DAYFORCE, INC. The following is a discussion and analysis of our financial condition and results of operations as of, and for, the periods presented. You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and notes thereto included elsewhere in report and in conjunction with our audited consolidated financial statements and notes thereto for the year endedDecember 31, 2019 , in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSecurities and Exchange Commission ("SEC") onFebruary 28, 2020 (our "2019 Form 10-K"). This discussion and analysis contains forward-looking statements, including statement regarding industry outlook, our expectations for the future of our business, and our liquidity and capital resources as well as other non-historical statements. These statements are based on current expectations and are subject to numerous risks and uncertainties, including but not limited to the risks and uncertainties described in Part II, Item 1A, "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements." Our actual results may differ materially from those contained in or implied by these forward-looking statements. Any reference to a "Note" in this discussion relates to the accompanying notes to the unaudited condensed consolidated financial statements included elsewhere in this report unless otherwise indicated.
Overview
Ceridian is a global human capital management ("HCM") software company. We
categorize our solutions into two categories: Cloud and Bureau solutions. Cloud
revenue is generated from HCM solutions that are delivered via two cloud
offerings: Dayforce, our flagship cloud HCM platform, and Powerpay, a cloud HR
and payroll solution for the Canadian small business market. We also continue to
support customers using our Bureau solutions, which we generally stopped
actively selling to new customers following the acquisition of Dayforce in 2012.
Revenue from our Cloud and Bureau solutions include an allocation of investment
income generated from holding customer funds in trust before funds are remitted
to taxing authorities, also referred to as float revenue or float. We invest in
maintenance and necessary updates to support our Bureau customers and continue
to migrate them to Dayforce.
Dayforce provides HR, payroll, benefits, workforce management, and talent
management functionality. Our platform is used by organizations, regardless of
industry or size, to optimize management of the entire employee lifecycle,
including attracting, engaging, paying, deploying, and developing their people.
Dayforce was built as a single application from the ground up that combines a
modern, consumer-grade user experience with proprietary application
architecture, including a single employee record and a rules engine spanning all
areas of HCM. Dayforce provides continuous real-time calculations across all
modules to enable, for example, payroll administrators access to data through
the entire pay period, and managers access to real-time data to optimize work
schedules. Our platform is designed to make work life better for our customers
and their employees by improving HCM decision-making processes, streamlining
workflows, exposing strategic organizational insights, and simplifying
legislative compliance. The platform is designed to ease administrative work for
both employees and managers, creating opportunities for companies to increase
employee engagement. We are a founder-led organization, and our culture combines
the agility and innovation of a start-up with a history of deep domain and
operational expertise.
In 2020, we launched the Dayforce Wallet, which gives our customers' employees
greater control over their financial well-being by providing them with instant
access to their earnings. This on-demand pay feature allows employees more
choice over when they get paid by making any day payday. Dayforce Wallet enables
workers to access their already-earned wages anytime during the pay period, net
of taxes, withholdings and other payroll deductions. Leveraging Dayforce's
continuous pay calculations, Dayforce Wallet processes a same-day payroll each
time a worker requests their pay. The solution is compliant with federal, state,
and local remittances and requires no changes to payroll processing including
the funding, timing, and close-out of pay.
We sell Dayforce through our direct sales force on a subscription per-employee,
per-month ("PEPM") basis. Our subscriptions are typically structured with an
initial fixed term of between three and five years, with evergreen renewal
thereafter. Dayforce can serve customers of all sizes, ranging from 100 to over
100,000 employees. We have rapidly grown the Dayforce platform to 4,480 live
Dayforce customers as of March 31, 2020 . For the three months ended March 31,
2020 , we added 117 net new live Dayforce customers.
Our Business Model
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Our business model focuses on supporting the rapid growth of Dayforce and
maximizing the lifetime value of our Dayforce customer relationships. Due to our
subscription model, where we recognize subscription revenues ratably over the
term of the subscription period, and high customer retention rates, we have
historically had a high level of visibility into our future revenues. The
profitability of a customer depends, in large part, on how long they have been a
customer. Because in our business model, PEPM subscription fees are not charged
until the customer goes live, and because we incur costs in advance of receiving
PEPM revenue that are not fully offset by our implementation fees, we estimate
that it takes an average of 2 years before we are able to recover our
implementation, customer acquisition, and other direct costs on a new Dayforce
customer contract. As the proportion of Dayforce customers who have been live
for two or more years increases, our related profitability increases.
Over the lifetime of the customer relationship, we have the opportunity to
realize additional PEPM revenue, both as the customer grows or rolls out the
Dayforce solution to additional employees, and also by selling additional
functionality. We incur on-going costs to manage the account, to support
customers, and to sell additional functionality. These costs, however, are
significantly less than the costs initially incurred to acquire and to implement
the customer.
During the remainder of 2020, we anticipate adverse effects to our revenue
streams, primarily as a result of declining employment levels at our customers
in certain sectors, such as retail and hospitality, due to the effects of the
COVID-19 pandemic. Additionally, the federal funds rate cuts by the U.S. Federal
Reserve have had and will continue to have negative effects on our float
revenue.
How We Assess Our Performance
In assessing our performance, we consider a variety of performance indicators in addition to revenue and net income. Set forth below is a description of our key performance measures. Live Dayforce Customers
We use the number of customers live on Dayforce as an indicator of future
revenue and the overall performance of the business and to assess the
performance of our implementation services. We had 4,480 customers live on
Dayforce as of
Constant Currency Revenue We present revenue on a constant currency basis to assess how our underlying business performed, excluding the effect of foreign currency rate fluctuations. We believe this non-GAAP financial measure is useful to management and investors. We have calculated revenue on a constant currency basis by applying the average foreign exchange rate in effect during the comparable prior period.
Adjusted EBITDA and Adjusted EBITDA margin
We believe that Adjusted EBITDA and Adjusted EBITDA margin, non-GAAP financial
measures, are useful to management and investors as supplemental measures to
evaluate our overall operating performance. Adjusted EBITDA and Adjusted EBITDA
margin are components of our management incentive plan and are used by
management to assess performance and to compare our operating performance to our
competitors. We define Adjusted EBITDA as net income or loss before interest,
taxes, depreciation, and amortization, as adjusted to exclude gains or losses on
assets and liabilities held in a foreign currency other than the functional
currency of a company subsidiary, share-based compensation expense and related
employer taxes, severance charges, restructuring consulting fees, and certain
other non-recurring charges. Adjusted EBITDA margin is determined by calculating
the percentage that Adjusted EBITDA is of total revenue. Management believes
that Adjusted EBITDA and Adjusted EBITDA margin are helpful in highlighting
management performance trends because Adjusted EBITDA and Adjusted EBITDA margin
exclude the results of decisions that are outside the normal course of our
business operations. Please refer to the "Results of Operations" section below
for a discussion of Adjusted EBITDA and Adjusted EBITDA margin.
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Results of Operations
Three Months EndedMarch 31, 2020 Compared With Three Months EndedMarch 31, 2019 Three Months Ended March 31, Increase/ (Decrease) % of Revenue 2020 2019 Amount % 2020 2019 (Dollars in millions) Revenue: Recurring services Cloud$ 149.9 $ 124.4 $ 25.5 20.5 % 67.3 % 61.1 % Bureau 31.6 48.4 (16.8 ) (34.7 )% 14.2 % 23.8 % Total recurring services 181.5 172.8 8.7 5.0 % 81.5 % 84.8 % Professional services and other 41.2 30.9 10.3 33.3 % 18.5 % 15.2 % Total revenue 222.7 203.7 19.0 9.3 % 100.0 % 100.0 % Cost of revenue: Recurring services Cloud 41.0 37.2 3.8 10.2 % 18.4 % 18.3 % Bureau 11.2 13.7 (2.5 ) (18.2 )% 5.0 % 6.7 % Total recurring services 52.2 50.9 1.3 2.6 % 23.4 % 25.0 % Professional services and other 42.6 35.3 7.3 20.7 % 19.1 % 17.3 % Product development and management 17.6 15.2 2.4 15.8 % 7.9 % 7.5 % Depreciation and amortization 9.8 8.7 1.1 12.6 % 4.4 % 4.3 % Total cost of revenue 122.2 110.1 12.1 11.0 % 54.9 % 54.1 % Gross profit 100.5 93.6 6.9 7.4 % 45.1 % 45.9 % Selling, general, and administrative 74.2 66.2 8.0 12.1 % 33.3 % 32.5 % Operating profit 26.3 27.4 (1.1 ) (4.0 )% 11.8 % 13.5 % Interest expense, net 6.9 8.9 (2.0 ) (22.5 )% 3.1 % 4.4 % Other expense, net 2.6 1.6 1.0 62.5 % 1.2 % 0.8 % Income before income taxes 16.8 16.9 (0.1 ) (0.6 )% 7.5 % 8.3 % Income tax expense 8.2 5.7 2.5 43.9 % 3.7 % 2.8 % Net income $ 8.6$ 11.2 $ (2.6 ) (23.2 )% 3.9 % 5.5 % Adjusted EBITDA (a)$ 55.2 $ 49.8 $ 5.4 10.8 % 24.8 % 24.4 % Adjusted EBITDA margin (a) 24.8 % 24.4 % 0.4 % 1.6 %
(a) Please refer to the "Non-GAAP Measures" section for a discussion and
reconciliation of Adjusted EBITDA and Adjusted EBITDA margin, non-GAAP
financial measures.
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Revenue. The following table sets forth certain information regarding our
revenues for the three months ended
Percentage
change in
Percentage Impact of revenue on
change in changes in constant
revenue as foreign currency
Three Months Ended March 31, reported currency (a) basis (a)
2020 2019 2020 vs. 2019 2020 vs. 2019
(Dollars in millions)
Revenue:
Dayforce recurring services, $ 114.0 $ 87.6
excluding float 30.1 % (0.3 )% 30.4 %
Dayforce float 14.1 15.3 (7.8 )% (- )% (7.8 )%
Total Dayforce recurring 128.1 102.9
services 24.5 % (0.2 )% 24.7 %
Powerpay recurring services, 19.0 18.3
excluding float 3.8 % (- )% 3.8 %
Powerpay float 2.8 3.2 (12.5 )% (- )% (12.5 )%
Total Powerpay recurring 21.8 21.5
services 1.4 % (- )% 1.4 %
Total Cloud recurring services 149.9 124.4 20.5 % (0.2 )% 20.7 %
Dayforce professional services 40.7 29.9
and other 36.1 % (0.4 )% 36.5 %
Powerpay professional services 0.3 0.3
and other (- )% (- )% (- )%
Total Cloud professional 41.0 30.2 35.8 % (0.3 )% 36.1 %
services and
other
Total Cloud revenue 190.9 154.6 23.5 % (0.2 )% 23.7 %
Bureau recurring services, 28.9 42.6
excluding float (32.2 )% (0.3 )% (31.9 )%
Bureau float 2.7 5.8 (53.4 )% (- )% (53.4 )%
Total Bureau recurring 31.6 48.4
services (34.7 )% (0.2 )% (34.5 )%
Bureau professional services 0.2 0.7
and other (71.4 )% (- )% (71.4 )%
Total Bureau revenue 31.8 49.1 (35.2 )% (0.2 )% (35.0 )%
Total revenue $ 222.7 $ 203.7 9.3 % (0.2 )% 9.5 %
Dayforce $ 168.8 $ 132.8 27.1 % (0.2 )% 27.3 %
Powerpay 22.1 21.8 1.4 % (- )% 1.4 %
Total Cloud revenue $ 190.9 $ 154.6 23.5 % (0.2 )% 23.7 %
Dayforce, excluding float
31.7 % (0.2 )% 31.9 % Powerpay, excluding float 19.3 18.6 3.8 % (- )% 3.8 % Cloud revenue, excluding float 174.0 136.1 27.8 % (0.3 )% 28.1 % Cloud float 16.9 18.5 (8.6 )% (- )% (8.6 )% Total Cloud revenue$ 190.9 $ 154.6 23.5 % (0.2 )% 23.7 %
(a) We have calculated revenue on a constant currency basis by applying the
average foreign exchange rate in effect during the comparable prior period.
Total revenue increased$19.0 million , or 9.3%, to$222.7 million for the three months endedMarch 31, 2020 , compared to$203.7 million for the three months endedMarch 31, 2019 . This increase was primarily attributable to an increase in Cloud revenue of$36.3 million , or 23.5%, from$154.6 million for the three months endedMarch 31, 2019 , to$190.9 million for the three months endedMarch 31, 2020 . The Cloud revenue increase was driven by an increase of$25.5 million , or 20.5%, in Cloud recurring services revenue, and$10.8 million , or 35.8%, in Cloud professional services and other revenue. The increase in Cloud recurring services revenue of$25.5 million was due to$21.3 million from new customers, add-ons, and revenue uplift from migrations of Bureau customers, net of customer losses;$5.8 million from the migration of Bureau customers; partially offset by a$1.6 million decline in float revenue related to Cloud recurring services revenue. 27
-------------------------------------------------------------------------------- Cloud revenue was$190.9 million for the three months endedMarch 31, 2020 , an increase of$36.3 million , or 23.5%, compared to the three months endedMarch 31, 2019 . Dayforce revenue increased 27.1%, and Powerpay revenue increased 1.4% for the three months endedMarch 31, 2020 , as compared to the three months endedMarch 31, 2019 . Our new business sales to Dayforce and Powerpay customers comprised approximately 84% of our increase in Cloud revenue for the three months endedMarch 31, 2020 , and approximately 16% consisted primarily of customer migrations to Dayforce from our Bureau solutions. As we migrate our Bureau customers to Dayforce, we typically experience a revenue increase from such customers driven by increased product density on the Dayforce platform.
Bureau revenue declined
Excluding float revenue and on a constant currency basis, total revenue grew 13.4%, reflecting a 28.1% increase in Cloud revenue, partially offset by a 32.6% decline in Bureau revenue. Excluding float revenue and on a constant currency basis, Cloud revenue growth reflected a 25.8% increase in Cloud recurring services revenue and a 36.1% increase in Cloud professional services and other revenue. Excluding float revenue and on a constant currency basis, Dayforce revenue increased 31.9%, reflecting a 30.4% increase in Dayforce recurring service revenue and a 36.5% increase in Dayforce professional services and other revenue. Excluding float revenue and on a constant currency basis, Powerpay revenue increased 3.8%, reflecting a 3.8% increase in Powerpay recurring service revenue. Float revenue included in recurring services revenue was$19.6 million and$24.3 million for the three months endedMarch 31, 2020 , and 2019, respectively. Float revenue allocated to Cloud revenue and Dayforce revenue was$16.9 million and$14.1 million , respectively, for the three months endedMarch 31, 2020 . The average float balance for our customer trust funds for the three months endedMarch 31, 2020 , was$4,093.3 million , compared to$4,075.4 million for the three months endedMarch 31, 2019 . On a constant currency basis, the average float balance for our customer trust funds for the three months endedMarch 31, 2020 , was consistent with the three months endedMarch 31, 2019 . The average yield was 1.93% during the three months endedMarch 31, 2020 , a decline of 49 basis points compared to the average yield during the three months endedMarch 31, 2019 , primarily due to reductions in theU.S. Federal Reserve federal funds rate and theBank of Canada overnight rate target. For the three months endedMarch 31, 2020 , approximately 31% of our average float balance consisted of Canadian customer trust funds, compared to approximately 33% for the three months endedMarch 31, 2019 . Based on current market conditions, portfolio composition and investment practices, a 100 basis point change in market investment rates would result in approximately$18 million of change in float revenue over the ensuing twelve month period. There are no incremental costs of revenue associated with changes in float revenue. Cost of revenue. Total cost of revenue for the three months endedMarch 31, 2020 , was$122.2 million , an increase of$12.1 million , or 11.0%, compared to the three months endedMarch 31, 2019 . Recurring services cost of revenue for the three months endedMarch 31, 2020 , increased$1.3 million , or 2.6% compared with the three months endedMarch 31, 2019 , primarily due to additional costs incurred to support the growing Dayforce customer base, partially offset by reductions in Bureau costs. Professional services and other cost of revenue increased$7.3 million , or 20.7%, for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , primarily due to additional costs incurred to implement new customers. Product development and management expense increased$2.4 million for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , reflecting increases in Dayforce product development efforts, including costs to build out the Dayforce Wallet and our international offerings that are not eligible for capitalization; and increases in product management labor costs. For the three months endedMarch 31, 2020 , and 2019, our investment in software development was$17.2 million and$15.1 million , respectively, consisting of$8.1 million and$7.8 million , of research and development expense, which is included within product development and management expense, and$9.1 million and$7.3 million in capitalized software development costs, respectively. Depreciation and amortization expense associated with cost of revenue increased by$1.1 million for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , as we continue to capitalize Dayforce related and other development costs and subsequently amortize these costs. 28
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Gross profit. The following table presents total gross margin and solution gross margins for the periods presented:
Three Months Ended March 31,
2020 2019
Total gross margin 45.1 % 45.9 %
Gross margin by solution:
Cloud recurring services 72.6 % 70.1 %
Bureau recurring services 64.6 % 71.7 %
Professional services and other (3.4 )% (14.2 )%
Total gross margin is defined as total gross profit as a percentage of total
revenue, inclusive of product development and management costs, as well as
depreciation and amortization associated with cost of revenue. Gross margin for
each solution in the table above is defined as total revenue less cost of
revenue for the applicable solution as a percentage of total revenue for that
related solution, exclusive of any product development and management or
depreciation and amortization cost allocations.
Total gross margin for the three months ended March 31, 2020 , was consistent
with total gross margin for the three months ended March 31, 2019 , and gross
profit increased by $6.9 million , or 7.4%, as we continued to leverage our
investment in people and processes to realize economies of scale, while also
developing and expanding our service offerings.
Cloud recurring services gross margin was 72.6% for the three months ended
March 31, 2020 , compared to 70.1% for the three months ended March 31, 2019 . The
increase in Cloud recurring services gross margin reflects an increase in the
proportion of Dayforce customers live for more than two years, which increased
from 64% as of March 31, 2019 , to 70% as of March 31, 2020 , and was also
attributable to consistent configuration that has enabled us to continue to
realize economies of scale in hosting and customer support. Bureau recurring
services gross margin declined from 71.7% for the three months ended March 31,
2019 , to 64.6% for the three months ended March 31, 2020 , reflecting lower
allocated float revenue and a higher proportion of customer support costs to
support the end-of-life process of our Bureau payroll products. Professional
services and other gross margin was (3.4)% for the three months ended March 31,
2020 , improving from (14.2)% for the three months ended March 31, 2019 ,
reflecting continued productivity improvements in implementing new customers.
Selling, general, and administrative expense. Selling, general, and
administrative expense increased $8.0 million for the three months ended
March 31, 2020 , compared to the three months ended March 31, 2019 . Excluding the
impact of share-based compensation and related employer taxes, restructuring
consulting fees, severance expense, and certain other non-recurring charges;
selling, general, and administrative expenses would have increased $1.9 million .
This adjusted increase reflects a $4.5 million increase in sales and marketing,
primarily employee related costs, partially offset by a reduction of $2.6
million in general and administrative expense, primarily customer list
amortization expense. Please refer to the "Non-GAAP Measures" section for
additional information on the excluded items.
Operating profit. We realized operating profit of $26.3 million for the three
months ended March 31, 2020 , compared to $27.4 million for the three months
ended March 31, 2019 . Excluding the impact of share-based compensation and
related employer taxes, restructuring consulting fees, severance expense, and
certain other non-recurring charges; operating profit would have been $44.2
million and $36.7 million for the three months ended March 31, 2020 , and 2019,
respectively. This $7.5 million adjusted increase was primarily due to an
increase in gross profit.
Interest expense, net. Interest expense, net was $6.9 million and $8.9 million
for the three months ended March 31, 2020 , and 2019, respectively, which
declined primarily due to a reduction in our term debt interest rate. A 100
basis point change in LIBOR rates would result in an approximately $7 million
change in our interest expense, net over the ensuing twelve-month period.
Other expense, net. For the three months ended
Income tax expense. For the three months endedMarch 31, 2020 , and 2019, we recorded an income tax expense of$8.2 million , and$5.7 million , respectively. The$2.5 million increase in income tax expense was primarily due to a$4.6 million tax benefit recognized during the three months endedMarch 31, 2019 , that was not repeated during the three months endedMarch 31, 2020 and a$4.4 million increase in tax expense attributable to share-based compensation, partially offset by a$4.6 million reduction in tax expense attributable to the Global Intangible Low Tax Income tax ("GILTI"), and a$2.4 million reduction in the tax expense attributable to the base erosion anti-abuse tax ("BEAT"). 29 -------------------------------------------------------------------------------- Net income. We realized net income of$8.6 million for the three months endedMarch 31, 2020 , compared to$11.2 million for the three months endedMarch 31, 2019 . Adjusted EBITDA. Adjusted EBITDA increased by$5.4 million to$55.2 million , for the three months endedMarch 31, 2020 , compared to the three months endedMarch 31, 2019 , and Adjusted EBITDA margin was 24.8% for the three months endedMarch 31, 2020 , compared with Adjusted EBITDA margin of 24.4% for the three months endedMarch 31, 2019 .
Liquidity and Capital Resources
Our primary sources of liquidity are our existing cash and equivalents, cash provided by operating activities, borrowings under our credit facilities, and proceeds from equity offerings. As ofMarch 31, 2020 , we had cash and equivalents of$255.3 million and availability under our revolving credit facility of$300.0 million . No cash amounts were drawn on the revolving credit facility as ofMarch 31, 2020 . Our total debt balance was$681.2 million as ofMarch 31, 2020 . Please refer to Note 6, "Debt," to our condensed consolidated financial statements, for further information on our debt.
Our primary liquidity needs are related to funding of general business requirements, including the payment of interest and principal on our debt, capital expenditures, pension contributions, and product development.
OnFebruary 19, 2020 , Ceridian completed the first amendment to the 2018 Senior Secured Credit Facility, in which the 2018 Term Debt interest rate was reduced from LIBOR plus 3.00% to LIBOR plus 2.50%. Further, the interest rate trigger under the applicable rating by Moody's Investor Service was removed by the first amendment. The 50 basis point rate reduction will result in savings of approximately$3.4 million over the ensuing twelve-month period. Please refer to Note 6, "Debt," to our condensed consolidated financial statements, for further information on our debt. OnApril 2, 2020 , in light of the current uncertainty in the global capital markets resulting from the COVID-19 pandemic, Ceridian elected to borrow$295.0 million under the 2018 Revolving Credit Facility as a precautionary measure to increase our cash position and to preserve financial flexibility. We may use a portion of the proceeds from the borrowing for general corporate purposes. Our customer trust funds are held and invested with the primary objectives being to protect the principal balance and to ensure adequate liquidity to meet cash flow requirements. In accordance with these objectives, we maintain approximately 47% of customer trust funds in liquidity portfolios with maturities ranging from one to 120 days, consisting of high-quality bank deposits, money market mutual funds, commercial paper, or collateralized short-term investments; and we maintain approximately 53% of customer trust funds in fixed income portfolios with maturities ranging from 120 days to 10 years, consisting ofU.S. Treasury and agency securities,Canada government and provincial securities, as well as highly rated asset-backed, mortgage-backed, municipal, corporate and bank securities. To maintain sufficient liquidity in the trust to meet payment obligations, we also have financing arrangements and may pledge fixed income securities for short-term financing. The assets held in trust are intended for the specific purpose of satisfying client fund obligations and therefore are not freely available for our general business use. We believe that our cash flow from operations, availability under our revolving credit facility, and available cash and equivalents will be sufficient to meet our liquidity needs for the foreseeable future. We anticipate that to the extent that we require additional liquidity, it will be funded through the issuance of equity, the incurrence of additional debt, or a combination thereof. We cannot assure you that we will be able to obtain this additional liquidity on reasonable terms, or at all. Additionally, our liquidity and our ability to meet our obligations and to fund our capital requirements are also dependent on our future financial performance, which is subject to general economic, financial, and other factors that are beyond our control. Accordingly, we cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available from additional debt or otherwise to meet our liquidity needs. Although we have no specific current plans to do so, if we decide to pursue one or more significant acquisitions, we may incur additional debt or sell additional equity to finance such acquisitions, which would result in additional expenses or dilution. 30
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Statements of Cash Flows
Changes in cash flows due to purchases of customer trust fund marketable
securities and proceeds from the sale or maturity of customer trust fund
marketable securities, as well as the carrying value of customer trust fund
accounts as of period end dates can vary significantly due to several factors,
including the specific day of the week the period ends, which impacts the timing
of funds collected from customers and payments made to satisfy customer
obligations to employees, taxing authorities, and others. The customer trust
funds are fully segregated from our operating cash accounts and are evaluated
and tracked separately by management. Therefore, we have provided the table
below excluding the cash flows and restricted cash and equivalents held within
our customer trust funds to provide supplemental information regarding the cash
flows related to our core business.
Three Months Ended March 31,
2020 2019
(Dollars in millions)
Net cash used in operating activities, excluding
customer trust funds $ (9.8 ) $ (8.8 )
Net cash used in investing activities, excluding
customer trust funds (15.6 ) (24.1 )
Net cash provided by financing activities, excluding customer trust funds
8.7 18.4
Effect of exchange rate changes on cash and equivalents (9.3 ) 3.0
Net decrease in cash and equivalents (26.0 ) (11.5 )
Cash and equivalents at beginning of period 281.3 217.8
Cash and equivalents at end of period 255.3 206.3
Net customer trust funds restricted cash provided by operating activities
11.2 -
Net customer trust funds restricted cash provided by (used in) investing activities
24.9 (93.5 )
Net customer trust funds restricted cash provided by financing activities
480.8 1,916.1
Effect of exchange rate changes on restricted cash and equivalents
(5.2 ) 0.9
Net increase in restricted cash and equivalents 511.7 1,823.5
Restricted cash and equivalents included in customer trust funds at beginning of period
1,377.3 888.5
Restricted cash and equivalents included in customer trust funds at end of period
1,889.0 2,712.0
Net increase in cash, restricted cash, and equivalents 485.7 1,812.0
Cash, restricted cash, and equivalents at beginning of period
1,658.6 1,106.3
Cash, restricted cash, and equivalents at end of period
$ 2,918.3 Operating Activities Net cash provided by operating activities, was$1.4 million during the three months endedMarch 31, 2020 , primarily attributable to net income of$8.6 million and the net impact of adjustments for certain non-cash items of$30.3 million , including$12.5 million of non-cash share-based compensation expense and$11.8 million of depreciation and amortization. These items were partially offset by a$26.4 million reduction in liabilities for employee compensation and benefits due to payments of accrued incentive and compensation and a$7.5 million increase in assets for prepaid expenses and other current assets, primarily due to annual maintenance contracts. Included within net cash flows provided by operating activities for the three months endedMarch 31, 2020 , was$7.8 million in cash interest payments on our long-term debt and$2.9 million in cash tax payments. Net cash used in operating activities of$8.8 million during the three months endedMarch 31, 2019 , was primarily attributable to a net reduction in cash as a result of changes in working capital of$40.6 million , partially offset by net income of$11.2 million and certain non-cash items, primarily$14.4 million of depreciation and amortization and$6.0 million of non-cash share-based compensation expense. The net$40.6 million change in working capital included reductions of$16.9 million in liabilities for employee compensation and benefits, primarily due to payments of accrued incentive compensation;$8.1 million in liabilities for accrued taxes, primarily due to cash tax payments of$15.5 million ; and$7.0 million of increases in prepaid expenses and other assets, primarily due to annual maintenance contracts. Included within net cash flows used in operating activities for the three months endedMarch 31, 2019 , was$6.6 million in cash interest payments on our long-term debt.
Investing Activities
During the three months endedMarch 31, 2020 , net cash used in investing activities, excluding customer trust fund activity, was$15.6 million , related to capital expenditures. Our capital expenditures included$10.7 million for software and technology and$4.9 million for property and equipment. 31 -------------------------------------------------------------------------------- During the three months endedMarch 31, 2019 , net cash used in investing activities, excluding customer trust fund activity, was$24.1 million , related to capital expenditures of$13.9 million and acquisition costs, net of cash acquired of$10.2 million . Our capital expenditures included$9.9 million for software and technology and$4.0 million for property and equipment.
Financing Activities
Net cash provided by financing activities, excluding the change in customer trust fund obligations, was$8.7 million during the three months endedMarch 31, 2020 . This cash inflow is primarily attributable to proceeds from the issuance of common stock under share-based compensation plans of$11.4 million , partially offset by payments on our long-term debt obligations of$2.7 million . The payments on our long-term debt obligations included$1.7 million in payments towards our Senior Term Loan and$1.0 million in payments towards our financing lease obligations. Net cash provided by financing activities, excluding the change in customer trust fund obligations, was$18.4 million during the three months endedMarch 31, 2019 . This cash inflow is primarily attributable to proceeds from the issuance of common stock upon exercise of stock options of$20.1 million , partially offset by principal payments on our long-term debt obligations of$1.7 million . Backlog Backlog is equivalent to our remaining performance obligations, which represents contracted revenue for recurring services and fixed price professional services, primarily implementation services, that has not yet been recognized, including deferred revenue and unbilled amounts that will be recognized as revenue in future periods. Please refer to Note 9, "Revenue," to our condensed consolidated financial statements for further discussion of our remaining performance obligations.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
During the three months ended
Non-GAAP Measures
Adjusted EBITDA and Adjusted EBITDA Margin
We believe that Adjusted EBITDA and Adjusted EBITDA margin, non-GAAP financial
measures, are useful to management and investors as supplemental measures to
evaluate our overall operating performance. Adjusted EBITDA and Adjusted EBITDA
margin are components of our management incentive plan and are used by
management to assess performance and to compare our operating performance to our
competitors. We define Adjusted EBITDA as net income before interest, taxes,
depreciation, and amortization, as adjusted to exclude gain (loss) on assets and
liabilities held in a foreign currency other than the functional currency of a
company subsidiary, share-based compensation expense and related employer taxes,
severance charges, restructuring consulting fees, and certain other
non-recurring charges. Adjusted EBITDA margin is determined by calculating the
percentage Adjusted EBITDA is of total revenue. Management believes that
Adjusted EBITDA and Adjusted EBITDA margin are helpful in highlighting
management performance trends because Adjusted EBITDA and Adjusted EBITDA margin
exclude the results of decisions that are outside the control of operating
management.
Our presentation of Adjusted EBITDA and Adjusted EBITDA margin are intended as
supplemental measures of our performance that are not required by, or presented
in accordance with, GAAP. Adjusted EBITDA and Adjusted EBITDA margin should not
be considered as alternatives to operating profit, net income, earnings per
share, or any other performance measures derived in accordance with GAAP, or as
measures of operating cash flows or liquidity. Our presentation of Adjusted
EBITDA and Adjusted EBITDA margin should not be construed to imply that our
future results will be unaffected by these items. Adjusted EBITDA and Adjusted
EBITDA margin are included in this discussion because they are key metrics used
by management to assess our operating performance.
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Adjusted EBITDA and Adjusted EBITDA margin are not defined under GAAP, are not
measures of net income, operating profit, or any other performance measures
derived in accordance with GAAP, and are subject to important limitations. Our
use of the terms Adjusted EBITDA and Adjusted EBITDA margin may not be
comparable to similarly titled measures of other companies in our industry and
are not measures of performance calculated in accordance with GAAP.
Adjusted EBITDA and Adjusted EBITDA margin have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations are:
• Adjusted EBITDA and Adjusted EBITDA margin do not reflect our cash
expenditures or future requirements for capital expenditures or contractual
commitments;
• Adjusted EBITDA and Adjusted EBITDA margin do not reflect changes in, or
cash requirements for, our working capital needs;
• Adjusted EBITDA and Adjusted EBITDA margin do not reflect any charges for
the assets being depreciated and amortized that may need to be replaced in
the future;
• Adjusted EBITDA and Adjusted EBITDA margin do not reflect the impact of
share-based compensation and related employer taxes upon our results of
operations;
• Adjusted EBITDA and Adjusted EBITDA margin do not reflect the significant
interest expense or the cash requirements necessary to service interest or
principal payments on our debt;
• Adjusted EBITDA and Adjusted EBITDA margin do not reflect our income tax
expense or the cash requirements to pay our income taxes; and
• Adjusted EBITDA and Adjusted EBITDA margin do not reflect certain other
non-recurring charges.
In evaluating Adjusted EBITDA and Adjusted EBITDA margin, you should be aware
that in the future we may incur expenses similar to those eliminated in this
presentation.
The following table reconciles operating profit to Adjusted EBITDA for the
periods presented:
Three Months Ended March 31,
2020 2019
(Dollars in millions)
Operating profit $ 26.3 $ 27.4
Other expense, net (2.6 ) (1.6 )
Depreciation and amortization 11.8 14.4
EBITDA (a) 35.5 40.2
Intercompany foreign exchange loss 1.8 0.3
Share-based compensation (b) 12.7 6.0
Severance charges (c) 4.0 2.1
Restructuring consulting fees (d) 1.5 1.2
Other non-recurring charges (e) (0.3 ) -
Adjusted EBITDA $ 55.2 $ 49.8
Adjusted EBITDA margin 24.8 % 24.4 %
(a) We define EBITDA as net income before interest, taxes, and depreciation and
amortization.
(b) Represents share-based compensation expense and related employer taxes.
(c) Represents costs for severance compensation paid to employees whose positions
have been eliminated or who have been terminated not for cause.
(d) Represents consulting fees and expenses incurred during the periods presented
in connection with any acquisition, investment, disposition,
recapitalization, equity offering, issuance or repayment of debt, issuance of
equity interests, or refinancing.
(e) Represents gain on unrecovered duplicate payments associated with our
isolated service incident. Please refer to Note 13, "Commitments and
Contingencies," for further discussion.
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The following tables present a reconciliation of our reported results to our non-GAAP Adjusted EBITDA basis for all periods presented:
Three Months Ended March 31, 2020
Other
Share-based Severance operating
As Reported compensation charges expenses (a) Adjusted
(Dollars in millions)
Cost of revenue:
Recurring services $ 52.2 $ 0.8 $ 0.8 $ - $ 50.6
Professional services and other 42.6 0.5 0.8 - 41.3
Product development and management 17.6 0.9 0.3 - 16.4
Depreciation and amortization 9.8 - - - 9.8
Total cost of revenue 122.2 2.2 1.9 - 118.1
Sales and marketing 40.7 2.2 0.8 - 37.7
General and administrative 33.5 8.3 1.3 1.2 22.7
Operating profit 26.3 12.7 4.0 1.2 44.2
Other expense, net 2.6 - - 1.8 0.8
Depreciation and amortization 11.8 - - - 11.8
EBITDA $ 35.5 $ 12.7 $ 4.0 $ 3.0 $ 55.2 (a) Other operating expenses includes intercompany foreign exchange loss,
restructuring consulting fees, and other non-recurring charges.
Three Months Ended March 31, 2019
Other
Share-based Severance operating
As Reported compensation charges expenses (a) Adjusted
(Dollars in millions)
Cost of revenue:
Recurring services $ 50.9 $ 0.4 $ 0.2 $ - $ 50.3
Professional services and other 35.3 0.2 0.2 - 34.9
Product development and management 15.2 0.5 0.1 - 14.6
Depreciation and amortization 8.7 - - - 8.7
Total cost of revenue 110.1 1.1 0.5 - 108.5
Sales and marketing 35.2 1.0 1.0 - 33.2
General and administrative 31.0 3.9 0.6 1.2 25.3
Operating profit 27.4 6.0 2.1 1.2 36.7
Other expense, net 1.6 - - 0.3 1.3
Depreciation and amortization 14.4 - - - 14.4
EBITDA $ 40.2 $ 6.0 $ 2.1 $ 1.5 $ 49.8 (a) Other operating expenses includes intercompany foreign exchange loss and
restructuring consulting fees.
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