Reported Company:

Dayforce Inc

Researcher Company:

Blue Orca Capital

Price at Report Date:

Close Price Day after report date:

69.45

% Decline Day after Report Date:

% Decline vs Yesterdays Date:

0.1008

Summary

Blue Orca Capital, a known activist short seller, has published a report targeting Dayforce, Inc. (NYSE:DAY), a prominent player in the human capital management (HCM) industry. The report accuses Dayforce of engaging in aggressive accounting practices to inflate its revenue and profitability, which has led to an unjustified premium valuation in the market.

Who is Dayforce Inc.?

Dayforce, Inc.  is a company specializing in human capital management software, offering solutions for payroll, benefits, workforce management, and talent management. The company is part of the S&P 500 and is recognized for its cloud-based platform that integrates multiple HCM functions. Despite its market position, the company is under scrutiny for its financial practices, as highlighted in Blue Orca Capital’s report.

Key Points from Report

Inappropriate Revenue Recognition

• Aggressive Pull-Forward Tactics: The report alleges that Dayforce inflates its top-line revenue by pulling forward revenue recognition, particularly from professional services, far beyond what its competitors report. This practice allegedly inflates Dayforce’s operating profits by as much as 78%.
• Suspect Professional Services Revenue: Despite outsourcing over 50% of its onboarding services, Dayforce still reports a higher proportion of revenue from professional services than peers like Workday and ADP. This raises concerns about the validity of its revenue recognition practices.

Misleading Profitability Metrics

• Bogus Non-GAAP Metrics: Dayforce reportedly manipulates its profitability metrics by excluding critical recurring costs and including non-operating income (float revenue), which significantly overstates its recurring gross margin. Blue Orca estimates that Dayforce’s true recurring gross margin is 57%, far lower than the reported 78%.
• Executive Compensation Linked to Misleading Metrics: The report criticizes Dayforce’s management for tying their compensation packages to these manipulated metrics, which not only misleads investors but also unjustly enriches the executives.

Aggressive Accounting Gimmicks

• Extended Amortization Periods: The company has allegedly doubled the amortization period for sales commissions from five to ten years, which artificially boosts pre-tax profits by 60% without any real improvement in business fundamentals.
• High Capitalization of Software Costs: Dayforce is accused of capitalizing an unusually high percentage (44%) of its software development costs, compared to a median of 29% for its peers, further inflating its reported profits and cash flow.

Governance Concerns

• Material Weakness in Internal Controls: The report highlights a significant error where Dayforce failed to report over $546 million in customer funds, leading to an adverse opinion on the company’s internal controls. This, coupled with high executive turnover and substantial insider selling, paints a picture of a company with serious governance issues.

Activ8 Finance Analysis

From the standpoint of Activ8 Finance, the concerns raised by Blue Orca Capital about Dayforce are significant. The allegations of aggressive accounting practices, misleading profitability metrics, and governance issues suggest that the company’s financial statements may not fully reflect its true performance. Investors should exercise caution and perform thorough due diligence, considering the potential risks associated with these reported practices. While the market has thus far rewarded Dayforce with a premium valuation, this report suggests that such a valuation might be built on shaky foundations