A changed Ceridian returns to the public markets - the backstory

Brian Sommer Profile picture for user brianssommer May 1, 2018
Ceridian came back to public markets Friday after more than a decade away, but the HR/payroll vendor is much changed today. Brian Sommer has the backstory

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For the second time in its history, HR/payroll software firm Ceridian went public on Friday, this time on both the New York and Toronto stock exchanges. The successful offering should make a number of investors and employees happy. This story though isn’t the typical startup that grew up and became a publicly traded firm. No, Ceridian’s journey to Wall Street is definitely a unique one.

The Ceridian backstory

Ceridian is a provider of cloud HCM and payroll technology today. But, the company has had a long story.

Ceridian was spun out of Control Data Corporation in 1992 – Control Data Corporation itself was founded more than sixty years ago, in 1957. A number of former Control Data Corporation businesses operated under the Ceridian flag. Possibly the best known of these was Ceridian’s payroll service bureau operations. For a number of years, Ceridian faced off against other payroll service bureau firms like ADP.

Ceridian was a NYSE-traded firm until 2007 when it was taken private by private equity (PE) firm Thomas H. Lee Partners and Fidelity National Financial/Cannae Holdings, Inc. That deal was probably attractive to the PE buyers as payroll service bureaus often throw off a lot of free cash flow, have lots of cash float to utilize, have somewhat loyal customers and a solution with potentially high switching costs.

When it was taken private, Ceridian took on a material amount of debt, which is a common occurrence in PE-led deals. Servicing this debt would take a lot of cash and probably stalled many software R&D activities.

2007 was an interesting time as it also saw the introduction and rise of scores of new all-cloud HCM solutions. We saw Taleo, Vurv, SuccessFactors, and, of course, Workday emerge. In time many of these firms became major players in the HCM space with several of them threatening the payroll service bureau business in a material way. All of a sudden, it was popular for companies to bring payroll processing back in house.

In 2012, Ceridian acquired a multi-tenant cloud payroll/HCM solution called Dayforce. Dayforce’s founder would soon become Ceridian’s new CEO. The rationale for both moves was to transform Ceridian’s business into a more modern/relevant one. To do so, it would need a more modern technology solution – such as a multi-tenant cloud – and a management team that knew how to sell and extend these solutions.

To make Ceridian more market relevant and financially stronger, the company appears to have made a number of strategic investments. These included:

  • A substantial R&D effort to deepen the functionality within Dayforce
  • Selling off many ancillary businesses (e.g., Comdata) that Ceridian owned. Proceeds from those deals helped reduce the company’s debt load.
  • Reinvigorating the culture of the company
  • Converting large numbers of Ceridian service bureau customers to the new Dayforce HCM solution

Along the way, the company developed a time tracking solution using low-cost Linux tablets and acquired a smart team composition tool.

Now in early 2018, Ceridian barely resembles its former self. It has morphed into a cloud HCM and payroll solution provider. It has hit its major strategy milestones and has, in essence, re-birthed itself.

The statistics below included in Ceridian’s S-1 filing with the US Securities and Exchange Commission show the change that Ceridian underwent.

The public offering

Ceridian IPO stats from S-1
You can’t call this offering an IPO as it isn’t the first or ‘initial’ time the company has gone public. This time, the company hoped to raise between $462-531 million (less banker fees).

Last month, Enterprise Times UK stated:

The IPO should enable Ceridian to continue its growth trajectory it began following the merger between Dayforce and Ceridian in 2012. The timing is also right as Ceridian looks to break into profitability after a net loss (after tax) of only $9.2 million, down from $102 million the previous year. The IPO will also enable Ceridian to repay part of its $1.1 billion debt and refinance the remaining loans.

In a recent Ceridian press release, Ceridian stated:

Ceridian intends to use the net proceeds that it receives from this offering and a concurrent $100.0 million private placement to redeem the $475.0 million principal amount of its outstanding 11% Senior Notes due 2021 as well as to pay a portion of the interest on the Senior Notes that will have accrued at the time of the redemption.

Readers should note that high debt levels and interest rates for same can be manageable for solid, stable businesses but hard on companies still in their growth cycle. To service every $100 million of that debt, a company may have to defer $10 million or so in funding that it would otherwise use for geographic expansion, R&D, etc. The upside of this debt reduction will be that it improves the debt rating and creditworthiness of Ceridian. That could permit the company to refinance remaining debt on more favorable terms.

The S-1 illustrates this debt cost. Ceridian has been paying approximately $87 million in interest on revenues of $693-751 million. That means interest expense has been approximately 11.6-12.5% of total revenue. That’s gotta hurt.

Ceridian’s financials have changed a lot (positively) in recent years. According to the S-1:

Our total revenue increased from $693.9 million in 2015 to $704.2 million in 2016 and to $750.7 million in 2017. Our total Cloud revenue, which consists primarily of revenues from Dayforce and excludes revenues from our Bureau solutions, increased from $225.2 million in 2015 to $297.8 million in 2016 and to $404.3 million in 2017, representing increases of 32.2% and 35.8%, respectively. We generated HCM operating profit (loss) of $(1.1) million in 2015 compared to $(8.6) million in 2016 and $33.0 million in 2017. We generated HCM Adjusted EBITDA of $99.7 million in 2015 compared to $88.9 million in 2016 and $117.8 million in 2017.

The S-1 also provides these quick stats:

Ceridian IPO ARR from S-1 640px

It’s good to see customer count, ARR and retention rates growing. In fact, more than half of customer growth in the last few years has been net-new (not conversions of legacy service bureau customers).

Day one results

Ceridian priced its new shares @ $22/share. Financial advisors, underwriters, Ceridian executives, etc, worked on determining this price based on a number of factors. Once trading started Friday morning, shares shot up markedly and stayed up all day, closing at over $30/share.

Prior investors, employees and management had to like seeing the price jump materially as it represented an approximate 38% gain. For Ceridian’s PE owners, this stock performance means they’ll have both a liquidity opportunity on their original investment and possible a nice sweetener, too, with the day 1 closing price being higher (unless their shares are subject to a lockup period).


I have no idea whether it was ironic or planned but the new stock symbol for Ceridian is CDAY – this is only one letter different than its competitor Workday’s symbol, WDAY.

I suspected this offering would go well as the Ceridian turnaround story is something I’ve been covering for some time. But, it was the fact that I was blown off by Ceridian’s lead underwriter that led me to suspect this was an oversubscribed – that is, very high demand – IPO offering. So, the run up on the day 1 pricing was not a surprise.

I’m pleased to see that the company intends to retire some of its debt. The fact that it has grown well while materially fleshing out its product line is great but it’s even more impressive what they’ve done while carrying so much debt. Hopefully, they will use the savings from the reduced debt load to continue new product development.

For more diginomica coverage of Ceridian, please see Highlights from the 2017 Ceridian Insights event and Highlights from recent Ceridian analyst meeting. This paywalled Globe and Mail piece on Ceridian is also useful.

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Disclosure - Oracle (owner of Taleo, which acquired Vurv), SAP (owner of SuccessFactors) and Workday are diginomica premier partners at time of writing.

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