Ceridian (NYSE:CDAY) Surprises With Q4 Sales, Stock Soars

Full Report / February 08, 2023
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Online payroll and human resource software provider Ceridian (NYSE:CDAY) reported Q4 FY2022 results beating Wall St's expectations, with revenue up 19.1% year on year to $336.1 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $361 million at the midpoint, 4.86% above what analysts were expecting. Ceridian made a GAAP loss of $5.2 million, improving on its loss of $9.5 million, in the same quarter last year.

Ceridian (CDAY) Q4 FY2022 Highlights:

  • Revenue: $336.1 million vs analyst estimates of $325.1 million (3.39% beat)
  • EPS (non-GAAP): -$0.03 vs analyst estimates of $0.12 (-$0.15 miss)
  • Revenue guidance for Q1 2023 is $361 million at the midpoint, above analyst estimates of $344.3 million
  • Management's revenue guidance for upcoming financial year 2023 is $1.49 billion at the midpoint, beating analyst estimates by 3.2% and predicting 19.6% growth (vs 21.8% in FY2022)
  • Free cash flow of $12.2 million, down 74.7% from previous quarter
  • Customers: 5,993, up from 5,848 in previous quarter
  • Gross Margin (GAAP): 40.2%, down from 41.8% same quarter last year

Founded in 1992 as an outsourced payroll processor and transformed after the 2012 acquisition of Dayforce, Ceridian (NYSE:CDAY) is a provider of cloud based payroll and HR software targeted at mid-sized businesses.

Managing basic HR functions like payroll and benefits are requirements for all companies, but are particularly time consuming and expensive for small and medium sized businesses, who have historically used a series of patchwork measures involving spreadsheets, accountants and single purpose software from multiple vendors.

Dayforce’s value proposition for mid-sized businesses is cost savings and greater efficiency that come from being a centralized database that integrates standalone HCM features like set up shifts, process payroll and maintaining HR records, which both simplifies basic HCM tasks while providing the ability to derive insights across the different functions (e.g. are there pay disparities between gender or ethnicity?).

Ceridian’s flagship product is Dayforce, a cloud-based software platform that handles human resource functions such as running payroll, managing benefits, and onboarding employees.

For employees, Dayforce offers a single interface for everything from clocking in to managing days off to getting online training. It’s most innovative differentiating feature is Dayforce Wallet, which enables workers to access already-earned wages anytime during a pay period immediately, rather than waiting a standard two weeks.

HR software benefits from dual trends around costs savings and ease of use. First is the SaaS-ification of businesses, large and small, who much prefer the flexibility of cloud-based, web-browser delivered software paid for on a subscription basis than the hassle and expense of purchasing and managing on-premise enterprise software. Second is the consumerization of business software, whereby multiple standalone processes like payroll processing and compliance are aggregated into a single, easy to use platforms.

Ceridian’s main competitors are legacy provider ADP (NASDAQ:ADP) and Ultimate Kronos Group. Other cloud-first providers of HR solutions for small and medium-sized businesses include Asure (NYSE: ASUR), Paycom (NYSE:PAYC), Paycor (NASDAQ:PYCR), Paylocity (NASDAQ:PCTY), and Workday (NASDAQ:WDAY).

Sales Growth

As you can see below, Ceridian's revenue growth has been strong over the last two years, growing from quarterly revenue of $222.8 million in Q4 FY2020, to $336.1 million.

Ceridian Total Revenue

This quarter, Ceridian's quarterly revenue was once again up 19.1% year on year. We can see that the company increased revenue by $20.5 million quarter on quarter. That's a solid improvement on the $14.4 million increase in Q3 2022, so shareholders should appreciate the re-acceleration of growth.

Guidance for the next quarter indicates Ceridian is expecting revenue to grow 23.1% year on year to $361 million, in line with the 25.1% year-over-year increase in revenue the company had recorded in the same quarter last year. For the upcoming financial year management expects revenue to be $1.49 billion at the midpoint, growing 19.6% compared to 21.7% increase in FY2022.

Customer Growth

You can see below that Ceridian reported 5,993 customers at the end of the quarter, an increase of 145 on last quarter. That is a little better customer growth than last quarter and in line with what we have seen in previous quarters, demonstrating the company has the sales momentum required to drive continued growth. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is running smoothly.

Ceridian Customers


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Ceridian's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 40.2% in Q4.

Ceridian Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.40 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

Cash Is King

If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Ceridian's free cash flow came in at $12.2 million in Q4, turning positive year on year.

Ceridian Free Cash Flow

Ceridian has generated $74.8 million in free cash flow over the last twelve months, a decent 6% of revenues. This FCF margin is a result of Ceridian asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.

Key Takeaways from Ceridian's Q4 Results

Sporting a market capitalization of $11.5 billion, more than $431.9 million in cash and with positive free cash flow over the last twelve months, we're confident that Ceridian has the resources it needs to pursue a high growth business strategy.

We were impressed by the very optimistic revenue guidance Ceridian provided for the next quarter. And we were also glad that the revenue guidance for the rest of the year exceeded expectations. On the other hand, it was less good to see the pretty significant deterioration in gross margin. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 7.48% on the results and currently trades at $80.28 per share.

Is Now The Time?

When considering Ceridian, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Ceridian we will be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its strong free cash flow generation gives it re-investment options, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.

Given its price to sales ratio based on the next twelve months is 8.0x, Ceridian is priced with expectations of a long-term growth, and there's no doubt it is a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

The Wall St analysts covering the company had a one year price target of $74.9 per share right before these results, implying that they didn't see much short-term potential in the Ceridian.

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