We are short Dayforce, Inc. (“Dayforce” or the “Company”), an S&P 500 human capital management business which we believe engages in highly aggressive revenue recognition and accounting maneuvers to inappropriately pull forward revenues and inflate profits. We also believe that Dayforce manipulates key profitability metrics which not only misleads investors but unjustly enriches management, whose compensation is tied to such bogus profitability metrics or directly benefit from the Company’s aggressive accounting. Dayforce is plagued by worst-in-class GAAP gross margins, yet its stock trades at an unjustified 25%+ premium above other human capital management companies, likely because of a latticework of misperceptions created around the Company’s business and true profitability. This premium is even more absurd under a proper apples-to-apples comparison when we adjust Dayforce’s financials to remove the impact of what we consider to be financial alchemy. Once we adjust Dayforce’s financials to remove the impact of inappropriately pulled forward revenues, accounting gymnastics, and non-industry standard cost exclusions, we estimate that Dayforce trades at an eye-popping 38.8x FY23 adjusted EBITDA and 56.9x FY23 adjusted EBIT. An apples-to-apples comparison to other HCM companies implies a ~50% downside for the stock. But even this is likely conservative, as Dayforce is a governance mess beset by absurd executive pay packages, misleading non-GAAP metrics, unusual adverse auditor opinions on internal controls, insider selling and heavy management turnover. Ultimately, we believe that Dayforce is set up for an ugly correction as investors come to understand the pedestrian and chronically unprofitable business beneath a façade of financial alchemy.
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