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Ceridian HCM Holding Inc. (NYSE:CDAY)
Q3 2019 Earnings Call
Nov 7, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Jeremy Johnson -- Vice President, Finance and Investor Relations

Thank you and good evening. On the call today we have President and 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.

David Ossip -- Chairman and Chief Executive Officer

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 remained 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 Count. We ended the quarter with 4,159 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 onto 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 enterprise segments and to growing 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 and acquisitioning 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 median 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 nature of 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 three years.

Moving onto the sales in the third quarter. We continue to see strong demand and I wanted 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 healthcare 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 capability. Each winning account was our track record of consistently delivering new features to market and our experience processing large complex payrolls. Decision makers from that company attended our 2018 Insights Conference and an HCM summit.

We also won a large retail and wholesale footwear company with more than 30 brands, 13,000 employees in 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 largely 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 wins in Australia and the UK which further highlight the momentum we're seeing globally.

In Australia, we signed a leading retailer, our 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 engaging user experience, strong workforce management functionality and best-in-class talent management. In the UK, 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 bid for the government's future payroll, time and HCM business against two other vendors. In September, the government issued a press release detailing the fact that they had secured a CAD117 million to co-design and deliver pilot projects for next-generation human resources and pay solution. These pilot projects [Indecipherable] potential solutions against their real complexity 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 after payroll due to more than 3,000 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 in the week of October 25. 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 three new products including Dayforce Intelligence, which combines data with predicted 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 widgets and styles and the Dayforce Wallet, which leverages our continuous calculation differentiation and process of the same day payroll each time a worker request their pay, allowing employees to access their earn 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 on-boarding 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 welcome Bill Crawford to the Ceridian team, as our Chief Value Officer reporting to Leagh Turner. Bill's experience in the global HCM space, the way 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 in global markets. And finally, we announced this evening via our 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'll be fully employed by Ceridian until 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.

Arthur Gitajn -- Executive Vice President, Chief Financial Officer

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 40.5%. 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 with 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 two 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 to negative 15.6% 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 of 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 isolated service incident on September 26, 2019 through October 31, $12.6 million remains unrecovered and we 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. Correction efforts are going 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 carry forwards 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 $0.32 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 September30, 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 three 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 15.3% to 16.4% year-over-year.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] And our first question comes from Samad Samana with Jefferies.

Samad Saleem Samana -- Jefferies -- Analyst

Hi. Great. Thanks for taking my questions and 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?

David Ossip -- Chairman and Chief Executive Officer

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.

Samad Saleem Samana -- Jefferies -- Analyst

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 the 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? Thank you.

David Ossip -- Chairman and Chief Executive Officer

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 today 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.

Samad Saleem Samana -- Jefferies -- Analyst

That's helpful. Thanks for taking my questions.

Operator

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

Mark Steven Marcon -- Robert W. Baird & Co. -- Analyst

Good afternoon, let me 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 is that mix changing? And then specifically with some of the really big wins, the first big win that you mentioned in terms of 35,000 employees or what was the old client there?

David Ossip -- Chairman and Chief Executive Officer

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'll be more legacy systems whether they'd be home-grown all more antiquated types of technology that may not be in service.

In the case of the large healthcare 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.

Mark Steven Marcon -- Robert W. Baird & Co. -- Analyst

Great. And then in your conference you talked more about the wallet and on-demand pay capabilities. I'm 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?

David Ossip -- Chairman and Chief Executive Officer

So we obviously are very excited about the Dayforce Wallet in 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.

Mark Steven Marcon -- Robert W. Baird & Co. -- Analyst

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?

David Ossip -- Chairman and Chief Executive Officer

So Arthur?

Arthur Gitajn -- Executive Vice President, Chief Financial Officer

Yes. So we had an isolated incident on Thursday, September 26th 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 in the full amount with 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 their material will identify them and their impact on operating results.

Mark Steven Marcon -- Robert W. Baird & Co. -- Analyst

And it was a single incident?

Arthur Gitajn -- Executive Vice President, Chief Financial Officer

Isolated incidents and fully remediate.

Mark Steven Marcon -- Robert W. Baird & Co. -- Analyst

Fully remediate. Great. And Arthur 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.

Arthur Gitajn -- Executive Vice President, Chief Financial Officer

Thank you.

Mark Steven Marcon -- Robert W. Baird & Co. -- Analyst

[Technical Issues] How should we think about layering that in over the next couple of years?

David Ossip -- Chairman and Chief Executive Officer

Sure. So again, just as a reminder, when I look at the market in about 2010-2011, we kind of identify 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, state 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 four 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 build 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 -- we'll take full GDPR compliance into the product which allows us to adhere to the various GDPR policies by different countries across Europe and the UK.

Our plans for expansion most likely will involve some M&A very similar to what Dayforce did with Ceridian back in 2012-2013, where we were able to partner, in that case, with Ceridian as an organization and had very deep domain knowledge, had 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.

Mark Steven Marcon -- Robert W. Baird & Co. -- Analyst

Great. That's really helpful context. Thank you. 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're hoping to or at least aspiring to reaccelerate growth in that particular business up toward 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? Thank you.

David Ossip -- Chairman and Chief Executive Officer

Thanks. 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, it'll give us more ability to go back to that base in the future as well.

Mark Steven Marcon -- Robert W. Baird & Co. -- Analyst

Okay. Thanks very much.

Operator

[Operator Instructions] Our next question comes from Mark Murphy with JPMorgan.

Unidentified Participant

[Technical Issues] on behalf of Mark Murphy. Thanks for taking our questions. David, we spoke with some of your services partners at INSIGHTS who said that in big ops, it were 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 or so than what it used to now that you're being involved in some of those big ops?

David Ossip -- Chairman and Chief Executive Officer

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 rule 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 time sheet, 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 staff early access to the data, allowing employees to verify their own data before the money is transferred, it 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 generation useful business information for all people with 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.

Unidentified Participant

That's helpful. Thank you, David. 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 the decline?

Arthur Gitajn -- Executive Vice President, Chief Financial Officer

No, no. Again, the decline excluding migrations 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.

Unidentified Participant

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

Arthur Gitajn -- Executive Vice President, Chief Financial Officer

No, but it's becoming less -- obviously less and less of an issue. It's -- 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.

Unidentified Participant

Thanks very much.

Operator

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

Nandan Amladi -- Guggenheim -- Analyst

Hi, good afternoon. Thanks for taking my question. So first on 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?

Arthur Gitajn -- Executive Vice President, Chief Financial Officer

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 in implementation function.

Nandan Amladi -- Guggenheim -- Analyst

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

David Ossip -- Chairman and Chief Executive Officer

I think you'll see a combination, and 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 three to five-year period, we'd look at migrating the customer base on to 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 a distribution network and such.

Nandan Amladi -- Guggenheim -- Analyst

Right. Thank you

Operator

Our next question comes from Matt Pfau with William Blair.

Matthew Pfau -- William Blair -- Analyst

Hey guys. Thanks for taking my question. Wanted to ask on the UK and Australia markets and now that you've been in them for several quarters. I was 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.?

David Ossip -- Chairman and Chief Executive Officer

Sure. So I'll -- first by starting that even in the U.S. and Canada, we really only see two competitors on a consistent basis. As we go global, whether it'd be the UK, Australia, it's a similar type of pattern that there -- they aren't that many people that actually play in the segments that we do. When I compare the UK to North America, I would argue that, the vendors in the UK market are probably 10 years behind the North American players and when I look at the Australian parallels, it seems that the technologies are probably another five to 10 years behind the UK. So the advantages of the Dayforce platform whether it'd be the full end-to-end human capital management functionality that obviously allows us to differentiate in the, what we call, the major markets up to that 6,000 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 larger customers, having that continuous calculation fees also gives them much more time to verify and validate that people are getting paid correctly.

Matthew Pfau -- William Blair -- Analyst

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 -- with the Ceridian brand name you're probably better known in North America than in some of these newer markets?

David Ossip -- Chairman and Chief Executive Officer

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 the 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 a several hundred customers immediately following the close of the acquisition we did two 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 -- recognize very quickly in a particular market as a top player.

Matthew Pfau -- William Blair -- Analyst

Great. That's all I had guys. Thanks a lot for taking my questions.

David Ossip -- Chairman and Chief Executive Officer

Appreciate it.

Operator

And your next question comes from Scott Berg with Needham.

Scott Berg -- Needham -- Analyst

Hi David and Arthur. Congrats on a good quarter and thanks for taking my questions. 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 was really strong not just in the 2020 but for another in a multi-year run. And this is after what mostly would consider to be five to 8-year run, a really good salesmen 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 segment that you don't plan as strongly today?

David Ossip -- Chairman and Chief Executive Officer

If I looked 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 set that's what is a continuous calculation, I would argue that we probably are five to 10 years ahead of the two other competitors in the 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 in the size of the customers as you can see with some of the healthcare 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 our core compliance application market, which would be payroll, time and benefits, where we're very strong. On the talent side, we are really fortifying our offering 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 will 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 UK 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.

Scott Berg -- Needham -- Analyst

Excellent. 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 a intermediate term perspective multi-year trend. You've had obviously 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? Thank you.

Arthur Gitajn -- Executive Vice President, Chief Financial Officer

So 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 two years. The actual number of customers live for more than two years increased by more than 30% year-over-year and we know from experience, if a customer is live for more than two 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.

Scott Berg -- Needham -- Analyst

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

Operator

[Operator Instructions] And our next question comes from Siti Panigrahi with Mizuho.

Siti Panigrahi -- Mizuho -- Analyst

Right. Thanks for taking my question. 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 UK and Australia and now RITEQ under your umbrella. Just wondering if you could talk about right now 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?

David Ossip -- Chairman and Chief Executive Officer

So 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.

Siti Panigrahi -- Mizuho -- Analyst

Okay, that's helpful. And now on the On-Demand pay side and that's definitely an emerging team 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 employer/employee per transaction. So could you tell us 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?

David Ossip -- Chairman and Chief Executive Officer

Sure. So the way that we differentiate with the Dayforce Wallet from a Dayforce Card is that each time an employee loads a Dayforce card we do a same day payroll for that employee, which means we do the submissions of all the necessary remittances and immediately and say we have a fully compliance 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 pattern 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'll be a very successful launch come Q1.

Siti Panigrahi -- Mizuho -- Analyst

Thanks, David. Keep up the good work.

David Ossip -- Chairman and Chief Executive Officer

Thank you.

Operator

And our next question comes from Raimo Lenschow with Barclays.

Raimo Lenschow -- Barclays -- Analyst

Hey, thanks for squeezing me in. David can I stay 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 cheque and it 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?

David Ossip -- Chairman and Chief Executive Officer

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 survey 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 that it helps them on the financial flexibility. I believe that within a period of time. I don't know if it's five 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 is no technical reason why you can't offer this benefit to workers today.

Raimo Lenschow -- Barclays -- Analyst

Yeah, OK. And then on that note, like and it's, I mean, I don't want to get too technical on earnings call but like some of your competitors are starting to say like oh! we are 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 continuous whereas this kind of the old approach?

David Ossip -- Chairman and Chief Executive Officer

There's continuous M&As doing it properly. In order to do a 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, if you make a change backwards in time during the calculation and determining the amount of money that you are -- 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'd 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 of 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.

Raimo Lenschow -- Barclays -- Analyst

Okay, perfect. Thank you.

Operator

And our next question comes from Chris Merwin with Goldman Sachs.

Christopher David Merwin -- Goldman Sachs Group Inc -- Analyst

Okay. Thanks very much. David, you weren't talking about how implementations are going in particular for strategic accounts. Are those sort of taking place to the on time, given, I know that there 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? Thanks.

David Ossip -- Chairman and Chief Executive Officer

Thanks. So the -- 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 needs gives us the forecast for both their go-lives and their project kick-offs 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 noticed because of the size of accounts and the number of program management you have to put onto the account and decision to think like project management. So the accounts typically or manage very, very nicely, and from the customer side, you typically have a large client team, you often have third-party fire resources harping 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.

Christopher David Merwin -- Goldman Sachs Group Inc -- Analyst

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? Thanks.

David Ossip -- Chairman and Chief Executive Officer

So if you would 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 it 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.

Christopher David Merwin -- Goldman Sachs Group Inc -- Analyst

Thank you.

Operator

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

Drew Kootman -- Cantor Fitzgerald -- Analyst

Hi. Thanks for taking my questions and squeezing me in here. 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?

David Ossip -- Chairman and Chief Executive Officer

Well, every year, we release probably two to three 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 pattern 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 pattern and we get for those modules as well as for new customers get a higher pattern just to begin. So you'll continue to see those types of investments going forward.

Drew Kootman -- Cantor Fitzgerald -- Analyst

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

David Ossip -- Chairman and Chief Executive Officer

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.

Drew Kootman -- Cantor Fitzgerald -- Analyst

Got it. Thank you.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Jeremy Johnson -- Vice President, Finance and Investor Relations

David Ossip -- Chairman and Chief Executive Officer

Arthur Gitajn -- Executive Vice President, Chief Financial Officer

Samad Saleem Samana -- Jefferies -- Analyst

Mark Steven Marcon -- Robert W. Baird & Co. -- Analyst

Unidentified Participant

Nandan Amladi -- Guggenheim -- Analyst

Matthew Pfau -- William Blair -- Analyst

Scott Berg -- Needham -- Analyst

Siti Panigrahi -- Mizuho -- Analyst

Raimo Lenschow -- Barclays -- Analyst

Christopher David Merwin -- Goldman Sachs Group Inc -- Analyst

Drew Kootman -- Cantor Fitzgerald -- Analyst

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