2023-03-24 18:18:36 ET
Summary
- Ceridian HCM reported its Q4 2022 financial results on February 9, 2023.
- The firm provides a range of human capital management software capabilities to organizations of all sizes worldwide.
- CDAY has produced steady growth, has broken through operating breakeven and is well positioned for domestic US and international growth.
- My outlook is a Buy at around $68.00 per share.
A Quick Take On Ceridian HCM
Ceridian HCM Holding (CDAY) reported its Q4 2022 financial results on February 8, 2023, beating revenue and EPS consensus estimates.
The company provides human capital management software and services to enterprises to assist them in attracting, managing and retaining the best people for their organizations.
Given the firm's steady revenue growth trajectory, positive operating income and continued strong growth potential domestically and internationally, my outlook on CDAY is a Buy at around $68.00.
Ceridian Overview
Minneapolis, Minnesota-based Ceridian was founded in 1932 to help businesses maximize their human capital investments through its modular human capital management software system.
Management is headed by CEO David Ossip, who was previously founder and CEO of Dayforce, which was acquired by Ceridian in 2012.
The firm operates a significant partner program through relationships with software integrators, consulting firms, brokers and small business sales channel partners.
Private equity firm Thomas H. Lee Partners and Fidelity National Financial (FNF) invested $150 million in Ceridian in 2006 and then took it private in 2007 for approximately $5.3 billion.
Ceridian's Market & Competition
According to a 2016 MarketsandMarkets research report , the global human capital management market for software is expected to reach $22.51 billion by 2022.
This represents a forecasted CAGR of 9.2%, which is a middling growth level for an enterprise software segment.
The report stated that the consumer goods and retail vertical would likely show strong growth over the survey period due to 'technological changes, customer needs, and employment,' as a function of increased competition in the industry.
The North American region will account for the greatest demand as the markets of APAC, Latin America and the Middle East and Africa are still in the 'emerging stage.'
Major competitive vendors that provide a range of software include:
-
Workday
-
Paycor HCM
-
Oracle
-
SAP
-
Kronos
-
Automatic Data Processing
-
Ultimate Software Group
-
IBM
-
SumTotal Systems
-
EmployWise
-
Paycom Software
-
PeopleStrategy
Ceridian's Recent Financial Results
-
Total revenue by quarter has risen per the following chart:
Total Revenue History (Seeking Alpha)
-
Gross profit margin by quarter has grown appreciably in recent quarters:
Gross Profit Margin History (Seeking Alpha)
-
Selling, G&A expenses as a percentage of total revenue by quarter have remained within a narrow range recently:
Selling, G&A % Of Revenue History (Seeking Alpha)
-
Operating income by quarter has turned slightly positive in recent quarters:
Operating Income History (Seeking Alpha)
-
Earnings per share (Diluted) have approached breakeven in Q4 2022:
Earnings Per Share History (Seeking Alpha)
(All data in the above charts is GAAP)
In the past 12 months, CDAY's stock price has dropped 2.6% vs. that of PYCR's drop of 14.6%, as the chart indicates below:
As to its Q4 financial results, total revenue rose 19.1% year-over-year and gross profit margin increased by four percentage points.
The company's customer retention rate was 97.1%, but management did not disclose its net dollar retention rate, which is a better indicator of product/market fit and sales & marketing efficiency.
SG&A as a percentage of total revenue has trended lower in recent quarters, while operating income was positive and earnings per share made meaningful progress toward breakeven.
For the balance sheet, the firm ended the quarter with $431.9 million in cash and equivalents and $1.2 billion in total debt.
Over the trailing twelve months, free cash flow was $112.4 million, of which capital expenditures accounted for $20.2 million. The company paid a very hefty $144.8 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For CDAY
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 9.1 |
Enterprise Value / EBITDA | 200.7 |
Price / Sales | 8.3 |
Revenue Growth Rate | 21.7% |
Net Income Margin | -5.9% |
GAAP EBITDA % | 4.5% |
Market Capitalization | $10,480,000,000 |
Enterprise Value | $11,300,000,000 |
Operating Cash Flow | $132,600,000 |
Earnings Per Share (Fully Diluted) | -$0.48 |
(Source - Seeking Alpha)
As a reference, a relevant partial public comparable would be Paycor HCM (PYCR); shown below is a comparison of their primary valuation metrics:
Metric [TTM] | Paycor HCM | Ceridian HCM | Variance |
Enterprise Value / Sales | 8.6 | 9.1 | 5.1% |
Revenue Growth Rate | 26.4% | 21.7% | -17.7% |
Net Income Margin | -20.0% | -5.9% | -70.6% |
Operating Cash Flow | $24,580,000 | $132,600,000 | 439.5% |
(Source - Seeking Alpha)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
CDAY's most recent GAAP Rule of 40 calculation was 26.2% as of Q4 2022's results, so the firm is in need of some improvement in this regard, per the table below:
Rule of 40 - GAAP | Calculation |
Recent Rev. Growth % | 21.7% |
GAAP EBITDA % | 4.5% |
Total | 26.2% |
(Source - Seeking Alpha)
Future Prospects For Ceridian HCM
In its last earnings call (Source - Seeking Alpha), covering Q4 2022's results, management highlighted exceeding its guidance 'across all metrics.'
The firm's cloud annual recurring revenue surpassed $1 billion for the first time and management sees an expanding target market as it adds new modules to its Dayforce platform as well as growing its global payroll capabilities.
For its Dayforce Wallet module, which enables employees to decide when they want to get paid, leadership expects 2023 growth of at least 100%, and forecasts revenues of $140 million.
Looking ahead, management guided 2023 revenue to grow at 26% over 2022's results and for adjusted EBITDA to be $368 million at the midpoint of the range.
Adjusted figures usually exclude stock-based compensation, which is a large number in CDAY's case.
Regarding valuation, the market is valuing CDAY at an EV/Sales multiple of around 9.1x.
The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.2x on February 23, 2023, as the chart shows here:
Enterprise Value / Next 12 Months Revenue Index Multiple (Meritech Capital)
So, by comparison, CDAY is currently valued by the market at a significant premium to the broader Meritech Capital SaaS Index, at least as of February 23, 2023.
The primary risk to the company's outlook is a macroeconomic slowdown or recession, which may accelerate new customer discounting, produce slower sales cycles and reduce its revenue growth trajectory due to lower hiring or increasing layoffs.
A potential upside catalyst to the stock could include continued strength in the labor market as companies 'hoard' employees despite economic softness.
One concern I have is that the technology vertical hasn't been shy about laying off employees since they apparently hired too many during the pandemic.
However, given the firm's steady revenue growth trajectory, positive operating income and continued strong growth potential domestically and internationally, my outlook on CDAY is a Buy at around $68.00.
For further details see:
Ceridian HCM Presents 2023 Growth And Profitability Potential