Description

Over the course of the past week + we’ve been selectively sifting through some of the SaaS and SMID cap tech carnage and taking a few smaller positions in what we view as some of the higher quality SaaS names. We’ve been focusing on moving up the quality spectrum and putting some cash to work in names that we think have great products, management teams, and long-term shareholder orientation. Ceridian HCM is a name we think fits this category and a name that has never been written up on VIC. Ceridian (CDAY) has always been on our “wish list” but was always too expensive and in the early days we viewed it as sub-scale and not de-risked enough with regards to product acceptance standpoint. A lot has changed over the past few years, CDAY now has significant scale at > $1B in LTM revenue and over 5m active employees on the platform; we think this is a business segment that is the next “big thing” in payroll/HCM/Fintech, the DayForce Wallet. We think Ceridian is a company that is poised to consistently take market share from domestic U.S. players Paychex, ADP, and other legacy competitors globally. Given the recent volatility in the stock we wanted to get this out as soon as possible and thus will focus mainly on the Dayforce Wallet as it is the piece of the business that is the main driver of value.

Business Background:

Ceridian was taken private by Thomas H Lee Partners & Fidelity National Financial back in 2007 for $5.3B, at the time it was a legacy HR payroll company. The company eventually acquired Dayforce in 2012, which transformed the business into a SaaS payroll provider w/ a slower growth legacy component. Ceridian went public in 2018 at roughly a $3B valuation, it recently had a market cap c.a. $20B, and has come in by about -50% since its recent peak in November.

Dayforce Wallet:

“When I mentioned it back in 2019 and announced real-time pay (Dayforce Wallet program), you could hear a pin drop in the room everyone went silent, and today it is becoming the norm”

CEO David Ossip 12/21

“Ceridian is the only provider that can do continuous calculations, other providers have bolt-on solutions that are a very complex form of a payroll loan, difficult reconciliation, and with jurisdictional issues.” CEO David Ossip

David Ossip started doing field research with the on-demand pay space in 2010, after recognizing a common issue/pain point, seperational systems issues between HR/payments, benefits, and recruiting. Everything was built on a batched based process and the overall experience for the client was horrible. Payroll teams used to not get access to tax and other data until after payroll was issued, Dayforce is unique in that it has built pay and time together as one system, fully unified. To Ossip at the time it made no sense why most employees got paid every 2 weeks + another 3-4 day lagg, the employee was legally entitled to the pay immediately. 

Dayforce solved this solution on the payments rails by having immediate access to payroll, inclusive of all taxes and the employee can actually spend immediately (same day payroll). The client pays on the typical weekly timeframe, and Ceridian acts as a commercial lender to the organization, they are taking advantage of the interchange which is ~ 1.25%, & they make a spread (~80 bps) after funding costs on the movement of money, and CDAY is moving ~ $350B in payroll benefits per year. CDAY makes more money on the movement of money than on the payroll solutions side, and that is where the real play is, increasing the amount of money moving on the platform. The new 2 day early direct deposit feature for employees embodies this stratgey of trying to retain more funds on Dayforce platform, rather than being delayed 2-3 days by sending through ACH to another financial intermediary. This strategy gets more spend to remain on the Dayforce Wallet; they are also moving to a pay streaming service, which is an instantaneous spending solution.

“Every single conversation I’ve had with a client starts with the Dayforce Wallet”

CEO David Ossip 12/21

What is so compelling about Dayforce as it continues to scale is the software is fairly ubiquitous in that CDAY doesn’t need to build out bespoke solutions for clients in different industries or geographies. Combine this with a life of a customer ~10+ years, plus the addition of possible upsell features that most clients want. CDAY customers are looking to do more and more with one platform, not a bunch of independent software systems that don’t speak to each other.

In 2018 Ceridian had an offering about $15/seat, whereas now the full price stack in 2021 $40-50 (~ 35% of customer opt to take the full suite).

Overall, we think Ceridian has a better mousetrap than competitors, they have some of the highest NPS scores, and customer satisfaction results, with cloud retention rates at ~97%. Gartner ranks them: #1 for workforce management, #1 compliance, #1 payroll, #1 time and attendance. There is also some data from Ceridian that says employees that are integrated in the Dayforce Wallet program and other modules are 40% more likely to stay with that firm than other companies not offering a similar product suite. With approximately 55% of Americans living paycheck-to-paycheck, on demand pay is a way to relieve stress and provide solutions in place of payday loans, which in itself is a $7B business.

• Dayforce has 5,400+ corporate customers live on the product, +207 taken live in Q4, implemented in 105 countries at the moment
• 35% of customers now buy the full Dayforce suite.
• 9 new countries in 2022
• Large addressable market: $20B in North America
• Global TAM: > $20B

Market share within the U.S. and Canada is only ~4%, and only 1% internationally, so a tremendous amount of whitespace and ability for Dayforce to get penetration with a vastly better solution than competitors. ADP alone is estimated to have approximately $1B of churn per year, giving ample market share up for grabs every year for the newer compeititors. Ceridian has also seen the least amount of volatility with regards to recurring revenue disruptions from Covid when compared to peers.

Source: Deutsche Bank

Interest Rates:

Ceridian is one of the few SaaS related companies that directly benefits from rising interest rates. In 2019, Ceridian generated ~ $80m in float revenue vs. recent expectations for FY ‘22 ~ $43m, on a much higher aggregate float number. Since those estimates were provided the U.S. 10-year is up about +60 bps, which if it holds for the year could move the needle incrementally on EBITDA by about +10%, slightly above +100 bps and it could move EBITDA by almost +15% for '22 numbers. Among the HCM peer group Ceridian has the greatest exposure to rising rates, and thus the possibility for outsized returns as rates rise.

Valuation:

Catalyst

Continued global adoption of the Dayforce product, continued execution of additional upsell features, and successful global expansion.