Ceridian Continues to Take Share of the Sticky Enterprise Market 

Equity Analyst

Emma Williams

Ceridian HCM offers payroll and human capital management solutions via its flagship Dayforce platform, secondary platform Powerpay, and legacy Bureau products. The company has taken share of the expansive and growing HCM market through the appeal of its agile cloud-based solutions that offer an alternative to legacy on-premises solutions or solutions cobbled together using multiple databases or platforms. Ceridian derives most of its revenue from Dayforce, which is geared to larger enterprises wishing to streamline human resources operations across multiple jurisdictions and leverage the platform’s scalable infrastructure.

To maximize revenue per client and entrench its software further in a client’s business, Ceridian continues to expand the functionality of Dayforce by rolling out new add-on modules and features. As a result, we estimate per employee per month revenue for a client adopting the full suite of Dayforce modules increased at a 30% compound annual growth rate over the three years to fiscal 2021, to about $50. In addition to traditional modules, Ceridian expanded Dayforce’s functionality into the adjacent market of preloaded pay cards with the rollout of Dayforce Wallet in 2020. While this innovation is being replicated by competitors, we expect it will create a promising new high-margin revenue stream for Ceridian that leverages the firm’s exposure to millions of employees and their earned wages.

To remain competitive in an increasingly crowded market, Ceridian will need to maintain high levels of investment in product development and innovation, in our view. Dayforce’s functionality including continuous payroll calculation has provided a point of differentiation historically, but rivals are rapidly replicating these innovations, diminishing the competitive edge.

Ceridian has made a tactical shift to target larger businesses and move further upmarket into the large enterprise and global space. While this drives higher revenue per client and exposes the company to a larger pool of client funds, we expect fierce competitive pressures and powerful clients will lead to increased pricing pressure, limiting margin upside potential over the long run.

Business Strategy & Outlook

Ceridian has garnered a narrow economic moat underpinned by high customer switching costs. We think it also benefits from intangible brand assets based on a growing record of performance supporting the company’s ability to take market share. While dominant incumbent provider ADP has invested heavily over the past decade to remain competitive on functionality, nascent providers like Ceridian have been able to capitalize on the leader’s shortfalls and capture share through the appeal of a unified, user-friendly platform. Over the five years to fiscal 2022, Ceridian’s flagship product Dayforce’s client base grew at an 15% CAGR to about 6,000 clients, relative to an estimated mid-single-digit growth for ADP’s midsize and enterprise client base over a comparable period. While Ceridian’s returns on invested capital including goodwill have fallen short of our estimated weighted average cost of capital to date (based on available data since the fiscal 2018 initial public offering), we view the company’s robust cloud revenue retention in the mid- to high-90s as supportive of a narrow moat. We expect Ceridian will achieve positive economic profits by fiscal 2024, supported by greater operating leverage, as it continues to increase scale and upsell high-margin modules to new and existing clients. 

Ceridian holds a minority but fast-growing share of the North America payroll and HCM markets and is rapidly expanding its global footprint through organic and acquisitive investment. Approximately 70% of group revenue is derived from clients headquartered in the United States, with the remainder primarily derived from Canada-based clients. While the Dayforce platform services a broad range of business sizes, it is primarily geared to enterprise clients with the average client size around 1,000 employees over the four years to fiscal 2021. The company reports an estimated 4% market share across its 100- to 100,000-employee target market in North America and less than 1% share globally. On a more granular basis, we estimate Ceridian has a market share of about 2% of the 50- to 999-employee midsize market in the U.S. This compares with ADP’s and Paychex’s midsize market shares of about 30% and 14%, respectively. For the 1,000-plus employee enterprise market, we estimate Ceridian has a low-double-digit market share in the U.S., compared with about 23% for ADP. In Canada, we estimate Ceridian’s Powerpay platform has about a 3% share in the highly fragmented small-business market. We expect most future client growth to come from taking share in the enterprise market, including further global expansion of the Dayforce platform. This will result in mid- to high-single-digit group revenue per client growth, offset by flat client size growth and minimal price increases for small-business customers. 

Dayforce offers a range of payroll and HCM solutions via its unified, cloud-based platform supported by a single database. This platform infrastructure is scalable, can be efficiently maintained and modified, and supports a streamlined user experience, reducing the need for integrations with separate platforms or databases. Dayforce’s infrastructure supports real-time continuous payroll calculation and, as a natural extension, on-demand pay. Leveraging this functionality, Ceridian introduced Dayforce Wallet in 2020, which allows clients’ employees to load their net earned wages on demand to a prepaid Mastercard, generating interchange fee revenue for Ceridian when purchases are made. This product is free for employees to use and has been well received to date, with mature clients benefiting from lower employee attrition and shorter recruitment cycles attributed to a better employee experience offering. 

Like its payroll and HCM peers, Ceridian benefits from high customer switching costs. Payroll and HCM software is typically deeply embedded in a business’ operations, making it a costly and time-intensive process to switch providers. Alongside monetary costs, a business could face operational disruptions and inefficiencies, including having to train employees on the new system and integrate the new solution with other software and risk losing data. As of 2022, Ceridian's flagship Dayforce platform boasted retention of 97.1%. Assuming minimal annual price increases, this implies an average cloud platform client’s life span of at least 20 years. While about 88% of group revenue was derived from cloud products in fiscal 2022, we assume the remaining revenue from legacy Bureau solutions would marginally dampen the group revenue retention rate. We expect Ceridian to continue to invest in software development and delivering high-grade user experiences to maintain high retention rates overall. Maintaining high customer retention rates allows Ceridian to earn a steady stream of recurring revenue at a low marginal cost. 

We think Ceridian’s growing reputation for delivering reliable and compliant solutions over the past decade is supporting its ability to win market share, including in international markets. Payroll is a highly sensitive, complex, and mission-critical operation for all businesses that place a high value on reliability, accuracy, compliance, and data security. The potential ramifications for a business that fails to make payroll on time or accurately, is noncompliant with applicable laws, or breaches data security can be severe. We believe legacy providers have stronger brand assets by virtue of their longer operating histories and larger scale, but Ceridian has an advantage over newer entrants that lack a record of performance.

Narrow

Economic Moat

Ceridian HCM Holding Inc.

Ceridian HCM Holding, Inc. engages in the development of human capital management software. It offers Dayforce, Powerpay, and Bureau products and services. The Dayforce provides human resources (HR), payroll, benefits, workforce management, and talent management functionality. Powerpay is a cloud HR and payroll solution for the Canadian small business market, through both direct sales and established partner channels. The Bureau solutions offer payroll and payroll-related services using legacy technology. The company was founded on July 3, 2013, and is headquartered in Minneapolis, MN.

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Dayforce, Inc. engages in the development of human capital management software. It offers Dayforce, Powerpay, and Bureau products and services. Dayforce provides human resources (HR), payroll, benefits, workforce management, and talent management functionality. Powerpay is a cloud HR and payroll solution for the Canadian small business market, through both direct sales and established partner channels. The Bureau solutions offer payroll and payroll-related services using legacy technology. The company was founded in 1992 and is headquartered in Minneapolis, MN.

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