should result in free cash flow margin of between 9.5% and 10% of revenue.

Float revenue is now expected to be $192 million for the full year. And for the fourth quarter, we expect Dayforce recurring revenue ex float of $311 million to $316 million, or growth in the range of 21% to 23% as reported and on a constant currency basis. Total revenue of $452 million to $457 million, or growth of 13% to 14% as reported or 13% to 15% on a constant currency basis. Adjusted EBITDA of $120 million to $135 million, or 26.5% to 29.5% margin. And float revenue of $37 million.

The USD to CAD for an exchange rates assumed in our guidance are CAD 1.38 for Q4 or an average of CAD 1.37 for the full year. And to be clear, the weakening Canadian dollar continues to be a headwind for us versus our original 2024 guidance and versus last year.

We feel good about our growth trajectory. And for 2025, we're issuing initial guidance of total revenue growth, excluding float between 14% and 15% on a constant currency basis, adjusted EBITDA margin above 31% and free cash flow margin above 12%.

As David mentioned, our Investor Day is scheduled for November 12 in Las Vegas. During the day, we look forward to diving into our strategy, our product differentiation, our continued durable growth and expanding profitability and more, as we lay out our path to achieving our long-term ambitions of $5 billion in revenue, $1 billion in free cash flow as a leader in the HCM space.

With that, we can begin the Q&A portion of our call.

[Operator]

[Operator Instructions] Our first questions come from the line of Kevin McVeigh with UBS.

[Kevin McVeigh, analyst]

Congratulations on the results. I wonder if you could just help us understand what gave you confidence to offer the initial 2025 guidance? I wanted to kind of start there and maybe a little bit of focus, because it looks like the free cash flow conversion continues to kind of scale, maybe a little bit focused on that, too.

[David Ossip, executive]

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

[Jeremy Johnson, executive]

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

[Kevin McVeigh, analyst]

Great. And just real quick, it's great to hear the initial buyback. Any thoughts, Jeremy, on that over the balance of this year into 2025, or David?

[Jeremy Johnson, executive]

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

[Operator]

Our next questions come from the line of Mark Marcon with Baird.

[Mark Marcon, analyst]

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

[David Ossip, executive]

Sure. Martin, nice to hear from you this morning. In terms of the hospitality, it was quite a competitive process. I believe the final or one of the other payroll-focused organizations and one of the ERPs that you typically would find in these types of deals. What's great of it there, it is a 12:1 simplification deal, where we have gone in and we were able to broaden our platform at a large enterprise deal. And as you know, we differentiate when we are focusing on organizations regardless of size to have a high percentage of frontline workers.

We're finding that the value proposition of simplifying the number of components that have in their HR stack resonates very, very well in this particular macro, because it often leads to a reduction in total subscription and, obviously, tremendous FTE and efficiency savings. In that particular deal, I would say that our compliance lead, and again, you might have seen with Gartner for the fifth consecutive year, we're in the leadership quadrant, and they ranked us #1 for compliance in that, I believe, 1,000 to 2,500 employee segment, as well as the above 2,500 employees segment. And in their case, I believe they had to move because of continual compliance challenges that they're having in their organization.

In terms of pipeline, as I mentioned, we entered the quarter with a [ 4:1 ] coverage ratio, which means for every targeted dollar of ACV we had $4 of pipeline, which is very healthy. In terms of the deals, we did see the length of deals extend by about 25% with inside the Q3. That could be driven by a number of items. Firstly, as we are now doing mostly 12:1 simplifications, it means that there are more people that have to sign off on each of the different selections. So no longer are we just looking at the owners of the compliance modules, but we now have to look at getting sign-off from all of the HR and Talent owners as well.

Second, the deals, as you know, have increased. If you look at the average stable recurring, it's up 15% year-over-year. And as the deal sizes goes up, obviously, more sign-offs are required from a financial perspective as well. And then lastly, with the macro, I would say that organizations are being more cautious and more thorough in their selections and that actually takes more time.

[Mark Marcon, analyst]

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

[David Ossip, executive]

Mark, I would say eventually the time lines normalize. So something that gets delayed in 1 particular quarter eventually moves into a subsequent quarter. And eventually, it normalizes. So the same deal volume comes out of the machine, if you like. In terms of the overall economy, if I look at employment numbers, they came in as expected, which is roughly about 1.5% or so employment growth across the customer base year-over-year. And I would say that's in line with what we had thought and what we've seen consistently.

If we look at the actual float balances, that was actually quite positive. We saw float balances go up by 12% year-over-year. So although the float came down -- the yield rate came down slightly, you'll see that we kind of outperformed on the float to a tune of about $5 million inside the actual quarter.

[Operator]

Our next questions come from the line of Samad Samana with Jefferies.

[Samad Samana, analyst]

Maybe first, Jeremy, just one for you. On the 2025 outlook, just as we think about the exit rate for Dayforce recurring ex float for 2024, is that the assumption that's embedded for the '25 Dayforce recurring ex float outlook? Or what are you assuming in that '25 guidance for Dayforce specifically?

[Jeremy Johnson, executive]

Samad, look, it's -- I want to be clear, we're not providing that breakout kind of Dayforce recurring for PS and other or Powerpay at this point, and this is a full 3 months in advance of when we normally give guidance on this. I think we do have some pretty good insight into kind of the trajectory and we're confident in our trajectory right now. And a couple of points I would call out. One is that Dayforce recurring ex float this year is projected to grow at 21% for the full year. But keep in mind that does include a tailwind from eloomi. So just consider that as it will kind of -- that tailwind goes away in your estimates.

I think PS and other revenue can continue to show strength with some of the larger deals we're working through. And I think Powerpay should kind of look similar to the prior years. But at this point, we've got interest rate cuts in the future. We've got foreign exchange rates. And we've got a big finish to the fourth quarter. So we're going to hold off on giving the specific Dayforce recurring ex float guidance at this point.

[Samad Samana, analyst]

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

[David Ossip, executive]

Yes. Samad, thanks for the question. On AI, we are likely the first HCM adviser in market with a marketable GenAI offering. We now offer the Dayforce Copilot. And the way that, that works is any data that you upload into the hub -- the hub is effectively the landing page of the application which is a content management system. So any PDF documents, Word documents, text documents and the like, we now index and we allow the users of the application, whether they be employees, managers, executives, to ask questions that are answered from the documents that they are in the audience of.

So a typical use case could be I could upload my employee benefits book and I could ask questions like what is my vision co-pay, when are my benefits going to change. Or if I load up my employee handbook, I could ask questions about policy and the like. We believe that, that particular skew, if you like, should allow us to go back to the base and see a lift of between 5% to 7%, just from that one particular monetization of that AI feature.

Of course, as you know, we have AI throughout the application. We offer things like if you are creating a job requisition, that it drives the job description. If you're in talent acquisition, we do the grading of the candidates using a proprietary ML model. If you're a candidate applying, we match you to opening job requisitions based on your particular skill set.

We constantly look at the work energy of individuals and we use that as a predictor of someone leaving the organization. And if you read the Gartner report, that is actually included in the compensation module that we have, which allows people to adjust the compensation based on the predictive leave, if you like, of the actual employees. And on the Workforce Management side, are very strong from a perspective of now using machine learning algorithms to do the actual forecasting for labor and the like.

I don't see AI as being a factor of the elongated sales cycles. But I do see our kind of differentiation in AI being noted, again, by groups like Gartner and others because it is catchable and real. I encourage you and others to come to Discover in a couple of weeks, which is our customer conference. We'll have, as I know, I call it the Joe show, which largely is focused on AI and he'll be showing live some very new use cases and capabilities that we have from an AI perspective. It should be very, very exciting.

[Operator]

Our next questions come from the line of Siti Panigrahi with Mizuho Securities.

[Sitikantha Panigrahi, analyst]

Jeremy, looking into your Q4 guidance, could you talk about the assumptions made on that Dayforce recurring ex float? Do you expect, in terms of go-live pipeline, is it more front-end or back-end loaded for Q4? Or any eloomi assumptions that baked into that 7% sequential growth?

[David Ossip, executive]

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

[Jeremy Johnson, executive]

That's right. Yes. And maybe I'll just add in there. Yes, the guidance at 21% to kind of 23% there. As we talked about, nothing has really changed there. It's -- we held the guidance from the previous quarter. It is a slight acceleration or reacceleration from the Q3. But mostly, that's kind of timing of the go-lives. So our business is very predictable. That visibility that we have has maintained, and I think it's clear in our guidance there.

[David Ossip, executive]

And Jeremy, maybe just a bit of clarity on the actual guidance relative, I'd say, towards expectations. If you look at the actual numbers, which might be helpful for everyone, we beat on the total revenue side by $12 million and we increased the fiscal year by $8 million. On the EBITDA side, we beat by $5 million and we increased the full year guide by $1 million. Now when we actually look at the numbers, the difference between the $5 million and the $1 million is $2 million of float. Because as I pointed out, the float balances in the quarter were very positive in Q3, and that could have been tied to bonuses and the like.

And the second is on the Professional Services and Other. There were some timing differences to the tune of about $2 million. And so the combination of those is the delta between the, if you like, on the adjusted EBITDA side between the beat of $5 million and the rise of $1 million, the $2 million of float and $2 million of professional services, which is really related to timing.

[Sitikantha Panigrahi, analyst]

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

[David Ossip, executive]

It's very exciting. The brand -- the branding around Dayforce reflects the business as it is today. The business today is focus on the Dayforce product. As opposed to if I go back to 5 years ago or 6 years ago, where we had more different types of products and a combination between cloud and between bureau. And as we are moving forward, and you'll see this as we go into 2025, there will be a final simplification of the business around Dayforce. And with that, you should see us being able to improve the profitability of the company as we effectively focus on the higher profitability, cloud revenue and less so on the bureau end-of-life products.

[Operator]

Our next questions come from the line of Scott Berg with Needham & Company.

[Scott Berg, analyst]

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

[Jeremy Johnson, executive]

Yes. Look, I mean, I think we are at the point in the year where things are coming into really good focus, I think even greater than we had earlier in the year. Certainly, we're looking at investments that we can make this year into next year, and drive some benefit through both on the revenue side and the profitability side. So you certainly see us kind of pulling through some of those investments and trying to make some tough decisions here. And that's the trade-off that we come to every fourth quarter.

And I think we're -- I guess, I'd maybe point out the fact that, excluding float, our Q3 adjusted EBITDA expanded by almost 300 basis points. And throughout the year, you should see that be, on a full year basis, 100 to 200 basis points is kind of what our guidance implies, both within and without float. So some pretty solid margin expansion there that, obviously, you see going through to the cash flow statement as well.

[Scott Berg, analyst]

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

[Jeremy Johnson, executive]

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

[Scott Berg, analyst]

Great. Congrats on the quarter.

[Operator]

Our next questions come from the line of Bhavin Shah with Deutsche Bank.

[Bhavin Shah, analyst]

Just kind of focus on the add-on bookings. It kind of remains healthy, but it looks like at 37% is a tick-down a touch from last quarter. Kind of any sense of what the drivers of this were? Was this kind of a result of the elongation in sales cycles or any kind of changes in what competitors are doing? And kind of how should we think about this part of the business going forward?

[David Ossip, executive]

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

[Bhavin Shah, analyst]

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

[Jeremy Johnson, executive]

Yes. It's one of the areas where -- kind of the quarter before we give guidance on float. I think expect to see balances continue to grow as we have in the past, and there's no real difference in that. You'll see that kind of continue to increase on the average balance side of things. But the rate is going to come down with the [ rate cuts ], both in the U.S. and Canada. We just don't know how much right now.

Our laddering strategy helps quite a bit. For example, you saw some of the rate cuts this quarter, and our average yield link from 4.1 to 4. So it's a pretty, I think, durable anyway yield that you'll see on that one. But I just don't want to give the guidance and we'll wait on 1 more quarter to see where we think the different central banks are going to go.

[David Ossip, executive]

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

[Operator]

Our next questions come from the line of Steve Enders with Citi.

[Steven Enders, analyst]

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

[Jeremy Johnson, executive]

Yes. Similar to how I answered an earlier question here, the guidance is that revenue excluding float on a constant currency basis is going to grow 14% to 15%. And that's going to flow down through adjusted EBITDA at a pretty solid above 34% margin and then into cash flows. And if you think about the breakout, there. I don't really want to provide that breakout between Learning and Powerpay and PS and Other at this point. We have pretty good visibility.

But we've got the largest sales quarter ahead of us. And we've also got, I think, Canadian exchange rates are probably the worst spot that I've seen them in a few years, and we want to see what happens there. And obviously, as I just on the interest rate side of things and see where the central banks go to provide a little bit more focus on that. But we're trying to say, look, I think we feel really confident going into next year, and that's both on the top line and on the profitability side of things.

[Steven Enders, analyst]

All right. That's helpful context there. And I guess I want to ask on the Partner side and some of those dynamics. I know it's been a big investment and focus area. But how are you kind of feeling about how that's resonating? And kind of maybe what they're bringing to the table, if there's been any change in that in the past quarter or so?

[David Ossip, executive]

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

[Operator]

Our next questions come from the line of Brad Reback with Stifel.

[Brad Reback, analyst]

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

[Jeremy Johnson, executive]

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

[Brad Reback, analyst]

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

[David Ossip, executive]

On the first month of the quarter, we haven't closed it as of yet. But if I look at it, I think Sam is on target for [indiscernible]. his first month of the quarter, which actually will be up quite nicely year-over-year. On a monthly basis, Q4 always is skewed towards the December. And in fact, the last 2 weeks of December probably are what determines the particular quarter. It's also our largest quarter. And as I mentioned, we entered the quarter at about a 4x coverage ratio. So it comes down to really execution across the actual deals.

[Operator]

Our questions come from the line of Daniel Jester with BMO Capital Markets.

[Daniel Jester, analyst]

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

[David Ossip, executive]

This year has been a very strong year for growth of the actual wallet. As you know, last year, Dayforce revenue on the Wallet was about $12.5 million. We'll exit this year above $30 million, and will probably go into next year with an ARR of somewhere in the 14s. So it's been quite a successful year for Wallet. We spent obviously a lot of time this year in bringing out new features that help with the monetization and the use of the Wallet.

Recently, we just launched a savings and goals, and we've seen quite nice adoption of that feature, probably over $1 million across the users that are using the savings and goals to put it into those particular types of accounts on the actual wallet. This year, again, a reminder, we launched AST and IFt, which has been very, very nice. Another new feature we just released are cashless tips on the wallet. So if you are in hospitality, you have the ability now to pay your tips through the Dayforce Wallet on a gross basis, which is very, very useful for restaurants.

In November, we'll be releasing the BYOC capability, which allows users of the Wallet to use existing debit card they have, and we believe that will also help with monetization as well and should help lift the revenue as we go into next year. So it's also -- it's very, very exciting, I would say, in terms of the actual growth in that particular type of product.

[Daniel Jester, analyst]

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

[Jeremy Johnson, executive]

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

[Operator]

Our next questions come from the line of Jason Celino with KeyBanc Capital Markets.

[Jason Celino, analyst]

Jeremy, I'm not going to ask you to break down the 2025 guide further. But at a high level, by giving this framework earlier than you usually do, should we be viewing it as more conservative than usual?

[Jeremy Johnson, executive]

Thanks for the question. Look, I don't -- I wouldn't call it more conservative than usual. I think I would call it just kind of less focused than we have at a February time frame when we normally give this. So it's we just don't have that aperture that I would like to have at this point, which is why we're not giving the same exact guidance that we always would, which is Dayforce recurring total revenue and the adjusted EBITDA.

I think some of the things that you -- that we have to get focused on in our model is the difference between Dayforce recurring and PS and Other. And I think ultimately, you should look at this and has us feeling confident in the business to give this guidance this early enough in the cycle.

[David Ossip, executive]

Jason, one of the reasons we have been giving guidance or preliminary guidance for 2025 is to make sure that the market understands the focus on profitability. As you would expect, as we have -- I would argue, we now are a scaled company and so we will have much more focus in terms of probability. As you know, this year, in terms of adjusted EBITDA or free cash flow, the growth, I would argue, it's been quite tremendous. And as we go into '25, we'll keep that same focus, which will be a nice lift in the adjusted EBITDA number. We have previously spoken about 30% next year. So we've taken that up by 100 basis points at this particular point in time.

And then on a free cash flow perspective, you'll see continued expansion of operating cash flow and free cash flow next year. Now this ties to really the simplification of the overall product, of the overall company. As we've moved from a company of having several bureau type of products to now having Dayforce and Powerpay, our 2 cloud products, in focus. And both of those are -- we should be able to continue improving the gross margin on recurring. We're very confident we'll hit that 80% plus on the -- sorry, in the cloud recurring gross margin. And we now are resetting that target up significantly on a go-forward basis.

[Jason Celino, analyst]

Excellent. Great. And then maybe just a follow-up, David. The ForEx pipeline coverage, you gave very healthy and definitely within that rule of thumb that you want to see software pipelines at. But curious how this has trended this year over time, especially as you've extended with the channel and the launch of the partner exchange?

[David Ossip, executive]

The pipeline this year is a better qualified pipeline as well. So the revenue operations under Sam's team has done a very, very good job of really building up a pipeline and qualifying so that it is very clean. What's nice in the pipeline is there's a healthy percentage of that to the base opportunities over there. And that comes from the work that Joe and his team has done in terms of building out a very robust HR and Talent capabilities, which really allow us to go back to the base and to actually sell more.

From a pricing perspective, we've also done a lot of work on packaging and simplification around that. The way that you can really think about is, if we sell the compliance modules, Payroll, Ben and Time, I'd say, just to, as an example, about 1,000 employee level, you're expecting a price range probably around $12. When we add Talent modules, we effectively more than double that. And finally, we have the Managed Services offering, which has proven to be also a very good driver of growth for the client base and for net new customers. And remember, for Managed Services, our margins are very similar to that of cloud. And that adds another probably about $10 to $12 on top of that.

As you know, from a growth perspective, it's important that we continue to expand the platform. The AI component, the Copilot, as we kind of discussed a bit earlier, is an example. The Copilot will add about 67% of white space across the client base, which obviously allows us to continue growing the revenue from the 6,700 live customers we have on Dayforce.

[Operator]

Our next questions come from the line of Raimo Lenschow with Barclays.

[Raimo Lenschow, analyst]

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

[David Ossip, executive]

Steve can answer. I don't know if we have an SI agreement with Capgemini. I don't think so.

[Raimo Lenschow, analyst]

I mean it as more of an example, yes. Sorry.

[David Ossip, executive]

Okay. Yes, thanks. It's going quite nicely. In fact, recently, we signed an agreement with another one of, I'll say, the top 4 of -- 5 or top 4 global SIs in the world, which has seen a bit of time to actually get through the paperwork, but we finally got through that. So we continue to see strong growth across the SI channels. Again, if you come to Discover, I believe it is on the 11th to the 14th of November, the sponsorship that we have now from the SI channels and their attendance and the customers they bring to these types of events and refer to us is really healthy.

[Raimo Lenschow, analyst]

Yes. Okay. Perfect. And then the thing that I think I get the most questions from investors is that they're a little bit confused. Obviously, if you give guidance or talk about a quarter, you kind of think about every word because you know we are going to be detected. So on the one hand, you have really good pipeline coverage, macro hasn't changed, but you still started talking about elongation a little bit. Like is that -- but in a way, we're kind of like quite a few quarters into a macro situation, into macro not being ideal. Like -- so are we kind of overreading into that? Or like how should we think about that you're talking about that for the first time?

[David Ossip, executive]

Raimo, I've always thought about the business in kind of a half year basis. The quarters often are impacted as to when the quarter ends relative to vacations and the like. So when I look at the second half of the year, I can't say that I'm seeing any differences than what I've seen beforehand. And if I look at the first half of the year, I can't say that I've seen any differences. You see the same in terms of go-lives as well, that it really is more of a half year basis as opposed to a 3-month basis. So I wouldn't read too much into it.

But as we have gone more upmarket and as we are selling a broader suite, again, 51% of the customers are buying suite deals, which means more than just Pay and Time and Core HR, so the Talent modules, these deals do take longer because of the number of people that we have to speak to. And the customers often have to look at their existing contracts with now more vendors and work out how to terminate those as they kind of move to a Dayforce.

So I wouldn't read more than that into it. In the second half of the year, we're very weighted towards December. It's when most of our customers look at buying and completing the actual contracts. This year, it'll be a volume type of deal. So there's a tremendous number of opportunities that we have to get through. We have to make sure we can execute across all the different sales steps that you would expect that are required to finalize those agreements.

[Operator]

Our next questions come from the line of Alex Zukin with Wolfe Research.

[Aleksandr Zukin, analyst]

Maybe just to Raimo's question, is this a -- the commentary about sales cycle elongation, again, David, it sounds like that's more of the idiosyncratic issue because you're moving upmarket rather than a broad-based kind of comment on the general demand environment, which you're talking about isn't changing. But I guess given the narrowing of the Q4 Dayforce guide from, I think, 21% to 21.5% to 21%, is it going to push out some implementations from Q4 to Q1? Or how do we think about like the very specific impact of that?

[David Ossip, executive]

So Alex, we kept the guide consistent for Q4. And as we mentioned last quarter, we have tremendous visibility into the quarter, if not a year out. In terms of go-lives, they came in on plan at the end of Q3, as you would expect. In terms of the elongation, there are a number of aspects, as I had mentioned. One is we have gone upmarket and largely will take more time. There obviously are more global deals in there, which also take longer to actually finalize. We have more suite deals, which require more people to sign off inside actual organizations.

And then as I did mention, on the macro side, we are seeing organizations being much more diligent in the actual contracting and sign-off process. So it's a combination, I would say, of all 4 of those.

On the positive, we are seeing evidence of the deal size growing as you see the Dayforce recurring, a lift across the client base of the average size of a Dayforce recurring customer has gone up 15% year-over-year. I would say that the client-based sales motion that we put in place just a year is working very, very well, with very healthy year-over-year improvements. And as we mentioned in the quarter, it came in at about 37% of sales. which, again, is very consistent with the guide I gave even at the beginning of the year, which again talks about the predictability of the business.

In terms of 2025, what would be true to say is that as an organization, we are more focused on profitability and free cash flow. And that comes with the simplification of the business as we focus on the better revenue streams and products of the business, which are Dayforce and Powerpay. And as we do that, you will see a period of time where the -- it flows very nicely to the actual bottom line. And I think the outlook that Jeremy gave, it's consistent with expectations with an increase in the probability next year, which we felt was important that we get out there.

[Aleksandr Zukin, analyst]

Perfect. And then maybe just a clarifying question. You mentioned first year float would be a $25 million to $30 million headwind. I'm assuming that means you grew $25 million to $30 million this year, be probably flatter for next year, not it's going down by $25 million or $30 million.

[David Ossip, executive]

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

[Operator]

Our final questions will come from the line of Mark Murphy with JPMorgan.

[Mark Murphy, analyst]

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

[David Ossip, executive]

As I mentioned on the call, Mark, we didn't see any one segment stand out. Remember, we don't sell in the small business. So the majority of our deals that we sell are above 1,000 employees. And in the major markets, which goes up to 3,500 employees, we are selling mostly full suite deals, which have the 12 different components that we're replacing.

To the first part of your actual question, the quarter is very dependent on the month of December. Much more so than in other quarters in the year, we get more of an even linearity between the different months. Q4 is more weighted -- about 50% would always be in the month of December. If I look at it at the moment from a pipeline coverage basis, it's very healthy, whether I look at a gross coverage basis or I look at a weighted coverage basis, so that's when you tie in the probability side, we're above the ACV target.

So it will come down to the month of December, but there is a lot of activity. If I look at other indicators, attendance at the summers, at the Discover customer conference, up significantly year-over-year. So there's a lot of activity that's occurring. And when I look at the work that I think Sam is doing, I think that we've seen really good productivity increases in the group.

[Mark Murphy, analyst]

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

[David Ossip, executive]

Mark, I think we've actually kind of focused on where GenAI was first used. So the first use case, as you saw coming out of really some of the development tools that Microsoft put in place, so they've been in market longer. I think you're now moving into a phase where you've seen AI being added to other use cases across the enterprise stack. We are, I believe, first in market with the Copilot for the GenAI offering. And remember, this -- we don't charge for things like the writing of the job description in talent acquisition.

Rather, this is a separate product that we now have on the actual price sheet, it's separate view where we can go back to customers. And it is a great product here. In fact, you'll see me show it at Discover. And when customers see it, there's a tremendous amount of excitement. And remember, for us, we're always focused on how do we deliver value to the customer, whether it's a 12:1 simplification where we can reduce subscription fees and reduce FTEs around the management of the HCM stack.

In the terms of Copilot, we're reducing the number of inbound calls to the HR teams by being able to answer the question through a GenAI conversation. And at the same time, we're delivering tremendous value to the users of the application and really lifting up their experience on how they interact and get data about the organization, about policies, about themselves; or if they're frontline managers or executives, how they get information about their teams and performance of their organization.

[Operator]

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

[David Ossip, executive]

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

[Operator]

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