Dayforce (DAY)

Online payroll and human resource software provider Dayforce (NYSE:DAY) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 11.7% year on year to $481.8 million. On the other hand, next quarter’s revenue guidance of $411 million was less impressive, coming in 11.4% below analysts’ estimates. Its non-GAAP profit of $0.58 per share was 6.9% above analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, Dayforce grew its sales at a 18.7% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, Dayforce reported year-on-year revenue growth of 11.7%, and its $481.8 million of revenue exceeded Wall Street’s estimates by 1.1%. Company management is currently guiding for a 2.9% year-on-year decline in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 9.8% over the next 12 months, a deceleration versus the last three years. This projection doesn't excite us and indicates its products and services will face some demand challenges.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Dayforce’s billings punched in at $479.6 million in Q1, and over the last four quarters, its growth was solid as it averaged 14.9% year-on-year increases. This performance aligned with its total sales growth, indicating robust customer demand. The cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Dayforce is extremely efficient at acquiring new customers, and its CAC payback period checked in at 5.9 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Dayforce more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

For software companies like Dayforce, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Dayforce’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 50.3% gross margin over the last year. That means Dayforce paid its providers a lot of money ($49.65 for every $100 in revenue) to run its business.

Dayforce’s gross profit margin came in at 50.4% this quarter, marking a 1.5 percentage point decrease from 51.9% in the same quarter last year. Zooming out, however, Dayforce’s full-year margin has been trending up over the past 12 months, increasing by 2 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Dayforce has managed its cost base well over the last year. It demonstrated solid profitability for a software business, producing an average operating margin of 5.2%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Dayforce’s operating margin decreased by 3.4 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Dayforce generated an operating profit margin of 6.4%, down 3 percentage points year on year. Conversely, its revenue and gross margin actually rose, so we can assume it was less efficient because its operating expenses like marketing, R&D, and administrative overhead grew faster than its revenue.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Dayforce has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 11.6% over the last year, slightly better than the broader software sector.

Dayforce’s free cash flow clocked in at $19.5 million in Q1, equivalent to a 4% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

Over the next year, analysts’ consensus estimates show they’re expecting Dayforce’s free cash flow margin of 11.6% for the last 12 months to remain the same.

Dayforce reported $557.3 million of cash and $1.23 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $528.3 million of EBITDA over the last 12 months, we view Dayforce’s 1.3× net-debt-to-EBITDA ratio as safe. We also see its $19.4 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Dayforce beat analysts’ EPS and EBITDA expectations this quarter. We were also happy its revenue narrowly outperformed Wall Street’s estimates. On the other hand, its full-year revenue guidance missed significantly. Overall, this was a softer quarter. The stock traded down 6% to $54.68 immediately following the results.

Updated: May 22, 2025 at 10:23 PM EDT

Before deciding whether to buy Dayforce or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Dayforce isn’t a terrible business, but it isn’t one of our picks. First off, its revenue growth was mediocre over the last three years, and analysts expect its demand to deteriorate over the next 12 months. And while its efficient sales strategy allows it to target and onboard new users at scale, the downside is its gross margins show its business model is much less lucrative than other companies. On top of that, its declining operating margin shows it’s becoming less efficient at building and selling its software.

Dayforce’s price-to-sales ratio based on the next 12 months is 4.8x. Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $68.37 on the company (compared to the current share price of $58.35).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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