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Ceridian (NYSE:CDAY) Beats Q1 Sales Targets, Next Quarter Growth Looks Optimistic


Full Report / May 04, 2022
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Online payroll and human resource software provider Ceridian (NYSE:CDAY) beat analyst expectations in Q1 FY2022 quarter, with revenue up 25% year on year to $293.3 million. Guidance for next quarter's revenue was $294.5 million at the midpoint, which is 1% above the analyst consensus. Ceridian made a GAAP loss of $27.4 million, down on its loss of $19.2 million, in the same quarter last year.

Ceridian (CDAY) Q1 FY2022 Highlights:

  • Revenue: $293.3 million vs analyst estimates of $289.4 million (1.33% beat)
  • EPS (non-GAAP): $0.13 vs analyst estimates of $0.08 ($0.05 beat)
  • Revenue guidance for Q2 2022 is $294.5 million at the midpoint, above analyst estimates of $291.5 million
  • The company lifted revenue guidance for the full year, from $1.2 billion to $1.21 billion at the midpoint, a 1.2% increase
  • Free cash flow was negative $14.4 million, compared to negative free cash flow of $4.3 million in previous quarter
  • Customers: 5,609, up from 5,434 in previous quarter
  • Gross Margin (GAAP): 35.1%, down from 44.8% 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 year, growing from quarterly revenue of $234.5 million, to $293.3 million.

Ceridian Total Revenue

This quarter, Ceridian's quarterly revenue was once again up a very solid 25% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $11.2 million in Q1, compared to $24.9 million in Q4 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Guidance for the next quarter indicates Ceridian is expecting revenue to grow 17.6% year on year to $294.5 million, slowing down from the 30% 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 16% over the next twelve months.

Customer Growth

You can see below that Ceridian reported 5,609 customers at the end of the quarter, an increase of 175 on last quarter. That is a little slower customer growth than last quarter but quite a bit still above what we have typically seen over the last year, suggesting sales momentum is coming off slightly after a stronger quarter.

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, licenses, technical support and other necessary running expenses was at 35.1% in Q1.

Ceridian Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.35 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 been going down over the last year, which is probably the opposite direction shareholders would like to see it go.

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 burned through $14.4 million in Q1.

Ceridian Free Cash Flow

Ceridian has generated $30.8 million in free cash flow over the last twelve months, 2.84% 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 Q1 Results

With a market capitalization of $8.69 billion Ceridian is among smaller companies, but its more than $354.8 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

It was good to see Ceridian revenue guidance for the full year, exceed market's expectations even if just slightly.  And we were also glad to see good revenue growth. On the other hand, it was less good to see the pretty significant deterioration in gross margin and there was a slowdown in customer growth. Overall, this quarter's results could have been better. The company is down 2.05% on the results and currently trades at $59.57 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. Unfortunately, its gross margins show its business model is much less lucrative than the best software businesses.

Ceridian's price to sales ratio based on the next twelve months is 7.4x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. 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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