Ceridian (NYSE:CDAY) Exceeds Q3 Expectations

Full Report / January 23, 2023
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Online payroll and human resource software provider Ceridian (NYSE:CDAY) beat analyst expectations in Q3 FY2022 quarter, with revenue up 22.7% year on year to $315.6 million. The company expects that next quarter's revenue would be around $324.5 million, which is the midpoint of the guidance range. That was in roughly line with analyst expectations. Ceridian made a GAAP loss of $21 million, down on its loss of $20.9 million, in the same quarter last year.

Ceridian (CDAY) Q3 FY2022 Highlights:

  • Revenue: $315.6 million vs analyst estimates of $305.5 million (3.28% beat)
  • EPS (non-GAAP): $0.20 vs analyst estimates of $0.12 ($0.08 beat)
  • Revenue guidance for Q4 2022 is $324.5 million at the midpoint, below analyst estimates of $327.2 million
  • Free cash flow of $29.4 million, roughly flat from previous quarter
  • Customers: 5,848, up from 5,728 in previous quarter
  • Gross Margin (GAAP): 37.7%, down from 41.3% 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 solid over the last two years, growing from quarterly revenue of $204.4 million in Q3 FY2020, to $315.6 million.

Ceridian Total Revenue

This quarter, Ceridian's quarterly revenue was once again up a very solid 22.7% year on year. On top of that, revenue increased $14.4 million quarter on quarter, a very strong improvement on the $7.9 million increase in Q2 2022, which shows acceleration of growth, and is great to see.

Guidance for the next quarter indicates Ceridian is expecting revenue to grow 15% year on year to $324.5 million, slowing down from the 26.6% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 15.4% over the next twelve months.

Customer Growth

You can see below that Ceridian reported 5,848 customers at the end of the quarter, an increase of 120 on last quarter. That's in line with the customer growth we have seen last quarter but a bit below what we have typically seen over the last year, suggesting that sales momentum may be slowing a little.

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 37.7% in Q3.

Ceridian Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.37 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 follow 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 $29.4 million in Q3, up 20.4% year on year.

Ceridian Free Cash Flow

Ceridian has generated $39.4 million in free cash flow over the last twelve months, 3.3% of revenues. This FCF margin is a result of Ceridian asset lite business model, and provides it with at least some cash to invest in the business without depending on capital markets.

Key Takeaways from Ceridian's Q3 Results

With a market capitalization of $10 billion, more than $408.4 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

It was good to see Ceridian outperform Wall St’s revenue expectations this 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 were mostly showing the company is staying on target. The company currently trades at $69.75 per share.

Is Now The Time?

Ceridian may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. 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 a little slower, and analysts expect growth rates to deteriorate from there. And on top of that, 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 6.9x, 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, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.

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