Ceridian Earnings: Interest Income Upside and Shift to Higher Value Cloud Solutions Boosts Margins

Narrow-moat Ceridian CDAY reported a stellar start to fiscal 2023, with top-line growth broadly tracking our expectations but profitability surprising to the upside. Following the result, we have lifted our near-term assumptions, however, our longer-term forecasts and valuation remain intact. At current prices, Ceridian shares are trading an attractive 24% discount to our unchanged $83 fair value estimate. We believe the market is underappreciating the firm’s ability to displace incumbent providers and take further share, especially in international markets.

Revenue in the first quarter of 2023 increased 26% year on year, as a sharp increase in interest income revenue and a growing base of live clients on the higher value flagship Dayforce platform were partly offset by declining revenue from legacy solutions amid planned platform migrations and foreign exchange headwinds. Ceridian is continuing skew to larger clients, and success in selling the full suite of modules yielded average Dayforce recurring revenue per client growth of 14% during the quarter, tracking in line with our full-year forecasts.

Ceridian’s profitability gains during the quarter were ahead of our expectations, with the firm reporting operating margins of 10% relative to an operating loss in the year-on-year prior period. This improvement was aided by greater contribution of ultra-high margin interest income, a faster-than-expected mix shift to higher-margin cloud solutions, further realization of sales and service efficiencies, and cycling nonrecurring severance and restructuring costs.