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Good afternoon. My name is Jesse, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Ceridian HCM Holding Inc. First Quarter 2019 Earnings Call. [Operator Instructions] Jeremy Johnson, Vice President of Finance and Investor Relations, you may begin your conference.
Thank you, and good evening. On the call today, we have Ceridian's 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 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 first quarter earnings release and quarterly report on Form 10-Q, the related financial statements and the MD&A have been 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. With that I will turn the call over to David.
Thanks, Jeremy. Good evening, everyone, and thank you for joining our first quarter earnings call. We are pleased with the results from the first quarter of 2019. During the first quarter, Dayforce momentum remained strong with revenue growing by 28% year-over-year and 29% on a constant currency basis. Including Powerpay, sales revenue grew by 22% to 24% on a constant-currency basis. We are also pleased that Cloud were -- gross margin expanded by 320 basis points to 70.1%; and professional services and other gross margin also improved from negative 17.6% to negative 14.2%. During the quarter, we added approximately 90 new implementation employees to keep pace with our strong sales performance, which has continued through the first quarter of 2019. We ended the quarter with 3,851 customers live on the Dayforce platform, a net increase of 133 customers from the fourth quarter of 2018 and a net increase of 697 customers since March 31, 2018. This quarter, we saw a higher mix of larger sized customers taken live compared to the first quarter last year, and we expect this trend to continue as demand for our product continues to be strong in both major and enterprise markets. Arthur will go into more details on the financials but I will briefly highlight the 2 areas of investment we have discussed on prior earnings calls: product development and sales and marketing. During the first quarter, we continued our investments in product development. Our cash investment in product development, including research and development expense and capitalized software development, was $15.1 million or 7.4% of revenue, an increase of 80 basis points compared to the first quarter of 2018. We launched Australian-native payroll and recently hosted our first Australian sales summit. We believe that Dayforce can fill the gap in the marketplace by providing a single human capital management solution for this market. Australian payroll, along with U.S., Canada, U.K. and our best-in-class workforce management capabilities, gives us what we believe to be one of the broadest global solutions in the marketplace. And as we have said before, we expect to continue to add countries at the pace of 1 to 2 per year with Ireland and New Zealand as our next planned rollouts. We also announced the release of Dayforce version 56, which includes Dayforce benefits decision support, Dayforce voice assistant and Dayforce On-Demand Pay. We believe these product enhancements will broaden our human capital management functionality, enable us to sell additional functionality to new and existing customers and improve our pricing in the marketplace. We also invested in sales and marketing during the first quarter, which increased by approximately $6 million to 17.3 of revenue. This represents a continuation of our investments to grow in enterprise segments and our global expansion. In the first quarter, we continue to see strong demand from enterprise customers, and I want to spend a few minutes highlighting some of those wins, beginning with traction we saw in our global markets. G8 Education, a leading Australian provider of development and childcare services with more than 11,000 employees, selected Dayforce for our ability to transform their manual processes to better engage their workforce and deliver return on investment.
In South Africa, we won a large global retailer with dozens of brands in over 3,000 stores in 32 countries. They wanted to improve their workforce management and labor planning and provide better employee experience. They were struggling with old tech and old processes and were looking for a new solution. We beat both local and global competitors, and ultimately won because of having the best fit and the strongest return on investment for them choosing Dayforce. There is also a follow-on opportunity around talent that we are currently pursuing, which is a great expansion opportunity. I would now like to highlight some of the key wins we had in North America this quarter. In our Health and Human Services segment, we signed a large health care company comprised of 8 different hospital groups, with over 20 hospitals and 20,000 employees. Each group was on a different payroll system. Some of which were big competitors and some of which were archaic in-house systems. They wanted to centralize payroll and standardize processes across the entire organization and needed a vendor that could handle their complex need. We are able to bring their payroll under one system with Dayforce. In the retail and hospitality vertical, we won a popular quick service restaurant with over 13,000 employees. They wanted a single platform for the full human capital management suite to replace the legacy payroll system and a homegrown workforce management system. Dayforce's continuous calculation engine will allow them to shorten net pay processes by a day, which will reduce the need for manual checks. It will also be able to greatly reduce the number of interfaces managed by their IT team and most importantly Dayforce will help them build their culture. We are very pleased with continued performance of our sales team and the continuous strong demand we are seeing in the marketplace. I would now like to briefly highlight some of the recent industry recognitions. Constellation Research named Dayforce to the Constellation shortlist for both workforce management suite and for payroll for North America's small- and medium-sized businesses and for the second time Software Reviews rated Dayforce as the leading vendor solution in their most recent HCM category report. Dayforce was also ranked in this report for first place or likeliness to recommend. We are proud of our accompaniments, and are committed to our continued product effort. I will now turn it to Arthur to discuss our financial results and guidance with you in greater detail.
Thank you, David, and good evening, everyone. I'm going to take a few minutes to talk about our first quarter 2019 financial results, then I'll provide guidance for the second quarter of 2019 and for the full year. The Ceridian 10-Q has been filed and is available on the SEC EDGAR website and also in Canada on the SEDAR website. Note too, beginning on Page 9 of our Form 10-Q, details recently adopted accounting policies, and I'm going to take just a few minutes to highlight some of the new standards we adopted. First as we've talked about on previous calls, we adopted the new revenue recognition standard, ASC 606, effective January 1 this year on a retrospective basis. All prior year figures have been adjusted as if ASC 606 had been in effect, and we've detailed on pages 10 and 11 of our Form 10-Q the impact of implementing ASC 606 on our financial statements. Generally, the adoption of ASC 606 had the effect of increasing professional services and other revenue and reducing recurring services revenue. And certain selling expenses such as commissions and bonuses paid to the sales force, are now being amortized over a 5-year period. We've also adopted the new pension presentation standard, ASU 2017-07, and as a result, pension expense is now included in the line other income expense net, which is now presented in a separate line outside of operating profit. And we've adopted a new restricted cash presentation standard, ASU 2016-18, and restricted cash and equivalents held to satisfy customer trust funds obligations are now included in our cash flow statement. Moving on to our first quarter 2019 financial results. Revenue from our flagship Cloud HCM platform Dayforce increased by $28.7 million or 27.6% to $132.8 million. On a constant currency basis, Dayforce revenue increased 28.6%. Revenue from Powerpay, our Cloud solution exclusively for the Canadian small business market, declined by $1 million or 4.4% to $21.8 million. On a constant currency basis, Powerpay revenue increased by 0.5%. Cloud revenue, which includes both Dayforce and Powerpay, increased by $27.7 million or 21.8% to $154.6 million. On a constant currency basis, Cloud revenue increased 23.7%. Total revenue, which includes revenue from both our Cloud and Bureau solutions, increased by $14.9 million or 7.9% to $203.7 million and on a constant currency basis, total revenue increased 9.5%. Our guidance for 2019 assumed a U.S. dollar to Canadian dollar exchange rate of $1.30. The Canadian dollar weakened against the U.S. dollar during the first quarter, and the actual average exchange rate was just under $1.33. The weaker Canadian dollar negatively affected revenues, including a $1 million currency headwind. Cloud revenue came in at the middle of our $154 million to $156 million guidance range; however, on a constant currency basis, Cloud revenue came in at the high end of our guidance range. Total revenue came in at the middle of our $203 million to $205 million guidance range; however, on a constant currency basis, total revenue came in right at the high end of our guidance range. Adjusted EBITDA exceeded the high end of our guidance range by $1.8 million primarily due to solid revenue results and lower than planned expenses. Cloud revenue growth in the first quarter was driven by a 24.5% increase in Cloud recurring services revenue and an 11.9% increase in Cloud professional services and other revenue. Of the $27.7 million increase in total Cloud revenue, $4.7 million or 17% was attributable to Bureau customers migrating to Dayforce. Excluding the impact of migrations to Dayforce, revenue from Bureau solutions declined by $8.1 million or 13.1% which was in line with our expectations. Cloud revenue accounted for 76% of our total revenue in the first quarter of 2019 compared to 67% in the first quarter of 2018. Q1 revenue from Powerpay, our Cloud HR and payroll solution for the Canadian small business market, declined 4.4% to $21.8 million. On a constant currency basis, Powerpay revenue was up about 0.5%. As we noted in the management's discussion and analysis, Powerpay revenue is recognized on a per employee, per process basis and the timing of customer processing at year-end can vary from year-to-year. A larger proportion of year-end processing occurred in the fourth quarter of 2018, and a smaller proportion of year-end processing occurred in the first quarter of 2019 as compared to the prior periods. This pull-forward of revenue into Q4 2018 was driven by the fact that December 31 was a Monday, and a number of customers processed their first 2019 payroll on Monday, December 31, 2018. We estimate that approximately $1 million in Powerpay revenue that would otherwise have been recognized in the first quarter of 2019 was recognized in the fourth quarter of 2018. Excluding this pull-forward, Powerpay revenue on a constant currency basis would have grown by approximately 5%. The average float balance for our customer trust funds during the first quarter was approximately $4.08 billion compared to $4.07 billion in the first quarter last year. The average yield on our float balance was 2.42% during the first quarter of 2019, an increase of 67 basis points compared to the average yield in the first quarter of 2018. As a result, income from invested customer trust funds was $24.3 million in the first quarter compared to $17.6 million in the first quarter last year. The balance sheet value of customer trust funds as of March 31, 2019, was $4.6 billion compared to $2.6 billion as of December 31, 2018. The increase in the March 31, 2019, balance sheet value of customer trust funds reflects the fact that the last business day of Q1 was a Friday while the last business day of Q4 2018 was a Monday, and Friday balances are generally higher than Monday balances. We also continued to expand our gross margin during the first quarter. While Cloud recurring services revenue grew $24.5 million or 24.5%, our cost of Cloud recurring services to support this growth increased by only $4.1 million or 12.4% and our gross margin on Cloud recurring services increased from 66.9% in the first quarter last year to 70.1%, reflecting an increase in the proportion of Dayforce customers live for more than 2 years from 59% in the first quarter last year to 64%. And also our ability to continue to realize economies of scale in customer support and hosting costs. Our negative gross margin on professional services and other revenue improved from negative 0.17% in the first quarter last year to negative 14.2%, reflecting an increase in profitable post go-live professional services. We're adding implementation resources throughout the year to address increased demand. And as these new resources become more productive, we expect the margin on professional services and other revenue to continue to improve. As we discussed on previous earnings calls, we stepped up our investments in research and development and in sales and marketing in the second half last year, and our first quarter results reflect these initiatives. Product development and management expenses increased by $1.5 million or 10.9% to $15.2 million; sales and marketing expenses increased $6.2 million or 21% to $35.2 million; and sales and marketing expenses as a percent of revenue increased from 15.4% to 17.3%. G&A expenses increased $5.1 million to $31 million. On an adjusted basis, excluding share-based compensation expense, severance charges and fees primarily associated with our secondary offering in March, G&A expenses increased $2.1 million as compared to the first quarter last year primarily due to increased costs associated with being a public company. We realized an operating profit of $27.4 million in the first quarter compared to an operating profit of $28 million in the first quarter last year, a decline of 2% year-over-year primarily due to higher selling, general and administrative expenses. After adjusting for share-based compensation and other items excluded from adjusted EBITDA, operating profit was up 10.4 -- 10.5%. Adjusted EBITDA increased by $3.3 million or 7.1% to $49.8 million. Adjusted EBITDA margin declined 20 basis points from 24.6% to 24.4%. As we discussed in our last earnings call, we expected Q1 2019 adjusted EBITDA margin to be in the 22.7% to 23.4% range as we were comparing to a period prior to our IPO, which did not reflect certain public company expenses and investments in R&D and sales and marketing. Actual Q1 adjusted EBITDA margin exceeded the high end of our guidance by 100 basis points to 24.4%. Income from continuing operations before income taxes was $16.9 million, an increase of $8.9 million compared to $8 million in the first quarter last year, reflecting reduced interest expense from the redemption of the senior notes during the second quarter last year. I'm happy to report that on March 26, Moody's upgraded our senior secured credit facilities rating from B3 to B2, which will result in a 25 basis point rate reduction to our floating rate term debt interest rate, which will save us about $1.7 million on an annual basis. Moving to the balance sheet. As of March 31, 2019, we had cash and cash equivalents of $206.3 million, a reduction of $11.5 million compared to December 31, 2018, and our total debt was $668.9 million as of March 31, 2019, a reduction of $1.4 million compared to December 31, 2018. The $11.5 million reduction in cash was primarily attributable to annual incentive plan payments and the benefits decision support acquisition. Our capital expenditures in Q1 2019 were $13.9 million compared to $10.3 million in Q1 2018. Included in the $13.9 million in capital expenditures were $4 million for property and equipment and $9.9 million for software and technology, of which $7.3 million was capitalized software development, an increase of $1.2 million compared to Q1 2018. Turning now to our outlook for the second quarter and full year fiscal 2019, I want to highlight 3 critical assumptions underlying our guidance: first, our guidance reflects the adoption of ASC 606 effective January 1 this year; second, our guidance continues to reflect a U.S. dollar to Canadian dollar exchange rate of $1.30 consistent with the exchange rate assumption used for guidance provided in previous quarters; third, our guidance also assumes no changes in the U.S. Fed funds rates or the Bank of Canada rates during 2019, so any Fed funds or Bank of Canada rate increases will be upside to our guidance. Now with respect to guidance for the full year fiscal 2019, we are reaffirming the full year ranges we provided on February 6, 2019, for Cloud revenue, total revenue and adjusted EBITDA. Specifically on a constant currency basis, Cloud revenue's expected to be in the range of $655 million to $660 million; total revenue is expected to be in the range of $810 million to $815 million; and adjusted EBITDA is expected to be in the range of $182 million to $187 million. For the second quarter of 2019, we expect Cloud revenue to be in the range of $154 million to $156 million; total revenue to be in the range of $191 million to $193 million; and adjusted EBITDA to be in the range of $37 million to $39 million. At this time, I am going to ask the operator to open the line for questions. Thank you very much.
David Ossip, CEO of Ceridian, would like to provide a few remarks before I begin the live Q&A session. David, please proceed.
Thank you, Arthur. There are 5 areas that I would like to go into a little bit more depth in terms of the acceleration of Dayforce in Q1, which I believe provide a lot of color into where the business is and where we are going. First the Dayforce growth rate accelerated from 27.4% to 28.6% between Q4 and Q1, and if you look at our fiscal year guidance you can imply that by the end of the year, we expect to be close to 30% year-over-year growth on Dayforce. The second item is, if you look at the Dayforce customers that we've added over the last 12 months, in 2018 in Q1 we added 674 customers in the prior 12 months and that increased to the current Q1 of 697. At the same time that we were adding more customers, we saw the revenue per customer increase as well. In Q1 of 2018, the average customer was approximately $113,000 and that increased to $121,000 in Q1 of 2019, an increase of 7%. Similarly if we look at the incremental revenue per customer, in Q1 of 2018, it was $155,000 and that increased to $158,000 in Q1 of 2019. And at the same time that we've obviously been increasing the number of customers, the revenue per customer and the acceleration of the Dayforce revenue growth rate, we've also have seen an improvement in the Cloud margin. The Cloud -- the gross profit margin on recurring increased from 68.5% to 70.5% year-over-year, and we also saw professional services increase from negative 17.6% to negative 14.6% during the same time. In summary, we obviously are quite happy with the results on the Dayforce side, and we're very confident on the future for the business. Operator, I'd like you to open it up for questions.
[Operator Instructions] The first question comes from Alex Zukin with Piper Jaffray.
So maybe first for David. Can you maybe talk about how the team in the field is responding to some of the changes made into the sales organization and maybe just any anecdotal commentary in terms kind of how you started the year from a bookings perspective? Any color there would be helpful. And then I've got a quick follow-up for Arthur.
Thanks, Alex. Nice to speak with you. So the first question I think is answered by the fact that we've seen a very, very strong bookings. We saw that, as you know, in Q3 of last year, Q4 of last year and that continued into Q1 of this year. So the changes that we've made in the sales organization have led to better-than-expected results, if you like, on the sales side. Alongside that as well, we had a record kick off of new projects in both Q4 and in Q1, which is where the confidence of the increase in growth rate of Dayforce is coming from.
Perfect. And then for Arthur, can you maybe speak to some of the seasonality of the business on both kind of the top and bottom line. I think the consensus models -- or our model maybe have a little bit of a different linearity to it. But it seems like between the FX impacts in the quarter and some of the variability of the Powerpay revenue from Q1 into Q4, can you maybe just talk about some of the seasonality aspects that you -- so we can make sure our models are properly calibrated.
Well, I think you hit on 2 items that were -- that I think masked and disguised a little bit the strong performance of Dayforce, both foreign exchange and Powerpay. Foreign exchange, year-over-year, the Canadian dollar is now, I think, at a low point for the last 10 years, and weakened about 5% relative to the U.S. dollar. And since we have about 30% of our revenues in Canada, Cloud revenue was generally affected and Powerpay revenue in particular. Powerpay revenue on a constant currency basis increased by 0.5%. And as I explained on the remarks that we had this shift of about $1 million of Powerpay revenue recognized in December that would have otherwise been recognized in January as a certain number of customers, about a 10% increase in the number of processes in December, as the number of customers chose to process their first week's 2019 payroll in 2018 on the Monday, December 31. So I think those 2 items really masked the underlying strong performance of Dayforce.
Your next question comes from Mark Murphy with JPMorgan.
David, just at a high level, regarding the very last point you made in your prepared comments. Is it fair to say that you're confident in the ability to onboard more customers this year than last year, and also at a higher ASP than last year. In other words, kind of leveraging both of those growth vectors to grow by a larger dollar increment?
Mark, we've seen a shift in distribution to larger customers that have a higher dollar value. So we're confident that we will onboard obviously, more dollars of recurring revenue this year. I can't speak to the volume, but I expect the volume to be somewhat constant to what we've seen in prior years. There is, as you know, as we go up the market, we expect the growth rate, if you like, in that to somewhat flatten out, but the dollar amount will keep on going up and probably accelerate. Related to that as well is that we, as Arthur mentioned, we expect that the professional services and other margins will also continue to strengthen throughout the year. And so we obviously are becoming much more efficient at onboarding the revenue and onboarding the revenue in many cases, quicker than we have historically.
Okay. Good. Yes. thank you for clarifying. It's good to hear that dollar amount will increase, if not accelerate. And then, Arthur, I wanted to ask just in Q1, did you realize the benefit that you expected from the record Q4 volume of Dayforce go-lives? Or did -- said differently, did anything other than currency restrict the sequential growth in the Cloud recurring revenue?
No.
And Mark, we were very happy with the Dayforce performance. If you look at it on a constant currency basis, it's actually gone from, in Q4 of '18, from 27.4% to 28.6% in the sequential quarters. So you see the impact of the go-live and the very strong sales [ really ] in Q3 and Q4 coming into impact. We haven't yet seen the impact really of the Q3, Q4, Q1 sales yet, and that's what gives us confidence in believing that we'll see these Dayforce growth rate end of the year close to 30%, so up from the 28.6% as well.
Okay. Understood. One last one, Arthur. I believe you said you're still using the $1.30 on the U.S. dollar, Canadian dollar. But I believe the spot rate, if I'm looking at this correctly, is $1.34. And so I guess I just wanted to clarify, is there a reason you're not using the spot rate currently?
Yes. I mean we had a lot of discussion about this. So just to be clear, we used $1.30 last year. It turns out $1.30 was the actual exchange rate in 2018. It was the actual exchange rate in 2017. It was the average exchange rate for the last 4 years. At the time we were preparing guidance for the year, we were $1.31 so we decided that we'd stick with the $1.30. We don't want to be in a position where we're raising and lowering guidance every quarter based on currency fluctuations. But the Canadian dollar, which is at the weakest point it's been now, I think in the last 10 years, we'll have to look at it. If the U.S. dollar continues to be as strong as it has, we may revisit this in the next quarter.
Your next question comes from Justin Furby with William Blair and Company.
David, if you look at the Dayforce recurring revenue and you strip out the services, it looks like that's closer to mid-30s growth, net of currency. And I guess, you're talking to an acceleration or slight acceleration in Dayforce throughout the course of the year. Is that driven on recurring, or is some of that some of the services work that you expect to deliver? Just sort of what drives that between the 2 lines? And then I've got a quick follow-up.
So in general, it's been driven by both. Arthur can provide the kind of comments as to the breakdown of the 2.
Yes. So we had tremendous growth last year in Dayforce professional services and other, and we've had continued growth this year but the incremental additional growth this year is less. The actual recurring -- Dayforce recurring revenue on a constant currency basis increased $26.3 million to $103.1 million, and this compares to an increase of $25.9 million in Q1 last year. So not only is it increasing but the increases are increasing.
Okay. Maybe said another way, I guess your services growth is sort of the low teens in the Cloud and your Cloud recurring was mid-20s. Is that sort of the right way to think about sort of the rest of the year. Or is there something that you think changes in that dynamic as we move throughout the year.
The -- more of the growth is going to come from the recurring side this year versus on the professional services and other because we had the very rapid growth, if you like, in professional services and other last year. Whereas this year, it will be somewhat more constant. Currently I believe in the business, about 70% of the Dayforce revenue currently is on the recurring side and about 30% on the professional services. So you'll see more dollars come in from the growth of the Dayforce Live from the recurring side both because of the 70% versus the 30% and also because you've got a higher growth rate on the recurring and due on the professional services.
Okay. That's helpful. And then just on Powerpay. Can you give a sense for what you're expecting. I know there's some pull forward, but throughout the balance of this year like should we still be thinking about it as sort of a mid-single-digit grower? Or what's embedded in your guidance there?
Yes, that's correct. Let me just repeat what Arthur said. Powerpay, we recognize revenue when the client processes pay. This year, December 31 fell on a Monday and so approximately about 10% of the Powerpay customers elected to process their first pay for 2019 on that Monday, and so that $1 million of revenue was recognized in 2018 versus 2019. If you adjusted the revenue for that, you would have landed up at about a 5% growth rate in constant currency. We would expect that to be somewhat within the range for the remainder of the year. We believe it will be in the mid-single digits for the remainder of the year. Now towards the end of this year, we do have some new features that are going to come online for the Powerpay business, which should provide an up-sell capability. So we do still believe that we can bring the business into the low double digits but it requires the new products to come on stream in the second half of the year.
[Operator Instructions] Your next question comes from Mark Marcon with RW Baird.
I'm just wondering if you could talk a little bit about the pipeline that you're seeing with regards to new opportunities, both domestically and internationally, particularly in light of some of the customer events that you've had and some of the recent wins, just how much is the buzz spreading? How's that pipeline look?
So Mark, we -- the pipeline remains very healthy. As we said, we believe very -- and we see very strong demand for our product. This year, in terms of summits, we had one in Miami, we had a partner event in Fort Lauderdale, a customer event in L.A., a customer event in Sydney, Australia. In May, we have one in the U.K. We have a larger one in June in New York, followed by Chicago in August, and that will be followed by INSIGHTS in October. We're seeing very healthy attendance at the events. You also see the evidence of the pipeline in the sales results. And as I mentioned, where we saw very strong sales results in 2018, we continue to see very strong sales results in Q1. Not only are we seeing stronger results, but we're also seeing evidence of more successes upmarket, consistent of what we communicated last year about our focus on strategic accounts and we're confident that will continue for the remainder of the year.
Great. And then can you talk a little bit about how we should think about the professional gross margins as we unfold through the year. You've obviously had a number of wins, and you've had to ramp up the implementation capabilities. So how do we think about this from a -- what's embedded in the guidance in terms of the professional margins for this year, and then as we think about longer term relative to some of the things that you've mentioned previously?
Yes. Also still very consistent what we communicated before. We saw strengthening of professional services and other gross margin Q1 to Q1 of negative 17.6% to negative 14.2%. What I would point out is that we did increase head count. I think Arthur made mention of that, in the implementation of professional services fees. So the improvement of the 340 basis points actually includes additional head count that we have in there. So we've seen increased productivity of that group. We would expect that negative 14.2% to strengthen throughout the year, and we'll probably end the year in probably kind of a low single-digit negative margin with the objective obviously of getting to breakeven as we've communicated previously in future years.
And how should we think about the impact from some of the international expansion? Whether it's -- we've had the U.K., Australia. As that ramps, how do we think about the impact? When we're looking at the margin performance, should we think of those as being drags that obviously will be profitable in the long term, but how do we think about this kind of the domestic profitability relative to those newer initiatives?
You aren't going to see a negative impact of the global side. In fact, within Q1 and Q2 of this year, we've got a number of customers that have gone live with the U.K. product. In Australia, we're using a partner model for implementation, so you actually get higher margins because it's offloaded onto the partners if you like. We take responsibility for that. We also have domestic teams in both the U.K. and in Australia who are able to do local implementations. And those teams are augmented by the resources that we have in the Mauritius, which obviously have a lower cost base than we have in North America. So we don't believe that the global expansion will impact the professional services and other margins.
Your next question comes from Michael Turrin with Deutsche Bank.
On the Dayforce go-lives, you added 133 customers during the quarter, which is a solid number but maybe a touch lower than what we saw in Q1 of last year. You obviously referenced the trailing 12-month number's up nicely. Can you just remind us around some of the seasonality inside that number. And I'm also wondering if some of the strength we saw in Q4 there had any impact at all in the Q1 number.
Yes. Michael, that's a great question. And if you recall in the last earnings call, I kind of explained that you really have 2 large go-live seasons. You have basically January and you have July. And so when we look at it from a trailing perspective, you really should be thinking more from a perspective of the Q4, Q1. So Q4 of last year, we had 253 accounts that went live. And in this year [ over here ] you've got 133. So if you add those 2 numbers together, you are at about 386 customers that went live during that period. And you compare that to Q4 of '17 and Q1 of '18, you had a 146 and 153 go-lives, so a smaller number. We would expect to see a -- the next big increase in go lives will probably be between the Q2, Q3 piece. And again, it's somewhat dependent by day of week. So the fact that you have that Monday being -- 12/31 being a Monday of the year, the customers that would have gone live in the first week of January ended up going live on that Monday, which was that 12/31. And so the day of the week piece unfortunately creates a little bit of movement both in the float side, the Powerpay processing side, but also on the go-live. And you'll see that as well as we go into the Q2, Q3 period for go-lives, depending on where that day of the week ends could have impacted some of the numbers. So I would encourage you rather to look at a longer term; last 12 months is probably a good number because it evens out the days of the week.
That's helpful, David. I appreciate the color there. And then maybe one for Arthur. The Q1 EBITDA number came in above the high end and despite some of these FX headwinds, of where you were guiding. But it looks like the Q2 numbers is below -- a touch below where we were modeling. So just wondering if you saw and expenses that may have shifted from Q1 into Q2 and/or if there might be any FX-related impacts to that number to call out as well.
No. In Q2, we're lapping a quarter before we accelerated investments in sales and marketing and research and development in the second half of the year. That's where it accounts for the quarterly decline. But again on a full year basis, we're -- our full year guidance, which we're reaffirming, is for EBITDA to increase. And again, we're -- even as we're investing in R&D and sales and marketing to continue to grow the business, we expect full year adjusted EBITDA to increase by $21 million to $26 million and adjusted EBITDA margin to expand 80 to 120 basis points to 22.5% to 22.9%.
Your next question comes from Brad Zelnick with Crédit Suisse.
David, now with the market digesting the take-private of Ultimate Software and financial results they just released a couple hours ago showing deceleration, what's changing from a competitive perspective? And are win rates changing against them in any perceptible way?
As I've said before, we've seen very strong successes in sales over the last number of quarters, if not longer, and we're still seeing very strong demand. We've seen a move upmarket. I can't speak directly to what's going on within Ultimate, but I would imagine some of our success may have come from there. But as far as we're seeing, we're still seeing a very, very healthy market. And as I pointed out, we've seen an acceleration in the Dayforce growth rates and we've seen an acceleration at scale.
Great. And if I could just ask one follow-up. With the average revenue per customer ticking up very nicely this quarter consistent with the success you're seeing with increasingly large customers, can you give us a sense of how much of this is driven by increasing customer size versus broader module adoption? And which models are experiencing the most momentum?
Sure. It's a combination of both. We definitely are seeing an increase in average size, and we are seeing many more wins in the what we call strategic market, which is above the 6,000 piece. In terms of ACV, or in terms of revenue, as we've mentioned before, it's approximately 20% of the revenue growth actually comes from the add-ons, so the additional modules and as well professional services to the existing base. Where we see high attachment rates or higher uptick would be where you would expect recruiting, performance management, learning management, document management, et cetera.
[Operator Instructions] The next question comes from Raimo Lenschow with Barclays.
Can you talk -- as you kind of expand internationally, can you talk a little bit about -- you mentioned Ireland as the next area where you can go in, et cetera. Can you talk a little bit about what drives to go deeper into a certain country like invest more versus going into a new country. Like what's your thinking process there.
Sure. Hey, Raimo. So really the next 2 countries are Ireland and New Zealand, and really we think about it as completing a region. So if we think about the U.S. say kind of U.S. and Canada, if you think about the U.K., it's the U.K. and Ireland. If you think about Australia, you talk about ANZ. And so in order to increase the success rate in the U.K. market and Australian market, it makes a lot of sense and low-hanging fruit to add those 2 adjacent marketplaces. As we go beyond that, we basically look to where we have clusters of success of customers. So although we haven't made a decision, potential countries to expand to would include Germany, where we've had tremendous success on the workforce management side. It could be countries like South Africa as I mentioned. We signed another very large customer in Southern Africa. And then obviously, there could be the expansion possibilities into Asia.
And Arthur, one quick question, follow-up if I may. Can you talk a little bit about the capitalization of R&D that kind of -- what's driving -- what's getting capitalized versus what's getting expensed? What's your policy there?
Sure. We actually include this in the Q. But it's ASC 350 requires us to capitalize 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. So when the project reaches the application development phase, it's a point between the when we've got the preliminary project stage completed, we've got funding authorized and the projects deemed to be probable, we will capitalize software. Then the expenses that we incur before that point and the expenses we incur after that point are both reflected in cost of revenue under a product development expense. And I can break out those numbers for you. The capitalized software development was $7.3 million in Q1 compared to $6.1 million in Q1 '18. The R&D portion, pure research and development that occurs before that stage, was $7.8 million this quarter -- this first quarter compared to $6.4 million in Q1 last year. And then the product management expense, which is after the products are completed, was $7.4 million this year compared to $7.3 million last year, essentially flat.
Raimo, internally and when we actually speak, we actually talk about R&D investment as a combination of them both.
Your next question comes from Samad Samana with Jefferies.
I wanted to ask a little bit more about sales investments. I'm curious, as you think about the priorities for the rest of 2019, is it more focused on hiring sales reps in North America versus international? And then generally, in terms of hiring sales reps versus the summits and branding events that increase Ceridian's brand presence in the market.
So that's actually quite a good question. If we actually look at our sales and marketing expense, it's actually declined from Q4 to Q1. It went from 18.4% to 17.3%. However, the 17.3% is up about 1.9% from Q1 of last year. In terms of global versus North America, the fact that we've got a larger presence in North America means the numbers are going to be skewed to North America versus global. But if you look at the percentage of increase in those domestic markets, in the U.K. and Australia, we obviously are investing quite significantly year-over-year in those particular markets. In terms of marketing spend, which includes the summits, it's up slightly but still is quite modest relative to the others inside the market.
Great. And then maybe one for Arthur. When we think about the Bureau churn and the capture rate for Dayforce, I know the company has given its expectations last quarter for this year. But I'm curious if there's any updated view on the percentage you expect to capture. And then maybe just the profile of the customers that are left in the Bureau business that you think you'll gather in terms of size. Are those more in midmarket? Are those slightly on the largest side? Just curious.
The guidance we provided is that we expect about 13% to 17% of our Cloud revenue to come from migrations from Bureau and that's -- and we saw that this quarter, of the $27.7 million increase in Cloud revenue, about 17%, $4.7 million of the increase came from Bureau customers. While we're talking about Bureau, we tend to isolate Bureau and Cloud and talk about Powerpay and so forth, but if you look at the whole, the whole business continues to perform very well. If you look at the incremental additional revenue of $14.9 million is increasing 3x more than the cost of revenue. So even as we're adding implementation resources and stepping up our investments in R&D, the gross margin on the incremental revenue for the whole business was 72% in the first quarter. And we now have the happy problem of having to calculate diluted earnings per share as our net income has increased from $600,000 in Q1 last year to $11.2 million.
Your next question comes from Chris Merwin with Goldman Sachs.
So just to follow up on a question earlier on revenue per customer. Can you tell us what is assumed in your full year revenue guidance for growth in employee per customer? You've contemplated any meaningful increase there or is further success with what you're seeing as strategic accounts really just incremental to what you've guided to. And then maybe a second question for David, on On-Demand Pay. I know that was rolled out relatively recently, so just curious what the feedback has been from customers so far and maybe how we should be thinking about tailwinds to [happen] from that product.
Sure. So for the first, we don't provide guidance in average revenue customer. And from a forecasting perspective, we actually build up a forecast from -- an account by account basis. So we look at the work in process, and we have the expected go-live days of each of the accounts, and we know when they go live, we get access to the recurring revenue and obviously, the implementation of professional services revenue is recognized over the life of that. So that's how we basically forecast out the numbers. But you've seen a consistent trend over the last 5 quarters that we've reported. So if I look at the total revenue per customer in Q1 of -- in fact, I'll go back to '17. Q1 of '17, you had $101.5 thousand per customer, that increased to $102.8 thousand in Q2 to $105.3 thousand in Q3 to $108.3 thousand in Q4. That increased to $113 thousand in Q1 to $116.6 thousand in Q2 to $118.9 thousand in Q3 to $117.6 thousand in Q4 to $121.3 thousand in Q1 of 2019. So you've seen the kind of increased consistently now for the last 9 quarters that we reported out. In terms of On-Demand Pay, again, when I think about On-Demand Pay, I talk about it as a longer-term growth factor for the business. In terms of the growth for the business, again 2019 is largely driven by more success in what we call the major markets, which goes up to 6,000 employees, which is effectively winning more customers, going back to those customers and selling the add-on revenue. In the latter half of this year, although we're already begin to see some of it now, more success rate in the strategic market, which starts at 6,000, which is effectively being more successful in winning accounts in the 4 verticals that we currently play. As we go into next year, you will see more impact of the strategic accounts into 2020. And towards probably the middle of the latter half of the year, we should start to see some impact on the global successes. And then as we go into 2021, you will begin to see some of the impact from the On-Demand side as well as you'll see more impact from the global and strategic side. So I think about it really as a separate growth curves. And the importance of all of them is to sustain the growth rate of Dayforce. And again if I look at 2019, we'll begin to see that in the acceleration of the Dayforce growth rate.
Your next question comes from the line of Matthew Wells with Citi.
This one's for David. When you're adding implementation head count, I believe you and Arthur flagged it earlier on the call. Is that a function of complexity that you're seeing in your current large deals? Or are you just seeing more pipeline activity overall?
So thanks for the question. So between 2017 and 2018, we actually reduced head count in the professional -- implementation professional services and other. We're now adding head count just basically to meet the sales success that we've had over the last number of quarters. As I mentioned, we had record project kickoffs in Q4 and again in Q1. And so obviously, it's a requirement just to handle the project volume and the business.
And I have a quick follow-up for Arthur. I'm just doing the math here and it looks like FX was about a 2% incremental headwind to Cloud since you issued original guidance for Q1 and that comes out to be about $1.2 million. I just want to make sure I'm thinking about that correctly.
Yes.
There are no further questions at this time. I will now turn the call back over to David for closing remarks.
Great. Thank you, everyone, for joining us today. Again, we're very pleased with the results in the Dayforce business, and we're very confident in the future of the Dayforce business. I look forward to speaking with you all, I think in the one-on-ones. And for those of the investors will be joining us at the JP conference in a few weeks, I look forward to seeing everyone. Thank you very much.
This concludes today's conference call. You may now disconnect.