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Greetings, and welcome to the Ceridian First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Jeremy Johnson, Vice President of Finance and Investor Relations at Ceridian. Thank you, sir. Please go ahead.
Thank you. Good morning, and welcome to the Ceridian financial results conference call for the first quarter ending March 31, 2018. On the call today, we have Ceridian's CEO, David Ossip; and CFO, Arthur Gitajn. Our President, Paul Elliott, will also be available to answer questions during the Q&A portion of the call. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements about current and future plans, expectations and intentions, results, level -- 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, and listeners are cautioned not to place undue reliance on such statements. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those set forth in such statements. We refer you to securities law filing for information regarding the significant assumptions, underlying forward-looking statements and certain risks and factors that could affect our future performance and ability to deliver on those statements. We undertake no obligation to update or to revise any forward-looking statements made on this call, except as maybe required by law. The first quarter earnings release, the related financial statements and the management's discussion and analysis will be available on the SEC's EDGAR database in the U.S. and the System for Electronic Document Analysis and Retrieval, or SEDAR, in Canada as well as on the Ceridian Investor Relations website at investors.ceridian.com. Finally, all figures discussed on this conference call are in U.S. dollars, unless otherwise noted.
With that, I will turn the call over to David.
Thanks, Jeremy. Good morning, everyone, and welcome to Ceridian's first earnings call as a public company following our successful initial public offering in April 2018. Our listing on both the New York Stock Exchange and the Toronto Stock Exchange was a significant milestone for Ceridian, and we are very pleased to take this important step in growing our company. I'm pleased with our strong performance in the first quarter, where we achieved Cloud revenue growth of 38% in the HCM adjusted, EBITDA growth of 39.7%, which drove 470 basis point improvement in our HCM adjusted EBITDA margin of 23.3%. In addition, we continue to see strong market demand for Dayforce, our flagship cloud human capital management, or HCM, platform. We had 3,154 customers live on the Dayforce platform at the end of the first quarter, an increase of 150 customers from the fourth quarter of 2017 and an increase of 674 customers from the same date last year. In short, we're off to a strong start to 2018. Also, we'll review our financial results in greater detail, but first, I'm going to spend a few minutes to recap the Ceridian transformation so new investors and our analysts can better understand the key drivers for Ceridian's growth and strong financial results. In 2009, I looked at reentering the human capital management market. And what I saw at that time was that there had been a shift from on-premise solutions to cloud, and I looked to use that change in technology as a way to enter the market. When I looked at the market, my first observation was that the human capital management market was very large, around $20 billion, with cloud payroll being about 25% of that market. And when I looked particularly at the cloud payroll market, it was -- a few things stood out. First, the requirements across customer, regardless of industry or size, appeared to be the same. And that meant, from a cloud perspective, that we could build an application that will not require any customizations and could be deployed with a single code base on a single instance, which is very important from a cloud perspective. My second observation was that the average life of a customer for any of the payroll vendors seemed to be above 10 years. And that, from a cloud perspective, meant that there would be a very long life of customer and very attractive lifetime value for each customer relationship. My third observation was that there seem to be a requirement in the market for vendor consolidation, particularly that the customers wanted to have recruiting, performance, compensation functionality and other on top of their core HR, payroll and time applications. To me, these appear to be very attractive for building a cloud company. So my question was, is there a tangent that I could use to enter the market by solving a persistent problem for customers that was not being addressed by the incumbent payroll providers? I did a lot of observation of payroll people, had a number of conversations, and what I observed was that the general workflow used by payroll people was not optimal. What was going on was that there was a separation between time systems and payroll systems, time being where people would clock in and clock out, and payroll being where the taxes and the withholding calculations would happen. And the payroll data would effectively be stuck in the time system for the duration of the pay period, which was typically a 1-week or 2-week period. And so what would go on is that the people would clock in, clock out. The data would remain in the payroll system. The payroll people wouldn't be able to access it until typically a day after the pay period ended, and then they would have a very short period of time to do all of their quality checks, adjustment entries and all of their reconciliations that were needed to pay people accurately. And what resonated the most was when payroll people said they committed pay when they ran out of time rather than when they were ready. The solution to me was to build a new system that would combine payroll benefits and time with a continuous calculation. What that meant was that any time an HR record would change, a benefit record would change, a time record would change, you would recalculate the net earnings immediately. And by doing that, you could allow the payroll people to get access to the data throughout the payroll period, make any of the necessary adjustments, do all of their required audits, and that would obviously increase the accuracy of pay, reduce the anxiety for the payroll team, increase compliance. And you could also make that information available to employees so that they could see their earnings statements during the after pay period, to managers and CFOs so they could use that data for general business purposes. The idea was that we would enter the market with this differentiated solution with continuous calculations, and we would use that to win customers. And once we have the customer, we would expand the platform into all the different talent applications such as recruiting, onboarding, performance management, compensation management and learning. And the idea would be that we will be able to increase the recurring revenue from the clients without materially changing the cost basis of the actual account. In 2011, I had approached the owners of Ceridian with the concept of merging Ceridian and Dayforce together. And the reason that I wanted to partner with Ceridian was that in order to do payroll, you require very comprehensive tax. And tax, while the calculations themselves are not necessarily difficult, it does require a tremendous amount of knowledge from all of the tens of thousands of jurisdictions across the United States. And Ceridian had very strong best-of-class tax capabilities. The second reason that I wanted to partner with Ceridian was that I had been a Ceridian customer, and I had, had a very pleasant experience working with Ceridian. And I felt that their service organization was quite strong. The partnership completed in 2012 with the acquisition of Dayforce, and at that point, I took over the organization. We had 3 priorities following the combination. The first priority was that we were going to complete the Dayforce platform. The second priority that we had was that we were going to change the culture of the organization. And our belief was that if we could have a leading culture, that will translate into better customer relationships, higher referenceability and in-growth. And our third priority was that we were going to simplify the business by effectively divesting all areas of Ceridian that were not central to the growth of our cloud human capital management business. I am proud that we have accomplished much on all of those 3 priorities. We have simplified the business to the point that we now sell only our flagship Dayforce product and our leading Powerpay product, which is a cloud HR and payroll solution for the Canadian small business market. On the second priority, we have a winning culture. Our brand promise is to make work life better for anyone who uses our products and services, and that has become the focus of driving a culture of innovation and getting very high employee engagement, which has led to very high customer retention rates and new customer referrals. In fact, on Dayforce, our retention rate has been about 97% in 2017. In 2017, we're also very honored to receive over 20 awards, alone, recognizing our culture, including Glassdoor's Top 100 Best Places to Work. And on the platform side, we have built a very comprehensive end-to-end platform for human capital management. We have over 3,150 clients live on the Dayforce platform. And we have been successful across all areas of industry, industries such as financial services, retail, consumer product group, manufacturing, health care and human sciences and others. From a growth perspective going forward, we have 6 key initiatives. First, we'll continue to grow doing exactly what we have done over the last number of years. We believe that the HCM market is massive, and we still have a significant opportunity to increase our penetration in North America. The second initiative is to expand globally. We have built Dayforce as a global platform, and we are now adding a native payroll functionality in select countries. We currently have the ability to do native payroll in the U.S., Canada and the U.K., and we will be releasing in other countries in the upcoming years. Our third initiative is to continue selling the talent modules that we have already built to customers that are already live on the Dayforce platform. Our fourth initiative is to continue to innovate and to continue building new modules that we can take to our customers to provide additional value and to drive additional revenue for us. Our fifth initiative is to continue to grow our partner ecosystem. And finally, our sixth initiative is to take advantage of our continuous pay calculation capability and to bring that to our customers to provide them with on-demand pay, which would allow their employees to effectively cash out during an active payroll cycle to get paid for the days that they have worked. And we can also take advantage of the rise of the gig economy, which effectively would allow for the same-day onboarding and same-day payments for the flexible workers. I would now like to turn over the call to Arthur to discuss our financial results and guidance.
Thank you, David, and hello, everybody. As of March 31, we had 2 operating and reportable segments: our human capital management, or HCM, segment; and Lifeworks. The HCM segment includes both of our cloud solutions, Dayforce and Powerpay as well as our Bureau solutions. Our Lifeworks segment reflects the results of our Lifeworks joint venture. Subsequent to the first quarter on April 30, we successfully completed our initial public offering. And at the same time, we distributed our interest in Lifeworks to our pre-IPO stockholders. So beginning with our second quarter, Lifeworks will no longer be reported as a segment of our business, and historical Lifeworks results will be reclassified and presented as discontinued operations. As David mentioned, we're very pleased with our performance in the first quarter ended March 31, 2018. Dayforce revenue increased by $31.4 million or 44% to $102.4 million. Cloud revenue, which includes both Dayforce and Powerpay, increased by $34.5 million or 38% to a $125.2 million. And total HCM revenue, which includes revenue from both our Cloud and Bureau solutions, increased by $19.8 million or 12% to a $187.2 million. Total revenue, which includes revenue from both our HCM and Lifeworks segments, increased by $21.9 million or 12% to $208.9 million. We have 2 categories of revenues, recurring services revenues and professional services and other revenues, which are nonrecurring. Cloud recurring services revenue consists primarily of per employee per month subscription charges, and professional services and other revenues consist primarily of charges relating to Dayforce implementations but also include post-go-live professional services. Cloud revenue growth in the first quarter was driven by a 39% increase in Cloud recurring services revenue and a 34% increase in Cloud professional services and other revenue. Of the $34.5 million increase in total Cloud revenue, $6.1 million or 18% was attributable to Bureau customers migrating to Dayforce. Excluding the impact of migrations to Dayforce, revenue from Bureau solutions, which we generally stopped selling in 2012, declined by $8.6 million or 11.2%, which was in line with our expectations. Cloud revenue accounted for 67% of our total HCM revenue in the first quarter this year compared to 54% in the first quarter last year. Breaking down our Cloud revenue by solution, during the first quarter, Dayforce revenue increased 44% to a $102.4 million, and Powerpay revenue increased 16% to $22.8 million. Excluding the impact of foreign currency fluctuations, Dayforce revenue increased 43%, and revenue from Powerpay, our Cloud solution for small businesses in Canada, increased by 10%. The average float balance for our customer cross-funds during the first quarter was approximately $4.1 billion compared to $3.8 billion in the first quarter last year. And the average yield was 1.75% during the first quarter, an increase of 52 basis points compared to the first quarter last year. As a result, income from invested customer cross-funds was $17.6 million in the first quarter compared to a $11.4 million in the first quarter last year. While Cloud recurring services revenue grew 39%, our cost of Cloud recurring services to support this growth increased by $4.2 million or 15%, and our gross margin on Cloud recurring services increased from 62% in the first quarter last year to 69% as we continue to scale the business. While professional services and other revenue grew 29%, cost of professional services and other revenue was reduced by $1.1 million or 3%, primarily due to productivity improvements in implementing new customers, reflecting the increased experience of our implementation consultants and the continued use of automation in our implementation processes. Continuing the trend from last year, our negative margin on professional services and other revenue improved from negative 117% in the first quarter last year to negative 62%, reflecting, in addition to productivity improvements, an increase in profitable post-go-live professional services as a proportion of professional services and other revenue. Product development and management expenses increased by $2.6 million or 20% to $15.4 million, and capitalized software development costs increased by 13% from $5.4 million in the first quarter last year to $6.1 million. Excluding Lifeworks, HCM product development and management expenses increased by $2.9 million or 27% to $13.7 million. Overall, gross profit increased by $15.4 million or 21% to $89.2 million. Excluding Lifeworks, HCM gross profit increased by $15.5 million or 24% to $81.3 million as we continue to leverage our investment in people and processes to realize economies of scale. Selling, general and administrative expense increased $4.9 million or 8% to $65.6 million. Excluding Lifeworks, HCM selling, general and administrative expense increased $3 million or 6% to $56.8 million, primarily due to an increase in HCM sales and marketing expense, partially offset by a reduction in other general and administrative expenses. HCM operating profit increased to $27.3 million from $10.9 million in the first quarter last year, and HCM adjusted EBITDA increased to $43.6 million from $31.2 million last year. Net loss attributable to Ceridian improved by $9.1 million to a net loss of $2.1 million compared to a net loss of $11.2 million in the first quarter last year. As of March 31, we had cash and cash equivalents of $62.2 million, and our total debt was $1,132,000,000. Our capital expenditures in the first quarter were $10.3 million, including $7.4 million for software and technology and $2.9 million for property and equipment. Subsequent to the first quarter, on April 30, 2018, we successfully completed our initial public offering of 21 million shares of common stock at a public offering price of $22 per share to raise $462 million in primary proceeds. Subsequent to the closing of our IPO on April 30, THL/Cannae Investors LLC purchased from us in a private placement a $100 million of our common stock at a price per share equal to the IPO price. Including the exercise of the underwriters' overallotment option, the total offering was 24.15 million shares of common stock, with gross proceeds of $631.3 million when combined with the private placement. Concurrently, with the closing of the IPO and the private placement, we applied a portion of the net proceeds to satisfy and to discharge the $475 million principal amount of our outstanding 11% senior notes, and they will be redeemed on May 30, 2018. We also refinanced our remaining indebtedness under our $702 million senior term debt and a $130 million revolving credit facility, including accrued interests and related costs and expenses, with new senior credit facilities consisting of a $680 million term loan debt facility and a $300 million revolving credit facility. As I mentioned, contemporaneously with the IPO and private placement, we distributed our interest in Lifeworks to our pre-IPO stockholders on a pro rata basis in accordance with the pro rata interest in U.S. Consequently, we no longer have any material obligations under the Lifeworks joint venture agreement. Lifeworks is no longer a separate segment, and we will no longer have a noncontrolling interest in Lifeworks on our consolidated financial statements. Turning now to our outlook for the second quarter and full year fiscal 2018. For the second quarter, we expect Cloud revenue in the range of a $123 million to $125 million, total HCM revenue to be in the range of a $173 million to $175 million and HCM adjusted EBITDA in the range of $27 million to $29 million. Our outlook for the second quarter also includes the following assumptions: interest expense of approximately $41 million and 113.1 million weighted average shares outstanding. It's also important to note, since this is our first time providing guidance as a public company, there is some seasonality in our business. Q1 and Q4 are our strongest quarters. Q1 benefits primarily from tax filing revenue earned in association with W-2 tax forms in the U.S. and T4 tax forms in Canada and higher post-go-live professional services revenue related to the year-end activities of our customers. Q4 also benefits from seasonality where we earn revenue on certain year-end processes and higher cloud professional services revenue. For the full year fiscal 2018, we expect Cloud revenue to be in the range of $521 million to $524 million, total HCM revenue to be in the range of $730 million to $735 million and HCM adjusted EBITDA to be in the range of a $148 million to $152 million. Our outlook for full fiscal year 2018 also includes the following assumptions: interest expense of approximately $84 million and 113.7 million weighted average shares outstanding. I would also note that our guidance for both Q2 and the full year assumes no significant changes in our foreign exchange. To conclude my prepared remarks, I would say that our first -- that our results for the first quarter reflect the combination of revenue growth and increased profitability that, I believe, is one of the things that differentiates Ceridian from a financial perspective. Dayforce has transformed Ceridian into a fast-growing cloud business on a constant currency basis over the last 5 years. Cloud revenue has grown at a compound annual growth rate of 34%, and on a constant currency basis in the first quarter of this year, cloud revenue increased by 36%. At the same time, HCM gross profit increased by 24%, HCM operating profit more than doubled and HCM adjusted EBITDA increased by 40%. At this time, I'd ask the operator to open up the lines so that we can take any questions that you may have. Thank you.
[Operator Instructions] Our first question comes from the line of Alex Zukin with Piper Jaffray.
Congratulations on your first quarter out of the box here. Could you maybe quantify -- you talked about the success of converting some of the Bureau customers to Dayforce in the quarter. How was that trend relative to maybe this time last year? Maybe what should we expect as we look forward towards the remainder of the year?
So historically, Bureau customers have accounted for approximately 25% of the increase in Cloud revenue. We would expect that to decline to the 15% to 20% range over the next 8 quarters.
Great. Great. And then Powerpay, that business seems like, by our math, grew in kind of the double-digit range in the first quarter, I think almost even accelerating from last year. Can you talk to what you're seeing out of that business? And maybe in terms of the guidance, how should we be thinking about Dayforce versus Powerpay revenue for the balance of the year?
Alex, last year, we began to make some small investments in Powerpay. As you can recall, the Powerpay business is largely an outbound calling business where we make contact with an opportunity and try to convert it very, very quickly. We saw some yield from those investments as Powerpay grew year-over-year by 16% or 10% on an FX-adjusted basis. As we go forward, we will be making investments now in the growth of Powerpay. We'll probably speak a little bit more about this in the Q2 call as we currently are looking at all the various ways that we can look at investing in growth.
Our next question comes from the line of Jesse Hulsing with Goldman Sachs.
I have 2. You talked a bit about international expansion as being one of your core growth initiatives and having support for Canada and U.K. payroll. I'm wondering what you're thinking about for a distribution strategy. Is the plan to use partners as you expand internationally? Will you build out a direct sales force? And what should we think about with regards to timing of that?
Nice to be speaking with you, Jesse. Just on global, as you said, we do now have native capabilities for Dayforce for the U.S., Canada and for the U.K. Proud to announce that we now have live customers in the U.K. using the Dayforce product. As we mentioned during the road show and before, we are currently building out additional native countries. Our go-to-market strategy in the countries will largely depend on which country. At the moment, we are using a direct sales model that is very similar to what we've done in North America. But depending on the country we go into, there may be more of a partnership strategy. In terms of timing, we also mentioned this before, it takes us about 9 months to build out a new payroll engine for a new country. And then we typically select a few customers to go live to get referenceability in that particular geography, and that's typically followed by the buildout of the business development executives who do the outbound calling to source the actual leads as well as the salespeople who do the conversion. So the time from making the decision to build out a new country until we release is about 9 months. It takes us probably about a 6 to 12 months to get the first customers live, followed by the buildout of the salespeople, and then we get the revenue.
Got it. And then, Arthur, one for you. As you migrate Bureau customers to Dayforce, what impact, if any, does that have on float revenue? Does the time you're holding the funds change? Or does anything change there that would impact float?
Generally, no, but it's important to note that our revenue will generally increase faster there afloat because the float is associated with payroll, payroll tax deposits. And when customers migrate from Bureau to Cloud solutions, they typically buy additional functionality on the HCM side of our offering.
Our next question comes from the line of Mark Murphy with JPMorgan.
Yes, David, I'm wondering, in what percentage of your new wins was your continuous calculation engine being cited as a key swing factor that caused the customer to select Dayforce over the competition? And also, was it impactful to prospects that have salaried workers primarily rather than hourly workers?
So that's an interesting question. I don't think we've ever quantified it by surveying the customers. However, from my opinion, I would say that our ability to do continuous calculations which, again, provides not only the payroll people, but the business people and the employees with access to real-time, fully costed payroll data usually is a differentiating factor and one of the reasons that clients select us. There are other reasons as well that I would point to. Typically, their client experience is typically very positive. Referenceability is quite high. And the platform, as you know, with the native capabilities in just one is a differentiator as well.
Okay. And as a follow-up, could you comment on your upmarket traction in the quarter? For instance, how did you fare with the organizations that have, I think, over 6,000 employees as your line there for the enterprise? And then what was the size of the largest organization that selected Dayforce in the quarter?
So we continue to see strong traction in the upper market, which is above 6,000. I don't believe we have disclosed, and Arthur can correct me if I'm wrong, the number of customers that we saw above 10,000, 20,000, 30,000 or 40,000, but we did see a traction in those markets.
Our next question comes from line of Karl Keirstead with Deutsche Bank.
And maybe one for David and one for Arthur. David, IPOs can sometimes be branding events, and I'm just curious whether you think your IPO has had any impact. I know it's only obviously been a month or so on Dayforce awareness in the U.S. market. Any early reaction that you can share? And then for Arthur. Arthur, you mentioned that HCM sales and marketing expenses were up in the quarter. I'm just curious if you could put that into context in terms of your plans to grow the Dayforce sales capacity throughout 2018 to drive continued growth.
Nice to speak with you, Karl. The IPO obviously was a tremendous milestone for Ceridian, and we're very proud of what we've accomplished. We were pleased with how the market responded to the Ceridian story which, as you know, is the transformation of the company into one of the leading cloud human capital management businesses. In terms of pipeline and closed rates, we continue to see strong traction inside the market. That, though, has been going on for quite some time, and it's too soon to tell if the IPO has had a material impact on that.
With respect to sales and marketing, sales and marketing expenses increased $4.5 million from Q1 last year to Q1 this year. Of that $4.5 million, Lifeworks was $500,000. So say, $4 million for the HCM segment, primarily attributable to higher commission expense because we had stronger sales at the end of last year and -- or higher commission expense due to stronger sales year-over-year, and we also had some additional headcount in marketing. I'm going to hand back to David to talk about potential plans for initiatives on the sales and marketing side.
Sure. As I mentioned earlier, we're in the early stages of determining which of the growth strategies to fund. There are a number of areas that we are currently looking at. The first is additional headcount in the business development executives. These are the people who do outbound calling to identify active HCM projects. Alongside that, we are looking at increasing the headcount in sales across -- in sales resources across segments. We are also looking at having additional HCM summits. This, again, is where we bring a group of opportunities to a particular location and take them through the Ceridian/Dayforce story. They've been very successful for us in the past. Our next HCM summit is in a few weeks in New York. We are also looking at additional modules to add to the Dayforce platform. Again, as I had mentioned during the road show, it typically takes us about 9 months to get the minimal viable products stood up for a new talent module. Historically, we've been building out about 1 or so per year. Now we obviously can increase the buildout of the actual platform. I mentioned also previously, we're looking at additional investments in Powerpay, which includes both additional outbound callers as well as some R&D work to add some additional HR and talent functionality to that particular platform. In terms of the U.K. market, we're looking at ramping up the BDEs and the sales executives as well as having one or more HCM summits. And as well, we're looking at a number of initiatives around the demands of the emerging gig economy.
Our next question comes from the line of Raimo Lenschow with Barclays.
David, quick question. Prior to the IPO, we -- it kind of always like don't touch the Bureau customers because it was a stable source of cash flow to pay the interest. Obviously, you have migrations. You did mention kind of attacking Bureau more aggressively in the plans you just outlined. Can you just talk a little bit about the -- your focus there in terms of being maybe slightly more aggressive or maybe not? And then I have a follow-up for after.
So right now, our #1 priority is making sure that the clients have a very pleasant experience with Ceridian. So we are quite sensitive to the client's ambitions as to what they would like to do. That being said, we have made adjustments in our sales model for the existing Bureau customers, where we are now pairing a new business sales executive with an account executive to help the client make the right decision for them in terms of movement to the Dayforce platform.
Okay, perfect. And then the -- so maybe a quick follow-up, David, on that one. So from what you've seen so far, like how long is that process or like in terms of getting the clients kind of to look and kind of move them?
Well, the process has been going on for quite a few years, and we have done, I believe, a very good job in keeping the Bureau customers aware of all of the benefits of the Dayforce platform. We have our annual INSIGHTS Conference in October, and generally, we get very good participation of the Bureau customers at that event, as we have a number of training programs for their HR and payroll professionals. It comes down to a matter of having a conversation with the client about their short- and longer-term objectives and whether or not they would like to take advantage of the continuous calculations and the single-platform benefits of the Dayforce application.
Okay, perfect. And Arthur, could you remind us on what do the -- if I get a rising interest rate environment, which we have at the moment, like what's the connectivity to the interest you get on the float? Like I don't know if you've done the math, like every 0.5 point of interest, how much does that give to your extra float income?
Sure. So each 100 basis point increase in interest rates is projected to have a positive $16 million increase in revenues, and then that would be partially offset by a $7 million increase in interest expense on our floating term debt.
Our next question comes from the line of Walter Pritchard with Citi.
Sorry about that. David, I'm wondering if you could talk about the attach on talent, sort of any metrics you can give us there and what sorts of customers you're seeing the most traction with as it relates to that and Dayforce.
So we don't report our attachment rates on the talent modules. As we've discussed beforehand, we generally sell in terms of bundles, and we get the -- our largest bundles in our midmarket segment, which effectively goes from about 500-or-so to about 2,500 employees is where we typically would see those particular customers buying the full end-to-end HCM suite.
Great. And then, Arthur, I guess just one follow-up for -- from Raimo's question on float. Is it possible to talk about what sort of embedded assumption you have in the guidance for this year around float? Or should we assume that the levels that you saw in Q1 are relatively sustainable for the year?
We are assuming still some increase in interest rates before year-end, something in the neighborhood of -- we're -- our average in Q1 is 1.75%. We would be looking at an average for the full year in the neighborhood of 1.9%. So still a little bit of an increase through the remainder of the year.
Our next question comes from line of Siti Panigrahi with Wells Fargo.
Just when you look at your products right now, what sort of like total PEPM opportunity that you have? And what sort of penetration you have currently? And as you talked about the new products coming, what's your goal in terms of achieving that PEPM -- total PEPM?
Siti, I'll talk in terms of realization, because I think that's more relevant. When we are playing in the middle segment, which, again, is around that 500 to 2,500 employee range, we see realization rates are somewhere between $25 and $30 when the clients buy the full bundle. Now that's obviously less than if you took the -- if you were to take the sum of all of the individualized modules, as there is a little bit of discounting when the clients buy the full bundle. In terms of aspirations, there's still a lot for us to build on the platform, and they vary between certain types of features that would add between $1 of PEPM to about $5 to $10 of PEPM.
And then you talked about this gig economy, like the on-demand pay, how big is that opportunity? Do you see currently any provider offering that or any customer requirement or demand at this point?
It's hard to quantify, but what I can say is if we look at the overall employment numbers, I believe about 40% of the workforce is expected to be flexible workers by 2020. So that obviously is a sizable opportunity for us. What makes it attractive is that our continuous pay calculation allows us effectively to do same-day pay. So you can imagine a situation where you clock in with a mobile device, clock out with a mobile device, and as you clock out, the employee's able to receive the amount, net of all the withholdings, and that's being transferred immediately to a digital wallet or a bank account.
Our next question comes from the line of John DiFucci with Jefferies.
This is Howard Ma on for John DiFucci. I guess for David first. So we know you're making a concerted effort in building out your partner program, and -- including global systems integrators. Could you comment on at what point can we expect a meaningful portion of implementations to be outsourced to SIs?
I think the answer to that really depends on market segmentation. At the moment, we are still very focused on improving the client implementation experience. We've done a lot of work in terms of automation around our Activate technology as well as our Dayforce Link technology, which handles the interface and with hundreds of different types of third-party software and carrier feed providers. We currently do use third parties to augment our implementation teams, and in some cases, they do the end-to-end implementation. As we go upmarket, we typically find that there is a higher opportunity to bring in larger SIs to those end-to-end implementations or to leverage those resources for the change management and the program management features of those particular programs. As we expand also on a global basis, we typically leverage partners as well who have the local domain knowledge and the experience and resources to do those specific types of implementations. But in summary, I would say it's still early days. Give us a few quarters to come back to you on that question.
Okay, David. And I have a follow-up for Arthur. Due to the 3- to 9-month lag, so call it 6-month average between contract signing and the customer go-live, upon which you start recognizing per-employee per-month subscription for Dayforce, it's a given like you have really high revenue visibility. And also, because of that, you have a limited ability to impact current year revenue beyond the first quarter. So the reported -- the quarter you just reported. So just given that, can you talk about your revenue visibility for the rest of the year? And what are some potential drivers of upside or downside relative to that at this point in time?
Sure. So again, our full year guidance for the year is, cloud revenue is expected to be in the range of $521 million to $524 million, and then total revenue between $730 million, $735 million. We've talked about the high level of visibility and predictability, and of course, the other side of that is that we don't have a lot of levers to pull to significantly increase our predictive results. But we do have some, and you saw them evident in the first quarter. For example, we had an uptick in Powerpay revenue which has a very short implementation cycle. We had a bit of favorable currency interest rate impacts. We had an increase in professional services and other revenue. By definition, it's nonrecurring. That's also an opportunity. And then, finally, I would note, just in passing, as Dave's talked about, we're beginning the planning process for 2019 and we're going to be considering accelerating investments and growth initiatives into the second half. We wouldn't expect any material change in revenue. However, if we have any change in our -- in the guidance we've given you for adjusted EBITDA, we'll talk about that in future quarters.
Our next question comes from the line of Mark Marcon with Robert W. Baird.
I was wondering if you could talk a little bit about what you saw from a competitive perspective in terms of just characterizing your wins in terms of whether they were coming from some of the older established players versus ERPs, et cetera. And also, if you could just talk a little bit about your workforce management modules and how key that was in terms of some of the wins.
I don't believe we've seen a change in the competitive environment. Typically, about half the time, we replace an incumbent, and the other half, we typically seem to replace what we term white space being -- and white space defined as very old technologies, in-house built solutions, vendors that no longer are around. That refers to what's inside the barrel side of the actual product. In terms of workforce management, we also typically replace probably more white space opportunities. You see us do a lot of in-house time and attendance systems and in-house scheduling systems that we replace. On the talent modules, it depends on what we're selling. Typically, with recruiting, you replace a point solution almost all of the time. Performance management and compensation management, you often replace spreadsheets and e-mail. Employee onboarding, we typically replace a lot of paper. So in terms of what we replace really depends on the bundle that's being sold. Workforce management continues to be a very strong differentiator for us. In the most recent Nucleus Research report, once again, they positioned us as the leader of the Leader quadrant. We find that workforce management is important for a number of reasons. First, a lot of the compliance calculations require access to the hour and now even the scheduling information to do the calculations correctly. And the fact that we have this continuous calculation allows us to do a lot of these compliance calculations more efficiently than the competitors. As well the fact that the pay engine and the workforce management engine runs in entirety in the scheduling side of the app, we also are able to help organizations avoid various types of penalties and irregular costs that they may not be aware of, just given the complexity of the actual environment. Workforce management also is a differentiator for more of the white-collared or desktop workers as well. We're finding that with some of the new multi-jurisdictional rules for higher earners where people move across states, you now have to track the hours. And the various states have those hourly thresholds as to when you have to do withholdings and file the state W-2s. We obviously do that very, very nicely. The other area that we see workforce management as a differentiator is invariably staffed organizations where we're able to use our labor forecasting, our labor deployment, our schedule optimization, labor compliance and schedule compliance rule sets to allow organizations to more effectively staff their various locations, and that typically leads to very strong ROIs across our customer base.
That's great. And can you talk a little bit about what you're seeing, just in terms of the pipeline and the pipeline build? How does that look compared to last year?
I don't believe we report out on the pipeline metrics. But as I have said, we continue to see strong momentum in the market and strong demand in the market.
Great. And then from an expense perspective, just as we sequence things out, given your comments with regards to sales, Arthur, would it make sense that from a sequential perspective, the line items that may end up seeing some of the strongest growth in terms of SG&A would be primarily focused on sales and marketing? Or how should we think about that? And then, also, while it is within gross profit, how should we think about the R&D spend?
Sure. So on the sales and marketing side, again, I'd note that the increase in SG&A was totally sales and marketing, and that you should expect other G&A functions to be flat to down going forward. On the R&D side -- so we would classify our R&D development and management cost basically into 3 categories, depending on the stage development. In accordance with ASC 350, we're required to capitalize certain costs associated with software developed for internal use. And because we're a true cloud company that offers our software on a subscription basis, all of our software development is for internal use. And so when the project reaches the application development phase, certain costs such as design, coding are required to be capitalized. And our capitalized software development were $6.1 million in Q1 compared to $5.4 million in Q1 last year. I'd also note in passing that the amortization of capitalized software for us is -- closely approximates the capitalization. Last year, amortization of capitalized software was $24.5 million compared to $26 million in capitalized software development. Then research and development costs that are incurred before the application development phase, and also costs that don't qualify for capitalization such as administration and training, their expense is incurred, and we include those in product development and management expense as a component of cost to revenue. And then, in the first quarter of 2018, research and development expenses were $6.4 million compared to $5.2 million in the first quarter last year. If you take those first 2 phases together, including both research and development expenses and capitalized software development, our total investment in HCM software development increased by $1.9 million or 18% to $12.5 million compared to $10.6 million last year. And finally, the third category of product development and management costs are costs related to the management of our solutions after the application development phase, and these are expensed as incurred and included in product development and management expenses as a component of cost to revenue. And in the first quarter of '17, product management expenses were $7.3 million compared to $5.6 million in the first quarter last year.
Ladies and gentlemen, we have come to the end of our time allowed for questions. I'd like to turn the floor back to Mr. Ossip for any final remarks.
Thank you, everyone, for joining us this morning. In closing, we are excited by all that we have accomplished to date at Ceridian. Our recent IPO was a significant milestone for the company, and we're pleased with our strong performance in the first quarter. However, these are just steps forward in a longer journey as we continue our longer-term aspiration to be a cloud company generating more than $1 billion of revenue, growing at more than 20% per year with gross margins greater than 75% and EBITDA margins greater than 30%. We remain dedicated to building and delivering innovative technology that helps companies better engage and manage their employees, because when their employees succeed, our customers succeed, and when our customers succeed, we succeed. Thank you, again, everyone, for your interest in Ceridian and joining us for the call today.
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