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Dayforce (NYSE:DAY) Reports Q4 In Line With Expectations But Full-Year Guidance Underwhelms


Full Report / February 07, 2024

Online payroll and human resource software provider Dayforce (NYSE:DAY) reported results in line with analysts' expectations in Q4 FY2023, with revenue up 18.9% year on year to $399.7 million. The company expects next quarter's revenue to be around $425.5 million, in line with analysts' estimates. It made a non-GAAP profit of $0.50 per share, improving from its profit of $0.23 per share in the same quarter last year.

Dayforce (DAY) Q4 FY2023 Highlights:

  • Revenue: $399.7 million vs analyst estimates of $399.4 million (small beat)
  • EPS (non-GAAP): $0.50 vs analyst estimates of $0.32 (57.9% beat)
  • Revenue Guidance for Q1 2024 is $425.5 million at the midpoint, roughly in line with what analysts were expecting
  • Management's revenue guidance for the upcoming financial year 2024 is $1.73 billion at the midpoint, missing analyst estimates by 0.9% and implying 14% growth (vs 21.6% in FY2023)
  • Free Cash Flow of $63.8 million, up from $4.8 million in the previous quarter
  • Customers: 6.39 million, up from 6.35 million in the previous quarter (miss vs. expectations of 6.56 million)
  • Gross Margin (GAAP): 42.5%, down from 45.7% in the same quarter last year
  • Market Capitalization: $11 billion

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

The company'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

Modern HR software has two powerful benefits: cost savings and ease of use. For cost savings, businesses large and small much prefer the flexibility of cloud-based, web-browser-delivered software paid for on a subscription basis rather than the hassle and complexity of purchasing and managing on-premise enterprise software. On the usability side, the consumerization of business software creates seamless experiences whereby multiple standalone processes like payroll processing and compliance are aggregated into a single, easy-to-use platform.

Dayforce’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, Dayforce's revenue growth has been strong over the last two years, growing from $282.1 million in Q4 FY2021 to $399.7 million this quarter.

Dayforce Total Revenue

This quarter, Dayforce's quarterly revenue was once again up 18.9% year on year. We can see that Dayforce's revenue increased by $22.2 million quarter on quarter, which is a solid improvement from the $11.6 million increase in Q3 2023. Shareholders should applaud the re-acceleration of growth.

Next quarter's guidance suggests that Dayforce is expecting revenue to grow 14.8% year on year to $425.5 million, slowing down from the 26.4% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $1.73 billion at the midpoint, growing 14% year on year compared to the 21.5% increase in FY2023.

Customer Growth

Dayforce reported 6.39 million customers at the end of the quarter, an increase of 47,000 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.

Dayforce 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. Dayforce'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 42.5% in Q4.

Dayforce Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.42 left to spend on developing new products, sales and marketing, and general administrative overhead. Dayforce'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. Dayforce's free cash flow came in at $63.8 million in Q4, up 423% year on year.

Dayforce Free Cash Flow

Dayforce has generated $105.1 million in free cash flow over the last 12 months, a decent 6.8% 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 Dayforce's Q4 Results

Although total customer count missed expectations, revenue beat slightly. On the other hand, the company's full year revenue guidance was below Wall Street analysts' estimates. Overall, this was a mixed quarter for Dayforce. The stock is flat after reporting and currently trades at $71.12 per share.

Is Now The Time?

When considering an investment in Dayforce, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

Although Dayforce isn't a bad business, it probably wouldn't be one of our picks. Although its revenue growth has been solid over the last two years, Wall Street expects growth to deteriorate from here. On top of that, its gross margins show its business model is much less lucrative than the best software businesses.

The market is certainly expecting long-term growth from Dayforce given its price-to-sales ratio based on the next 12 months is 6.5x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Dayforce doesn't trade at a completely unreasonable price point.

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