Q3 2019 Earnings Call
On the call today, we have CEO David.
CFO Arthur get tight.
Before we begin allow me to provide a disclaimer regarding forward looking statements.
This call, including the Q and a portion may include forward looking statements about our current and future outlook.
Right and.
Plans.
Expectations and attention.
No.
Levels of activities performance.
Older achievement.
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 Thursday.
Each forward looking statement, a subject to risks and uncertainties that could cause actual results to differ materially from those set forth in such statements.
We refer you to our previous filings with the FCC for information regarding the significant assumptions underlying forward looking statements.
Certain risks and other factors that could affect or future performance and ability to deliver on these days.
We undertake no obligation to update or revise any forward looking statements made on this call except as may be required by law.
The third quarter earnings release in quarterly report reports on Form 10-Q , the related financial statements and the Mdna had been furnished were filed with the FCC.
And we'll be available on the Fccs Edgar database in the U.S. and the theater database in Canada.
As well as on the Ceridian Investor Relations website investors, that's iridium dot com.
As a reminder, all figures discussed on this conference call or in U.S. dollars unless otherwise noted.
And with that I will turn the call over to David.
Thanks, Jeremy Good evening, everyone and thank you for joining <unk> earnings call.
We are very pleased with the results from the third quarter 2019.
April's momentum remains strong.
Well they both recurring revenue grain by 33% that's on a GAAP basis and on a constant currency basis.
Turtles, April's revenue, including professional services and other.
Increased by 30% year over year on a GAAP basis and that he wants to send on a constant currency basis.
As we had expected revenue growth, but staple for carried and Dave <unk> total revenue.
Accelerated.
Dave will total revenue growth exceeded 30% for the first time since the third quarter of 2018.
Including policy.
<unk> revenue grew by 26% both on a GAAP basis and on a constant currency basis.
Moving onto customer accounts.
We ended the quarter with 4169 customers live on the day for platform.
Net increase of 163 customers from the second quarter 2019, and an increase of 704 customers since September Thirtyth 2018.
From a profitability standpoint.
We're pleased that cloud recurring services gross margin.
We 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 onto I'll focus areas of investment product development and sales and marketing.
Cash investment in product development, including research and development expense and capitalized software development was 17.4 million or 8.6% to revenue an increase of 21% compared to the third quarter of 2018.
Sales and marketing expenses during the third quarter with 35.5 million or 17.5% of revenue.
By approximately $7 million, an increase of 26%.
This represents a continuation of all investments to grow in the enterprise segments integrated global territories.
Also during the quarter, we announced the acquisition of writer and Australian provider of enterprise workforce management solution.
We followed the acquisition was a series of summits in Melbourne, and Sydney aimed at positioning the full day full suite is a 325 right take customers.
We have seen significant success, that's fall and remain excited about potential in this region.
The acquisition provides day falls within an immediate presence in the region, our solid customer base to move today April and a wealth of localized smallish enhancer breadth of the nature day falls offerings.
We believe this type of acquisition strategy can be replicated across the globe and be can be used to accelerate our global expansion.
Which we believe can reach 20 countries within the next three years.
Moving onto sales in the third quarter.
We continue to see strong demand and I want to spend a few minutes highlighting some of the key one beginning with the traction in North America this quarter. So.
Uh huh.
We won a large health care account that provides herbert community based services to customers such as the full day full suite to manage over 35000 employees.
They fall for health and streamline employee Onboarding experience any pound managers with access to real time data and workforce management capabilities.
He to winning their account.
<unk> track record of consistently delivering new features to market and all experience processing large complex payrolls.
Decision makers from the company a standard out 2018 insights conference and HCM summit.
We also won after logs retail and wholesale footwear company with more than 30 brand 30000 employees are approximately 12000 locations across North America.
The company, we're struggling with an in house pay and benefits model.
And an aging workforce management system.
Chose day falls for core HR manage payroll benefits and wage administration as well as advanced workforce management.
And we had a large retail one with an online women's clothing retail business based in San Francisco.
The company had recently acquired a major luxury retailer with over 8000 employees. They selected day forsell payroll HR benefits and time and attendance.
This one was a great example of the scale, we're seeing in the private equity channel and the impact if he's having own outgrowth in the market.
We have a few significant ones in Australia, and the UK, which for the highlight the momentum were seeing globally.
No Stranger, we signed and he didn't retailer well performance and lifestyle footwear with more than 9000 employees and 500 stores across Australia New Zealand.
The company work using multiple said parties revisions to handle payroll time and workforce management. The team wants it to replace these different systems with a single into and HCM platform.
Chose baseball force engaging user experience strong workforce management functionality and best in class talent management.
In the UK, we want to deal with the largest operate your fitness facilities in the region. The company chose staples to help manage its 3500 employees, while trying to double the size of the business.
The organization needed to modernize its systems and get access to data that would help and allocate the right people at the right time, she cruise control over labor span.
I also would like to provide an update on the Canadian government opportunity.
Background in June we signed a contract with the government go calendar, enabling us to bid for the government's future payroll time, an ATM business against two other vendors.
In September the government issued a press release detailing the fact that bad secured $117 million Canadian to co design deliberate pilot projects. The next generation human resources and pace of vision.
These pilot projects, which has potential solutions against the real complexities of the federal government human resources and pay system.
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 effort payroll to the more than 300000 federal employees in Canada.
We are currently working with the government to secure a formal contract for the pilot project and we believe we'll begin work on the pilot project in 2020 .
I would like to spend a few minutes recapping our successful customer conference insights.
In Las Vegas.
Week about 10 to 20 foot.
That was great.
As a 2900 attendees and over 60 customer presentation and over 150 session.
We spoke about the importance of intelligent HCM and announced three new products, including Staples intelligence, which you which combines data we predicted technologies to identify and measure key metrics, we each HCM process.
Staples hub, which allows customers to tailor the dayforce experience with their branding and content through considerable widgets and style.
And the day fourth one it.
Which leverages, our continuous calculation differentiation and processes are same day payroll each time, a worker request they pay.
How many employees are accessing and wages before being normal payroll date.
We also announced the launch of enhancements in our policy of product.
The enhancements give customers the ability to manage their employees secured company sensitive documentation modernizing the on boarding process and manage time off efficiently.
We believe these enhancements along with the existing strength of the policy product and customer base.
Enable us to continued growth in the Powell pay revenue into the future.
On the people side, we welcome Bill Crawford to this Iridian team, that's all chief value officer reporting to the China.
Those experiments in the global ATM space.
He has led high performance sales functions will provide serene with significant leadership debt as we continue to execute on our ambitions in the enterprise in global markets.
And finally, we announced this evening via a form 8-K, the planned retirement about CFO ought to get 10 at the end of December 2020, and the launch of a search for his replacement.
Author will continue as CFO until we have onboard isn't new CFO .
We will be fully employed by Ceridian until December 31st 2020 and then we'll continue to support the company as a consultant until the end of June 2022.
I'll now turn it over to offset to discuss our financial results and guidance with you in greater detail.
Thank you David and good evening everyone.
I'm going to take a few minutes to talk about a third quarter 2000 break chief financial results and then will provide gardens for the full fiscal year 2019.
Starting with her third quarter 2000, Wright Chief financial results revenue for more flagship cloud HCM platform gave tours increased by 53 point Threemillion was 30.2% to 143.7 million.
On a constant currency basis, Dayforce revenue increased 30.5%.
Revenue can power pay cloud HR and payroll solution to the Canadian small business market increased by 2.3% to 21.8 million on a constant currency basis, how old pay revenue increased 3.7%.
Paul revenue, which includes the day for some coal trade increased by 53.8 million, 25.7% to 65.5 million.
On a constant currency basis club revenue increased 26.2%.
In total revenue, which includes revenue from both a cloud and Buren solutions increased by 24.2 million was 13.6% two to 2.3 million and on a constant currency basis total revenue increased 14%.
Our guidance for 2019 assumed a U.S. dollar to Canadian dollar exchange rate of the Dol food the Canadian dollar weakened against the U.S. dollar during the third quarter and the average exchange rate for the quarter, we should always can be too.
Even with the weaker Canadian dollar and try to be a sector producing cloud revenue by $9000 club revenue exceeded the high end, although $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 or 195 to 197 million guidance range by 5.3 million and by 6.4 million on a constant currency basis.
Adjusted EBITDA exceeded the high end over $41 million to $43 million guidance range like 3.4 million, primarily due to solid revenue results.
Club the group Inc. third quarter was driven by 26.6% increase in cloud recurring services revenue and a 22.3% increase in cloud professional services and other revenue.
The $33.8 million increase into the cloud revenue 5 million or 15% was attributable to Buick customers migrating to date force.
Moving the impact of migrations to Dayforce revenue can be really solutions declined by 4.6 million or 9.9%, which was more than go expectations.
Club revenue accounted for 82% to work to work when you look to quarterly 2019 compared to 74% MCU quarterly 2018.
Yes.
Barrels for customer Trust fund is really the food costs <unk> was approximately $3.12 billion compared to 2.97 billion in the third quarter last year.
The average yield general Flintstones was 2.33% during the third quarter 2000.
An increase of 22 basis points compared to the average yield in the third quarter 2018.
As a result income from invested coaster moved 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 customer trust funds as from September 32019 was $2.6 billion, which was relatively unchanged from the balance at December 31 2018.
We continue to expand our gross margins during the third quarter more cloud coating services revenue grew 27.5 million were 26.6% or cost.
Well good coating services to support the schools increased by only three point Sixmillion were 10.2% gross margin on cloud deployment services increased from 65.8% in the third quarter last year.
70.2%, reflecting an increase in proportion dayforce customers was more than two years from 62% in the third quarter last year to 68% and also or 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 negative 13.6% in the quarter last year to negative 7.7% due to productivity improvements in too many new customers, reflecting the increased experience of our implement.
Patient consultants and also the continued use of automation.
Implementation process.
Activations increased 22.7 million were 66%.
Well professional services and other costs to coordinate compared to 18.1 million were 64% of cloud professional services costs in the third quarter last year.
And post go live professional services increased 8.1 million were 23% of cloud professional services and other costs in the third quarter compared to 6.1 million 22%.
Professional services and other costs.
Third quarter last year.
We continue to invest in research and development and in sales and marketing to support warm truly great Dayforce and product development and management expenses increased by $3 million, 20.7% to 17.5 million.
Sales and marketing expenses increased 7.3 million were 25.9% to 35.5 million and sales and marketing expenses as a percent of revenue increased from 15.8% to 17.5%.
<unk> expenses increased 17.7 million to $56.8 million as disclosed in our 10-Q filed earlier today.
Most of this increase in DNA is attributable to isolated super sensitive.
And the 26 2019.
Through October 31st 12.6 million remains on the cobbled and Weve recorded the Wall Street. This amount with engineered the incident did not create the natural extension to enable customers as customers only funded the correct payroll amounts we've identified the issue and corrected.
Good morning problem to present to recruits.
If the school impacted 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 should be Cincinnati operating profit would have been 19.1 million up 17.9% year over year.
Collection of concern going and we expect to the recoveries, which will be recognized as a reduction digi makes sense in future in future periods.
When you exclude any subsequent recoveries from adjusted EBITDA goal and detailed any material positive impacts of additional recoveries on operating profit. They report Q4 results.
Adjusted EBITDA increased by $10 million, 27.5% to 46.2 million, an adjusted EBITDA margin increased approximately 250 basis points from 20.4% to 22.9%.
During the quarter, we determined that given consistent profitability since your IPO.
Forecast for the future, we believe it's more likely than not that we will be able to utilize net operating loss carry forwards and other deferred tax assets and therefore, we do reached $65.8 million, although evaluation allowance.
This 65.8 million dollar tax benefit was partially offset by $200000 just aggregate tax expense and we recorded a net tax benefit 65.6 million during the third quarter.
Including the expected this tax benefit diluted net income per share was 42 cents.
This year compared to three cents in the third quarter last year.
Adjusted diluted net income per share was 11 cents in the third quarter. This year compared to diluted net income per share of 10 cents in the third quarter last year.
Moving to the balance sheet as of September Thirtyth 2019, we had cash cash equivalents of 270.9 million an increase of 53.1 million compared to December 31, 2018, and or total debt was 666.1.
1 million as of September Thirtyth 2019, a reduction of 2.2 million compared to December can be one 2018.
Our capital expenditures in Q3, 2019 were $12 million compared to 9.9 million in Q3 2018.
Can you give them a 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 billion was capitalized software development.
Turning now to our outlook for the full year fiscal 2019.
Given all performance in the first three quarters, we are raising full year fiscal 2019 revenue guidance, specifically on a constant currency basis, we expect club revenue to be in the range of 659 million to 662 billion an increase of two.
4.7% to 25.3% on a constant currency basis, assuming power pay revenues of approximately 92.5 million Dayforce revenue is expected to be in the range of $566.5 million to $569.5 million.
In 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.
Or to your revenue guidance incorporates the 25 basis point reduction in the federal discount rate at the end of October each hundred basis point change in interest rates is estimated to had approximately $18 million impact on flu revenue over the ensuing 12 months.
We're continuing to invest in the digital digital wallet global expansion sales growth and we were reaffirming the full year adjusted EBITDA range. We provided on February six 2019, we expect adjusted EBITDA to be in the range.
$180 million to $287 million were increased 13.3% to 16.4% year over year.
At this time im going to hand, the call back to the operating and all the openly worn for questions. Thank you.
[noise]. Thank you to ask an audio question simply press Star then the number one on your telephone keypad again, that's star one to ask a question.
My first question comes from some odd some money with Jefferies.
Hi, great. Thanks for taking my questions. Congrats on a great quarter. So I guess first David if I could err on the Canada contract.
The heels of that the company that's a new public sector came I was wondering if you'd 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.
Hi.
Thanks to my job as you know we are quite excited about a healthy need Canadian government and paying its people correctly.
We did bring in a very experienced subject matter expert I mean did launch the new public sector vertical probably about a quarter again, we are seeing traction already and increased demand and pipeline build back to its too early to already talked about the are they impact.
At that particular vertical I will report on it obviously more in subsequent quarters.
Great and then maybe if I could just ask a follow up question in terms of the acceleration. It seems like the company is a is executing on that and it's too early 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 lives how should we think about that acceleration and.
Fourq you and then into 2020, thank you.
Well a as you know we don't provide guidance, what 2020, but I can't speak about Q4, and not get mentioned Nexus well I in my little full carry that Oh, we obviously expect day false revenue to continue to accelerate in Q4, and what I did point until they start we believe that today if they totaled.
Hey, false revenue acceleration will be driven by day false recurring.
[noise] I I again, we typically go into a quarter with a.
Very high degree of confidence given that.
The recurring revenue he's really determined by the go lives at the end of Q3.
And the professional services, obviously the contracts we working on most did you get live at the end of Q4.
That's helpful. Thanks for taking my questions.
And your next question comes from the line of Mark Marcon with Baird.
Good afternoon, only add my congratulations Im wondering could you talk a little bit about the composition of some of the when the came this quarter you mentioned roughly 167 that you ended up implementing.
Are they typically coming from some of the the older legacy UMB 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 35000 employees were what was.
What was the old.
There.
Sure. So first of all the the number was 163 not 167 and <unk> that is the accounts that we activated in the portrait.
No not be accounts, if we sold in the quarter right.
The composition all those accounts would be quite typical for what we usually would expect across different verticals.
In terms of the a competitor to fill the system separately, replacing it hasnt changed about half the time it would be a direct competitor and the other half of their time going to be more legacy.
It's systems, whether they be home grown.
Oh or more antiquated types of technology, they may not be in service.
In the case, something large healthcare I I had a company a it was a combination of a large workforce management vendor every replaced on the time and attendance side.
And I believe but I'm not fashion. They said they had a a an ERP system I think on the payroll side and we all saw but you get the full talents suite for them to.
Great.
And then at your conference you know you talked more about the wallet then an on demand paid capabilities wondering if you can talk a little bit about what the feedback was to you.
You know from some of the bigger clients in terms of their interest there.
So we obviously are very excited about the dayforce wallets and the launch at the day fourth quarter, which we all the same side to wallet.
In Q1 off next year and the reaction from the client base has been very high we have started to take orders for activation also wallets in Q1 and I expect it will grow very quickly next year.
Really that's great and then can you talk just a little bit about isolated incident its detailed in the queue, but <unk> the underlying nature and do you expect to.
The fun.
So.
Also don't yes, so we had an isolated incident wrong on Thursday September 26 resulted in duplicate payments for a portion of our U.S. payroll customers Oh, we get we identified the issue we corrected the underlying problem or the incident didn't create any financial exposure.
Sure for any of our customers with respect to the charge.
Got it rather than speculate about how much more we may recover we booked a loss for the in the full amount remaining 12.6 million, but we do expect additional recoveries in a in Q4 and again, we'll adjust those from adjusted EBITDA and to the extent their material will identify them and then.
The impact on operating results.
It was a single incident.
Oh, absolutely isolated incidents.
Fully remediated.
And fully Remediated, great and Arthur just want to great Congrats and commend you for.
For everything is as well as.
You know the way that you announced this would trickle nice lead time that's fantastic.
[noise] and your next question comes from Daniel Jester with Citi.
Hi, good afternoon, everyone. So just on the international expansion you talked about this the see aspiration to get to 20 countries over the next couple of years. He talked 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.
Sure. So again, just as a reminder, when I looked at the market [noise].
In about a 2010 2011.
We kind of identified that half of our addressable market was outside the U.S. in Canada.
And say, we designed the platform from the very beginning to be global in nature.
And that all the C deals with everything from culture actually language localization. We've had a 22 languages are ready supported.
Currency FX state full matching.
We also built the rule engine in a way that we could extended very easily into new jurisdictions and when we first launch day force in 2013, we launched it at the same time for both the U.S. and kind of both of which are very difficult jurisdictions.
Since then we've now expanded the product into four additional jurisdictions.
And the cost Abbas extend into each of these jurisdictions is probably about 10 million to $2 million of direct I 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.
On track a structure that you have on a global basis.
From a data privacy and protection perspective, we feel full blown we'll stick with GDP, our compliance into the product, which allows us to judge the various GDPR policies by different countries across Europe , and the UK [noise].
Our plans for expansion most likely will involve.
Hi, some M&A very similar to what day Fools did was ceridian back in 2012 2013.
We were able to partner in that case with Sigrity not as an organization had very deep domain knowledge had very good distribution, but given that 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 day falls platform into that particular jurisdiction use in the people who have the domain knowledge.
And then obviously leveraging their distribution capability to accelerate our penetration into that particular market.
[noise] right. That's really helpful context. Thank you and then on the announcements that you are that you made enhancements for for a in Canada for that Powerplay application. I think you said in the past that you were hoping to or at least aspiring to reaccelerate growth.
In that particular business, you know up towards maybe that the high single digits overtime are these enhancements enough to gets you there or should be we'd be expecting more in the future. There. Thank you.
Yeah. Thanks, it saying the start of the enhancements say this gives us some basic <unk> HR and telling capability for the power pay customers.
You know we have close to 50000 different organizations that use the top a product.
We pay about 10 million people on that particular platform.
This allows us immediately to go back to the power pay based an offer then the new functionality.
Hi monthly fee.
And as we build out more talent capabilities will give us more ability to go back to that base in the future as well.
Great. Thanks very much.
And as a reminder, once again press star one to ask a question. Our next question comes from Mark Murphy with JP Morgan.
[noise] costs on behalf of Mark Murphy, Thanks for taking my questions.
David We spoke with some of your services partners It insights who said that.
In Bakeoffs were only work last 15 workday. Once competed ceridian has started to be part of that mix.
What is it's about some of these larger customers or what do they see in ceridian that you makes it a very attractive and maybe more so than what it used to now that you're being involved in some of those take off.
So a few things on the site.
Very similar to global when we designed to Dayforce platform, we built it in a way that we could scale two very large workforces. So highly scalable rule engine, a 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 10000 to employees.
Is the continuous calculation engine, where every time a time she'd HR record changes, we are able to recalculate. The net earnings the launch of the cost him as more valuable that is because it gives them much more time to verify that the payroll danger is correct.
As you remember instead of waiting until the end of the pay cycle, we allow the payroll stuff access to the day should the very beginning they can run they ordered do they edits and their adjustments immediately and that means that they ended the pay cycle they effectively all done.
We also allows organizations to enable a payroll preview.
For employees to view, there Payslips Jeremy Act to pay cycle.
And much like allowing the payroll stopped early access to the data, allowing employees to verify their own data before the money is transferred it gives them much more time organization much more time to verify and you pay people accurately.
The benefits of the continuous calculation engine, obviously apply as well to generation useful business information for all people with inside the organization and we obviously are leveraging that now inside today falls wallet, which again allows employees to view, what Dave and at the end of each day and.
The ability to access that money without any direct fees.
Hello, Thank you David and then maybe one for Arthur I 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 twentys on a consistent basis and any change to that the decline.
No no again, the the decline excluding excluding migrations that 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, a we would expect it to be in the 13% to 17% range.
And that was also in line.
Okay, but but no no drastic changes expected in that.
And how it's been no guarantee covenant was you know, obviously less and less of an issue. It's clear you know cloud cloud is now 82% of our of our total revenue 36 months ago. We just we just crossed the 50% line and.
Yeah, It's really a you know less and less of an impact on the business.
Thanks very much.
And our next question comes from the line of Nandan Amladi with Guggenheim partners.
Hi, good afternoon, not thanks for taking my question.
So first one no perhaps for our third 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 was that trajectory looks like over the next to say 12 to 18 months.
Well again, where we were not forecasting 2020, right now, but I mean part part of be part of the effort to engage in you know third party users to have a more profitable no professional services and implementation function.
Right Okay.
A follow up for David the reference to expanding to 20 countries in three years and you touched on not perhaps making some acquisitions to get there.
Any indication of the balance of organic development versus acquisitions.
I think you'll see a combination and remember even when we do an acquisition, we not requiring for technology.
Say the playbook tributaries very similar to what we did with Ceridian, a we would do it stops so almost immediately.
We were a a stop any new development on their products I put it into more of a maintenance mode.
Over a three to five year period, we have looked at migrating the customer based on today falls.
And we would use their knowledge that people.
To help build out to use the stories and have the dayforce develop this obviously build out the rule engine to handle those users stories very quickly and then to enter the market with prop and momentum no using they love leveraging a distribution network and such.
Right.
Thank you.
Our next question comes from match style with William Blair.
[noise] Hey, guys. Thanks for taking my question wanting to ask on on the UK and Australia markets and now that you've been and then for several quarters. So wondering how would you characterize the the competitiveness of of those markets for payroll relative to the U.S. and then.
You know what are you seeing and in terms of win rates and those markets versus the U.S.
Sure So office by starting that even in the U.S. encountering dad, we are ready onishi two competitors on a on a consistent basis.
As we go global whether it'd be the UK, Australia, it's a similar type of passion.
There is they aren't that many people that actually played in the segments that we do.
When I compare the UK to North America, I would argue that the vendors in the UK markets I'll, probably 10 years behind the North American players.
And when I look at the Australian tail as it seems that the technologies are probably another five to 10 years behind.
The UK.
So the advantages of the day falls platform, whether it be the full end to end human capital management.
Functionality that obviously allows us to joke differentiate in the what we call the major markets up to that 6000 employees space, having one database one rule engine across all of the use cases around a particular worker.
Resonates exceptionally well in the UK and in Australia and for the logic customers, having that continuous calculation piece also it gives them much more time to verify and validate the people getting paid correctly.
Got it and is there any sort of you know in investments or I guess, a time that it takes to maybe gaining some brand awareness in those markets sense here with the Ceridian brand name here, you're probably better known in North America that some of these newer markets.
That's a very good question and that's where the M&A strategy comes and in the last quarter, we get an acquisition other workforce management company called dry check in Australia has a presence in Australia, but little bit in New Zealand as well and what's actually acquired several hundred customers.
The following the close of the acquisition, we did two HCM summits wanting Sydney and one in Melbourne, primarily targeting the write checks customer base and we see that has a very good way of can't change.
I I recognize very quickly in a particular market as a top plan.
Great. That's all I had guys. Thanks, a lot taking my questions.
Appreciate it.
And your next question comes from Scott Burk, we can Needham.
Hi, David in Arthur Congrats on good quarter, Thanks for taking my questions I.
Yes.
David starting with you if you take a step back some of the commentary that we heard and HR Tech.
Would indicate overall demand trends in the space, what really strong not just under 2020, but right now they're kind of multiyear rod. This is after what most people would consider to be a five to eight year run a really good sales front of the space. How do you think long term your ability is from a competitive stance.
Pointing even further penetrate different aspects of the maybe segments that you don't plan is strongly today.
If I looked at our market penetration in the U.S. I I would think that we probably have less than a 5% market share today.
I think our technology has most I think of investors on the banks have verified is quite differentiated both in the end to end a feature sets that's what it's a continuous calculation.
I would argue that we probably all five to 10 years ahead of the two other competitors in this space and we've now proven out that we have a very robust and scalable solution with over 4000 customers live on the actual product.
The number of customers up we're taking life is obviously accelerated slightly in the size of the customers as you can see what some of the health care and retail a wins that we discussed have obviously gone up Sarah I think that you'll see us growth first of all in capturing more of what I'll call. It compliance application markets.
Which would be a payroll time and benefits was a 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.
They are also is potential growth in adjacent markets, where we don't play in at all and you'll see some build all some M&A activity in those markets probably over the next 12 to 24 months.
And then on the global side, we just really begun.
Indeed, detraction, we're having in the UK and in Australia is very positive and I expect it did you continue to be very good.
He into the into the future.
And we're also very excited with the potential for the day falls wallet and what we can do around financial wellness.
[noise] excellent quite helpful. There and then from a follow up perspective are there.
Should we think about.
Divorce gross margins kind of trending are tracking from a intermediate term perspective multiyear trend.
You've had a obviously nice jump year over year divorce revenues already make up a substantial portion of total revenues trying to understand maybe what that trajectory can actually looks like from the current high level. Thank you.
Well, our our gross margin on cloud recurring services is is really declined 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 had you know the the.
Nominal number of or customers like for more than two years. The actual number of customers like more than two years increased by more than 30% year over year, and we know from experienced a customer's life more than two years, we have fewer customers for tickets.
So we we would expect or gross margins on cloud recurring services no to continue to expand and likewise on professional services.
We would expect the trend towards breakeven to continue as well.
[noise] very helpful. Thanksgiving Congrats on the good quarter.
Again to ask an audio question I saw one on your telephone keypad and our next question comes from Funky kind of Guy with Mizuho.
Right.
Thanks for taking my question just a follow up just following up on that international expansion. It makes sense for you to go aggressive and expand on their native barrel in 20 different countries, given New York technology advantages over competition.
And also good to see some of the notable wins and the you can Australia.
And now right to go under your umbrella just wondering if you could talk about right now in our international revenue how much is that in a as a percent business revenue and how do you expect dr. grow in next few years.
So we don't report on international revenue as a percentage up overall revenue a there what I have said and I. We believe it to be true is that in 29 chain. Most of the growth would come from outside of the penetration in major markets and 2020, you'll see the impact any our success in the enterprise.
Market and we believe that you'll see an impact from the global expansion in 2021 and beyond.
Oh, Okay. That's helpful and now on the on demand pay side and that's definitely on the emerging team right now in peddled industry, but do you guys seem to have a very differentiating offering then you know sounds your competitors, who offer alone so charge employer employee <unk> transaction. So could you share like how big is.
The on demand opportunity for you and also what sort of feedback you got from customer with digital wallet, then onsite and how you're planning to monetize that.
Sure. So the way that we differentiate with the Dayforce water from the Dayforce Cogs is that each time, an employee loads a day falls card. We do a same day payroll full that employee which means we do the submissions of all the necessary remittances.
Immediately and say we have a fully comply installation.
From a go to market perspective, we've been able to.
I I could you take it out in a way that we don't have to charge the customer and additional pathan to offer it to their employees and we doesn't change the way that they do their funding and they still find at the end of the actual payroll cycle.
And from an employee perspective in the U.S., we didn'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 times you do the proper research and profit 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 I believe that it'll be a very successful launch come Q1.
Thanks, David I keep up the good work.
Thank you. Thank you.
And our next question comes from Raynaud when scale with Barclays.
Hey, Thanks for squeezing me in a.
David can I see on that subject do you know like if you think about it a few years back when we move to kind of direct deposit from check and it was like Oh. My God. You know everyone was kind of pushing against that no you kind of if you think what you do with seemed <unk>. It almost feels like the technology has just me on that it's not possible and it should.
And next.
Evolution of the industry you would you kind of agree with that or is this kind of a different kind of step.
The Grand <unk> I think it makes tremendous sense, we know that almost 80% of all people out there, let's paycheck to paycheck.
We also noted when we do so they know people, especially the younger generations.
50% of them once you get paid much more frequently than they currently are and the reason for that either helps them on the on financial flexibility.
I would be I believe that within a period of time I didn't hear it was five years old 10 years at this will obviously become the norm and expectation.
All told people who work for companies.
From our perspective, when you've completed a day of work you've earned that money. Its yalls. The continuous calculation allows us to calculate the net earnings full employment and our back office has the sophistication that we can do the same day remittances and the money movement. So there's no technique.
For a reason why why you called off at this benefit to a works is today.
Okay, and then on that note like and it's like I don't want to get too technical on earnings call, but like you know some of your competitors starting to see like all we're going to do continues can you just remind us like how different is it in terms of from a technical set up to be able to do continues whereas this come up the old approach.
Oh, Yeah. There's continues and then is doing it properly in order to day continues calculations you have to have a very robust time and attendance.
Engine and that means that you can do sophisticated calculations like retroactive a adjustments if you make a change backwards in time during the day to calculation and determining the amount of money that yards that you have to topped employee up if you change your time code from page on table on page page.
After recalculate that.
You have to have the benefit side and the HR side working as well because it's not just time reichhold's I can lead to change in the current Barrett.
And to do that requires a in a it 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 build very robust time and attendance or 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 profit benefit benefit eligibility types of calculations that did that you'd have to do as well the old.
The full HR module and then also build out their payroll engine and even if they do that they then have to develop the backend to do the tax calculation from the various I remittances.
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 as well.
Okay perfect. Okay. Thank you.
And our next question comes from Chris Merwin with Goldman Sachs.
Okay. Thanks, very much I think you I'm talking about how implementations are going in particular for strategic accounts are those sort of taking place when times get whenever this can be some sense some bigger projects.
And also as we look to the fourth quarter I'm should think about more strategic accounts going live in potentially seeing a tail into revenue per customer there. Thanks.
City, the so I think that the segment, it's actually enterprise accounts.
Implementations appeared to be going quite well.
You know from our perspective, we meet on a a a biweekly basis, where each of our segment needs gives us the forecast full birthday go lives on their project K calls in that particular quarter and we monitored very very carefully.
And when we do the planning, especially with the enterprise accounts, you, sometimes get more more mochas because of the size of accounts and then on the program management you have to put onto the account in addition to things like project management.
The accounts to 50 on manage very very nicely and from the customer side you typically have.
I I large client team you often have third party ESI resources hopping on the program management and the project management side.
We we feel quite comfortable with that particular segment.
They also on the enterprise customers going live and as I said earlier, you would expect to see some impact from enterprise accounts in 2020.
Okay, Great and then just as it.
Relates to international and I know you talked before about how investment there is going to be in 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 or are you going to manage that thanks.
Say, it Buda Oscar anywhere, where we focus on I, 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 a year over year. If I look at Q3. It went up by 370 basis points. If I look at Q1 and 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.
He had gross profit on recurring.
Improved.
In terms of overall investment we will focus on growth of the organization.
Full most.
But at the same time, we would expect you see the gross profit on recurring go up.
And then on the remainder we will take that and determine how much will invest that into new markets. This is into profitability.
Thank you.
And our last question comes from true Kookmin with Cantor Fitzgerald.
Hi, Thanks for taking my question squeezing me in here, so you've talked a lot about the wallet and everything I was just curious if you could talk about where you guys see moving forward as far as the pipeline or for products or applications.
Oh every year, we release [laughter], probably two to three new modules are then the next module that will be taken t., a that'll become G.A. is engagement surveys and pulse surveys and that will be in the next release, we've begun we've already begun showing that your customers.
And we expect that we'll have obviously a positive impact on the pattern that we get.
From our from our customers.
We're also beginning to relief plus modules for the existing features we have recruiting recruiting plus benefits benefit last well, we're able to go back to the existing base and increase the pepam, we get for those modules as well as for new customers get a high if im just to begin so you'll continue to see those types.
So if investments going forward.
Great and then just curious on how retention rates look when you go to the enterprise client and just how it impacts the total either positive or negative.
We we don't breakout or retention based on segment.
And we gave guidance this year between 95 and 97% in we're tracking I write writing the middle full that Karen as expected.
Got it thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[noise] Oh.
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