Dayforce outlook revised to positive, ’BB-’ ratings affirmed: S+P Global

Investing.com -- Dayforce Inc., a Minneapolis-based human capital management (HCM) software provider, has been showing a positive growth trend according to S+P Global. The demand for its solutions has remained consistent, and it is expected that strong recurring cloud revenue growth will back solid credit metrics over the next 12 to 18 months. The company’s expansion in the enterprise segment and cross-selling initiatives are anticipated to support this growth.

S&P Global Ratings predicts that Dayforce’s debt to EBITDA will stay below 2.5x through 2025. The ’BB-’ issuer credit rating has been affirmed, and the outlook has been revised to positive from stable. The ’BB-’ issue level rating on the company’s revolver due in 2029 and senior secured term loan due in 2031 remains unchanged. The recovery rating on this debt remains at ’3’, with a 65% rounded recovery estimate.

The positive outlook reflects the expectation that Dayforce’s growth strategy will lead to continued deleveraging through 2025, improving leverage to below 2.0x. The company’s growth from its expanding customer base and high retention rates is expected to support significant positive free operating cash flow (FOCF).

Dayforce’s revenues grew by 16.3% in 2024, primarily due to an increasing customer base, higher revenue per customer, and higher float revenue. As a result, the S&P Global Ratings-adjusted rolling-12-months EBITDA grew to $391.7 million in 2024 from $324.6 million in 2023. The last-12-months (LTM) leverage fell to 1.7x in December 2024 from 2.5x as of March 2024. The company ended 2024 with a strong fourth quarter, leading to a 16.3% full-year revenue growth.

Dayforce plans to capitalize on favorable market conditions to reprice its $350 million revolving credit facility and $650 million term loan B, which is expected to modestly reduce its annual interest expense.

In 2024, Dayforce’s recurring revenue excluding float grew by about 21%, driven by large enterprise customer wins, strong execution for its full suite adoption, and operational efficiencies. Dayforce’s cloud recurring revenue stream spans 160 countries and has a customer retention rate above 97%. To accelerate its global market penetration, Dayforce increased its investment in sales and marketing in 2024.

The company’s cloud recurring revenues are less volatile as they focus on enterprise business customers that usually have multiyear contracts and high customer switching costs. Float revenues also increased by a low 20% range in 2024 from about an 8% year-over-year increase in float balance.

Despite ongoing investments in global expansion, Dayforce is expected to improve its profitability with a continued shift towards its high-margin cloud recurring revenue. Recurring revenue, excluding float, made up approximately 65% of Dayforce’s revenues in the 2023-2024 period. The gross margin on its recurring revenue has increased in recent years due to scale and high retention rates.

Dayforce is expected to balance capital allocation between internal expansion, share repurchases, and acquisitions. The company’s capital-light business model helps it focus on advancements toward automation, personalized content and communication, and talent acquisition. Dayforce will continue to prioritize investment in its organic growth, but it is also expected to slightly tilt capital allocation toward acquisitions and share repurchases.

The positive outlook reflects the expectation that Dayforce’s growth strategy will lead to continued deleveraging through 2025, with post-acquisition leverage remaining below 2.5x. The company’s strong growth from its increasing customer base and high retention rates is expected to support significant positive FOCF.

The outlook could be revised back to stable if Dayforce’s S&P Global Ratings-adjusted debt to EBITDA increases above 2.5x and its S&P Global Ratings-adjusted FOCF to debt falls below 10%, or if the company adopts an aggressive growth strategy for its cloud-based HCM software offerings, along with increasing debt-funded business investments that pressure its near-term profitability and deleveraging strategy. The ratings could be raised if Dayforce sustains post-acquisition S&P Global Ratings-adjusted debt to EBITDA well below 2.5x and FOCF to debt of below 15%.

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