Q3 2024 Dayforce Inc Earnings Call
Speaker Change: Greetings and welcome to the day-force third quarter, 2024 earnings call. At this time, all participants are an illicit only mode. A question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce David Niedermann, Vice President of Investor Relations. Thank you.
Speaker Change: Thank you for joining and welcome to the Dayforce third quarter 2024 earnings call. I'm David Niederman, Vice President, Investor Relations. As a reminder, all participants are in a listen-only mode and a question and answer session will follow our opening remarks.
Speaker Change: 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.
Speaker Change: Before I hand the call over to David, I want to remind everyone that our commentary may include forward-looking statements. These statements are subject to risks and uncertainties that could cause Day Force's results to differ materially from historical, experience, or present expectations.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Thanks, David, and thank you all for joining us.
David: 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, rents and customer go-lives and an updated full-year outlook.
David: 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.
David: Day falls recurring revenue of $333 million was up 19% with and without float and total revenue of $440 million increased 17%.
David: Cloud recurring gross margin was 79% up 200 basis points and adjusted cloud recurring gross margin was 79.9% up 160 basis points.
David: Adjusted EBITDA was $126 million, up 18%, to an adjusted EBITDA margin of 28.7%, up 30 basis points.
David: Year-to-date operating cash flow was 200 million, up 54%, and year-to-date free cash flow was 117 million, up 184%.
David: We ended the third quarter with 6,730 customers live on the Dayforce platform, with the average Dayforce recurring revenue per customer up 15%.
David: We believe we are well positioned to continue to win in the marketplace, with the Dayforce platform providing a competitive advantage.
David: Our pace of innovation is faster than ever, and some examples from our most recent product release include the delivery of the new Dayforce Learning, a re-platforming of our e-learning acquisition into the Dayforce platform.
David: Introduction of cashless tips into our wallet product and enhancement of our people analytics with introduction of measures, allowing organizations to set thresholds and track performance of their people with intelligent nudges.
David: The market opportunity remains substantial. Organizations recognize that adopting a modern and best-in-class HCM system can yield significant benefits.
David: These benefits stem from a replacement of as many as 12 disparate systems with the DaveWallz platform.
David: Drilling down into our sales during the quarter, we did see instances of elongated sales.
David: There was no specific industry or segment where this was more pronounced. However, we continue to have strong confidence in our fourth quarter guidance, underscored by our Go Live plans, our expanding sales motion to our existing customer base, and more full suite deals.
David: Our Q4 pipeline remains strong, with a coverage ratio of sales opportunities to sales targets.
David: of approximately four times.
David: 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 HTM offerings, our move up market to target and win large customers
David: building the system integrated channel which allows us to leverage our partners implementation and sales capabilities and finally building the foundation to win and serve global clients
David: 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.
David: Looking now to the fourth quarter, we are excited to host customers at our annual Dayforce Discover event in Las Vegas in a few weeks.
Speaker Change: 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: Thanks, David.
Jeremy Johnson: We were pleased with our third quarter results. Top line revenue growth remained strong while we scaled the business and continued to expand cash flow margins.
Jeremy Johnson: Day Force recurring revenue was $333.2 million, up 19.2% or up 19.3% on a constant currency basis.
Jeremy Johnson: 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.
Jeremy Johnson: Total revenue was $440 million, up 16.6% on a gap basis, and 16.7% on a constant currency basis.
Jeremy Johnson: PowerPay recurring revenue excluding float was $20.2 million, up 3.1% on a gap basis and 5.1% on a constant currency basis.
Jeremy Johnson: And professional services and other revenue was $64.1 million, up 23% on a gap and on a constant currency basis.
Jeremy Johnson: On a gap basis, gross profit was $201.3 million, up 25.4%.
Jeremy Johnson: 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 dollar earn out expense related to the 2021 acquisition of Data Fusion.
Jeremy Johnson: cloud recurring gross margin was 79% up 200 basis points
Jeremy Johnson: On a non-GAAP basis, adjusted cloud recurring gross margin was 79.9%, up 160 basis points. Adjusted EBITDA was 126.1 million, up 17.6%, or a 28.7% margin.
Jeremy Johnson: Expanding 30 basis points and reflecting our continued improvement in gross profit margins and scale in adjusted G&A.
Jeremy Johnson: 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.
Jeremy Johnson: 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%.
Jeremy Johnson: 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.
Jeremy Johnson: Some notable sales wins from across the globe in Q3 included a North American Hospitality Company,
Jeremy Johnson: to support 22,000 employees across the U.S., Mexico, and Canada.
Jeremy Johnson: A major multi-brand Australian retailer selected Dayforce as its unified HCM solution to support their 12,000 employees across Australia and New Zealand.
Jeremy Johnson: A global manufacturing and distribution leader operating in over 12 countries selected the FoldA4 suite to enhance the experience of 8,500 employees across the U.S. and Canada.
Jeremy Johnson: and some key Q3 customer go-lives included a British multinational hotel and restaurant company with 38,000 employees went live across the UK with Dayforce managed payroll, HR, workforce management and talent.
Jeremy Johnson: and a UK fashion retailer with 400 stores and 10,000 employees recently implemented Dayforce HR, Workforce Management, Payroll and Dayforce Wallet.
Jeremy Johnson: You can read about more notable sales wins and customer go-lives in our earnings press release.
Jeremy Johnson: A few other call-outs before I move on to guidance. As expected, Illumi Revenue added approximately 170 basis points of growth to our Dayforce recurring revenue ex-float in the third quarter.
Jeremy Johnson: while last year's movement of the tax business represented a headwind of approximately 100 basis points of the third quarter date for its recurring revenue X flow.
Jeremy Johnson: During the quarter we executed a receivables securitization facility to optimize cash movements related to Dayforce Wallet.
Jeremy Johnson: As part of this, we sold 30.1 million of wallet receivables to fund Dayforce Wallet Draws.
Jeremy Johnson: 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.
Jeremy Johnson: and to manage dilution from share-based compensation while maintaining investment in the business.
Jeremy Johnson: Now turning to guidance, for the full year, we expect day force recurring revenue, X float of $1.163 to $1.168 billion, or growth of 21% as reported and on a constant currency basis.
Jeremy Johnson: Total revenue of $1.747 to $1.752 billion, or growth of 15% to 16% as reported, or 16% on a constant currency basis.
Jeremy Johnson: adjusted EBITDA of 492 to 507 million or 28.2% to 28.9% margin
Jeremy Johnson: We remain confident in our full-year cash flow targets of upper 50% conversion from full-year adjusted EBITDA to operating cash flow, and expect capital expenditures to remain steady on a dollar basis versus last year, which should result in a free cash flow margin of between 9.5% and 10% of revenue.
Jeremy Johnson: Float revenue is now expected to be $192 million for the full year.
Jeremy Johnson: And for the fourth quarter, we expect Dave Horse recurring revenue ex-float of $311 to $316 million or growth in the range of 21% to 23% as reported and on a constant currency basis.
Jeremy Johnson: 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.
Jeremy Johnson: Adjusted EBITDA of $120-$135 million or a 26.5-29.5% margin Float revenue of $37 million
Speaker Change: As David mentioned, our Investor Day is scheduled for November 12th in Las Vegas.
Speaker Change: 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.
Speaker Change: With that, we can begin the Q&A portion of our call.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker Change: You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. As a reminder, we ask that you please limit yourself to one question and one follow-up question.
Speaker Change: Our first questions come from the line of Kevin McVeigh with UBS. Please proceed with your questions.
Speaker Change: Thanks so much and congratulations on the results.
Kevin Mcveigh: Hey, I wonder if you could just help us understand what gave the confidence to offer the initial 2025 guidance. I wanted to kind of start there and maybe a little bit of focus because it looks like the free cash flow conversion continues to kind of scale. Maybe a little bit of focus on that too.
Speaker Change: Hey Kevin, nice to hear from you and thanks for your comments. As you know, our business is highly plannable and we go into the year with a high degree of certainty based on the percentage of recurring revenue that we have. That tackled or combined with the...
Speaker Change: Go live forecasts we have both in Q4 in the early part of the year.
Speaker Change: gives us a high degree of certainty and as you've seen consistently relative to our guide, we come in very, very accurately.
Speaker Change: 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
Speaker Change: on top of probability-free cash flow.
Speaker Change: Jeremy, do you want to add anything on the free cash flow side? Yeah, look, I mean, I think we're highly focused on leveraging the inherent profitability of this business and we're confident that we can achieve both of the guidance metrics that we offered, which are adjusted EBITDA above 31% and the free cash flow above 12%, but it all comes down to focus.
Speaker Change: And it's something that I've been working on since I got here.
Speaker Change: And just real quick, break this, the initial buyback, any thoughts Jeremy on that over the balance of this year into 2025 for David?
Jeremy Johnson: Yeah, look, I mean, you saw us buy about 30 million shares in the quarter. As you know, the primary purpose of our share buyback is to manage dilution from stock-based compensation. You'll see us probably in market continuing to do that. But, you know, ultimately we've got a lot of capacity under that and could be opportunistic in the future should the
Speaker Change: Thank you so much.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next questions come from the line of Mark Marcotte with Baird. Please proceed with your questions.
Mark Marcotte: I'm wondering if you can talk a little bit about some of the major wins that you ended up having this past quarter, and specifically, you know,
Mark Marcotte: who you ended up winning from, so when we take a look at this North American Hospitality Company.
Mark Marcotte: or the Australian retailer.
Mark Marcotte: ask about saturation, they ask about, you know, how much room there's left. What are you seeing just in terms of the pipeline and decision cycles? I know you mentioned decision cycles earlier, but wondering if you can talk about that as well.
Speaker Change: Hi Mark, nice to hear from you this morning. In terms of the hospitality,
Speaker Change: It was a quite a competitive process. I believe the finals were one of the other payroll focused organizations and one of the ERPs that you typically would find in these types of deals.
Speaker Change: What's great over there, it is a 12 to 1 simplification deal where we have gone in and we were able to broaden our platform.
Speaker Change: at a large enterprise deal. And as you know, we differentiate when we are focusing on organizations, regardless of size, that have a high percentage of front-line workers.
Speaker Change: Total subscription and obviously tremendous FTE and efficiency savings.
Speaker Change: In that particular deal, I would say that our compliance lead, and again, you might have seen with Gartner.
Speaker Change: For the fifth consecutive year, we're in the leadership quadrant.
Speaker Change: and they ranked us number one for compliance in that, I believe, 1,000 to 2,500 employee segment as well as the above 2,500 employee segment.
Speaker Change: In their case, I believe they had to move because of continual compliance challenges that they were having.
Speaker Change: In terms of pipeline, as I mentioned, we entered the quarter with a four times coverage ratio, which means for every targeted dollar of ACV, we had four dollars of pipeline, which is very healthy.
Speaker Change: 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.
Speaker Change: And as the deal sizes goes up, obviously more sign-offs are required from a financial perspective as well.
Speaker Change: Lastly, with the macro, I would say that organizations are being more cautious and more thorough in their selections, and that, too, takes more time.
Speaker Change: Great. David, you've been through multiple cycles. Do you think, you know, as interest rates, you know, start continuing to come down across the globe and and some of the election uncertainty passes, that could end up reversing a little bit and we might end up seeing
Speaker Change: You know, some faster deal closes as the year progresses.
Speaker Change: Thank you.
Mark Marcotte: Mark, I would say eventually the timelines normalize.
Mark Marcotte: So, something that gets delayed in one particular quarter.
Mark Marcotte: eventually moves into a subsequent quarter and eventually it normalizes. So the same gill volume comes out of the machine if you like.
Mark Marcotte: 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.
Mark Marcotte: and I would say that's in line with what we had thought and what we've seen consistently.
Mark Marcotte: If we look at the actual float balances, that was actually quite positive. We saw float balances go up by 12%.
Mark Marcotte: year over year, so although the yield rate came down slightly, you'll see that we outperformed on the float to a tune of about $5 million inside the actual quarter.
Speaker Change: That's terrific, thank you.
Speaker Change: Thank you. Our next questions come from the line of Samad Samaleh with Jeffries. Please proceed with your question.
Speaker Change: Thank you for your time.
Speaker Change: Hi, good morning. Thanks for taking my questions. Maybe first, Jeremy, just one for you.
Samad Samaleh: for 2024, is that the assumption that's embedded for the 25-day force recurring outlook, or what are you assuming in that 25 guidance for day force specifically?
Speaker Change: And a couple of points I would call out. One is that Dayforce's recurring X float this year is projected to grow at 21% for the full year. But keep in mind that does include a tailwind from Illumi. So just consider that as that tailwind goes away in your estimates.
Speaker Change: I think PS and other revenue can continue to show strength.
Speaker Change: with some of the larger deals we're working through. And I think power pay should kind of look similar to the prior years.
Speaker Change: But at this point, you know, we've got interest rate cuts in the future, we've got foreign exchange rates, and we've got a big finish to the fourth quarter, so we're going to hold off on giving the specific Day Force recurring ex-float guidance at this point.
Speaker Change: 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.
Speaker Change: 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 times, but is that one of the factors as companies figure out how to implement maybe that, and what to think about doing with your AI features? Thank you.
Speaker Change: Yeah, as I said, thanks for the question. On AI, we are likely the first HTM provider in market with a marketable Gen AI offering.
Speaker Change: We now offer the Dave Walsh Co-Pilot.
Speaker Change: And the way that that works is any...
Speaker Change: from the documents that they are in the audience of.
Speaker Change: So a typical use case could be I could upload my employee benefits book.
Speaker Change: 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...
Speaker Change: I could ask questions.
Speaker Change: about policy and the like. We believe that that particular skew, if you like,
Speaker Change: should allow us to go back to the base and see a lift of between 5 to 7 percent.
Speaker Change: just from that one particular monetization of that AI feature.
Speaker Change: Of course, as you know, we have AI throughout the application. We offer things like if you are creating a job requisition, that it writes the job description. If you're in talent acquisition, we do the grading of the candidates.
Speaker Change: using a proprietary ML model. If you're a candidate applying, we match you to opening job requisitions based on your particular skill set.
Speaker Change: We constantly look at the work energy of individuals and we use that as a predictor of someone leaving the organization. And if you read the Gartner report, that is actually included in the compensation module that we have, which allows people to adjust the compensations based on the predictive leave, if you like, of the actual employees.
Speaker Change: And on the workforce management side, we are very strong from a perspective of now using machine learning algorithms to do the actual forecasting for labor and the like.
Speaker Change: The Elongated Sales Cycle
Speaker Change: Again, by groups like Gartner and others, because it is touchable and real.
Speaker Change: I encourage you and others to come to DISCOVER in a couple weeks, which is our customer conference.
Speaker Change: 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 a AI perspective and should be very, very exciting.
Speaker Change: Great, thank you again.
Speaker Change: Thank you. Our next questions come from the line of Citi Panigrahi with Mizuho Securities. Please proceed with your questions.
Speaker Change: Thanks for taking my question. Jeremy, looking to your Q4 guidance, could you talk about the assumptions made on that Day Force Recurring X float? Do you expect, in terms of go-live pipeline, is it more front-end or back-end loaded for Q4 or any ILLUMi?
Speaker Change: assumptions that baked into that 7% sequential growth.
Speaker Change: I'll take and then hand it off to Jeremy. As you know, we've given the guide of above 21% for Q4 in terms of day falls recurring. That is determined based on the accounts that have already gone live.
Jeremy Johnson: So the go lives that we have in Q4, which we have very good clarity on, will obviously impact Q1 and beyond.
Jeremy Johnson: That's right. Yeah, and maybe I'll just add in there, yeah, the guidance, that 21 to kind of 23% there. As we've talked about, nothing's really changed there. It's that we held the guidance from the previous...
Jeremy Johnson: It is a slight acceleration or re-acceleration from the Q3, but mostly that's kind of timing of the go-live.
Speaker Change: It's very predictable, that visibility that we have has maintained and I think it's clear in our guidance there. Yeah, Jerry, maybe just a bit of clarity on the actual guidance relative, I'll say, towards expectations.
Speaker Change: and we increased the fiscal year by eight.
Speaker Change: On the EBITDA side, we beat by 5 and we increased the 4-year guide by 1. Now, when we actually look at the numbers...
Speaker Change: The difference between the 5 and the 1 is $2 million of float because as I pointed out the float balances in the quarter were very positive in Q3.
Speaker Change: And that could have been tied to bonuses and the like.
Speaker Change: And so the combination of those is the delta between the, if you like, on the adjusted EBITDA side, between the BTOF 5 and the raise of 1, so $2 million of float and $2 million of professional services, which is really related to timing.
Speaker Change: Thanks, David, for that clarification. 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 an HR company? Or could you talk about that? That was an interesting campaign.
Speaker Change: As opposed to if I go back to five years ago, six years ago, where we had more different types of products and a combination between cloud and between bureau.
Speaker Change: Our focus on the higher profitability cloud revenue and less so on the Bureau end-of-life products.
Speaker Change: Great. See you in a few weeks.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next questions come from the line of Scott Berg with Needham & Company. Please proceed with your questions.
Scott Berg: I have two kind of follow-ups there, David, to your last kind of answer there, and they're both on the profitability side, is if I looked at the third quarter results,
Scott Berg: You beat your float revenue by $5 million.
Scott Berg: You kind of only raised the adjusted EBITDA range. It was actually $2 million for the year.
Scott Berg: You know, that you saw in the quarter, kind of either in Q3 or Q4, or is there maybe some other expenses in the business that are popping up to not see the full year, just even a go by, you know, get raised by what you beat in the third quarter?
Speaker Change: Yeah, look, I mean, I think we, uh...
Speaker Change: 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, you know, I guess I'd maybe point out the fact that...
Speaker Change: excluding Float, are Q3 adjusted EBITDA expanded by almost 300 basis points.
Speaker Change: And, you know, throughout the year, you should see that be, you know, on a full year basis, 100 to 200 basis points is kind of what our guidance implies, both with and without flow. So some pretty solid margin expansion there that obviously you see going through to the cash flow statement as well.
Speaker Change: Yeah, that actually brings me to your fiscal 25 guidance on the Adjust-DIVA side, which I think is quite positive, you know, greater than 31 percent, even with the expectation that floats probably a headwind into next year.
Speaker Change: Thank you.
Speaker Change: Do we think about, or should we think about, those operational efficiencies coming from anything different than what you saw here in 24, or is there maybe some difference in how you're, I guess, managing the business next year to drive what's, you know, theoretically in the core business, more than a 200 basis point expansion in profitability?
Speaker Change: Yeah, it's
Speaker Change: The recurring gross margins, you'll see us continue to scale some of our, you know, 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.
Speaker Change: So no real differences, but it's a focus, the business around productivity and margin and cash flow expansion.
Speaker Change: Great, congrats on the quarter. Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next questions come from the line of Fabian Shaw with Deutsche Bank. Please proceed with your questions.
Fabian Shaw: Great, thanks for taking my question. Just kind of focus on the add-on bookings. It kind of remains healthy, but it looks like at 37% it ticked out of touch from last quarter.
Fabian Shaw: 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.
Speaker Change: It's a very positive number. Remember last quarter we had the GC, the Government of Canada, included in the add-ons.
And that you'll see that kind of continue to increase in the average balance side of things, but the rate's going to come down with the rate cuts both in the U S and Canada, we just.
Speaker Change: Don't know how much right now.
Speaker Change: Our ladder strategy helps quite a bit.
Speaker Change: For example, you saw some of the rate cuts this last quarter and our average yield linked from four one to four.
Speaker Change: It's a pretty right.
Speaker Change: Thank you.
Speaker Change: Terrible anyways yield that youll see on that one, but I just don't want to give the guidance and we'll wait on one more quarter or two.
Speaker Change: See where we think the different central banks are going to go.
Speaker Change: One thing just from a modeling perspective at the moment.
We would say that there's probably about $25 million to $30 million headwind in terms of next year.
Speaker Change: And even with that.
Speaker Change: As you know we've taken up the EBITDA.
Speaker Change: Our forecast for next year.
Speaker Change: 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.
Speaker Change: That makes sense, thanks for taking my questions and congrats again.
Speaker Change: Thank you our next questions come from the line of Steve Enders with Citi. Please proceed with your questions.
Speaker Change: Yeah.
Steve Enders: Okay, great. Thanks for taking my questions. This morning.
Speaker Change: I would like to thank all of the.
Speaker Change: And the outlook there.
Steve Enders: I guess would be great to kind of hear kind of what the underlying assumptions are kind of.
Steve Enders: Thinking around when we should be expecting in terms of labor rates are.
Steve Enders: Those are kind of what you are accounting for.
Steve Enders: And its preliminary outlook here.
Steve Enders: Yeah.
Steve Enders: Similar to how I answered.
Steve Enders: An earlier question here you know the guidance is that our revenue excluding float.
Steve Enders: Constant currency basis is going to grow 14% to 15%.
Steve Enders: And that's going to flow down through adjusted EBITDA at a pretty solid.
Steve Enders: 31% margin and then into cash flows and if you think about.
Steve Enders: The breakout there.
Steve Enders: Don't really want to provide that breakout between recurring and power pay NPS. Another at this point, we have pretty good visibility.
Steve Enders: But you know we've got the largest sales quarter ahead of us and.
Steve Enders: We've also got I think Canadian exchange rates are probably the worst spot that I've seen them in and in a few years and we want to see what happens there and obviously as I just mentioned on the interest.
Steve Enders: 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 hey look I think we feel really confident going into next year.
Steve Enders: And that's both on the top line and on the profitability side of things.
Steve Enders: Alright.
Steve Enders: That's helpful context there.
Speaker Change: I guess I want to ask on the partner side.
Some of those dynamics announced my big investment and focus area, but how are you kind of feeling about how that's resonating and kind of maybe.
Speaker Change: What they are bringing to the table if theres been any change and then.
And you know in the past quarter or so.
Speaker Change: So it's still very positive if you come to discover.
Speaker Change: You'll see the number of sponsorships that we have across the system integrators and other partners.
Speaker Change: Youll see the attendance level by the actual partners are back at the conference as well.
Speaker Change: We continue to leverage the partners both from the perspective of helping us on the sales side as well as helping us on the implementation side.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Thank you our next questions come from the line of Brad Reback with Stifel. Please proceed with your questions.
Brad Reback: Great. Thanks, very much Jeremy understanding that it's still early on 25, maybe just from a high level the assumptions that have gone into a form which you've told US today do you assume that the elongated sales cycles continue and that employment levels are flat in those numbers.
Speaker Change: Yes, we would have assumed that our employment levels kind of remain where they are right now.
And.
Speaker Change: I think on the elongated sales cycles.
Speaker Change: Really confident in and providing us a pretty solid Q4, we've had a really good year to date.
Speaker Change: 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.
Speaker Change: Which I would look at it is kind of unchanged from what we've talked about in the past.
Hope that helps provide a little bit of context.
Speaker Change: It does thank you and then David real quick any commentary on the first month of the quarter.
Okay.
On the first month of the quarter, we havent close date as of yet.
Speaker Change: If I look at it I think Sam is on target for a hitch and he is very fast.
Speaker Change: For the quarter, which actually will be up quite nicely at year over year.
Speaker Change: On a monthly basis Q4 always is skewed towards the December and in fact, the last two weeks of December probably what determines the particular quarter. Its also our largest quarter and as I mentioned, we entered the quarter with about a four times coverage ratio.
Speaker Change: Comes down to execution across the actual deals.
Speaker Change: Great. Thank you very much.
Speaker Change: Yeah.
Speaker Change: Thank you our next questions come from the line of Daniel Jester with BMO capital markets. Please proceed with your questions.
Daniel Jester: Great. Thanks for taking my question, maybe just one on the wallet.
Daniel Jester: Well the 190 live customers I think that's up 20 customers sequentially and it looks like Youre in about 20% of the customer base live today I think in the past you've talked about that.
Daniel Jester: Many many of your customers would be potential wallet customers, but we had seen a slowdown in and does go lives. So any sort of updated thoughts about the wallet and its potential growth opportunity.
Daniel Jester: Think about it into next year and beyond.
Speaker Change: This year, it's been a very strong year for growth for what the actual wallet.
Speaker Change: Last year de force.
Speaker Change: Revenue on the wallet was about $12 5 million.
Speaker Change: We will exit this year above $70 million and it will probably go into next year with a a R are somewhere in the Forty's.
Speaker Change: It's been quite a successful year for wallet. We spent obviously a lot of time this year.
Speaker Change: And bringing out new features that help with the monetization and the use of the wallet recently, we just launched our savings goals and we've seen quite nice adoption of that feature.
Speaker Change: Probably over $1 million.
Speaker Change: Cross the users that are using the savings and goals. They put it into those particular types of accounts on the actual wallet.
Speaker Change: This year again, a reminder, we launched <unk> and IFC.
Which has been very very nice another new features we feature we just released.
Speaker Change: Let's touch on the wallet. So if you are in hospitality.
Speaker Change: The ability now to pay your chips through the day fourth wallet on a gross basis, which is very very useful.
Speaker Change: Our restaurants are in November we'll be releasing.
There'd be y N C capability, which allows a user of the water to use existing debit cards that they have and we believe it 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.
Speaker Change: Great. Thank you and then just a quick one for Jeremy on 2025.
Speaker Change: Cash flow I think in the past you mentioned that theres 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 any update there. Thank you.
Speaker Change: Yeah. Thanks for the question.
Speaker Change: Yeah that would be included in our guidance are the pension termination.
Speaker Change: Underway and the timing of the payments.
Speaker Change: Likely be in the kind of third or fourth quarter time frame.
Speaker Change: 1% to $25 million and again that would be included in our operating cash flow and free cash flow next year.
Speaker Change: Thank you very much.
Speaker Change: Thank you our next questions come from the line of Jason Selina with Keybanc capital markets. Please proceed with your questions.
Speaker Change: Okay.
Speaker Change: Hey, Thanks for having me, it's going to be on.
Jason Selina: Jeremy I'm not going to ask you to break down 2025 guide further but at a high level.
Jason Selina: Giving this framework earlier than you usually do you know should we be viewing it as more conservative than usual.
Thanks for the question.
Jeremy Johnson: I wouldn't call it more conservative than usual I think I would call. It just kind of less focused than we have.
Jeremy Johnson: At our February timeframe, when we normally give this so it's a we just don't have that aperture.
Jeremy Johnson: But I would like to have at this point, which is why we're not giving the same exact guidance that we always would which as Dave Horst recurring.
Jeremy Johnson: Total revenue and the adjusted EBITDA.
Jeremy Johnson: I think some of the things that you you.
Jeremy Johnson: That we have to get focus on in our models as the break the difference between day force recurring and P. S. Another and.
Jeremy Johnson: Ultimately you should look at this as us feeling confident in the business to give this guidance. This early enough.
Jeremy Johnson: And the cycle, Jason one of the reasons, we have given guidance or preliminary guidance for 2025 is to make sure that.
Jeremy Johnson: The market understands the focus on profitability as you would expect as we have.
Jeremy Johnson: Argue we now are a scaled company and so we will have much more focus in terms of profitability.
Jeremy Johnson: As you know this year in terms of adjusted EBITDA and free cash flow growth.
Jeremy Johnson: I would argue it's been quite tremendous and as we go into 'twenty five we'll keep that same focus which will be.
Jeremy Johnson: A nice lift in the adjusted EBIT EBITDA number we had previously spoken about a 30% next year. So we've taken that up by 100 basis points at this particular point in time.
Jeremy Johnson: And then on the free cash flow perspective, Youll see continued expansion of operating cash flow and free cash flow next year now.
Jeremy Johnson: Now this ties to really the simplification of the overall product of the overall company.
Jeremy Johnson: As we've moved from a company of having several bureau type of products to now having day force and pallet pay out your cloud products and focus and both of those.
Jeremy Johnson: We should be able to continue improving the gross margin on recurring.
Jeremy Johnson: We're very confident we'll hit that 80%.
Plus on the Dave offer in the cloud recurring gross margin and we know already searching net chalked it up significantly on a go forward basis.
Speaker Change: Excellent great. Thanks for those signals.
Speaker Change: Maybe just a follow up David.
Speaker Change: Rx pipeline coverage, you gave a very healthy and definitely within that rule of thumb that you want to see sophomore pipelines at but curious how this has trended.
Speaker Change: This year over time, especially as you've expanded with the channel and the launch of a foreign exchange. Thanks.
Speaker Change: 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.
Speaker Change: Of really building up a pipeline and qualify and say that it is very clean.
Speaker Change: What is nice and the pipeline is there is a healthy percentage of back to the base.
Speaker Change: Opportunities over there and that comes from the deep work that Joe and his team has done in terms of building out.
Speaker Change: A very robust HR and talent capabilities, which really allow us to go back to the base and to actually sell more.
Speaker Change: From a pricing perspective, we've also done a lot of work on packaging simplification around that.
The way that you can really think of vouchers, if we sell the compliance modules payroll and time I'd say are just too as an example about 1000 employee level, you'll be expecting a price range probably around $12.
Speaker Change: When we add talent modules, we effectively more than double that.
Speaker Change: 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.
Speaker Change: And that adds another probably about 10 to $12 on top of that as you know from a gross perspective is important in fact, we continue to expand the platform. They AI components. The co potash as we kind of discussed a bit earlier is an example of a co pilot will add about 67% of white space across the client base.
Speaker Change: Which obviously allows us to continue growing the revenue from the 6700 or so live customers we have on to April.
Speaker Change: Perfect. Thank you.
Speaker Change: Thank you our next questions come from the line of Raimo <unk> with Barclays. Please proceed with your questions.
Raimo <unk>: Thank you.
Speaker Change: What youre seeing in the partner channel at the moment like you know that was one of the big focus areas for you as well to engage more partners.
Speaker Change: <unk> seen that like cap Gemini just cut their revenue outlook last quarter.
Speaker Change: Last night.
Speaker Change: How do you see them building out and engage them with you guys. What's the progress there. Thank you.
Speaker Change: Steve can answer or I don't know if we have a S I agreement with cap Gemini.
Speaker Change: Thanks, so much.
Speaker Change: And there's more of an example, yeah sorry, okay. Yeah. Thanks, right now it is growing quite nicely and in fact recently, we signed an agreement with another one of I'll say the top four or five full top for global F. EIS.
Speaker Change: And in the World, which is taking a bit of time to actually get through the paperwork.
Speaker Change: Finally got through that so we're continuing to see strong growth across the ESI channels again, if you come to discover.
Speaker Change: And believe it is on the 11th 14th of November.
Speaker Change: The sponsorship that we have now from the Si channels and their attendance and the customers. They bring to these types of events then referred to us.
Speaker Change: He's really healthy.
Speaker Change: Yeah, Okay, perfect and then the.
Speaker Change: The thing that I think I get the most questions from investors is that they are a little bit confused is obviously you know what.
Speaker Change: Do you give guidance I'll talk about a quarter of your kind of thinking about every work because you know we are going to dissect it.
Speaker Change: So on the one hand, you have really good pipeline coverage macro hasn't changed but you still started talking about elongation of little bit like.
Speaker Change: Is that but in a way were kind of like quite a few quarters into a macro situation.
Speaker Change: Macro not being ideal.
Speaker Change: So we kind of overriding into that or like how should we think about that.
Speaker Change: You were talking about that for the first time.
Speaker Change: Yeah.
Speaker Change: I've always thought about the business and kind of a half year basis.
Speaker Change: The quarter's often are impacted as to when the quarter end relative to vacations and the like.
Speaker Change: So when I look at the second half of the year.
Speaker Change: I can't say that I've seen any differences than what I've seen beforehand, and if I look at the first half of the year I cant say that ive seen any differences you see the same in terms of go lives as well that it really is more of a half year basis as opposed to a three month basis.
Speaker Change: So I wouldn't read too much into it but as we have gone more upmarket and now we are selling a broader suite again, a 51% of the customers are buying suite deals, which means more than just paying diamond core HR. So the talent modules. These deals do take longer because of the number of people.
Speaker Change: That we have to speak to in the customers often have to look at their existing contracts with now more vendors and work out how.
Speaker Change: Terminate those as they kind of move to.
Speaker Change: Day falls.
Speaker Change: So I wouldn't read.
Speaker Change: More than that into it.
Speaker Change: In the second half of the year, we're very weighted towards December is when most of our customers look at buying and completing the actual contracts.
Speaker Change: This year it will be a volume type of deals that there is a tremendous number of opportunities that.
Speaker Change: That we have to get through it and 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.
Speaker Change: Okay. Thank you that's clear.
Speaker Change: Thank you our next questions come from the line of Alex Zukin with Wolfe Research. Please proceed with your questions.
Alex Zukin: Hey, guys. Thanks for squeezing me in.
Speaker Change: Ramos question is this.
Speaker Change: A.
Alex Zukin: The commentary about the sales cycle elongation.
David It sounds like Thats more of us idiosyncratic issue, because you're moving up market rather than a broad based kind of comment on that.
Alex Zukin: The general demand environment, which you are talking about isn't changing but I guess given the narrowing of the Q4 D Force guide from I think 21 or 21 half of 'twenty. One is it did it also push out some implementations from Q4 to Q1.
Alex Zukin: Or how do we think about like the very specific impacts of that.
Speaker Change: So Alex we kept the guide consistent for Q4 and as we mentioned last quarter, we have tremendous visibility into the Q2 quarter out if not a year out.
Speaker Change: As we mentioned in the quarter came in at about 37% of sales, which again is very consistent with the guide that we gave even at the beginning of the year, which again talks about the.
Speaker Change: <unk> ability of the business.
Speaker Change: In terms of 2025, what would be true to say is that an organization. We are more focused on profitability and free cash flow.
Speaker Change: And that comes with the simplification of the business as we focus on the better revenue streams and products of the business, which are <unk> and par pay and as we do that you will see a period of time, where the flows very nicely to the actual bottom line.
Speaker Change: And I think the outlook that Jeremy gave it.
Speaker Change: Consistent with street expectations with a increase in the profitability next year, which we felt was important.
Speaker Change: That we get out there.
Speaker Change: Perfect and then maybe just a clarifying question you mentioned for next year load would be at $25 million to $30 million headwind I'm assuming that means.
Speaker Change: <unk> grew $25 million to $30 million this year.
Speaker Change: Probably flatter for next year, it's going down by 25 or 30 months.
Speaker Change: That's correct if you look at.
Speaker Change: Last year.
Speaker Change: The yield was about three 7%.
Speaker Change: The yield for this year.
We'll likely be about 4% to four 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.
Speaker Change: For next year I would expect that the yield will be at the most.
Speaker Change: Equal to what we had last year, which again was about three 7% and if you do the math on that that creates a headwind.
Speaker Change: Headwind of about $25 million also.
Speaker Change: Sure.
Speaker Change: Okay, great. Thank you guys.
Speaker Change: Thank you our final question will come from the line of Mark Murphy with Jpmorgan. Please proceed with your questions.
Speaker Change: Come down to the month of December.
Speaker Change: But there is a lot of activity if I look at other indicators attendance at the summers that the discover a customer conference up significantly year over year.
Speaker Change: So theres a lot of activity that scaring and when I look at the work that I think Sam's doing I think that we've seen really good productivity increases in the sales group.
Speaker Change: And thank you for that David as a quick follow up.
Speaker Change #100: I'm curious how are you assessing the willingness to pay for.
Speaker Change #101: Whether it's co pilot there is in the realm of a tolerance of.
Speaker Change #102: The reason that I ask is the the monetization seems to be moving faster in the areas like developers generators and customer service contact center sales and marketing workflows it seems to be built.
Speaker Change #102: Building and monetizing well I heard your comment about some uplift.
Speaker Change #103: You know as you get into it but I think investors are just trying to understand is the perceived value and willingness to pay on par when it comes to HR managers or payroll managers. When you become a contrast, it to some of these other areas.
Speaker Change #102: Mark.
Mark: I think where you've actually kind of a focused.
Speaker Change #102: The.
Speaker Change #102: Jen AI was first used.
Speaker Change #102: The first use cases, you saw coming off of really some of the development tools that Microsoft put in place. So they have been in market longer.
Speaker Change #102: I think you're now moving into a phase where you're seeing AI being added to other use cases across the enterprise stack. We are I believe first in market with the co pilot for the Gen AI offering and remember this we don't charge for things like.
Speaker Change #102: Right you know if the job descriptions in talent acquisition. Rather this is a separate product that we now have on the actual price sheets as a separate SKU, where we can go back to customers.
Speaker Change #102: <unk> is a great product you see in fact, Youll see me show it at discover and when customers see it there's a tremendous amount of excitement and remember for US. We're always focused on how do we deliver value to the customer whether it's a 12 to one simplification, where we can reduce.
Speaker Change #102: <unk> fees and reduce ftes around the management of the HCM stack.
Speaker Change #102: In terms of co pilot, we're reducing the number of inbound calls to the HR teams by being able to answer the question through Gen. AI conversation and at the same time, we are delivering tremendous value to the users of the application and really lifting up their.
Speaker Change #102: Experience on how they interact and get data about the organization about policies about themselves or their frontline managers or executives, how they get information about their teams and performance of their organization.
Speaker Change #102: Thank you.
Speaker Change #105: Thank you there are no further questions at this time I would now like to hand, the call back over to David <unk> for closing remarks.
David: Thank you very much and thank you all for attending.
Speaker Change #106: <unk> see many of you at our Investor day at discover and I'm, hoping that many of you do you can discover as well again the products that will be shown I think will be very very exciting and I'm looking for just a wonderful experience for everyone as we enhance the community around the day force platform.
Speaker Change #107: 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.
Speaker Change #107: Yeah.
Speaker Change #107: Okay.
Speaker Change #107: Okay.
Speaker Change #107: Okay.
Speaker Change #107: Yeah.
Speaker Change #107: Okay.
Speaker Change #107: Okay.
Speaker Change #107: Okay.