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Ceridian (NYSE:CDAY) Exceeds Q3 Expectations But Gross Margin Drops


Full Report / November 03, 2021
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Online payroll and human resource software provider Ceridian (NYSE:CDAY) reported strong growth in the Q3 FY2021 earnings announcement, with revenue up 25.8% year on year to $257.2 million. Ceridian made a GAAP loss of $20.9 million, down on its loss of $800 thousand, in the same quarter last year.

Ceridian (CDAY) Q3 FY2021 Highlights:

  • Revenue: $257.2 million vs analyst estimates of $253.5 million (1.45% beat)
  • EPS (non-GAAP): $0.05 vs analyst estimates of $0.04 (16.4% beat)
  • The company reconfirmed revenue guidance for the full year, at $1.01 billion at the midpoint
  • Free cash flow of $11.4 million, roughly flat from previous quarter
  • Customers: 5,227, up from 5,164 in previous quarter
  • Gross Margin (GAAP): 36.1%, down from 43.3% same quarter last year

Founded in 1992 as an outsourced payroll processor and transformed after the 2012 acquisition of Dayforce, Ceridian (NASDAQ: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.

Ceridian benefits from 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.

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 decent over the last year, growing from quarterly revenue of $204.4 million, to $257.2 million.

Ceridian Total Revenue

This quarter, Ceridian's quarterly revenue was up a very solid 25.8% year on year, which is above average for the company. But the growth did slow down compared to last quarter, as the revenue increased by just $6.8 million in Q3, compared to $15.9 million in Q2 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 18.6% over the next twelve months, although estimates are likely to change post earnings.

Customer Growth

You can see below that Ceridian reported 5,227 customers at the end of the quarter, an increase of 63 on last quarter. That is a bit slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.

Ceridian Customers

Profitability

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, licences, technical support and other necessary running expenses was at 36.1% in Q3.

Ceridian Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.36 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.

Key Takeaways from Ceridian's Q3 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Ceridian’s balance sheet, but we note that with a market capitalization of $19.5 billion and more than $378.8 million in cash, the company has the capacity to continue to prioritize growth over profitability.

Ceridian delivered solid revenue growth this quarter. And we were also happy to see it topped analysts’ revenue expectations, even if just narrowly. Less good was a pretty significant deterioration in gross margin and a slowdown in customer growth. Overall, this quarter's results could have been better. The company is down 1.79% on the results and currently trades at $126.01 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 very weak, but at least that growth rate is expected to increase in the short term. And while its very efficient customer acquisition hints at the potential for strong profitability, the downside is that its gross margins show its business model is much less lucrative than the best software businesses and its cash burn raises the question if it can sustainably maintain its growth.

Given its price to sales ratio based on the next twelve months is 16.9x, 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, 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 $120.40 per share right before these results, implying that they didn't see much short-term potential in the Ceridian.

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