Ceridian Earnings: Strong Sales Execution and Further Interest Income Upside; Valuation Maintained

Narrow-moat Ceridian CDAY reported healthy second-quarter results, with both top line growth and profitability coming in marginally ahead of our expectations due to higher-than-forecast interest income. Following the result, we have lifted our near-term assumptions to align with updated guidance, however, our longer-term forecasts and valuation remain intact. At current prices, Ceridian shares trade an attractive 19% discount to our unchanged $83 fair value estimate. We continue to believe the market is underappreciating the firm’s ability to displace incumbent providers and take further share, particularly in international markets.

Coinciding with the release, Ceridian announced CFO Noemie Heuland will depart the firm in December 2023 after a three-year tenure. We assume a replacement CFO will be announced before year-end, and expect no changes to the firm’s capital allocation strategy or outlook on the back of the announcement.

Revenue in the second quarter of 2023 increased 22% year on year on a sharp increase in interest income revenue, Dayforce client growth aided by internal platform migrations, and stable employment within the base. These tailwinds were partly offset by declining revenue from legacy solutions, flat Powerpay revenue, and foreign exchange headwinds. The firm continues to skew upmarket and successfully sell a broader suite of solutions with the support of system integrator partners, fueling average Dayforce recurring revenue per client growth of 15% at quarter-end, in line with our full-year forecasts.

Ceridian’s profitability gains during the quarter were marginally ahead of our expectations, with the firm reporting GAAP operating margins of 8% relative to an operating loss in the prior period. This improvement was aided by greater contribution from ultra-high margin interest income, a continued mix shift to higher-margin cloud solutions, and further realization of sales and service efficiencies despite ongoing investments in global expansion.