Simplified HCM Operations And Microsoft Azure Partnership Will Expand Reach

Key Takeaways

• Strong sales momentum, project kickoffs, and a healthy sales pipeline indicate sustained revenue growth and positive impact on total revenue.
  
• AI-driven products and streamlined HCM operations simplify client processes, boosting recurring revenue and enhancing margins for improved profitability.
  
• Macroeconomic uncertainties and reliance on large contracts pose risks to Dayforce's revenues and margins, while workforce reductions signal potential operational challenges affecting future earnings.

Catalysts

Operates as a human capital management (HCM) software company in the United States, Canada, Australia, and internationally.

• Strong sales momentum and project kickoffs, along with a healthy sales pipeline, suggest that revenue growth will continue in 2025 and 2026, positively impacting total revenue.
  
• The company’s strategy of providing a single application to manage HCM operations simplifies the process for clients, reducing operational costs and increasing recurring revenue per customer, which can improve net margins.
  
• Expansion of partnerships, such as with Microsoft Azure, and significant growth in the system-integrated channel indicate a growing partner-led pipeline, likely increasing future earnings through expanded sales reach and distribution efficiency.
  
• Adoption of AI-driven products such as the AI Assistant and enhancements to existing modules could drive additional revenue growth due to high customer attachment rates and upsell opportunities, impacting both revenue and margins positively.
  
• Efficiency plans and workforce reductions aim to achieve annualized cost savings of $80 million, leading to improved adjusted EBITDA margins and free cash flow, enhancing overall profitability and earnings.

Dayforce Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dayforce's revenue will grow by 11.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 12.8% in 3 years time.
• Analysts expect earnings to reach $315.1 million (and earnings per share of $2.05) by about May 2028, up from $18.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $369.1 million in earnings, and the most bearish expecting $224 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 44.5x on those 2028 earnings, down from 508.8x today. This future PE is greater than the current PE for the US Professional Services industry at 21.2x.
• Analysts expect the number of shares outstanding to grow by 0.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.65%, as per the Simply Wall St company report.

Dayforce Future Earnings Per Share Growth

Risks

• Dayforce is experiencing tariff impacts, which may affect future revenues and profits if the situation worsens or affects customer demand (Revenue, Earnings).
  
• The company is facing macroeconomic uncertainties like employment levels and interest rate changes, which could adversely affect Dayforce’s revenue projections, particularly since invoices are based on a per-employee per-month basis (Revenue).
  
• Foreign exchange volatility poses a risk, potentially affecting the U.S. dollar amount of both revenue and expenses, which might impact net margins (Net Margins).
  
• Significant reliance on large enterprise deals and government contracts, such as the Government of Canada, could pose risks if projects face delays or cancellations, affecting anticipated revenues (Revenue).
  
• The recently announced workforce reduction could indicate operational challenges, which could impact the company’s ability to innovate and deliver on growth expectations, potentially affecting future earnings (Earnings).

Valuation

• The analysts have a consensus price target of $71.71 for Dayforce based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $95.0, and the most bearish reporting a price target of just $55.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.5 billion, earnings will come to $315.1 million, and it would be trading on a PE ratio of 44.5x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $58.19, the analyst price target of $71.71 is 18.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.