Ceridian (NYSE:CDAY) Exceeds Q2 Expectations

Full Report / August 02, 2023

Online payroll and human resource software provider Ceridian (NYSE:CDAY) beat analysts' expectations in Q2 FY2023, with revenue up 21.5% year on year to $365.9 million. The company also expects next quarter's revenue to be around $369.5 million, roughly in line with analysts' estimates. Ceridian made a GAAP profit of $3.1 million, improving from its loss of $19.8 million in the same quarter last year.

Ceridian (CDAY) Q2 FY2023 Highlights:

  • Revenue: $365.9 million vs analyst estimates of $358.3 million (2.13% beat)
  • EPS (non-GAAP): $0.02 vs analyst estimates of $0.29 (-$0.27 miss)
  • Revenue Guidance for Q3 2023 is $369.5 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year of $1.5 billion at the midpoint
  • Free Cash Flow of $53.6 million is up from -$17.1 million in the previous quarter
  • Customers: 6,272,000, up from 6,179,000 in the previous quarter
  • Gross Margin (GAAP): 42.6%, down from 45% in the 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 $250.4 million in Q2 FY2021 to $365.9 million this quarter.

Ceridian Total Revenue

This quarter, Ceridian's quarterly revenue was once again up a very solid 21.5% year on year. However, the company's revenue actually decreased by $4.7 million in Q2 compared to the $34.5 million increase in Q1 2023. While we'd like to see revenue increase each quarter, management is guiding for growth to rebound in the next quarter and a one-off fluctuation is usually not concerning.

Next quarter's guidance suggests that Ceridian is expecting revenue to grow 17.1% year on year to $369.5 million, slowing down from the 22.7% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 15.3% over the next 12 months.

Customer Growth

Ceridian reported 6,272,000 customers at the end of the quarter, an increase of 93,000 from the previous quarter. That's a little slower customer growth than what we've observed in past quarters, suggesting that the company's customer acquisition momentum is slowing.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 42.6% in Q2.

Ceridian Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.43 left to spend on developing new products, sales and marketing, and general administrative overhead. Ceridian's gross margin is poor for a SaaS business and it's dropped significantly since the previous quarter. This is probably the exact opposite of what shareholders would like to see.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Ceridian's free cash flow came in at $53.6 million in Q2, up 86.8% year on year.

Ceridian Free Cash Flow

Ceridian has generated $116.8 million in free cash flow over the last 12 months, a decent 8.71% of revenue. This FCF margin stems from its asset-lite business model and gives it a decent amount of cash to reinvest in its business.

Key Takeaways from Ceridian's Q2 Results

With a market capitalization of $11 billion, a $486.6 million cash balance, and positive free cash flow over the last 12 months, we're confident that Ceridian has the resources needed to pursue a high-growth business strategy.

It was good to see Ceridian beat analysts' revenue expectations this quarter and product solid free cash flow. That really stood out as a positive in these results. On the other hand there was a slowdown in customer growth. Overall, this was a decent quarter for Ceridian. The stock is flat after reporting and currently trades at $67 per share.

Is Now The Time?

When considering an investment in Ceridian, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in case of Ceridian, we'll 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, the downside is that its customer acquisition is less efficient than many comparable companies and 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 12 months is 6.6x, Ceridian is priced with expectations of a long-term growth, and there's no doubt it's 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.

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