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Edited Transcript of CDAY.TO earnings conference call or presentation 7-Nov-19 10:00pm GMT

Q3 2019 Ceridian HCM Holding Inc Earnings Call

Dec 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Ceridian HCM Holding Inc earnings conference call or presentation Thursday, November 7, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arthur Gitajn

Ceridian HCM Holding Inc. - Executive VP & CFO

* David D. Ossip

Ceridian HCM Holding Inc. - Chairman & CEO

* Jeremy Johnson

Ceridian HCM Holding Inc. - VP of Finance & IR

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Conference Call Participants

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* Christopher David Merwin

Goldman Sachs Group Inc., Research Division - Research Analyst

* Daniel William Jester

Citigroup Inc, Research Division - VP

* Drew L. Kootman

Cantor Fitzgerald & Co., Research Division - Research Analyst

* Mark Steven Marcon

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Matthew Charles Pfau

William Blair & Company L.L.C., Research Division - Analyst

* Matthew James Coss

JP Morgan Chase & Co, Research Division - Analyst

* Nandan Girish Amladi

Guggenheim Securities, LLC, Research Division - Senior Analyst

* Raimo Lenschow

Barclays Bank PLC, Research Division - MD & Analyst

* Samad Saleem Samana

Jefferies LLC, Research Division - Equity Analyst

* Scott Randolph Berg

Needham & Company, LLC, Research Division - Senior Analyst

* Sitikantha Panigrahi

Mizuho Securities USA LLC, Research Division - MD

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Presentation

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Jeremy Johnson, Ceridian HCM Holding Inc. - VP of Finance & IR [1]

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Thank you, and good evening. On the call today, we have Ceridian CEO, David Ossip; and CFO, Arthur Gitajn.

Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion, may include forward-looking statements about our current and future outlook, guidance, plans, expectations and intentions, results, levels of activities, performance, goals or achievements or any other future events or developments. These statements are based on management's reasonable assumptions and beliefs in light of information currently available to us. Listeners are cautioned not to place undue reliance on such statements. Each forward-looking statement is subject to risks and uncertainties that could cause our actual results to differ materially from those set forth in such statements.

We refer you to our previous filings with the SEC for information regarding the significant assumptions, underlying forward-looking statements and certain risks and other factors that could affect our future performance and ability to deliver on these statements. We undertake no obligation to update or to revise any forward-looking statements made on this call, except as may be required by law.

The third quarter earnings release and quarterly report on Form 10-Q, the related financial statements and the MD&A have been furnished or filed with the SEC and will be available on the SEC's EDGAR database in the U.S. and the SEDAR database in Canada as well as on the Ceridian Investor Relations website at investors.ceridian.com. As a reminder, all figures discussed on this conference call are in U.S. dollars, unless otherwise noted.

And with that, I will turn the call over to David.

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [2]

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Thanks, Jeremy. Good evening, everyone. And thank you for joining our earnings call. We are very pleased with the results from the third quarter of 2019. Dayforce momentum remains strong, with Dayforce recurring revenue growing by 33% both on a GAAP basis and on a constant currency basis. Total Dayforce revenue, including professional services and other, increased by 30% year-over-year on a GAAP basis and 31% on a constant currency basis. As we had expected, the revenue growth for both Dayforce recurring and Dayforce total revenue reaccelerated. Dayforce total revenue growth exceeded 30% for the first time since the third quarter of 2018. Including Powerpay, Cloud revenue grew by 26%, both on a GAAP basis and on a constant currency basis.

Moving on to customer accounts, we ended the quarter with 4,169 customers live on the Dayforce platform, a net increase of 163 customers from the second quarter of 2019 and a net increase of 704 customers since September 30, 2018.

From a profitability standpoint, we were pleased that Cloud recurring services gross margin expanded 440 basis points year-over-year to 70.2% and professional services and other gross margin improved from negative 13.6% to negative 7.7%.

Adjusted EBITDA was $46.4 million, an increase of 27.5% compared to last year, and adjusted EBITDA margin was 22.9%, an increase of 250 basis points compared to last year.

Moving on to our focused areas of investment, product development and sales and marketing. Our cash investment in product development, including research and development expense and capitalized software development, was $17.4 million or 8.6% of revenue, an increase of 21% compared to the third quarter of 2018. Sales and marketing expenses during the third quarter were $35.5 million or 17.5% of revenue, up by approximately $7 million, an increase of 26%. This represents a continuation of our investments to grow in the enterprise segments and to grow in global territories.

Also during the quarter, we announced our acquisition of RITEQ, an Australian provider of enterprise workforce management solutions. We followed the acquisition with a series of summits in Melbourne and Sydney aimed at positioning the full Dayforce suite to the 325 RITEQ customers. We have seen significant success thus far, and remain excited about our potential in this region. The acquisition provides Dayforce with an immediate presence in the ANZ region, a solid customer base to move to Dayforce and a wealth of localized knowledge to enhance the breadth of the native Dayforce offering. We believe this type of acquisition strategy can be replicated across the globe and can be used to accelerate our global expansion, which we believe can reach 20 countries within the next 3 years.

Moving on to the sales in the third quarter. We continued to see strong demand, and I want to spend a few minutes highlighting some of the key wins, beginning with the traction in North America this quarter. First, we won a large health care account that provides home and community-based services. The customer purchased the full Dayforce suite to manage over 35,000 employees. Dayforce will help them streamline the employee onboarding experience and empower managers with access to real-time data and workforce management capabilities. Each winning account wants our track record of consistently delivering new features to market and our experience processing large complex payrolls. Decision-makers from the company attended our 2018 Insights Conference and an HCM summit.

We also won at a large retail and wholesale footwear company with more than 30 brands, 13,000 employees and approximately 12,000 locations across North America. The company was struggling with an in-house pay and benefits model and an aging workforce management system. They chose Dayforce for core HR, managed payroll benefits and wage administration as well as advanced workforce management. And we had a large retail won with an online women's clothing retail business based in San Francisco. The company had recently acquired a major luxury retailer with over 8,000 employees. They selected Dayforce for payroll, HR benefits and time and attendance. This win was a great example of the scale we're seeing in the private equity channel and the impact it is having on our growth in the market.

We had a few significant ones in Australia and the U.K., which further highlight the momentum we're seeing globally. In Australia, we signed a leading retailer of performance and lifestyle footwear with more than 9,000 employees and 500 stores across Australia and New Zealand. The company was using multiple third-party solutions to handle payroll, time and workforce management. The team wanted to replace these different systems with a single end-to-end HCM platform. They chose Dayforce for its engaging user experience, strong workforce management functionality and best-in-class talent management.

In the U.K., we won a deal with the largest operator of fitness facilities in the region. The company chose Dayforce to help manage its 3,500 employees while trying to double the size of their business. The organization needed to modernize its systems and get access to data that would help them allocate the right people at the right time to improve control over labor spend.

I also would like to provide an update on the Canadian government opportunity. As background, in June, we signed a contract with the government of Canada, enabling us to build for the government's future payroll time and HCM business against 2 other vendors.

In September, the government issued a press release detailing the fact that they have secured CAD 117 million to co-design and deliver pilot projects for next-generation human resources and pay solution. These pilot projects will test potential solutions against the real complexities of the federal government's human resources and pay systems. We continue to believe that we are uniquely qualified and well positioned to replace the government's existing system and to deliver on-time and after payroll due to more than 300,000 federal employees in Canada. We are currently working for government to secure a formal contract for the pilot project, and we believe we will begin work on the pilot project in 2020.

I would like to spend a few minutes recapping our successful customer conference, INSIGHTS, held in Las Vegas the week of October 21. The event was great, with over 2,900 attendees and over 60 customer presentations and over 150 sessions. We spoke about the importance of intelligent HCM and announced 3 new products, including Dayforce Intelligence, which combines data with predictive technologies to identify and measure key metrics for each HCM process: Dayforce Hub, which allows customers to tailor the Dayforce experience with their branding and content through configurable wages and style; and the Dayforce Wallet, which leverages our continuous calculation differentiation and processes the same-day payroll each time a worker request their pay, allowing employees to access their earned wages before their normal payroll date.

We also announced the launch of enhancements in our Powerpay product. The enhancements give customers the ability to manage their employees, secure company-sensitive documentation, modernize the onboarding process and manage time-off efficiently. We believe these enhancements, along with the existing strength of the Powerpay product and customer base, will enable us to continue growth in the Powerpay revenue into the future.

On the people side, we welcomed Bill Crawford to the Ceridian team as our Chief Value Officer, reporting to Leagh Turner. Bill's experience in the global HCM space, where he has led high-performing sales functions, will provide Ceridian with significant leadership depth as we continue to execute on our ambitions in the enterprise and global markets.

And finally, we announced this evening via Form 8-K, the planned retirement of our CFO, Arthur Gitajn, at the end of December 2020 and the launch of a search for his replacement. Arthur will continue as CFO until we have onboarded a new CFO, who will be fully employed by Ceridian until December 31, 2020, and then will continue to support the company as a consultant until the end of June 2022.

I will now turn it over to Arthur to discuss our financial results and guidance with you in greater detail.

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Arthur Gitajn, Ceridian HCM Holding Inc. - Executive VP & CFO [3]

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Thank you, David, and good evening, everyone. I'm going to take a few minutes to talk about our third quarter 2019 financial results, and then I'll provide guidance for the full fiscal year 2019.

Starting with our third quarter 2019 financial results, revenue from our flagship Cloud HCM platform Dayforce increased by $33.3 million or 30.2% to $143.7 million. On a constant currency basis, Dayforce revenue increased 30.5%.

Revenue from Powerpay, our Cloud HR and payroll solution for the Canadian small business market, increased by 2.3% to $21.8 million. On a constant currency basis, Powerpay revenue increased 3.7%. Cloud revenue, which includes both Dayforce and Powerpay, increased by $33.8 million or 25.7% to $165.5 million. On a constant currency basis, Cloud revenue increased 26.2%. And total revenue, which includes revenue from both our Cloud and Bureau solutions, increased by $24.2 million or 13.6% to $202.3 million. And on a constant currency basis, total revenue increased 14%.

Our guidance for 2019 assumed U.S. dollar to Canadian dollar exchange rate of $1.30. The Canadian dollar weakened against the U.S. dollar during the third quarter and the average exchange rate for the quarter was $1.32. Even with the weaker Canadian dollar, which had the effect of reducing Cloud revenue by $900,000, Cloud revenue exceeded the high end of our $162 million to $164 million guidance range by $1.5 million and by $2.4 million on a constant currency basis. Total revenue exceeded the high end of our $195 million to $197 million guidance range by $5.3 million and by $6.4 million on a constant currency basis. And adjusted EBITDA exceeded the high end of our $41 million to $43 million guidance range by $3.4 million, primarily due to solid revenue results.

Cloud revenue growth in the third quarter was driven by a 26.6% increase in Cloud recurring services revenue and a 22.3% increase in Cloud professional services and other revenue. Of the $33.8 million increase in total Cloud revenue, $5 million or 15% was attributable to Bureau customers migrating to Dayforce. Excluding the impact of migrations to Dayforce, revenue from Bureau solutions declined by $4.6 million or 9.9%, which was in line with our expectations. Cloud revenue accounted for 82% of our total revenue in the third quarter of 2019 compared to 74% in the third quarter of 2018.

The average float balance for our customer trust funds during the third quarter was approximately $3.12 billion compared to $2.97 billion in the third quarter last year. The average yield on our float balance was 2.33% during the third quarter of 2019, an increase of 22 basis points compared to the average yield in the third quarter of 2018. As a result, income from invested customer trust funds was $18.3 million in the third quarter compared to $15.8 million in the third quarter last year. The balance sheet value of customer trust funds as of September 30, 2019, was $2.6 billion, which was relatively unchanged from the balance at December 31, 2018.

We continued to expand our gross margins during the third quarter. While Cloud recurring services revenue grew $27.5 million or 26.6%, our cost of Cloud recurring services to support this growth increased by only $3.6 million or 10.2%, and our gross margin on Cloud recurring services increased from 65.8% in the third quarter last year to 70.2%, reflecting an increase in the proportion of Dayforce customers live for more than 2 years from 62% in the third quarter last year to 68%, and also our ability to continue to realize economies of scale in customer support and hosting costs.

Our negative gross margin on professional services and other revenue improved from negative 13.6% in the third quarter last year to negative 7.7% due to productivity improvements in implementing new customers, reflecting the increased experience of our implementation consultants and also the continued use of automation in our implementation processes. Activations increased to $22.7 million or 66% of Cloud professional services and other costs in the third quarter compared to $18.1 million or 64% of Cloud professional services and other costs in the third quarter last year. And post go-live professional services increased to $8.1 million or 23% of Cloud professional services and other costs in the third quarter compared to $6.1 million or 22% of Cloud professional services and other costs in the third quarter last year.

We continue to invest in research and development and in sales and marketing to support long-term growth in Dayforce, and product development and management expenses increased by $3 million or 20.7% to $17.5 million. Sales and marketing expenses increased $7.3 million or 25.9% to $35.5 million, and sales and marketing expenses as a percent of revenue increased from 15.8% to 17.5%.

G&A expenses increased $17.7 million to $46.8 million. As disclosed in our 10-Q filed earlier today, most of this increase in G&A is attributable to an isolated service incident on September 26, 2019. Through October 31, $12.6 million remains unrecovered, and we've recorded a loss for this amount within G&A. The incident did not create financial exposure for any of our customers as customers only funded the correct payroll amounts. We've identified the issue and corrected the underlying problem to prevent a reoccurrence.

Although the fiscal impact of this isolated incident has been excluded from adjusted EBITDA, it had an adverse impact on operating profit, which was $6.5 million compared to $16.2 million in the third quarter last year. Excluding the impact of this isolated service incident, our operating profit would have been $19.1 million, up 17.9% year-over-year. Collection efforts are ongoing, and we expect to have further recoveries, which will be recognized as a reduction to G&A expense in future periods. We'll exclude any subsequent recoveries from adjusted EBITDA and detail any material positive impacts of additional recoveries on operating profit when we report Q4 results.

Adjusted EBITDA increased by $10 million or 27.5% to $46.4 million and adjusted EBITDA margin increased approximately 250 basis points from 20.4% to 22.9%.

During the quarter, we determined that given consistent profitability since our IPO and our forecast for the future, we believe it's more likely than not that we will be able to utilize our net operating loss carryforwards and other deferred tax assets, and therefore, we've released $65.8 million of our valuation allowance. This $65.8 million tax benefit was partially offset by $200,000 in aggregate tax expense, and we recorded a net tax benefit of $65.6 million during the third quarter. Including the effect of this tax benefit, diluted net income per share was $0.42 in the third quarter of this year compared to $0.03 in the third quarter last year. Adjusted diluted net income per share was $0.11 in the third quarter this year compared to diluted net income per share of $0.10 in the third quarter last year.

Moving to the balance sheet. As of September 30, 2019, we had cash and cash equivalents of $270.9 million, an increase of $53.1 million compared to December 31, 2018, and our total debt was $666.1 million as of September 30, 2019, a reduction of $4.2 million compared to December 31, 2018. Our capital expenditures in Q3 2019 were $12 million compared to $9.9 million in Q3 2018. Included in the $12 million in capital expenditures were $3.1 million for property and equipment and $8.9 million for software and technology, of which $8.7 million was capitalized software development.

Turning now to our outlook for the full year fiscal 2019. Given our performance in the first 3 quarters, we are raising our full year fiscal 2019 revenue guidance. Specifically, on a constant currency basis, we expect Cloud revenue to be in the range of $659 million to $662 million, an increase of 24.7% to 25.3% on a constant currency basis. Assuming Powerpay revenue of approximately $92.5 million, Dayforce revenue is expected to be in the range of $566.5 million to $569.5 million. And total revenue is expected to be in the range of $822 million to $825 million, an increase of 11.1% to 11.5% on a constant currency basis.

Our full year revenue guidance incorporates the 25 basis point reduction in the federal discount rate at the end of October. Each 100 basis point change in interest rates is estimated to have approximately an $18 million impact on float revenue over the ensuing 12 months. We're continuing to invest in the digital wallet, global expansion and sales growth, and we are reaffirming the full year adjusted EBITDA range we provided on February 6, 2019. We expect adjusted EBITDA to be in the range of $182 million to $187 million or an increase of 13.3% to 16.4% year-over-year.

At this time, I'm going to hand the call back to the operator, and I'm going to open the line for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Samad Samana with Jefferies.

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Samad Saleem Samana, Jefferies LLC, Research Division - Equity Analyst [2]

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Great; congrats on a great quarter. So I guess, first, David, if I could, on the Canada contract, I know on the heels of that, the company announced a new public sector team. I was wondering if you could give us an update on how that vertical is doing and maybe if you're drawing more interest from the public sector, given that you're involved in this Canada contract.

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [3]

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So thanks, Samad. As you know, we are quite excited about helping the Canadian government in paying its people correctly. We did bring in a very experienced subject matter expert, and we did launch the new public sector vertical probably about a quarter ago. We are seeing traction already in increased demand and pipeline build, but it's too early to really talk about the impact of that particular vertical. We'll report on it obviously more in subsequent quarters.

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Samad Saleem Samana, Jefferies LLC, Research Division - Equity Analyst [4]

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Great. And then maybe if I could just ask a follow-up question. In terms of the acceleration, it seems like the company is executing on that. I know it's too early to start thinking about 2020, but you announced a number of large logos this quarter that you won, and we're seeing larger and larger customers go live. How should we think about that acceleration in 4Q and then into 2020?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [5]

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Well, as you know, we don't provide guidance for 2020, but I can speak about Q4, and I did mention that as well in my little talk over there. We obviously expect Dayforce revenue to continue to accelerate in Q4. And what I did point out is that we believe that the total Dayforce revenue acceleration will be driven by Dayforce recurring. Again, we typically go into a quarter with a very high degree of confidence, given that the recurring revenue is really determined by the go-lives at the end of Q3 and the professional services are obviously the contracts we're working on, mostly to get live at the end of Q4.

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Operator [6]

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And your next question comes from the line of Mark Marcon with Baird.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [7]

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I want to add my congratulations. I was wondering, could you talk a little bit about the composition of some of the wins that came this quarter? You mentioned roughly 167 that you ended up implementing. Are they typically coming from some of the older legacy players? Or how's that mix changing? And then specifically, with some of the really big wins, on the first big win that you mentioned in terms of 35,000 employees, what was the old client there?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [8]

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Sure. So first of all, the number was 163, not 167, and that is the accounts that we activated in the quarter, not the accounts that we sold in the quarter. The composition of those accounts would be quite typical for what we usually would expect across different verticals. In terms of the competitors or the systems that we're replacing, it hasn't changed. About half the time, it would be a direct competitor. And the other half of the time, it would be more legacy systems, whether they'd be homegrown or more antiquated types of technology that may not be in service.

In the case of the large health care company, it was a combination of a large workforce management vendor that we replaced on the time and attendance side. And I believe, but I'm not certain, is that they had an ERP system, I think, on the payroll side. We also obviously did the full talent suite for them, too.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [9]

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Great. And then at your conference, you talked more about the Wallet and on-demand pay capabilities. Wondering if you can talk a little bit about what the feedback was to you from some of the bigger clients in terms of their interest there.

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [10]

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So we obviously are very excited about the Dayforce Wallet and the launch of the Dayforce card, which will be, obviously, inside the Wallet in Q1 of next year. The reaction from the client base has been very high. We have started to take orders for activation of the Wallet in Q1, and I expect it will grow very quickly next year.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [11]

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Really, that's great. And then can you talk just a little bit about the isolated incident? It's detailed in the Q, but just what was the underlying nature? And do you expect to recoup the funds?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [12]

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So Arthur, don't...

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Arthur Gitajn, Ceridian HCM Holding Inc. - Executive VP & CFO [13]

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Yes. So we had an isolated incident on Thursday, September 26. It resulted in duplicate payments for a portion of our U.S. payroll customers. We identified the issue. We corrected the underlying problem. The incident didn't create any financial exposure for any of our customers. With respect to the charge, rather than speculate about how much more we may recover, we booked a loss for the -- in the full amount of the remaining $12.6 million, but we do expect additional recoveries in Q4. And again, we'll adjust those from adjusted EBITDA. And to the extent they're material, we'll identify them and their impact on operating results.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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And it was a single incident.

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Arthur Gitajn, Ceridian HCM Holding Inc. - Executive VP & CFO [15]

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Isolated incidence and fully remediated.

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Mark Steven Marcon, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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And fully remediate. Great. And Arthur, I just want to say congrats and commend you for everything as well as the way that you announced this with such a nice lead time. So that's fantastic.

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Arthur Gitajn, Ceridian HCM Holding Inc. - Executive VP & CFO [17]

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Thank you.

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Operator [18]

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And your next question comes from Daniel Jester with Citi.

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Daniel William Jester, Citigroup Inc, Research Division - VP [19]

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So just on the international expansion, you talked about this, the aspiration to get to 20 countries over the next couple of years. Can you talk about some of the characteristics of the market that you would be looking at? I mean, obviously, you're in some today. But how should we think about layering that in over the next couple of years?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [20]

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Sure. So again, just as a reminder, when I looked at the market in about 2010, 2011, we kind of identified that half of our addressable market was outside of the U.S. and Canada. And so we designed the platform from the very beginning to be global in nature, and that obviously deals with everything from culture to language localization. We have over 20 languages already supported, currency, FX, date formatting. We also built the rule engine in a way that we could extend it very easily into new jurisdictions. And when we first launched Dayforce in 2013, we launched it at the same time for both the U.S. and Canada, both of which are very difficult jurisdictions. Since then, we've now expanded the product into 4 additional jurisdictions. And the cost of us extending to each of these jurisdictions is probably about $1 million to $2 million of direct work for that particular jurisdiction.

We've also already built out global workforce management. So that's dealing with all the various types of time rules, contract structures that you have on a global basis. From a data privacy and protection perspective, we've built full -- what they call GDPR compliance into the product, which allows us to adhere to the various GDPR policies by different countries across Europe and the U.K.

Our plans for expansion most likely will involve some M&A, very similar to what Dayforce did with Ceridian back in 2012, 2013. We were able to partner, in that case, with Ceridian as an organization who had very deep domain knowledge, a very good distribution, but didn't at the time have the most modern and competitive technology. We believe that there are many such opportunities out there on a global basis where we can find companies, extend the Dayforce platform into that particular jurisdiction, using their people who have the domain knowledge and then obviously, leveraging their distribution capability to accelerate our penetration into that particular market.

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Daniel William Jester, Citigroup Inc, Research Division - VP [21]

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Great. That's really helpful context. And then on the announcements that you made, the enhancements for -- in Canada for the Powerpay application, I think you've said in the past that you were hoping to -- or at least aspiring to reaccelerate growth in that particular business up towards maybe the high single digits over time. Are these enhancements enough to get you there? Or should we be expecting more in the future there?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [22]

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It's a start of the enhancements. So this gives us some basic HR and talent capability for the Powerpay customers. As you know, we have close to 50,000 different organizations that use the Powerpay product. We pay about a million people on that particular platform. This allows us immediately to go back to the Powerpay base and offer them a new functionality at a higher monthly fee. And as we build out more talent capabilities, we'll give us more ability to go back to that base in the future as well.

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Operator [23]

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(Operator Instructions) Our next question comes from Mark Murphy with JPMorgan.

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Matthew James Coss, JP Morgan Chase & Co, Research Division - Analyst [24]

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Coss on behalf of Mark Murphy. David, we spoke with some of your services partners at INSIGHTS, who said that, in bake-offs where only Oracle, SAP and Workday once competed, Ceridian has started to be part of that mix. What is it about some of these larger customers? Or what do they see in Ceridian that makes it very attractive and maybe more so than what it used to now that you're being involved in some of those bake-offs?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [25]

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So a few things on this. Very similar to global, when we designed the Dayforce platform, we built it in a way that we could scale to very large workforces. So highly scalable raw engine, very efficient data structures. The differentiation that we see in what we call the enterprise segment, this would be with accounts that are greater than 10,000 employees, is the continuous calculation engine where every time a timesheet HR record changes, we are able to recalculate the net earnings. The larger the customer, the more valuable that is because it gives them much more time to verify that the payroll data is correct. As you remember, instead of waiting until the end of the pay cycle, we allow the payroll staff access to the data at the very beginning. They can run their audits, do their edits and their adjustments immediately. And that means at the end of the pay cycle, they effectively are done.

We also allow organizations to enable a payroll preview for employees to view their pay slips during the active pay cycle. And much like allowing the payroll staffs early access to the data, allowing employees to verify their own data before the money is transferred, gives them much more time -- the organization much more time to verify and to pay people accurately. The benefits of the continuous calculation engine obviously apply as well to generating useful business information for all people inside the organization, and we obviously are leveraging that now inside the Dayforce Wallet, which, again, allows employees to view what they've earned at the end of each day and the ability to access that money without any direct fees.

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Matthew James Coss, JP Morgan Chase & Co, Research Division - Analyst [26]

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Helpful. And then maybe one for Arthur. Can you share your latest thoughts about the steady state of revenue from the Bureau business? I mean that's been declining roughly in the high teens and low 20s on a consistent basis. Any change to that decline?

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Arthur Gitajn, Ceridian HCM Holding Inc. - Executive VP & CFO [27]

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No. No. Again, the decline, excluding migrations, it was about 9.9%, which was as expected. I think if you go back, it's been in the 10% to 12% range. And likewise, the contribution of Bureau to Cloud, we would expect it to be in the 13% to 17% range, and that was also in line.

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Matthew James Coss, JP Morgan Chase & Co, Research Division - Analyst [28]

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Okay. But no drastic changes expected in that in how it's been contributing...

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Arthur Gitajn, Ceridian HCM Holding Inc. - Executive VP & CFO [29]

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No, but it's becoming less -- obviously, less and less of an issue. It's clean. Cloud is now 82% of our total revenue. 36 months ago, we just crossed the 50% line, and it's really less and less of an impact on the business.

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Operator [30]

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And our next question comes from the line of Nandan Amladi with Guggenheim Partners.

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Nandan Girish Amladi, Guggenheim Securities, LLC, Research Division - Senior Analyst [31]

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So first one, perhaps for Arthur, the professional services gross margin has been improving steadily. But now that you're engaging a community of system integration partners to do the implementation, what will that trajectory look like over the next, say, 12 to 18 months?

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Arthur Gitajn, Ceridian HCM Holding Inc. - Executive VP & CFO [32]

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Well, again, we're not forecasting 2020 right now. But I mean part of the effort to engage third parties is to have a more profitable professional services and implementation function.

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Nandan Girish Amladi, Guggenheim Securities, LLC, Research Division - Senior Analyst [33]

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Right. Okay. And a follow-up for David. The reference to expanding to 20 countries in 3 years, and you touched on perhaps making some acquisitions to get there. Any indication of the balance of organic development versus acquisitions?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [34]

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I think you'll see a combination. Remember, even when we do an acquisition, we're not acquiring for technology. So the playbook over there is very similar to what we did with Ceridian. We would do a stop sell almost immediately. We would stop any new development on their products, put it into more of a maintenance mode. Over a 3- to 5-year period, we would look at migrating the customer base onto Dayforce. And we would use their knowledge, their people to help build out the user stories and have the Dayforce developers, obviously, build out the rule engine to handle those user stories very quickly and then to enter the market with proper momentum using -- leveraging the distribution network and such.

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Operator [35]

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Our next question comes from Matt Pfau with William Blair.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [36]

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I wanted to ask on the U.K. and Australia markets. And now that you've been in them for several quarters, just wondering, how would you characterize the competitiveness of those markets for payroll relative to the U.S.? And then what are you seeing in terms of win rates in those markets versus the U.S.?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [37]

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Sure. So I'll -- first, by starting that, even in the U.S. and Canada, we already only see 2 competitors on a consistent basis. As we go global, whether it be the U.K. or Australia, it's a similar type of pattern, that there aren't that many people that actually play in the segments that we do. When I compare the U.K. to North America, I would argue that the vendors in the U.K. market are probably 10 years behind the North American players. And when I look at the Australian players, it seems that the technologies are probably another 5 to 10 years behind the U.K.

So the advantages of the Dayforce platform, whether it be the full end-to-end human capital management functionality, that obviously allows us to differentiate in, what we call, the major markets up to that 6,000 employee space, having 1 database, 1 rule engine across all of the use cases around a particular worker, resonates exceptionally well in the U.K. and in Australia. And for the larger customers having that continuous calculation, this also gives them much more time to verify and validate the people getting paid correctly.

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Matthew Charles Pfau, William Blair & Company L.L.C., Research Division - Analyst [38]

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Got it. And is there any sort of investments or I guess time that it takes to maybe gain some brand awareness in those markets since you're -- with the Ceridian brand name, you're probably better known in North America than in some of these newer markets?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [39]

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That's a very good question, and that's where the M&A strategy comes in. In the last quarter, we did an acquisition of a workforce management company called RITEQ in Australia that has a presence in Australia and a little bit in New Zealand as well. And with that, we acquired several hundred customers. Immediately following the close of the acquisition, we did 2 HCM summits, one in Sydney and one in Melbourne, primarily targeting the RITEQ customer base. And we see that as a very good way of getting recognized very quickly in a particular market as a top player.

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Operator [40]

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And your next question comes from Scott Berg with Needham.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [41]

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Congrats on a good quarter. I guess, David, starting with you, if you take a step back, some of the commentary that we heard at HR Tech would indicate overall demand trends in the space look really strong, not just in the 2020, but for another kind of multiyear run, and this is after what most people would consider to be a 5- to 8-year run, a really good sales run in the space. How do you think long term your ability is from a competitive standpoint to even further penetrate different aspects of the maybe segments that you don't play in as strongly today?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [42]

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If I look at our market penetration in the U.S., I would think that we probably have less than a 5% market share today. I think our technology has -- most, I think, of the investors and the banks have verified is quite differentiated, both in the end-to-end feature sets as well as the continuous calculation. I would argue that we probably are 5 to 10 years ahead of the 2 other competitors in this space, and we've now proven out that we have a very robust and scalable solution with over 4,000 customers live on the actual product. The number of customers that we're taking live has obviously accelerated slightly, and the size of the customers, as you can see, with some of the health care and retail wins that we discussed have obviously gone up.

So I think that you'll see us grow, first of all, in capturing more of what I'll call a compliance application market, which would be payroll, time and benefits where we're very strong. On the talent side, we are really fortifying our offerings around recruiting, performance management, compensation management, learning management. And our market share of various particular markets is obviously less than we see on the compliance side. So I still think there's tremendous long-term growth in that. There also is potential growth in adjacent markets where we don't play in at all, and you'll see some build or some M&A activity in those markets, probably over the next 12 to 24 months. And then on the global side, we've just really begun. And the traction we're having in the U.K. and in Australia is very positive, and I expect it to continue to be very good into the future. And we're also very excited with the potential for the Dayforce Wallet and what we can do around financial wellness.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [43]

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That's really quite helpful there. And then from a follow-up perspective, Arthur, how should we think about Dayforce gross margins kind of trending or tracking from an intermediate term perspective, multiyear trend? You've had obviously a nice jump year-over-year, but Dayforce revenues already make up a substantial portion of total revenues? Just trying to understand maybe what that trajectory can actually look like from the current high level.

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Arthur Gitajn, Ceridian HCM Holding Inc. - Executive VP & CFO [44]

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Well, our gross margin on Cloud recurring services is -- really on the cost side, is hosting and customer support. And we continue to get economies of scale in hosting. And on customer support, in addition to economies of scale, we also have the phenomenon of customers live for more than 2 years. The actual number of customers live for more than 2 years increased by more than 30% year-over-year. And we know from experience that customers live for more than 2 years, we have fewer customer support tickets. So we would expect gross margins on Cloud recurring services to continue to expand. And likewise, on professional services, we would expect the trend toward breakeven to continue as well.

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Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [45]

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Very helpful. Thanks again and congrats on the good quarter.

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Operator [46]

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(Operator Instructions) And our next question comes from Siti Panigrahi with Mizuho.

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Sitikantha Panigrahi, Mizuho Securities USA LLC, Research Division - MD [47]

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Right. Just a follow-up -- just following up on that international expansion. It makes sense for you to go aggressive and expand on your native payroll in 20 different countries, given your technology advantage over competitors. And also good to see some of the notable wins in the U.K. and Australia, and now RITEQ under your umbrella. Just wondering if you could talk about, right now, in international revenue how much is that in -- as a percentage of revenue? And how do you expect that to grow in the next few years?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [48]

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Sure. We don't report on international revenue as a percentage of overall revenue. But what I have said and we believe it to be true is that in 2019, most of the growth would come from our further penetration in major markets. In 2020, you'll see the impact in the -- our success in the enterprise market, and we believe that you'll see an impact from the global expansion in 2021 and beyond.

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Sitikantha Panigrahi, Mizuho Securities USA LLC, Research Division - MD [49]

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Okay. That's helpful. And now on the on-demand pay side, and that's definitely an emerging theme right now in payroll industry. But you guys seem to have a very differentiating offering than some of your competitors who offer loans or charge employee or employer transaction. So could you tell how big is that on-demand opportunity for you? And also, what sort of feedback you got from customer with that digital wallet announcement? And how are you planning to monetize that?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [50]

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Sure. So the way that we differentiate with the Dayforce Wallet and the Dayforce card is that each time an employee loads the Dayforce card, we do a same-day payroll for that employee, which means we do the submissions of all the necessary remittances immediately. And so we have a fully compliant solution. From a go-to-market perspective, we've been able to take it out in a way that we don't have to charge the customer an additional PEPM to offer it to their employees, and we don't change the way that they do their funding. They still fund at the end of the actual payroll cycle. And from an employee perspective, in the U.S., we don't have any direct fees for the employee either. So we believe with that, we should see very quick adoption of the product.

In terms of penetration, as I mentioned earlier, we've seen a high demand from customers who have seen it. I think the customers appreciate that we took the necessary time to do the proper research and proper consumer testing so that we can launch the product in a way that makes tremendous sense to both the employers and the workers at those particular companies. And I believe that it will be a very successful launch come Q1.

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Operator [51]

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And our next question comes from Raimo Lenschow with Barclays.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [52]

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David, can I stay on that subject? Do you know, like if you think about it, a few years back, when we moved to kind of direct deposit from check, and I was like, oh my god, everyone was kind of pushing against that. Now you kind of -- if you think what you do with same-day payroll, it almost feels like the technology has just moved on, that it's now possible and it should be a next evolution of the industry. Would you kind of agree with that? Or is this kind of a different kind of step?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [53]

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Look, Raimo, I think it makes tremendous sense. We know that almost 80% of all people out there live paycheck to paycheck. We also know that when we do surveying of people, especially the younger generations, over 50% of them want to get paid much more frequently than they currently are. And the reason for that is it helps them on financial flexibility. I would -- I believe that within a period of time, I don't know if it's 5 years or 10 years, that this will obviously become the norm and the expectation of all people who work for companies. From our perspective, when you've completed a day of work, you've earned that money, it's yours. The continuous calculation allows us to calculate the net earnings for the employee, and our back office has the sophistication that we can do the same-day remittances and the money movement. So there's no technical reason why you can't offer this benefit to workers today.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [54]

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Yes. Okay. And then on that note, like -- and it's -- I mean I don't want to get too technical on an earnings call, but like some of your competitors are starting to say, like, "oh, we're going to do continuous." Can you just remind us like how different is it in terms of on a technical setup to be able to do continuous versus kind of the old approach?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [55]

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Well, there's continuous and then there's doing it properly. In order to do continuous calculations, you have to have a very robust time and attendance engine, and that means that you can do sophisticated calculations like retroactive adjustments. So if you make a change backwards in time during the calculation and determining the amount of money that you have to top the employer, if you change a time code from paid to unpaid or unpaid to paid, you have to recalculate that. You have to have the benefit side and the HR side working as well because it's not just time records that can lead to a change in the current period. And to do that requires a design from the very beginning that you're going to do that type of calculation.

So for the others to do that, I think they would have to first build very robust time and attendance, which, as you know, there aren't many vendors out there that offer the same type of functionality that we do on the workforce management side. They would have to do the proper benefit, benefit eligibility, types of calculations that you'd have to do as well, build out the full HR module and then also build out their payroll engine. And even if they do that, they then have to develop the back end to do the tax calculations and the various remittances for the tens of thousands jurisdictions that are out there. So I think it's quite complicated to do, and I think it would take a long time for people to do it as well.

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Operator [56]

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Our next question comes from Chris Merwin with Goldman Sachs.

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Christopher David Merwin, Goldman Sachs Group Inc., Research Division - Research Analyst [57]

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David, do you mind talking about how implementations are going, in particular for strategic accounts? Are those sort of taking place on time, just given I know that those can be some bigger projects? And also, as we look to the fourth quarter, should we think about more strategic accounts going live and potentially seeing a tailwind to revenue per customer there?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [58]

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So the -- so I think that the segment is actually enterprise accounts. The implementations appear to be going quite well. From our perspective, we meet on a biweekly basis where each of our segment leads gives us the forecast for both their go-lives and their project kickoffs in the particular quarter, and we monitor it very, very carefully. And when we do the planning, especially with the enterprise accounts, you sometimes get more motors because of the size of accounts and the amount of program management you have to put on to the account in addition to things like project management.

So the accounts typically are managed very, very nicely. And from the customer side, you typically have larger client team. You often have third-party (inaudible) on the program management and the project management side. So we feel quite comfortable with that particular segment. There are some enterprise customers going live. And as I said earlier, you would expect to see some impact from the enterprise accounts in 2020.

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Christopher David Merwin, Goldman Sachs Group Inc., Research Division - Research Analyst [59]

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Okay, great. And then just as it relates to international, and I know you talked before about how investment there is going to be a mix between M&A and, I guess, organic. But as you think about getting into 20 countries and the OpEx required, I mean how do we think about that impacting the margin trajectory over the long term? And how are you going to manage that?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [60]

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So if you were to ask me where we focus on, we focus really on the gross profit on recurring more than we do anything else. And if I look at this particular quarter, we know that the gross profit on recurring went up by 440 basis points year-over-year. If I look at Q3, it went up by 370 basis points. If I look at Q1, it went up by 320 basis points. And that's where we get the most leverage as we scale the business. And so you'll continue to see the gross profit on recurring improve. In terms of overall investment, we will focus on growth of the organization foremost, but at the same time, we would expect to see the gross profit on recurring go up. And then on the remainder, we will take that and determine how much we'll invest that into new markets versus into profitability.

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Operator [61]

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And our last question comes from Drew Kootman with Cantor Fitzgerald.

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Drew L. Kootman, Cantor Fitzgerald & Co., Research Division - Research Analyst [62]

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So you've talked a lot about the Wallet and everything. I was just curious if you could talk about what you guys see moving forward as far as the pipeline or -- for products or applications?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [63]

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Well, every year, we release probably 2 to 3 new modules. The next module that will be taken to -- that will become GA is engagement surveys and pulse surveys, and that will be in the next release. We will begin -- we've already begun showing that to customers, and we expect that we'll have obviously a positive impact on the PEPM that we get from our customers. We are also beginning to release plus modules for the existing features. We have recruiting, recruiting plus benefits, benefit plus, where we're able to go back to the existing base and increase the PEPM we get for those modules as well as for new customers get a higher PEPM just to begin. So you'll continue to see those types of investments going forward.

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Drew L. Kootman, Cantor Fitzgerald & Co., Research Division - Research Analyst [64]

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Great. And then just curious on how retention rates look when you go to the enterprise client and just how it impacts the total, positive or negative?

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David D. Ossip, Ceridian HCM Holding Inc. - Chairman & CEO [65]

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We don't break out retention based on segment. And we gave guidance this year between 95% and 97%, and we're tracking right in the middle for that as expected.

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Operator [66]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.